The North American Free Trade Agreement undoubtedly has fueled an increase in trade on the continent, though proponents of the agreement may be exaggerating when they say its demise would block the flow of goods among member countries.
That’s because fewer companies — including tequila-makers — are taking advantage of benefits provided by the 23-year-old pact, which includes an elimination of tariffs on most goods traded between the U.S., Mexico and Canada. Of total U.S. imports from its two neighbors last year, only 51 percent were under the Nafta, down from 66 percent in 1998, according to calculations made by Bloomberg based on Census Bureau data.
Trade analysts said it’s unclear why fewer importers are taking advantage of Nafta benefits. They said red tape involved in using Nafta can be a deterrent, meaning some companies may instead choose to pay tariffs allowed by the World Trade Organization, which are still low and in some cases nonexistent. And companies may opt out of Nafta because it stipulates how much material must be sourced from North America, which can be a costly requirement given the low cost of Asian supplies.
The questions come at a crucial time, as U.S. President Donald Trump has made modernizing and improving Nafta a central component of his economic policy. Mexico has already given its companies notice that it will renegotiate the deal, while Trump and Canadian Prime Minister Justin Trudeau discussed trade ties in their first official meeting on Monday.
Trump hasn’t specified what he would change about the agreement, though he has threatened to scrap it if he can’t renegotiate terms that would boost manufacturing and protect jobs in the U.S. While ending Nafta would certainly hurt companies and workers who depend on the agreement, it wouldn’t create as big a trade a barrier as some people think, according to Christopher Wilson, deputy director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington.
“The fact that a major percentage of U.S.-Mexico trade occurs outside of the Nafta framework is clear evidence that changes to or even the elimination of Nafta would not destroy U.S.-Mexico trade, or do anything approximating that,” he said. “That said, Nafta is important.”
Even critics of the agreement such as Robert Scott, a senior economist at the Economic Policy Institute, agreed that the deal is crucial. While he estimates Nafta has resulted in 700,000 lost American jobs, it would be a “huge mistake” to dissolve it now that it has caused the three countries to integrate so closely. Gary Clyde Hufbauer of the Peterson Institute for International Economics likened Mexico to “another state” under Nafta, in the eyes of U.S. firms.
That’s particularly true for industries that depend heavily on Nafta. Almost 94 percent of vehicles and car parts imported into the U.S. from Mexico use Nafta benefits. On the other hand, spirits and beverages, including tequila and beer, only use the agreement 8 percent of the time. In fact, tequila comes into the U.S. for free for all WTO members.
“If Trump or somebody wants to blow up Nafta, he’s going to have one hell of a push-back from the auto industry,” said Fred Bergsten, a senior fellow at Peterson.
So when the Trump administration starts to renegotiate the pact, expect to hear a lot more from General Motors Co. and Ford Motor Co. than Corona beer brewer Anheuser-Busch InBev NV.