Trump signs executive order to renegotiate NAFTA with Canada and Mexico
US President Donald Trump, who assumed office on Friday, January 20th, 2017, signed an executive order on Monday, January 23rd, 2017, to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico and the Trans-Pacific Partnership (TPP), highlighting the rise of protectionism measures to spur economic development. Trump, who made bringing back manufacturing to the US a large part of his successful election campaign, has been pushing automakers to ramp up their investments in the US, while threatening to slap Mexico-built vehicles with a 35% import tax.
The Trump administration has also promised to create one million US jobs over the next five years through a series of radical measures that include new taxation policies and trade agreements, making countries such as China, Japan, Canada, Mexico, and other important trade partners wary about the repercussions of such measures.
NAFTA – boon or bane?
NAFTA is a trade agreement between Canada, Mexico, and the US that was signed into law in 1994 under President Bill Clinton. The framework of the deal was first drafted under President Ronald Reagan in 1987. NAFTA essentially eliminated almost all tariffs among the three nations, allowing for the seamless flow of goods and supplies across borders. Today, approximately $1.4 billion in goods cross the US-Mexico border every day. NAFTA also makes it easy for companies to move operations from the US to Mexico. US companies, especially automakers, have a clear advantage through this deal because they gain from the benefit of cheaper labor in Mexico.
Trade between Canada, Mexico, and the US has increased significantly, and particularly between America and Mexico. US exports to Mexico in 2015 were up nearly 470% compared to 1993, the year before NAFTA became law. While NAFTA has been a major driver of American trade for nearly two decades, it has long been divisive, with critics blaming it for lost jobs and lower wages. The Obama administration negotiated the trade pact for nearly eight years, but failed to reach a consensus.
Trump made the debate over free trade one of the central topics of his election campaign while criticizing China, Mexico, and Japan. Trump’s campaign has argued that America has lost nearly one-third of its manufacturing jobs since NAFTA. He argued in favor of dumping trade deals, saying that NAFTA was the worst trade deal ever made in the history of the country. According to Trump, NAFTA has resulted in a massive exodus of good-paying jobs overseas, leaving Americans with a mounting trade deficit and a crippled manufacturing base. However, with tough and fair agreements, international trade can be used to the advantage of the domestic market to spur economic growth by returning millions of jobs to the US, thereby establishing the US as a major force in manufacturing.
How have automakers reacted to Trump’s stance?
General Motors Company (NYSE: GM), one of the automobile majors making up the famous “Detroit 3”, announced a $1 billion US investment plan involving new models and plant updates, becoming the latest automaker to bow down to pressure from Donald Trump to create more domestic jobs, on January 17th, 2017. The announcement comes after Ford Motor Co. (NYSE: F), and Fiat Chrysler Automobiles N.V. (NYSE: FCAU) detailed out US spending plans, including manufacturing changes that brings back industrial jobs to the US.
On January 03rd, 2017, Trump threatened to impose a “border tax” on GM for making some of its Chevrolet Cruze compacts in Mexico. In the same vein, he has also warned German automakers like BMW AG and Toyota Motor Corp. over building vehicles abroad. Bending to political pressure, South Korea’s Hyundai Motor Co. and KIA Motors Corp. announced on January 17th, 2017, that they would boost US investment by 50% to $3.1 billion over five years, up from the $2.1 billion spent over last five years. The two automakers may consider producing Hyundai’s Genesis vehicles and a US-specific SUV in the country and may build a new plant in the US.
After facing criticism from Trump, Ford decided to cancel investments for a $1.6-billion factory in Mexico and expand an existing plant in Michigan. Similarly, Fiat Chrysler committed $1 billion toward making three new Jeeps in the US and enabling a Michigan facility to manufacture a Ram pickup now produced in Mexico. The decision to increase US manufacturing is potentially a response to Trump’s plan to renegotiate NAFTA as well as make it expensive to import Chinese goods. Trump has also blamed China for stealing American jobs and hurting the US manufacturing sector.
Over the years, NAFTA has contributed to a decline in US manufacturing jobs, but it has led to massive automotive industry investment in Mexico and the growth of a supplier network there. Nearly every automaker has built new plants in Mexico in recent years. Mexico has surpassed Canada in annual vehicle production. Reversing those investments to build new plants in the US would take years to accomplish even in a best-case scenario. Meanwhile, the 35% tariff or border tax that Trump has proposed would cause the price of many cars and trucks sold in the US to soar and could hurt industry sales and lead a steep decline in profits for automakers.
Trump’s trade policies could undermine auto industry
The Center for Automotive Research (CAR), a non-profit body founded to improve the competitiveness of the US automotive industry, has published a new report highlighting how Trump’s trade policies could hurt the automotive industry. If the US were to enact a 35% tariff on light vehicles imported from Mexico, CAR estimates the sales impact would be 450,000 units in the US, and an implied loss of nearly 6,700 North American assembly jobs. Meanwhile, because roughly 40% of the cars assembled in Mexico bound for the US include parts that are manufactured in the US, thousands of other American workers would be impacted as well.
Moreover, at least 31,000 US jobs could be lost in addition to some proportion of the 6,700 North American job loss, as a result of a 35% tariff on light vehicles and parts imports from Mexico. What’s more, the CAR report states that if the US withdraws from NAFTA and Mexico takes the expected step of installing retaliatory tariffs on goods exported by America, the obvious consequence is that American exports will suffer. Meanwhile, China and other countries could reap huge benefits as a result of these policy changes.
Any move by the US to withdraw from NAFTA or to otherwise restrict automotive vehicle, parts, and components trade within North America will result in higher costs to producers and consumers, lower returns for investors, and a less competitive US automotive and supplier industry. All these factors combined would undermine the Trump administration’s goal of creating manufacturing jobs. According to the US Chamber of Commerce, about 6 million US jobs depend on trade with Mexico.
Similarly, Trump’s decision to scrap the 12-nation TPP could have wider ramifications by upsetting multinational trade agreements that defined global economics for decades. The agreement, the largest regional trade accord ever, brought together the US and 11 other nations in a free-trade zone for about 40% of the world’s economy. Its member countries are Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru. It was intended to lower tariffs while establishing rules for resolving trade disputes, setting patents and protecting intellectual property.
Although the TPP has not been approved by Congress, the trade agreement was negotiated by former President Barack Obama to foster economic ties between the member nations and resist the emergence of China as a growing super power. Trump has stated that American workers would be protected against competition from low-wage countries like Vietnam and Malaysia, also parties to the deal.
Trump to repeal Obamacare
Among the other major policies opposed by the Trump administration are parts of the Affordable Care Act or popularly known as Obamacare, President Barack Obama’s signature healthcare law implemented in 2010. Trump has vowed to repeal the law and replace it with an alternative plan. The new President has also pledged to clamp down on drug prices and make it more affordable for the poorer population. Coincidentally, drugmakers feel that repealing and replacing Obamacare could benefit the pharmaceutical industry if it allows drugmakers to sell cutting-edge new medicines to more US patients. Parts of the Affordable Care Act have made it hard for patients to get access to some new drugs because they have high co-pays or are not covered.
Drugmakers said that they did not see a big increase in volume following the enactment of the Affordable Care Act because many of the roughly 20 million Americans who gained their insurance under the law are young, and are not major users of prescription medicines.
It now remains to be seen whether Trump’s renegotiation of major trade pacts would have a positive impact on the US economic growth in the next few years and whether he would be able to fulfill his promise of creating job growth for Americans.