How Trump Is Changing NAFTA

The Latest Negotiation Would Create U.S. Jobs and Raise Auto Prices

Donald Trump near Mexico
••• Photo by Matthew Busch/Getty Images

On August 27, 2018, the United States and Mexico renegotiated portions of the North American Free Trade Agreement. Under the new deal, at least 75 percent of the car's value in North America. It was 62.5 percent previously. At least 40 percent to 45 percent of the car must be made by workers earning at least $16 an hour. These changes should create more U.S. jobs while raising the price of cars sold in America.

Imported goods must also U.S. steel, aluminum, and auto parts. They must also use more U.S. textiles, chemicals, and industrial goods.The dispute settlement panels would only be retained for oil, gas, energy, and infrastructure industries.

President Trump said Canada has until August 24 to agree to the changes or he would jettison it from the trade pact. The the deal before a new Mexican president assumes office on December 1. Trump must notify Congress 90 days before he can sign the deal.

Trump can't sign the deal without Canada. Congress only authorized Trump to renegotiate NAFTA with Canada. Without Canada, NAFTA would no longer be the world's largest free trade agreement

History of NAFTA Renegotiations

The NAFTA renegotiations began on August 16, 2017. President Trump appointed U.S. Trade Representative Robert Lighthizer to represent the United States.

The . Congress needed a text of the new agreement by mid-June to approve it in 2018. Also, Trump's "fast track" negotiating authority could end. Some  to block automatic renewal. 

In his first 100 days, Trump threatened to withdraw from NAFTA if Canada and Mexico refused to renegotiate. They are willing because the agreement is outdated. For example, it doesn't address internet commerce. It also needs to incorporate the environmental and labor protections that are in side agreements. NAFTA's purpose is to make North America more competitive in the global marketplace.

On March 5, 2018, the seventh round of the renegotiations concluded. Progress had been slow.

On May 31, 2018,  a 35 percent tariff on steel and a 10 percent tariff on aluminum on Canada, Mexico, and the European Union. In retaliation, Canada imposed tariffs on $12.6 billion of U.S. imports. despite the angry rhetoric from their nations' leaders.

On July 1, 2018, approve any deal until after the U.S. midterm elections in November.

Changes Trump Would Make to NAFTA

The Trump administration between the United States and Mexico. In 2017, Americans bought $71 billion more imports from Mexico than vice versa. The trade deficit with Canada is smaller. 

To do this, the the rules on auto manufacturing and trade. Negotiators from each country have agreed to decrease the percentage of a vehicle sourced in Mexico. It also wants stronger protection for U.S. digital trade and intellectual properties.

The Trump administration wants to end the . These arbitration panels rule on whether a NAFTA country treated a partner's overseas investments unfairly. The panels make sure U.S. corporations maintain the rights protected by the U.S. Constitution.

But the Trump administration claims it erodes the sovereignty of U.S courts. For example, the U.S. Commerce Department has accused western Canadian provinces of subsidizing their lumber exports. It claims they dump low-cost lumber into the American market. The resolution panel has ruled in favor of Canada. The Commerce Department has threatened to impose a 20 percent tariff on Canadian lumber imports. But U.S. manufacturers want to keep the panel. They agree it protects their foreign investments.

Other measures include making it easier for U.S. telecom companies and banks to operate in the other NAFTA countries. Similarly, to open up more of their government contracts to U.S. companies. At the same time, it wants to use “Buy American” provisions to limit their firms from winning U.S. government contracts. 

The administration had also wanted to . It also wanted state-owned companies, such as Mexico's Pemex, to . In 2013, Mexican President  allowed foreign direct investment in Pemex. But the company is a source of national pride, so it's unlikely to be completely privatized. 

A March 30, 2017, a wanted to allow "snapback" tariffs if a domestic industry was damaged by imports. But some experts claim those provisions are already in NAFTA. 

In the past, Trump said he would like Mexico to end its  on U.S. companies. Trump claims that to Mexico. A is like a federal sales tax that's imposed on all companies in the supply chain. 

Mexico charges a 16 percent VAT tax on all business sales, whether it's to other firms or the consumer. When companies export the finished product to the United States, Mexico rebates the VAT tax. But U.S. companies that export to Mexico must pay the VAT tax. Trump says that encourages U.S. companies to build factories in Mexico to receive the rebate and avoid the tax. 

