This was a policy memorandum I wrote for a public policy evaluation class at Johns Hopkins University. It was required to be addressed to then President Donald Trump and to analyze policy solutions stemming from uncertainty about the continuation of NAFTA. It is formated as a memorandum.
On July 1st, 2018, Andres Manuel Lopez Obrador was elected Mexico’s next president. Mr. Lopez Obrador’s choice of Economy Minister is Graciela Márquez, and his chief negotiator will be Jesús Seade. Márquez and Seade will join the North American Free Trade Agreement (NAFTA) negotiations between Canada and the United States before Mr. Lopez Obrador takes office on December 1st. Ms. Márquez has stated that talks could end in a deal by this October.1
Though Ms. Márquez is optimistic about the possibility of a deal by October, there is some contention on whether Mexico and Canada will accept the provisions that the U.S. negotiators have listed as outcomes that they are pursuing. Analysts have stated that Mexico and Canada will most likely not agree to those provisions.2 If they do not accept the conditions, then the United States will have to decide whether they will continue to be a part of NAFTA or abolish the trade agreement.
NAFTA was preceded by the Canada-United States Free Trade Agreement (CUSFTA), which went into effect in 1988. While Mexico had previously rejected suggestions to enter trade agreements with the U.S., the newly elected president of Mexico, Carlos Salinas De Gortari, was open to negotiations.3 NAFTA negotiations began in the early 1990s, and it immediately became a hotly debated issue.4 Three months before January 1, 1994, when NAFTA would go into effect, The New Republic magazine wrote that public fears were that manufacturing jobs would leave the United States.5 According to a Gallup poll taken in March 1993, 63 percent of the American public opposed NAFTA.6 Since the agreement has been in effect, trade between the U.S., Canada, and Mexico has grown by 390%, reaching $1.2 trillion in 2017 alone.7 There have been some key sectors that have been affected by NAFTA. The two most notable sectors are manufacturing and agriculture.
Manufacturing jobs in the United States were once widespread, and a means to earn high wages. Whereas manufacturing jobs once made up nearly one-third of all U.S. jobs, now they make up about 9% of the workforce.8 This decrease has been a central topic during elections and discussions surrounding NAFTA. Many believe that it is because of NAFTA that manufacturing in the United States has declined so rapidly. However, some evidence supports that this change may be more from technology and less so from factories moving their production to Mexico in the form of maquiladoras9.
While manufacturing jobs have fallen since 1984, there was a slow increase from 11.4 million manufacturing jobs in March of 2010 to 12.6 million in March of 2018.10 Conversely, manufacturing output has grown since 1984. The Pew Research Center found that manufacturing production in 2017 was 80 percent higher than 30 years ago. However, manufacturing “still represents a smaller share of the economy than it used to.”11
One of the aspects of Mexico-U.S. trade that has been in the crosshairs are manufacturing factories called maquiladoras. Maquiladoras are factories in Mexico that import materials duty-free, assemble them into finished products then export them to the united states at a lower tariff rate than the same products from other countries.12
Agriculture is handled differently in NAFTA. There are three trade agreements under NAFTA between each respective country that govern agriculture. This division was to eliminate specific barriers to some trade while keeping some intact to protect specific agricultural industries.13 CUSTFA, the agreement between Canada and the United States, had a 10-year time limit to phase out the specific trade barriers, and NAFTA had both 10-year and 15-year time limits to phase out most of those barriers.14 All three countries use quotas, limiting how much of a product can be imported before tariffs are applied. This quota system is to protect the specific industry, such as peanuts in the U.S.15
NAFTA renegotiations began in August 2017 when U.S. President Donald Trump, Mexican President Enrique Peña Nieto, and Canadian Prime Minister Justin Trudeau met to discuss the agreement.16 Negotiations continued with U.S. Trade Representative Robert Lighthizer, Canada Foreign Minister Chrystia Freeland, and Mexico’s Economy Minister, Ildefonso Guajardo. They are soon to be joined by Graciela Márquez and Jesús Seade.17
In July 2017, the Office of the United States Trade Representative published a summary of the objectives that the United States is seeking in its renegotiations. There are five primary objectives within the summary. The first is to reduce the trade deficit that the U. S. has with Canada and Mexico. The Second is to increase the rules of origin amount to increase the amount of goods produced in the U.S. The Third, to create government purchasing practices within the NAFTA countries that model U.S. practices. The fourth is to strengthen investor protection rules favorable to the U.S. The fifth is to eliminate the arbitration mechanism in Chapter 19.18
If both Mexico and Canada do not agree to the provisions laid out in the NAFTA objectives, then the U.S. has two policy options. The first option is to let NAFTA continue as it currently is. The second option is to withdraw entirely from the agreement. This withdrawal would require the implementation of trade policies that follow guidelines from the World Trade Organization.19
