Since May 2017, when U.S. President Donald Trump gave notice that he wanted to renegotiate the North American Free Trade Agreement, there have been seven rounds of talks. The longer they go on, the more time Mexicans have to imagine what might happen if Trump ends Nafta altogether.
1. How could Nafta end?
If Trump decides to pull out of Nafta, he would first have to give six months’ notice to the other signatories, Mexico and Canada. But it’s unclear whether he could do this on his own. Nafta was implemented through congressional legislation in 1993, so U.S. lawmakers could potentially vote to block its repeal. And exporters, importers and trade organizations might file suit. If Trump prevailed, trade between the North American neighbors would likely revert to World Trade Organization rules, which came about in 1995, around the same time as Nafta. Under these, tariffs on U.S. exports to Mexico would average 7 percent; imports from Mexico would average 3.5 percent.
2. What would this do to Mexican exports?
It wouldn’t be pretty. Mexico’s total exports in 2016 were worth $401.2 billion, with 73.3 percent headed to the U.S. and 7 percent to Canada. Only about half of Mexico’s exports to the U.S. are now covered by Nafta, in part because of all the complicated paperwork. Mexican manufacturing, real estate and retail companies could be hit hardest, Fitch Ratings says. Avocado exports, on the other hand, might be O.K., as U.S. demand has soared and most consumers would be likely to pay the added costs.
3. What about imports?
Under international trade rules, Mexico would have more freedom to raise tariffs on its imports because its “bound rates” — the maximum rate a WTO member can impose — are higher than the “Most Favored Nation” rates the U.S. would impose, since advanced economies have agreed to apply lower rates than developing countries. For example, Mexico could raise its tariff on corn, one of the largest U.S. exports to Mexico, to 37 percent without breaking any rules. The move would help Mexican corn producers, who have long complained of having to compete with heavily subsidized U.S. grains. If Mexico does raise tariffs, the higher costs would, most likely, be passed along to Mexican consumers.
4. How many jobs would be lost?
It’s hard to say. Millions of jobs are tied directly or indirectly to Nafta. But the end of a free-trade agreement does not mean the end of trade. The greatest job loss could come from U.S. companies shutting down their Mexican factories and moving them to another country, like Ford did last year when it canceled plans to build a car plant in San Luis Potosi, a Mexican town, and built it in China instead. The $1.6 billion investment would have directly employed almost 3,000 people and would have provided indirect jobs to about 10,000 more.
5. What would be the impact on Mexico’s economy?
Oxford Economics estimates Mexico’s gross domestic product would lose 4 percentage points by 2022 and fall into a technical recession by mid-2019. In a survey of more than 100 financial professionals at a Bloomberg FX18 Summit in Mexico City in March, almost three-quarters said that the peso would be trading at between 18 and 20 to the U.S. dollar by the end of 2018. A Capital Economics report says the central bank, Banxico, would hike interest rates by about 200 basis points.
6. Could Mexico start exporting elsewhere?
Yes. Mexico isn’t sitting around waiting for Nafta to be renegotiated. The country has free-trade agreements with dozens of countries and is looking to modernize or expand agreements with other partners. Mexico recently joined 10 other countries, including Australia, Japan and Canada, in signing a successor to the Trans-Pacific Partnership. It also expects soon to finish updating its existing free-trade agreement with the European Union. China is also on Mexico’s sights. Government officials recently toured Shanghai to meet with infrastructure, energy, automotive and mining executives.
7. Would the end of Nafta spur new economic development?
Not at first, since Mexico does so much of its business with the U.S. It would take many years, decades even, for Mexico to overhaul its trading patterns.
8. Would there be any winners?
Maybe Mexican farmers. Those cheap U.S. produce exports displaced Mexican producers and eliminated about 5 million jobs. Even though Mexican produce production has grown considerably under Nafta, it’s created more seasonal jobs than permanent ones, hurting overall job creation in the sector. Without Nafta, local producers would presumably stop competing with U.S. products and boost their own production.
The Reference Shelf
- Text of the North American Free Trade Agreement.
- A U.S. Congressional Research Service report on what happens when the U.S. withdraws from free trade agreements.
- Bloomberg surveyed more than 100 financial professionals at its FX18 event in Mexico City in March on what the rest of 2018 held for the peso and interest rates.
- Bloomberg Businessweek article: “The Godfather of Mexican Manufacturing Couldn’t Care Less About Donald Trump.”
- Bloomberg QuickTakes on why it may not be easy for Trump to kill Nafta and on Mexico’s election.