As President Trump continues to threaten U.S. withdrawal from the North American Free Trade Agreement, it could soon become reality. However, dismantling NAFTA would bring large changes for consumers and the global economy. Over the past quarter century, the agreement has reshaped the United States economy, and its demise could raise costs for North American companies and consumers.
NAFTA was put into effect in 1994. As a result, the United States trade with Mexico and Canada has tripled, growing faster than American trade with the rest of the world. Canada and Mexico are now the second and third largest exporters to the United States, as well as the leading importers of American products.
In April, Mr. Trump expressed opposition for NAFTA by arguing that it was giving Mexico an unfair advantage, allowing the nation to successfully steal jobs from the United States and profit from opening the border to tariff-free goods.
Under NAFTA, the three countries pay nothing on most goods that cross the border. After the United States exits the pact, the tariffs that Canada and Mexico put on its goods would increase significantly. For certain goods, tariffs could rise as much as 150%. This would cause prices for exports to rise, decreasing the total revenue of firms involved in trade.
In addition, companies have spent years developing supply chains that stretch across North America’s borders to take advantage of differing resources and costs. These trading relationships help keep the price of the final product competitive with other major global manufacturers in Europe and Asia. The auto, agriculture, energy and retail industries would all be greatly affected.
“If the United States was to withdraw from NAFTA, this would present an opportunity for a new trade pact between the countries. However, due to strong opposition, Mexico and Canada may not be in the mood to negotiate” said Keith Knutsson of Integrale Advisors.