Trade Winds: The Trump administration and NAFTA
Blog Post
On the campaign trail, President Elect Donald Trump repeatedly discussed his plans to renegotiate the North American Free Trade Agreement (NAFTA) and impose high tariffs on imports of Mexican goods. The trade agreement’s terms provide for the possibility of either withdrawal or amendment. The impact either action would have on U.S. companies is hard to predict.
If the deal is scrapped entirely, tariffs would potentially revert to significantly higher pre-NAFTA levels. However, an extreme hike in tariffs on imports of Mexican and Canadian goods is unlikely. Such a move could trigger a trade war with these allies, inciting them to raise their own tariffs on imports of American goods, thereby hurting sales of American products north and south of the border. Further, it would harm U.S. businesses, such as GM, IBM and Coca-Cola, that manufacture parts and products in Mexico and ship them back to the U.S. While higher tariffs could result in some U.S. companies maintaining or increasing domestic manufacturing investment and hiring (as has been seen with recent announcements by Carrier and Ford), the downward impact of higher U.S. labor costs on U.S. company profits may discourage similar actions by other companies. Further, many legal scholars believe Trump would need Congressional support for a repeal of NAFTA, and a minority of just 40 Senators could successfully filibuster any such effort. Given these political and economic considerations, more tempered amendments of various aspects of NAFTA are more likely. The Trump transition team seems to have recognized this, as Anthony Scaramucci, senior advisor on the impact of NAFTA, was recently quoted as saying "I don’t think we’re looking to rip up NAFTA as much as we are looking to right-size it and make it fairer."
The details on proposed changes to NAFTA remain scarce, but the uncertainty shouldn’t last too much longer. The Trump transition team has been moving swiftly to select its candidates for Cabinet and other high-level administration trade posts over the past several weeks. Commerce Secretary-designee Wilbur Ross is expected to be the main architect of the administration's trade policy, and Robert Lighthizer has just been selected as the pick for U.S. Trade Representative, a position he previously held under President Ronald Reagan. Ross and Lighthizer will work alongside Jason Greenblatt, the new special representative for international negotiations, and Peter Navarro, who was tapped to head a new National Trade Council. Thus far Ross has expressed his intent to focus on growing U.S. exports and reducing the trade deficit. Time will tell how these goals will align with promised changes to NAFTA and other trade agreements.