‘There’s no success like failure’: Trump’s troubling NAFTA stance
There’s no success like failure, Bob Dylan once observed. A new round of North American Free Trade Agreement (NAFTA) talks ended this Monday, and by the time trade officials were wrapping up their week-long session in Mexico City, President Trump torpedoed the entire enterprise.
“We are on the losing side of almost all trade deals,” the president tweeted. “We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A.”
It seems that the only way for Canada and Mexico to salvage the trade agreement is to give the president what he asks for: a huge trade surplus for America.
President Trump is playing with fire. Scorning NAFTA may please some hard-bitten protectionists in the country, but is no policy for economic success nor reducing the trade deficit. First, he’s getting NAFTA and trade deficits wrong.
Yes, the U.S. has a trade deficit with Mexico, but it also has a trade surplus with Canada. Much as Mexico’s trade surplus with the U.S. has been growing, it is not because the country hones Trump-like trade mercantilism (“exports good, imports bad”), takes advantage of the U.S. or generally runs a big trade surplus with the world.
In fact, Mexico imports more than it exports and hence has a trade deficit. Its $50-plus billion bilateral trade surplus with the U.S. is in a way not about the U.S.-Mexico relation itself: It reflects that other countries now export to the U.S. through their subsidiaries and partners in Mexico.
Second, America’s free trade agreements (FTAs) actually improve the country’s trade balance. In all but three free trade agreements the U.S. has signed with other countries, there is actually a manufacturing trade surplus (not to mention the services trade surplus) in America’s favor.
Between 2000 and 2016, the U.S. trade balance with its FTA partners (including Mexico) has improved by $30 billion while the trade deficit with other countries has ballooned.
While there are several factors behind the rising deficit with its non-FTA partners, the simple fact is that the FTAs the U.S. have clinched — comprising 40 percent of its total trade — have opened markets to the benefit of U.S. exporters. The U.S. deficit with its FTA partners is nine-times smaller than the deficit with other countries.
That leads to our third point: Leaving NAFTA and other trade agreements would worsen the U.S. trade deficit. Take the steel sector as an example: The president exempted Canada and Mexico from the new tariffs on steel, but withdrawal from NAFTA would lead to new tariffs on steel between the U.S. and the other countries.
Under the rules of the World Trade Organization, Mexico could actually introduce substantially higher tariffs than the U.S. What would that do to the U.S. trade balance in steel? The U.S. has for several years had a trade surplus in steel with its NAFTA partners.
Almost 90 percent of all U.S. steel exports goes to Canada and Mexico. If the U.S. leaves NAFTA and all sides raise their steel tariffs, the U.S. would certainly destroy its trade surplus with NAFTA.
Worse, the United States’ global competitiveness would be reduced. Producers in the three countries are plugged into common supply and value chains, and if trade between them is distorted, it basically means that the price of their production goes up and their competitiveness goes down.
The effect is pretty obvious: The U.S. would export less to other countries and would substitute some domestic production by imports from other parts of the world.
President Trump may become successful in his campaign to pull America out of trade agreements. Perhaps there’s no success like failure for Trump, but the costs will be heavy for U.S. exporters and workers. As Dylan continued his lyrics of Love Minus Zero: “Failure’s no success at all.”
Fredrik Erixon and Hanna Deringer are director and policy analyst, respectively, at the European Centre for International Political Economy (ECIPE), a policy research think tank dedicated to trade policy and other international economic policy issues of importance to Europe.