In undertaking a political analysis, it will be helpful to look at several polls and surveys on whether the public supports or does not support NAFTA. Gallup reported in February of 2017 that while 48 percent of Americans believe that NAFTA has been positive for the U.S., 46 percent believe it has not been good.20 The Gallup poll also found that Republican support for the trade agreement has fallen to 22 percent.21 A Pew Research survey from October of 2017 found that 56 percent surveyed thought that NAFTA is good for the U.S., while a separate survey found that Mexicans and Canadians had a more positive view of NFTA than Americans.22 That same survey also found that Republican support of NAFTA was up to 35 percent.23 Both surveys found that younger people were overwhelmingly supportive of NAFTA at 73 to 69 percent.24,25 Washington reporter Eric Kulisch wrote in Automotive News that “NAFTA is probably more popular on Capitol Hill than any time in the last 20 years.”26 This issue’s popularity relays that multiple stakeholders are interested in whether NAFTA continues as is or is abolished. The agriculture, automotive, and business community all have a vested interest in the trade agreement outcome. Kulish reported that multiple companies are making a case to keep NAFTA due to the intricate partnerships that have been made and made possible by NAFTA.27 There has also been some mobilization among lawmakers showing support for NAFTA as well. In a letter to President Donald Trump, 36 Senate members wrote of the positive aspects of the trade agreement and listed ways to improve it.28 There also have been multiple State and local Chambers of Commerce that have come forward asking that the U.S. not withdraw from NAFTA.29 This activity shows evidence that there is likely more support of keeping NAFTA if the alternative is the abrogation of the agreement altogether.
The efficiency of the two policy options needs to be addressed. This analysis looks at how much it would cost the government to either withdraw from NAFTA or stay in the trade agreement. Staying in NAFTA would have no outright costs. The long-term costs are more difficult to predict. However, the costs of withdrawing from NAFTA, while also hard to quantify, would likely be more immediate as foreign business partnerships and supply chains may be disrupted. The costs may only be indirect if tariff costs are distributed to customers paying for trade goods, or the costs may be more severe in the case of jobs and GDP loss.
Effectiveness involves how the U.S. government would implement either a policy of withdrawing from NAFTA or staying in the trade agreement. This analysis also must look at which approach would be more effective for the American economy’s continued growth.
The policy options of withdrawing from NAFTA or keeping the agreement are economical. Trade between the three countries now reaches upwards of $1.2 trillion in trade per year.30 Mexico and Canada rely on the U.S. for their exports. Mexico’s exports to the U.S. amount to 76 percent of its total exports, while 72 percent of Canada’s exports are to the U.S.31 The number of people employed full-time in the U.S. reached 125.9 million, up from 99.7 million in 1994 when NAFTA began.32 GDP also rose to $19,390.6 billion in 2017, up from $7,308.8 Billion in 1994.33 While these numbers show a clear increase in trade, employment, and GDP during the 23 years since NAFTA was adopted, it is less clear that these increases are the direct result of NAFTA. If the U. S. is to exit NAFTA and trade barriers re-erected, then the cost of goods will likely increase when companies pass on added costs to their customers. This increase could affect the overall demand for those goods if the prices become too high.
Trade has grown since the inception of NAFTA. Sherman Robinson and Karen Thierfelder, in the Journal of Policy Modeling, simulated a NAFTA collapse that showed GDP falling 0.37 percent in the U.S. In comparison, Mexico and Canada GDP decline by 4.64 percent and 1.35 percent, respectively.34 Mexican and Canadian GDP falls are more significant due to a larger share of their exports going to the U.S. The simulation also calculated the amount of U.S. workers that the move would displace. The increase in unemployed, the simulation found, would be 611,000 workers, and .57 percent of those workers would be in unskilled labor.35
The government can withdraw from NAFTA if Canada and Mexico do not accept the provisions that the U.S. is seeking. However, an unintended consequence may be that it will not be within our capacity to create new trade agreements once other countries see that we may withdraw from a trade agreement in place.36 The government also can continue with NAFTA if no new trade agreement is reached.
There have also been some questions about national security. Mexican Foreign Minister Luis Videgaray stated in the fall of 2017 that a negative NAFTA outcome could hurt Mexico and the U.S.’s ability to work together on border security and migration issues.37
The policy recommended in this decision memorandum is to continue to be a part of NAFTA. There are many supporters within the business community and the general public who have expressed their support for NAFTA. While NAFTA’s adverse effects are hard to quantify, there would seem to be more concrete disruptions in trade partnerships and a possible decrease in national security cooperation.
