NAFTA is Dead: Trump Seeks Separate Agreements With Mexico and Canada

Trump proposes NAFTA by another name. But it won't look like NAFTA. He wants tailored bilateral trade agreements.

President Trump says Mexico and Canada are ‘very different countries’. That is true of any two countries, even countries in the EU. And on that note Trump Raises Prospect of Separate Trade Deals With Canada, Mexico.

“I wouldn’t mind seeing Nafta where you’d go by a different name... a separate deal with Canada... a separate deal with Mexico,” Mr. Trump told reporters.

“These are two very different countries,” Mr. Trump said, adding that in his opinion the U.S. loses “a lot of money with Canada” because of the existing framework, and loses “a fortune with Mexico.”

NAFTA is Dead

The Globe and Mail proclaims NAFTA is Dead and Canada Should Move On

NAFTA – at least as we know it – is dead. Donald Trump just killed it.

The reckless and crippling 25-per-cent tariff on steel and 10-per-cent tariff on aluminum that the U.S. President’s administration just used to bludgeon Canada and Mexico (not to mention the entire European Union) is the murder weapon.

When someone keeps threatening to smash you, as Donald Trump has since he announced his candidacy for president, it usually pays to take them seriously. Today, even the most committed somnambulist can’t ignore what the U.S. administration has done.

How can we for a moment believe that a renegotiated NAFTA can protect us from further unwarranted and equally ferocious economic attacks from our putative partner? The risible pretext that U.S. Commerce Secretary Wilbur Ross trotted out for the tariffs was “national security,” because, as he put it, “without a strong economy, you can’t have strong national security.” We can expect this elastic interpretation to be the standard approach of the Trump administration to any disputes under a renegotiated NAFTA.

The only negotiating stance that works against Donald Trump is the ability and willingness to walk away.

Disputing NAFTA

Every time I mention trade, at least one misinformed reader blames NAFTA for the loss of manufacturing jobs. It happened again yesterday. And it's nonsense.

NAFTA Not Responsible For Loss on Manufacturing Jobs

Manufacturing jobs peaked in June of 1979, nearly 15 years before NAFTA. Also note that manufacturing jobs rose for the first eight years after NAFTA started.

How many times do I have to post that chart before people look at it?

Manufacturing Share of Employment

As a percentage of employment, manufacturing's decline started in 1960 for Both the US and Canada.

Balance of Trade

Trump moans the "US loses a fortune" with Mexico. The above chart shows Trump is wrong.

Moreover, a cheap supply of parts helps keep auto prices down. Consumers spend the savings elsewhere. Jobs are created, not lost, in the process.

Dear NAFTA Bashers: You Need New Charts

For a collection of still more charts on the absurdity of NAFTA bitching, please see Dear NAFTA Bashers: You Need New Charts.

True Source of Trade Imbalance

To understand the origin of trade imbalance, please see Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the True Source of Trade Imbalances?

Trump is clueless about trade and barking up the wrong tree.

Mike "Mish" Shedlock

Comments (20)
No. 1-20
flubber
flubber

Anecdotal story....Our manufacturing company in the SE produced a major component used by a Fortune-500 company with the majority of applications in the chemical processing and oil refinery business. We produced the part for 22 years and felt that our process was so refined that no other firm in the USA could beat our pricing. We lost the job to a firm in Mexico in 2009. Since then, the whole assembly is manufactured in China. I cannot say that the loss of the job to Mexico was due to NAFTA.

thimk
thimk

good point; as this wiki article alludes to; it was not nafta that caused more manufactured goods to be exported into the US but free trade zones created in china and mexico that US companies outsourced/relocated . These areas offer a company low input costs(i.e. cheap labor ,in the case of mexico ;peso devaluation, no import duties. ) Simply put , US companies/manufacturing moved operations to other countries.To blame nafta is a fallacy.

Webej
Webej

Trump is an incorrigible ignoramus. When you are getting more than you are producing and shipping, you are not losing. Of course you are building up liabilities, in this case held in your own currency by other parties who will just have to trust you (ha ha). Purportedly free trade and business-minded, how will war help a situation in which Canada and the US trade various steel products (yes Canada also imports steel products from the US) across a 7000 km border on the basis of price, convenience, and quality all along that border. It doesn't get much more favorable than that.

Malcom
Malcom

Canada had the advantages of public healthcare and a low loonie for a long time, post NAFTA. We came to rely rather heavily on both and became too complacent in our competitive outlook.

Kinuachdrach
Kinuachdrach

"Consumers spend the savings elsewhere". True -- but only for those consumers who still have jobs. The academic theory implicitly assumes that workers who lose their jobs due to imports will find equivalent (or better) jobs producing exports. Nice theory -- but it does not conform to the real-world experience of declining labor force participation in the US.

Of course, there are many more factors in play in a real economy than simply treaties & tariffs. These are government statstics, so some of the trends lie in changing definitions -- from the 1980s onwards, manufacturers began to contract out lots of people (eg canteen staff, janitorial staff, accounting staff, legal staff) who were previously directly-employed "manufacturing employees". And let's not ignore the Big Kahuna -- the slope of the employment line on the chart Mish uses changed around 1970, coincidentally when the EPA was set up and big-time over-regulation got going.

