Just as we expected – another surprise election result (OK, we were wrong about Brexit and Donald Trump). While the November 8 U.S. presidential election concluded the exhaustive campaign process, the victory by Donald Trump immediately brought questions about his global trade policy to the forefront.
Throughout the campaigning process, President-elect Trump spoke frequently about wanting to make sure all nations play fair on trade – particularly Mexico and China. He called NAFTA the worst trade deal the U.S. has ever signed, and he derided NAFTA and other U.S. trade policies for costing millions of Americans their jobs. If elected, Trump promised to revive America’s manufacturing sector by slapping tariffs on many imports (45% on Chinese imports and 35% on Mexican), renegotiating (or terminating) free trade agreements, and going after companies that send manufacturing jobs abroad.
In the weeks/months to come, we will start getting an indication of whether Mr. Trump plans to follow through on his comments regarding global trade. In the meantime, we have provided a brief overview of free trade agreements below, with an emphasis on NAFTA.
Free Trade Overview
The benefit of Free Trade Agreements (FTAs) is that it opens foreign markets to U.S. exporters by reducing barriers to U.S. exports, protecting U.S. interests, and enhancing the rule of law in FTA partner countries. The reduction of trade barriers and the creation of a more stable and transparent trading and investment environment make it easier and cheaper for U.S. companies to export their products and services to partner markets.
The U.S. currently has 14 FTAs in place with 20 countries worldwide:
- Costa Rica
- Dominican Republic
- El Salvador
According to the International Trade Association (ITA), 47% of all U.S. goods exports went to FTA partner countries, totaling $710 billion. Additionally, the U.S. enjoyed a trade surplus in manufactured goods with FTA partners totaling $12 billion in 2015. Export growth between 2009-2015 totaled 52% in FTA countries versus 34% for the rest of the world. Small and medium-sized enterprises (SMEs) accounted for 97% of all exporters to FTA countries in 2013 (the latest year that data is available). SMEs provide $192 billion worth of exports to FTA countries (roughly 1/3 of all exports in dollar terms), demonstrating the significant impact trade agreements have on businesses of every size, not just multi-nationals.
While the figures above highlight the benefits of Free Trade Agreements and their impact to U.S. business, there are many people (including Mr. Trump) who believe they are “bad deals” and that the U.S. gives up much more than it gains. If you’re an American worker whose job has been outplaced or you own a manufacturing company that has struggled due to cheap imports, you may view FTAs (including NAFTA) as a ‘raw deal’. Their impact on the overall American economy, however, is not so cut and dry.
A Closer Look at NAFTA
Passed in 1994 (and preceded by the U.S.-Canada Free Trade Agreement in 1965), NAFTA virtually eliminated tariffs between Mexico, Canada and the U.S. NAFTA allowed U.S. firms to maximize efficiencies, remain globally competitive and increase sales and exports as a result. Not only did it pave the way for American companies to buy and sell more from its northern and southern neighbors, it also allowed them to shift some operations and capital to Mexico, where labor is cheaper, and send goods manufactured there back to the United States duty-free.
Opponents of NAFTA blame the agreement for a significant part of the 5 million manufacturing jobs lost in the United Sates since 2000. They also cite the rise in manufacturing output in Mexico since NAFTA became law as evidence of the agreement’s negative impact on American business.
Many experts agree, however, that while NAFTA has had some negative impact on American manufacturing jobs, the rise of technology in manufacturing is the bigger culprit. Technology has greatly boosted productivity in manufacturing (through increased automation, the use of robots, the introduction of product tracking systems, etc.), reducing the need for manufacturing workers. The reality is that factories today don’t look like they did 20 years ago.
Economists also believe that increased trade with China (with whom the U.S. has no free trade agreement) has been much more detrimental to American manufacturing workers than NAFTA. MIT professor David Autor estimates that between 1-2 million manufacturing jobs have been lost between 1999-2011 due to increased trade with China.
The Case for NAFTA
Proponents of NAFTA acknowledge that the agreement has been disruptive to certain companies, industries and communities, but many feel NAFTA suffers from a public relations problem. Extolling the benefits of the agreement is difficult because the benefits tend to be spread throughout the economy in ways that are not nearly as visible as a manufacturing executive telling hundreds of workers their jobs are moving to Mexico. Many economists even believe that the net effect of NAFTA on jobs has been a wash – just as many jobs have been created due to the treaty as have been lost.
Regardless of the exact net impact NAFTA has had on American jobs, manufacturing employment in the U.S. peaked in 1979, long before the treaty went into effect. And contrary to what some pessimists say, American manufacturing is far from dead. The U.S. remains the second largest manufacturer in the world, representing 17.2% of total global output. Additionally, we are the third largest exporter and remain the top destination for foreign direct investment, which represented $448 billion in 2015 alone.
While some argue that NAFTA is hurting American manufacturing, supporters of NAFTA argue that the agreement has resulted in numerous benefits to manufacturers and the economy overall. Examples of these benefits include:
- U.S. companies exported a total of $2.2 trillion in goods and services in 2012, of which $244 billion went to Mexico and $355 billion went to Canada (27% of total exports).
- In our trade with Canada and Mexico, the U.S. registered a $21 billion trade surplus in manufactured goods in 2012, a $44 billion surplus in services and a $3 billion surplus in agricultural products.
- U.S. export growth to NAFTA partners far outpaced exports to the rest of the world between 1993 and 2012.
- Canada and Mexico combined are the largest foreign suppliers of crude oil to the United States, representing 1/3 of total American oil imports (decreasing our reliance on Middle Eastern oil).
- 6 million American jobs depend on trade with Mexico according to the U.S. Chamber of Commerce.
- The U.S. sends more goods to Mexico than it does to China, India, Russia and Brazil combined.
- Mexico’s investment in the U.S. has increased by 819% from 1994-2012, while investment by non-NAFTA countries grew by 448%.
- Mexico invested $16.5 billion in U.S. businesses in 2015 alone.
- 40% of the parts in Mexican exports actually originate in the U.S. according to Congressional research.
Free trade agreements (and specifically NAFTA) have long evoked strong opinions (either pro or con) with many people. No matter whether you believe trade agreements are critical to American manufacturing or detrimental to it, most people agree that global trade is vital to the American economy. Exports create new markets for American products while imports help American families stretch their budgets by providing more choices and lower prices. With 92% of global economic growth and 80% of the world’s purchasing power outside the U.S., trading with the rest of the world isn’t an option, it’s a necessity.