The 1994 North American Free Trade Agreement (NAFTA) between Canada, Mexico, and America abolished most tariffs on goods and services that are traded between these countries. The trade and investment between these countries have exploded.
Their economies have become highly interdependent. Some of the major products traded between these countries include, agricultural products, chemicals, technologies, medical equipment, motor vehicles, pharmaceuticals, services and textiles.
America has the following options: cancel NAFTA, renegotiate NAFTA or legislate trade equilibrium.
A country may withdraw from the agreement six months after providing a written notice of withdrawal to the other two parties, according to Article 2205 of NAFTA. The agreement would then continue to remain in force for the remaining two parties.
Other things remaining same, canceling NAFTA could force America to impose or increase tariffs on imports of products from Mexico and Canada. The latter two countries would do the same. It would reduce imports from, and exports to, each other.
The net effect of this trade war on their production and jobs may actually be negative. Mexican immigration to America would increase. China would take advantage of the trade and diplomatic vacuum so created. It would defeat Trump’s main goals.
Renegotiating the terms of the agreement would have its own challenges. Canada’s Prime Minister Justin Trudeau is willing to do so. But according to Mexico’s Economy Secretary Ildefonso Guajardo Villareal, his country is not.
And don’t forget, President Obama also found renegotiating the terms challenging. It won’t be easy for Trump to renegotiate or nullify the agreement either.
Legislating trade equilibrium
If and when legislated, the trade equilibrium law would provide Trump with a trump card to create jobs and bring back home, even if he cannot renegotiate or nullify NAFTA.
“Trade equilibrium” can be defined as a situation when trading among different countries is such that the trading partners remain generally deficit-free from one another over a cycle of every two to three years. This theory has two major goals: to stop exporting of additional American jobs and to regain the American jobs already exported by legally requiring the dollar-trade surplus countries to eliminate their surplus over a 10-year period by buying American products.
The absence of new trade deficit would save three American jobs per $1 million of such absence. The emergence of new trade surplus would create three American jobs per $1 million of such surplus.
From 2000 to 2015, the U.S. accumulated a trade deficit of $767 billion with Mexico and that of $843 billion with Canada. Once the trade equilibrium law is in place, Mexico and Canada would have to use their surplus dollars to buy American products. Dollars coming back home from Mexico would create 2.3 million new jobs in America. Those coming back home from Canada would create 2.5 million new jobs in America. Thus, $1.610 trillion returning home would create 4.8 million new jobs in America. This is much, much more than the 700,000 jobs America has lost due to NAFTA.
Choosing trade equilibirum
Other things remaining same, the trade equilibrium law would allow trade to flow freely between the three countries. Trade, production and consumption would increase. Employment and incomes would grow. Cost of production and product prices would decline. Immigration from Mexico would decline.
An assumption of $1 million of new investment creating three jobs is very conservative. The U.S. EB-5 Immigrant Investor Program promotes new foreign investment in America assuming that $1 million of new investment can create 10 jobs. The Department of Agriculture provides an even more encouraging number. According to the agency, every $1billion of agricultural exports in 2013 required 7,580 American jobs throughout the economy.
It would be very difficult for Trump to renegotiate or nullify NAFTA. But it would be much easier for him, the deal maker, to convince Mexico and Canada to use their surplus dollars to buy American products. Why should Mexico and Canada continue to use these dollars to buy U.S. government bonds, which earn paltry yields of 2 percent to 3 percent. Using their surplus dollars to buy American products to improve their infrastructure and jobs would earn them a much higher rate of return.
With more jobs and higher incomes, Americans would spend more on American, Mexican and Canadian products. Mexicans and Canadians in turn would use their surplus dollars to buy more American products. The resulting geometric multiplication of free and fair trade between countries will give birth to the next economic revolution. The effects would be larger than that of the industrial and the Internet revolutions.
Is there a better way?
Narendra C. Bhandari, Ph. D., is a Professor of Management at Pace University, Lubin School of Business, New York.
The views by Contributors are their own and not the views of The Hill.