Kinuachdrach
Kinuachdrach

Mish -- the chart you show on US/Mexico trade seems to imply that the trade is nearly balanced in the $100 Billion range. But Census data shows for 2017 -- US exported $243 Billion in goods to Mexico, and imported $314 Billion, a substantial US deficit of $71 Billion.

Snow_Dog
Snow_Dog

The guys who come in and dismantle a factory, unbolt the machinery from the floor and put it on a flatbed truck are in “manufacturing”. The equipment they disassembled? That will be shipped overseas and counted as an “export”. Clinton administration used all sorts of data re-categorization for their political benefit. Same thing with Barack Obama, who actually wants us to believe he ramped up “deportations of illegals” when he did no such thing. Routine border crossing denials, usually over simple paperwork snafus suddenly became “deportations” and logged that way for data consumption.

Looking at the chart, the final data point appears to be around the 12,000 level. That puts it about equal to approx 1945 levels. We cannot say for sure that it is all NAFTA related, but likewise Mish cannot dismiss it as likely as he does. The 1993-2001 period is GIGO data. One last point is that the chart is all about quantity and none about quality of the beloved “manufacturing jobs”.

The maquiladoras that started sprouting up in that era at the US border we’re about textile jobs : t-shirt and underwear, etc. Stuff that likely was heading overseas with or without NAFTA. No one thought Michigan would lose the automotive sector or North Carolina the home furniture business. The whole damn issue of free trade was soft peddled to American voters and we were all put at ease and told not to worry about anything. It’s all baloney, but Joe Sixpack seems to be eternally gullible.

Realist
Realist

First; Mish is correct in his discussion of free trade. Free trade is good for all parties involved. The US has benefited from its many trade agreements, including NAFTA. More trade creates more jobs for all parties. The vast majority of job losses that people whine about are because of automation, not because of trade agreements. Second; Trump wants you to believe that all previous trade agreements were bad. That is nonsense. No country, including the US, would sign a trade agreement that hurts them more than it helps them. Third; Trump thinks he can bully his trade partners into signing trade agreements that allow the US to win, while the partners lose. Again, no country would willingly sign such an agreement. Mexico, Canada, Europe, Asia, etc will walk away before they sign a bad agreement. Fourth; It’s becoming apparent that there is no point negotiating or signing any agreement with Trump because his word can’t be trusted. He changes his mind constantly, and will back out of any agreement shortly after he signs it. The rest of the world would be better off ignoring the US, and simply focus on increasing trade with each other.

caradoc-again
caradoc-again

Sensible & hard to disagree with but do you see the EU and China doing that unless one or both sides change? If they do change might it be better to change to maintain easy US access? What about US footing defence bills for others? Etc. The EU is scared stiff of China, the EU knows it has had a good US arrangement and been defended and supported by the US and that Trump will one day be gone. The US will change sooner than the Chinese regime.

Sechel
Sechel

Trump has never built or run a manufacturing business nor studied economics. The hubris here cannot begin to be described.

sachvik
sachvik

Completely agree! The real question is: can we replace the jobs lost from automation and outsourcing? Yes there are always new jobs in new areas, but two fundamental issues now exist for a broad-based jobs recovery: (1) The basic business template is now set - the inventors, and their investors/ supporters in developed economies make a lot of money, while the item is manufactured in China/ developing world (so ordinary workers in developed economies lose), and (2) With increased technology adoption, industries commoditize faster and benefits accrue to the #1 more than anyone (everyone else struggles to survive/ make basic margins). The challenge for policy makers is: How do you ensure a fair society where the winners share the wealth with the losers? In other words, how do you stop the losing masses from revolting against the few winners (has always been a problem throughout human history)?

sachvik
sachvik

A few questions here: (1) Why is free trade good for those people in developed countries who lose their jobs? Even economics textbooks (optimistically) say: free trade allows people to move into areas where they can create more value. Not all ex-auto plant workers (of 20 years experience) can create the next Facebook/ Google/ Tesla. So, what's their alternative - move to Mexico/ China? (2) Anyone in business will tell you, there are no permanent deals! Companies renegotiate with suppliers all the time to get better terms as they scale - economics calls this (again very optimistically) as scale efficiencies. Are free trade agreements written 10+, in some cases 50+, years ago still relevant for today's conditions? (3) Haven't read enough economics to comment but here's an open question (would love to get the community's response on this): does it really make sense to have free trade with a country who has 5x your population and 3x your resources? I would think they can do everything cheaper, even the higher value added activities (perhaps not immediately, but over time as knowledge disseminates - why not?). Sure you get things cheaper but you lose all manufacturing jobs and face stiff competition in the higher value added jobs later as well. (4) A fundamental tenet of economics is that human wants are infinite - which I understand, drives most economics models. Question: Are industries related to basic needs (food, shelter, clothing) the ones that benefit from free trade the most, as costs reduce and living standards rise? Perhaps the remaining industries should not be part of free trade - how else do you differentiate? PS: Please don't take these questions as a criticism or my firmly held support of Trump! I like to argue from an opposite point of view as it helps clarify my own thinking...

