The North American Free Trade Agreement was signed between Canada, Mexico and the United States in 1994. The agreement was designed to eliminate almost all trade barriers between the three countries. For the most part, it has had its desired effect with trade between the three increasing significantly. For the United States, Canada is the leading country for American exports with Mexico second. Between the two, over one third of US exports go to these two countries.
According to the CIA World Factbook, 18.3 percent of $1.47 Trillion in US exports go to Canada and 15.9 percent go to Mexico. That means approximately $500 billion in exports could be in danger if President Trump terminates the agreement. Conversely, the U.S. imports more from China than any other country with Canada second and Mexico third. Between the two they represent 26.1 percent of the $2.2 Trillion in imports. Extrapolating these percentages out, it means the U.S. imports approximately $574 billion from our neighbors.
While it is true that we import more from Canada and Mexico than we export, the amount of exports going to these countries has quadrupled since the agreement went in to effect. The argument against the agreement is that it has unfairly resulted in job loss in the U.S., specifically factory jobs. While a great deal of industrial companies have moved jobs to Mexico, even if the agreement is terminated, it doesn’t mean the jobs will come back to the U.S. Companies will continue to seek lower labor costs, it would just mean that the jobs would move to another part of the world.
One industry that has benefited from the agreement is the auto industry. Prior to the agreement, Chrysler was the only U.S. auto manufacturer that saw significant sells in Mexico while Ford and General Motors exports to Mexico were virtually non-existent. After NAFTA went in to effect, Mexican tariffs on automobiles produced in the U.S. or Canada were reduced dramatically.
One company in particular that has benefited significantly is Cummins Inc. (NYSE: CMI). The company’s CEO, Tom Linebarger, made a recent appearance on Bloomberg Television and stated that, “NAFTA is the most important agreement for Cummins, by far.” He went on to state that Cummins has seen its exports to Mexico and Canada triple since NAFTA was enacted. He went on to explain that the company’s truck engines are a leading provider in that space in Mexico and that, “we had over $100 million in sales to Canada’s mining industry last year and $600 million in exports to Mexico.” If NAFTA is revoked or terminated, Cummins’ business would be hampered tremendously and the stock would sink. Not to mention the number of layoffs that could occur at the company and at its suppliers. Linebarger did state that he felt that the agreement could be improved.
Over the last 20 years, Cummins has seen its stock price increase dramatically. The stock price has seen a 30-fold increase from its low in 1998 to the present price. The S&P 500 has only increased 2.7 times during that same span.
Oil Prices Would Likely Spike In The U.S.
After NAFTA went in to effect, the U.S. was able to rely on Mexico and Canada more for oil. An article from the Japan Times in late 2015 stated that “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.” If we terminate the agreement, we could potentially have to rely on oil from OPEC countries and we would be at their mercy when oil prices start rising again. A big spike in oil prices could be very harmful to the U.S. economy. Americans have become accustomed to lower gas prices and the savings have been used for other products.
Another possible outcome if the agreement is revoked would be an increase in tariffs between the countries. Any tariff war between the neighbors would be bad for the economies of all three countries. The three countries did away with tariffs on products from the trade partners after the agreement went in to effect. Prior to NAFTA, the U.S. applied tariffs to Mexican and Canadian products at a rate of around 4.5 percent while Canada applied a tax to American products of 9.7 percent and Mexico applied a tariff of 12.4 percent to U.S. imports. The agreement did away with the tariffs and has allowed a number of industries to export their products with greater ease.
Another industry that has benefited greatly from NAFTA is the U.S. agriculture industry. Canada has become the largest importer of American agricultural products. A recent report from the Council on Foreign Relations stated that “Canada’s agricultural trade with the United States more than tripled since 1994, as did Canada’s total agriculture exports to NAFTA partners.”
No matter how you look at it, trade between the three countries has increased and has benefited the economies of all three countries in certain ways and has likely had negative effects as well. The table below shows how much trade has increased and it came from Investopedia.
Even after adjusting for inflation, trilateral trade between the countries has increased by 125%. The greatest increase came from the trade between Canada and Mexico with a 400 percent increase.
The Impact Termination Could Have
It seems to be in the best interest of all three countries for the agreement to stay in place, but as Tom Linebarger said, the agreement could be improved. If it were to be terminated, the U.S. industries such as auto, agriculture, energy and transportation would be negatively affected. Consumers in all three countries would also likely suffer as prices would increase across the board as inefficiencies in production would return. NAFTA has allowed each country to use their comparative advantage.
Do you think that the manufacturing jobs that have moved to Mexico would return to the United States? Probably not. Companies would still look for cheaper labor than what they can find domestically, so instead of the jobs being located in Mexico, Canada or the U.S., the jobs would likely be moved to a developing nation. This could cause a decline in the quality of products as well as higher prices.
Overall, NAFTA has been good for the economies of all three partners. Yes there have been winners and losers in each country, but the good seems to outweigh the bad. Let’s hope that tweaking the agreement ends up being the answer rather than a complete termination of the agreement.