1 Jude Webber, “NAFTA deal possible, says Mexico’s new economy minister,” Financial Times, July 8, 2018, https://www.ft.com/content/e1bc19e2-813b-11e8-bc55-50daf11b720d
2 Weinstein, Paul, “Public Policy Evaluation & the Policy Process” (syllabus, Johns Hopkins University, Washington, DC, 2018)
3 Frederick W. Mayer, Interpreting NAFTA The Science and Art of Political Analysis (New York: Columbia University Press, 1998)
4 Sidney Weintraub, “Ten Years Hench, Is NAFTA Succeeding?” Texas Business Review, June 2004.
5 John B. Judis, “The Divide: History vs. NAFTA,” New Republic, Vol. 209 (October 11, 1993): 23.
6 Judis, “The Divide,” 23.
7 Holly K. Sonneland, “Chart: NAFTA by the Numbers in 2017,” Americas Society / Council of the Americas, March 1, 2018, https://www.as-coa.org/articles/chart-nafta-numbers-2017
8 Morsheda Hassan and Raja Nassar, “An Empirical Investigation of the Effects of NAFTA, China’s Admission to the World Trade Organization, and Imports from Mexico and China on Employment in US Manufacturing,” Journal of International Business Disciplines 1, Vol. 13 (May 2018.)
9 Ibid
10 “Employment, Hours, and Earnings from the Current Employment Statistics survey,” Databases, Tables and Calculators by Subject, Bureau of Labor Statistics, accessed July 22, 2018, https://data.bls.gov/timeseries/CES3000000001?amp%253bdata_tool=XGtable&output_view=data&include_graphs=true
11 Drew Desilver, “Most Americans unaware that as U.S. manufacturing jobs have disappeared, output has grown,” Pew Research Center, July 25, 2017, http://www.pewresearch.org/fact-tank/2017/07/25/most-americans-unaware-that-as-u-s-manufacturing-jobs-have-disappeared-output-has-grown/
12 Kenneth S. Keyes, “Determining the perceptions of NAFTA on maquiladora product quality: An explanatory case study,” (PhD Diss., University of Phoenix, February 2010), 1-4.
13 Pascal L. Ghazalian, “The Effects of NAFTA/CUSFTA on Agricultural Trade Flows: An Empirical Investigation,” Canadian Journal of Agricultural Economics 65, (2017): 219-248.
14 Ibid
15 Ghazalian, “The Effects of NAFTA,” 219-248.
16 Elana Holodny, “Here’s what you need to know as NAFTA negotiations begin,” Business Insider, August 16, 2017, https://www.businessinsider.com/nafta-negotiations-round-1-begins-2017-8
17 Eric Martin, Josh Wingrove, and Andrew Mayeda, “NAFTA Negotiators Wrap Up Telecom Chapter, Sources Say,” Bloomberg, April 19, 2018, https://www.bloomberg.com/news/articles/2018-04-19/nafta-ministers-to-meet-in-washington-amid-push-for-quick-deal
18 Office of the United States Trade Representative, Summary of Objectives for the NAFTA Renegotiations, July 17, 2017. https://ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf
19 Sherman Robinson and Karen Thierfelder, “NAFTA collapse, trade war, and North American disengagement,” Journal of Policy Modeling, Vol. 40, (2018): 614-635.
20 Art Swift, “Americans Split on Whether NAFTA is Good or Bad for U.S.,” Gallup, February 24, 2017 https://news.gallup.com/poll/204269/americans-split-whether-nafta-good-bad.aspx
21 Swift, “Americans Split.” 2017
22 Alec Tyson, “Americans Generally Positive about NAFTA, but most Republicans Say it Benefits Mexico more than U.S.” Pew Research Center, November 13, 2017, http://www.pewresearch.org/fact-tank/2017/11/13/americans-generally-positive-about-nafta-but-most-republicans-say-it-benefits-mexico-more-than-u-s/
23 Ibid
24 Ibid
25 Swift, “Americans Split.” 2017
26 Eric Kulisch, “NAFTA makes a comeback on Capitol Hill,” Automotive News 6817, Vol. 92, (February 19, 2018.)
27 Ibid
28 Ibid
29 Kevin D. Williamson, “What NAFTA Does,” National Review, November 13, 2017.
30 Sonneland, “Chart: NAFTA.”
31 Robinson and Thierfelder, “NAFTA collapse,” 614-635.
32 “Number of full-time Employees in the United States from 1990 to 2017,” Statista, 2018, accessed July 22, 2018, https://www.statista.com/statistics/192356/number-of-full-time-employees-in-the-usa-since-1990/
33 “Gross domestic product of the United States from 1990 to 2017,” Statista, 2018, accessed July 22, 2018, https://www.statista.com/statistics/188105/annual-gdp-of-the-united-states-since-1990/
34 Robinson and Thierfelder, “NAFTA collapse,” 614-635.
35 Ibid
36 Ibid
37 Rosalind Mathieson and Eric Martin, “Bad NAFTA Outcome Could Hit Cooperation On Security, Mexico Says,” Bloomberg, November 11, 2017, https://www.bloomberg.com/news/articles/2017-11-11/bad-nafta-outcome-could-hit-cooperation-on-security-mexico-says