Realist
Realist

Hi sachvik. Wish I had more time to respond. Regarding 1) jobs. As I have stated many times, human ingenuity (such as technology and automation) has been changing the job market for the last 300 years, eliminating one type of job (digging a ditch by hand) with another (manufacturing and operating a backhoe). This dwarfs the effect of free trade job displacement. Either way, people always suffer in the short term, when they lose their job. Which is why the future belongs to those with the skills and education to be gainfully employed. I will simply copy and paste below, one of my previous responses to a similar question (as I am out of time)

The US has not lost the “trade war”, it has lost the “skills, training, and education war”. The US certainly has some of the best educated and brightest minds in the world. Combine that with capitalism/free enterprise and you end up with some of the world’s greatest companies (IBM, Microsoft, Apple, Google, Amazon, etc). However, the US also appears to have an over-abundance of lower-skilled, poorly educated workers who aren’t properly prepared for the modern world. Fifty years ago, Joe Six-pack could finish high school (or not finish), and get a job in a steel mill, coal mine, auto plant, etc. and still earn a decent wage to support his family. As a result, life was good, and Joe never bothered to learn any new skills, or improve himself, thinking that there would always be a good job for him (and for his children). Unfortunately, as Joe got older, the world changed. New technology, new processes, and automation, reduced the need for basic workers in the mines, mills and factories. Improved transportation systems throughout the world brought foreign competition into play. Basic skill Joe could no longer command a decent wage anymore because he couldn’t compete with lower-priced machinery or lower priced foreign workers. I see this story over and over every day in my country as well, because I work with a charity that has a goal of training the Joe’s and the Jill’s who have become unemployable. I have heard variations of this phrase a hundred times from Joe and Jill: “I was hoping to get through my working life without having to learn all this new-fangled stuff.” One positive, is that most of these people are willing to learn new skills now that it is absolutely necessary. I look at the US and President Trump, and I see a salesman who has appealed to Joe six-pack. He is promising to get Joe his good paying job again in the coal mine, steel mill and auto plant. He tells Joe that he lost his job because of poor trade agreements, and that he alone can fix this problem. Poor Joe voted for Trump and now Trump is making noise and threatening trade wars. Joe cheers. Sadly, no matter what Trump does, Joe isn’t going to get his well-paid basic-skill job back, because no company can compete in today’s world with that model. The most likely result of Trump’s trade bluster, is a minor adjustment to many trade agreements with Korea, China, Mexico, Canada etc. Trump will claim major victories, but the reality is that very little will change on the trade front, because the other countries will never agree to a trade agreement that is win-lose. Trade agreements, by their nature, must be win-win.

LawrenceBird
LawrenceBird

What the Trumpistas refuse to admit is that the American worker is, in many cases, vastly over priced. No sane company will outsource production to a country if the result is an inferior product. That Mexican, Chinese, Vietnamese, etc workers can manufacture/assemble products on a par with the US worker at lower wage is lost on the protectionists. This is not 1940, 50, even 1970 when those labor forces could not compete.

If the American worker wishes to command a premium, it is time to learn new skills and move on from jobs that others can and will do for less.

Brother
Brother

Air quality regulations in California has chased away thousands of companies because of the pollution tax implemented 30 years ago. That along with county regulations....NAFTA seems to have little to do with it. Come on Mish you know Mexico's regulations are next to nothing. They are part of the equation .

Tengen
Tengen

You've inadvertently touched on one of our main societal problems. We have a massive parasite class (bankers, MIC, and politicians) that face no competition and are free to mark up their wares as desired. Meanwhile everyone else is subject to relentless competition from here and abroad.

These tariffs to nothing to deter our parasite class and the benefit to average Americans is debatable at best. However, if Boeing can sell $7 cargo-rolling loaders to the army for about $1700 each and Wall St can manufacture crises to their hearts' content, the winners at the top will remain unchanged no matter how much noise Orange Julius makes.

Advancingtime
Advancingtime

The fact that China has not been fair in trading with America is a major reason to strengthen ties with those closer to home. A very strong strategic dimension exists for NAFTA and when President Reagan fathered and endorsed the concept decades ago he recognized the need to create a powerful regional trade bloc to compete in a changing global economy. More of why working with Canada and Mexico is smarter than letting China eat our lunch.

PowerAdapter
PowerAdapter

There is more to this issue and "America First"-ism than economics. Trade agreements and global agendas such as climate change and immigration and central bank coordination, and WB/IMF are about globalism as much as about addressing any particular issue. Treaties are a means to over-ride and circumvent national sovereignty and the rights of citizens and (for example) the constitution. Can't get enough. Trump is blowing-up the plan - is he really that smart?

Curious-Cat
Curious-Cat

Air quality regulations? Have you tried to spend two weeks in Beijing? It their level of air quality the price you would pay for manufacturing jobs? We decided as a country a long time ago that was too high a price to pay.