It’s only the beginning of his first week as president and Donald Trump is already moving to keep his campaign promises to trash free trade agreements. Before the coffee was cold Monday morning, President Trump had already announced his intention to withdraw from the Trans-Pacific Partnership and to sign an Executive Order to renegotiate the North American Free Trade Agreement.
“We will be starting negotiations having to do with NAFTA,” Trump said Sunday at a swearing-in ceremony for his top White House advisers covered by NBC News. “We are going to start renegotiating on NAFTA, on immigration and on security at the border.” The Executive Order withdrawing from the TPP was expected to be one of Mr. Trump’s first acts on Monday according to CNN. As I write this, the TPP page has already been removed from the US Trade Representative website.
During the campaign, Trump was critical of trade agreements that he called a “bad deal” for the United States. Trump blamed NAFTA for the migration of many US companies and factories to Mexico and other countries.
In spite of Trump’s claims, the website of the outgoing US Trade Representative shows that NAFTA has benefitted the US as well as Mexico and Canada. US exports to Mexico have increased by 468 percent since 1993 when NAFTA was implemented. Contrary to the popular belief that free trade is a one-way street, Mexico is the second largest export market for the US, accounting for almost 16 percent of all US exports. Only Canada imports more US goods.
While President Trump and the anti-traders among both parties blame cheap Mexican labor for enticing American companies to relocate, the real story is not that simple. When Trump negotiated a deal to keep an Indiana Carrier plant in the US, the company ended up eliminating many jobs due to automation anyway. The high cost of labor in the Indiana plant was not cost-effective for the low-tech products made there. Reneging on free trade agreements will not make American labor more cost-effective than machines.
The Carrier deal also hinged on tax credits for the company. The United States has the highest corporate tax rate in the free world. Only the United Arab Emirates and Puerto Rico, a bankrupt US territory, are higher. At 30 percent, Mexico’s corporate tax rate is above the international average, but still far lower than the US rate of 38.9 percent.
Ironically for Trump’s anti-trade agenda, another part of Mexico’s economic success is the country’s commitment to free trade. Mexico has numerous free trade agreements with countries in Central America, South America and Europe as well as with Israel and Japan. The ability to make products in Mexico and ship them abroad without taxes that would be incurred on US exports has attracted some US manufacturers. When Ford announced that it was moving small car production to Mexico, a key reason was that most of those vehicles would be sold in countries where Mexico had free trade agreements.
If Trump can wring a few concessions out of other countries to improve trade deals, then the US may benefit. If he ultimately plans to scuttle NAFTA as well as the TPP, then it will be bad for US companies, workers and consumers.
According to Yahoo News, Trump claims to favor trade treaties with individual countries rather than multinational trade pacts. Trump’s plan would, for a similar amount of effort, craft a trade deal with one country rather than a dozen. It would also leave US businesses to navigate a patchwork of trade regulations that vary from country to country rather than a consistent set of rules for North America and the Pacific countries.
The Center for Automotive Research estimates that withdrawal from NAFTA or implementing punitive tariffs could cost 31,000 US automotive jobs. Prices for cars sold in the US would almost certainly rise due to both tariffs and the higher cost of manufacturing in the US. As a result, fewer cars would be sold.
An additional factor is that if the US withdraws as a free-trade partner, it is likely to be replaced by China. In addition to loss of market share for US companies, that would entail a loss of leadership in setting regulatory standards since, without NAFTA, the US small car market is smaller than that of China and the European Union. American standards and engineering would have less influence on auto design and construction as the American market for small cars shrinks.
By rejecting the TPP, the Trump Administration may well be pushing other nations of the Pacific Rim toward a free trade agreement with China. CNN Money reports that the Chinese are already inviting many countries that would have been in the TPP to form a Regional Comprehensive Economic Partnership (RCEP). The RCEP may ultimately include staunch US allies like Australia and Japan as well as allowing China to make further inroads to Latin America.
Overall, there is a large potential downside to tinkering with a free trade agreement that has been an enormous success and scuttling another that will open a door to Chinese expansion. Edward Alden, a senior fellow at the Council on Foreign Relations, told CNN Money that he was “baffled” by Trump’s protectionist hostility to the trade treaties.
Alden questions Trump’s penchant for deal-making. “Trump has single-handedly given away an enormous source of leverage over China,” Alden said. “The first rule of negotiating is don’t give away something for nothing, and he’s done that right off the bat.”