You may or may not have heard, but Canada PM Justin Trudeau and Mexico Economy Minister Ildefonso Guajardo have stated that they were willing to discuss the North American Free Trade Agreement (NAFTA). President-elect Donald Trump won the US Presidential Election just two days ago and two of our main trade partners are showing a willingness to at least discuss NAFTA, an agreement Trump has previously stated needed either some serious renegotiation or scrapping. What does this mean? How will this affect our continent?
Canada is Open to Possible Renegotiation
While I may not always agree with everything Justin Trudeau says, I can now say with confidence: He not only cares about his people, he also cares about how America feels. I choose to see this as a sign of loyalty from Canada. Trudeau expressed the importance of reassessing trade agreements to ensure that it’s still beneficial to his people. He said, “I think it’s important that we be open to talking about trade deals.”
According to Yahoo! News, there are 9 million jobs in the US that are supported by free trade with Canada. On the flip side, Canadian exports to the US amounts to 20 percent of Canada’s GDP. Trudeau is making a very smart decision by being so open about this. He knows what would happen if NAFTA were to be completely scrapped. As was already mentioned, Canada relies on the agreement for 20 percent of its GDP, which hasn’t seen a whole lot of growth lately. I’m sure Trudeau’s economic advisers told him that it may be worth looking into to ensure that it still works for them as well.
Mexico Claims Its Only Open for Discussions
While Canada PM Justin Trudeau is optimistic and happy to reassess NAFTA, Mexico Economy Minister Ildefonso Guajardo is a little more direct with his words: “We’re ready to talk so we can explain the strategic importance of Nafta for the region… Here we’re not talking about… renegotiating it, we’re simply talking about dialogue.” Of course, Mexico isn’t too happy that the US elected a president who repeatedly expressed interest in building a wall and making them pay for it.
Mexico shouldn’t be on its knees, begging us to keep NAFTA in place, but it also should be careful in how they handle this. I completely understand its anger. But economically, its seen steady GDP growth for the past seven years, unemployment is a little lower than it is here in the US, and 81.1 percent of its exports comes directly to the US. Throwing a political temper tantrum would is not something that would be beneficial its own economy.
What if Mexico isn’t Willing to Renegotiate?
President-elect Trump has made it clear that any nation that refuses to discuss and renegotiate their trade agreements with us will be economically threatened with a tariff and/or withdrawn from previous agreements with them. CNN Money claimed that this is similar to the Smoot-Hawley Act in 1930.
There are two things to take away from this: First, this is misleading. The Smoot-Hawley Act was a blanket of tariffs on other nations to protect American goods. What President-elect Trump wants to do is simply sit down and renegotiate. If they refuse, then we tack on the tariffs. This is absolutely nothing like the Smoot-Hawley Act because the US wasn’t in any position to impose the tariffs it did. Today, it is a world superpower that, I would assume, most nations want to trade with.
Second, the US economy is very different today than it was during the Great Depression. Today, we’re not even in a recession! The National Bureau of Economic Research (NBER) clearly shows that the last turning point in a business cycle was June 2009, announced September 20, 2010.
So what exactly will happen if Mexico stonewalls us? While the US economy would certainly feel the effects of a withdrawal from NAFTA with any member state of the agreement, the consequences are far worse for Mexico. Mexico only accounts for 15.7 percent of US exports and 13.2 percent of US imports. In kind of a crude nutshell, trade with Mexico is sort of expendable.
Part of the reason why the US imports what it does from Mexico is due to companies moving certain operations there. 8.2 percent of US imports from Mexico is oil, which the US could easily work out with Russia (a member of OPEC) if Mexico wanted to throw a tantrum. The worst thing that could happen to Mexico, in my opinion, is if the US withdrew from NAFTA (just from Mexico) and the European Union (EU) decided to end its free trade agreement, too. The US currently has no trade agreement with the EU. Therefore, the EU could use Mexico to get goods to us without paying tariffs if they wanted to.
Effects on the American Economy
This will go one of two ways with any nation the US attempts to renegotiate a trade agreement with: Either the US sits down and is able to renegotiate its trade agreements in a way that is better for the US than before or the other nation finds itself getting slammed by tariffs. There is no discrimination towards any one nation in this plan. Any nation that refuses to sit down and talk with the US will find itself in this situation. But how does that affect the US economy?
At first, it wouldn’t be pretty. If you’ve ever seen the movie ‘The Big Short,’ you know that when it comes to something like this, it won’t look like it’s a good idea in the short-term. Long-term, however, it winds up working out for the main character’s investment bank in the movie. I really feel like we would see a storm before daylight. But this is economically natural. What isn’t natural, in my opinion, is steady growth with no dips at all. The American economy is fairly resilient, no matter what you might hear. In short, I believe that Mexico will not shoot itself in the foot. But if it does, it won’t be long until it comes back to the US ready to renegotiate.