The disappearance of the North American Free Trade Agreement (NAFTA) could result in the United States losing 300,000 jobs. The negative affects would impact all Americans one way or another, through prices for consumer goods and services increasing, stock indexes trading lower, and economic growth slowing.
So far there have been five rounds of NAFTA renegotiation failures, which has led to an analysis by Oxford Economics of the potential impacts of having no more NAFTA. Oxford Economics is a global consulting firm that is linked to Oxford University in the U.K.
Some 14 million Americans work for companies that benefit from NAFTA. If there were 300,000 job losses, it would be equivalent to losing two months of U.S. job growth at the current pace. The U.S. economic growth rate would see a decrease of half a percentage point in 2019 to 1.5%, compared to if there was no change to the NAFTA agreement.
The S&P 500 Index would also be negatively impacted if NAFTA ended, with an estimated reduction of five percent in value. This is because investors would look to invest their capital in less risky assets, such as bonds, certificate of deposits (CDs), and money market products.
The NAFTA deal, which was initiated by the American government, has been in place since 1994. President Donald Trump has said that, if he is not able to get the deal that he wants for America, he will withdraw from the free trade agreement.
If President Trump decides to end the free trade agreement, the U.S. government has to give six months notice to Canada and Mexico.
3 Reasons Why Trump Could Kill NAFTA
Here are three reasons why President Trump could get his way and see the NAFTA agreement terminated, leading to hundreds of thousands of job losses in the United States.
1. President Trump and his Administration Are Making Negotiations Very Difficult
President Trump is negotiating without compromising with Canadian or Mexican leaders. Trump has used the tactic of letting all parties involved take his deal or risk terminating the free trade agreement. There has been no in-between compromising from Trump and his team. This is the main reason why there have been NAFTA renegotiation failures.
One example of the tactics being used by the Trump administration has been during the negotiations over the automobile sector. Trump has said that any vehicle being produced must use at a minimum 50% American-made parts. This is a move of protectionism.
Trump believes that more American parts in vehicles would translate into benefits for the country. It is actually the opposite, because businesses will look to meet the quota rather than producing the most cost-efficient vehicles for American consumers. Also, it will disrupt the current supply chain management within companies’ current business plans. That would result in restructuring costs and could lead to higher ongoing business costs and a compression of margins.
2. President Trump Holds a Powerful Position
When President Trump wants a bill to be approved, he must go through Congress and win their votes. If the vote by Congress doesn’t go Trump’s way, however, he could then use his executive powers to make the bill a reality. The likelihood of President Trump pulling such a thing regarding NAFTA is a coin toss, based on his past actions.
3. President Trump’s Team Supports His Anti-Trade Beliefs
When President Trump was making nominations for his administration team, he wanted individuals who would be on the same page as him when it came to the country’s policies. For instance, Peter Navarro, the director of trade and industrial policy in the Trump team, is a true believer in having no international trade agreements. This list also includes the current United States secretary of commerce, Wilbur Ross.
With this said, if Trump doesn’t get his way at first, he could always drum up a plan with his team, since they share the same goals of limiting trade.
Removal of NAFTA Negatively Impacts Agriculture and the Auto Industries
The two sectors of the economy that would be the most negatively affected if NAFTA is terminated are the automobile and agriculture sectors.
All vehicles brought into the United States would see tariffs as low as 2.5% and as high as 25%. This would negatively impact companies in the auto sector, especially regarding the investments that they have already made for their future plans. Let’s take General Motors Company (NYSE:GM), which invested $400.0 million in a Canadian plant to manufacture trucks. With no NAFTA agreement, the trucks could see tariffs as high as 25% in the United States.
GM receives tax breaks and grants from the Canadian government. If the Canadian plant’s jobs were moved to the U.S., those grants would be lost. That could affect the U.S. job market by seeing job cuts in GM’s U.S. headquarters and dealerships since more money would be needed for self-funding.
The agriculture sector is in the same situation of seeing negative impacts if NAFTA ends. The trade agreement helps businesses stay afloat because there are no additional costs of shipping products across borders. This is a very tough business to stay operating in because it is very weather-dependent. With the removal of NAFTA, it means that there will be a higher cost of operating a business in the agricultural sector. It could result in cash-strapped farmers shutting down their businesses and looking for other opportunities. Customers, on the other hand, will feel the increase of higher prices at their local grocery stores.
Conclusion: NAFTA Renegotiation Failure
Even though at first removing NAFTA sounds great, because it would help protect the internal economy of the U.S., it is actually not the case. Products and services would see a rise in costs and, globally, American firms would not be as competitive.
In addition, companies from around the world would not want to invest their capital into America, since local U.S. companies would be favored. In today’s environment, the U.S. closing its doors on free trade is not a good idea, due to the globalization of the world’s economy.
“Killing NAFTA would cost 300,000 American jobs, analysis says,” Fox 2 Now, January 16,2018.
“The Canadians Think Trump Will Try to Kill NAFTA. Are They Right?,” Daily Intelligencer, January 11, 2018.
“’Everything is in play’: What could happen to our auto industry if NAFTA falls apart,” Financial Post, January 4, 2018.
“NAFTA failure would cause Transportation crisis,” Southwest Farmpress, January 15, 2018.