When it took effect in 1994, the North American Free Trade Agreement (NAFTA) created the largest trading market in the world. NAFTA lifted tariffs on the majority of goods produced and traded by the U.S., Canada and Mexico.
At that time, the three signatories had a combined 365 million people and GDP totaling $6 trillion. Today, NAFTA encompasses a market of 500 million people with a combined GDP of $25 trillion.
NAFTA has been a boon for U.S. producers and consumers. Canada and Mexico are our number one and two export markets, respectively, as we exported almost $500 billion worth of goods to them in 2016. And of the 14 million American jobs supported by trade with Mexico and Canada, 5 million are a direct result of NAFTA. It is vital to our prosperity to continue that strong trade relationship.
But while NAFTA has been an overall success, the agreement needs to be modernized for the 21st century to reflect new developments, such as the advent of digital trade, e-commerce and communications. The Trump administration renegotiated NAFTA’s successor, the United States–Mexico–Canada Agreement (USMCA), which was a step in that direction. As trade policy junkies pore over the details to mixed reviews, one thing is certain: the new deal isn’t perfect, but it’s far better than no NAFTA at all.
USMCA includes new, largely positive, chapters on digital trade, e-commerce, and finance. Modernization – check. It also makes very modest improvements on some points of contention by lowering barriers to certain dairy markets in Canada and lowering U.S. barriers to sugar and peanuts. Lowering additional trade barriers – check.
But there are problematic new elements in this deal, including stricter country-of-origin requirements, which increase trade barriers. Not so good. Perhaps more troubling are the new minimum wage standards for Mexican auto workers, which will be massively complicated to comply with.
These kinds of protectionist policies drive up costs for everyone. Including domestic policies in free trade agreements may be a slippery slope for other trading partners to make unacceptable demands on U.S. policy.
But upending today’s strong North American trading relationships and returning to pre-NAFTA days would be a perilous path. Given the central role NAFTA has played in strengthening our economy and improving lives in all three countries, it’s important not to undermine its obvious benefits as the new agreement undergoes approval and implementation. There are two areas that pose specific concerns.
First, the administration must keep the U.S. firmly in NAFTA until the new deal is fully ratified and implemented. Failure to do so could unleash real and unnecessary damage on the American economy.
Terminating NAFTA before a new deal is in place would reduce market access for businesses throughout North America, causing unnecessary pain for thousands of businesses and their workers.
One study for the Business Roundtable estimated that terminating NAFTA would shrink the U.S. economy by up to 1.2 percent annually and reduce net employment by as many as 3.6 million jobs, while imposing higher prices on working families. Threats to pull out of NAFTA are only creating unnecessary uncertainty for businesses whose time would be better spent preparing for changes under USMCA.
Second, U.S. tariffs on Canadian and Mexican steel and aluminum should be eliminated immediately, irrespective of any update to NAFTA, as should U.S. tariffs on Canadian soft wood lumber. Moreover, the administration should drop its 232 investigation for new tariffs – autos and auto parts hardly constitute a national security threat.
Every day, newspapers are filled with stories of how American workers, businesses, farmers and consumers are bearing the costs of these tariffs.
There is little evidence to show that the tariffs enhanced the United States’ bargaining position during the USMCA talks, despite claims to the contrary. If anything, the new agreement occurred in spite of the tariffs. And without the tariffs, American workers and companies would have been spared unnecessary harm.
The administration is now planning to negotiate respective trade agreements with Japan, the European Union and the United Kingdom. This is a welcome step. But leaving metal, lumber, and auto tariffs in place or in play may give negotiators understandable pause and make them less willing to lower barriers and open markets.
It is time to chart a new course, one based on cooperation, not confrontation.
The administration deserves credit for cutting taxes and removing regulatory barriers, which has resulted in a strong economy and the lowest unemployment rate in nearly 50 years.
Dropping tariffs and keeping NAFTA firmly in place while USMCA goes through the congressional approval process are key to ensuring this economic revitalization continues.
Alison Acosta Winters is a senior policy fellow for Americans For Prosperity.