Trump has asked Mexico to end . This program across the border in Mexico to assemble finished products. They then export the goods back to the United States. As a result, maquiladoras became responsible for 65 percent of Mexico's exports and . That undercut American workers and sent jobs to Mexico. NAFTA expanded the maquiladora program by ending tariffs. 

The United States would also like Canada to on dairy and poultry products.

What Mexico and Canada Want

Mexico has asked the United States to allow its trucks on U.S. roads. That was promised in the first NAFTA agreement but withdrawn by the U.S. Congress. Mexico is also . 

Mexico is creating a back-up plan if Trump makes good on this threat to pull out of NAFTA. It turned toward the Pacific Alliance. In 2011, the alliance created a free trade zone between Mexico, Colombia, Chile, and Peru. In 2017, 94 percent of all goods traded in the zone were tariff-free.

Canada wants the United States to end tariffs on its lumber and dairy products. It also wants . The U.S. Commerce Department added a 220 percent tariff on the imports of Bombardier CSeries jets. As a result, manufacturing plant in Alabama to skirt the tariff. That worsens Boeing's competitive position against Airbus, its biggest competitor.

increased access for business travelers. They will ask for inclusion of gender rights in the agreement. 

How Trump Could Easily End NAFTA

Trump by submitting a notice under Article 2205 of the NAFTA agreement. He would have to do so 90 days before withdrawal. He may not need congressional approval to do this. Some experts refer to Section 125 of the Trade Act of 1974. It states that the president has the power to unilaterally withdraw from all trade agreements. Others refer to NAFTA's Implementation Act. They argue that, since Congress approved NAFTA, only it has the authority to withdraw. It's uncharted legal territory.

Even if the United States did withdraw from NAFTA, the other two parties could retain the agreement between each other. But it would reinstate tariffs on trade between the United States and Canada and the United States and Mexico. That would raise the costs of imports from Mexico. Before NAFTA, Mexican tariffs on U.S. imports were 250 percent higher than U.S. tariffs on Mexican imports. Trump also threatened to on Mexican imports. By law, he can only raise tariffs by 15 percent for 150 days without congressional approval.

 

Without NAFTA, Mexico and Canada would probably return to most-favored-nation trade status. Canada and the United States would probably reinstate their bilateral trade agreement. Exports from those countries would be assessed standard tariffs. At that point, for making their costs higher overnight. 

How It Would Affect the Economy

In the short-run, tariffs would benefit U.S. oil companies by raising prices on imported Mexican oil. They would also benefit U.S. farmers. They might restore the 500,000 - 750,000 manufacturing jobs lost in California, New York, Michigan and Texas. These are just a few of NAFTA's pros and cons.

On the other hand, tariffs would raise the price of imports for American consumers. Inflation would increase as a result.

. Mexico would revert to the high tariffs it had before NAFTA. Mexico is the top export destination for U.S.-grown beef, rice, soybean meal, corn sweeteners, apples, and beans. It is the second-largest export destination for corn, soybeans, and oils.

that Trump would jeopardize their livelihood. They don't want to lose the $17.9 billion in agricultural products they exported to Mexico in 2016. Their Mexican buyers are hesitating to sign long-term contracts. Instead, many are already sourcing commodities from Argentina and other Latin American countries.

NAFTA quadrupled trade to $1.15 trillion, as of 2015. It increased U.S. growth by 0.5 percent each year. That created five million new U.S. jobs, including 800,000 manufacturing positions. Canada and Mexico invested $240.2 billion in the United States, while U.S. companies invested $452 billion in those countries.

The United States imports $294.7 billion from Mexico. That's almost as much as it imports from China. Any trade change would threaten the flow and price of these imports. They include oil, manufactured products, fruits, vegetables, coffee, and cotton. 

Similarly, 80 percent of Mexico's exports go to the United States. U.S. tariffs on these exports would be very damaging to Mexico's economy. It could force more Mexicans to immigrate to the United States. 

Mexico has improved its trade relationship with the EU. On April 21, 2018, the  with Mexico. Once signed, it will remove tariffs from almost all trade between the two areas.

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