Trump Killing Nafta Could Mean Big Unintended Consequences for the U.S.

Ending the deal would hurt American manufacturers. For consumers, backing out might mean price increases on everything from cars to fruits and vegetables

Republican Presidential Candidates Speak At Values Voter Summit
Photographer: Drew Angerer/Bloomberg

Donald Trump has pledged to renegotiate or terminate the North American Free Trade Agreement, saying that it’s been a disaster for the U.S.

And the billionaire front-runner for the Republican nomination isn’t the first presidential candidate to bash the deal: Since its inception (Ross Perot warned of a "giant sucking sound" pulling jobs to Mexico), Nafta has been a popular punching bag for politicians. Despite the idea's popularity, pulling out of Nafta could have all sorts of unintended consequences for U.S. businesses and the economy.

1. America's biggest export market would be jeopardized 

U.S. goods exports to Canada and Mexico have quadrupled since Nafta took effect in 1994, rising to about $550 billion last year. That’s more than sales to China, Japan, the U.K., Germany, South Korea, Brazil, India, Russia and Hong Kong combined.

While critics have decried Nafta and other free-trade agreements for opening U.S. markets to foreign products, the deal actually lowered tariffs in Canada and Mexico even more than in the U.S. The American government applied an average tariff of just 4.3 percent to imports from Mexico and 5.1 percent to those from Canada before Nafta, while Canada had a 9.7 percent tax on imports from the U.S. and Mexico’s tax was 12.4 percent, according to a study last year led by Gary Hufbauer, an analyst at the Peterson Institute for International Economics.

A return to the tariffs pre-Nafta would mean "our exporters have more to lose in the immediate shock" than Canada and Mexico, Hufbauer said in an interview. 

2. Jobs already gone wouldn't return 

As with any trade agreement, jobs were both created and destroyed after Nafta took effect as the workforce in each nation was realigned based on comparative advantage. In their search for lower costs for production chains, U.S. companies have moved jobs abroad—some to countries that have free trade with the U.S. and others to nations that don’t.

"If we didn’t have Nafta, would things like clothing and automobiles that are produced in Mexico be produced in the United States? No," said David Gantz, who teaches trade law at the University of Arizona. "They’d be produced in China or somewhere that the labor costs are a lot lower. One needs to look at what the alternatives would be."

3. The American economy overall would lose

Thanks to Nafta, U.S. consumers have enjoyed the benefits of cheaper imports from goods manufactured in Mexico. Scrapping the trade agreement might force Americans to stomach higher costs, from flat-screen TVs to Nissans to guacamole: Mexico is the world’s top producer of avocados.

Hufbauer estimates that Nafta trade growth makes the U.S. $127 billion richer each year, not only because of the boost to American exporters but also because of these benefits to U.S. consumers. That's about $400 per person. 

"It’s not always visible to people because much of the benefit is at the checkout counter," Hufbauer said.

4. American drivers could pay more for gasoline

Canada and Mexico accounted for about half of U.S. oil imports in 2014, more than all the nations in OPEC combined and 84 percent of the oil the U.S. bought from outside the cartel.

While a supply glut has driven oil prices to near a six-year low, there's no guarantee things will stay that way.  Ending Nafta could make the U.S. more reliant on imports from Saudi Arabia, Venezuela and other OPEC members when global demand rebounds down the road. 

Nafta gives the U.S. preferential access to oil, limiting the scenarios in which Canada can restrict energy exports to the U.S. If the U.S. didn’t import oil from its Nafta partners, it could do so at higher cost from other countries, some of which aren’t as friendly to the U.S. as Mexico or Canada.

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