Roosevelt Institute | Cornell University

Trump's "Simplistic" Approach to NAFTA

By Dylan NezajPublished October 19, 2017

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Trump's lambasting of the North American Free Trade Agreement (NAFTA), an integral trade deal which governs trade between the United States, Canada and Mexico, betrays either a false understanding of the economic status quo, or a manipulation of the truth through campaign rhetoric. If the latter is the case, Trump's current course of action is another one of many desperate attempts to live up to his grandiose campaign promises.

Trump’s lambasting of the North American Free Trade Agreement (NAFTA), an integral deal that governs trade between the United States, Canada and Mexico, betrays either a false understanding of the economic status quo, or a manipulation of the truth through campaign rhetoric. If the latter is the case, Trump’s current course of action is another one of many desperate attempts to live up to his grandiose campaign promises. His withdrawal from the Trans-Pacific Partnership (TPP) within days of his inauguration demonstrates his resolve to fulfil his promise to terminate trade deals that are allegedly stifling American industry and killing American jobs. Since the spring of 2017, Trump has been discussing NAFTA with Prime Minister Trudeau of Canada and President Peña Nieto of Mexico, raising fears of American withdrawal. Perhaps it is time for NAFTA to be updated, but what Donald Trump needs to understand is that NAFTA has established a complex international economic web that its renegotiation or U.S. withdrawal would certainly spell much more of an economic impact than he anticipates.

Most economists would either tell you that NAFTA has only accelerated inevitable economic trend towards North American integration, or that it has only moderately increased the United States’ GDP. But if you were to ask Donald Trump, he would tell you that the alleged decline in U.S. manufacturing, and in turn a wide range of social woes including increases in poverty and incarceration, owe themselves to this the "worst agreement ever.”

First of all, it is difficult to prove that the U.S. has experienced an overall decline in manufacturing. A study by the Journal of Economic Perspectives tells us that since long before 1994, the price-adjusted share of the U.S. GDP that owes itself to manufacturing has held constant at roughly 13%. It is important to note that this stability is largely due to the rise of high tech manufacturing, which makes up for a decline in other forms of manufacturing such as in the textile and timber industries. All manufacturing, however, has seen an increase in productivity, accompanied by a simultaneous 14 point decrease in the share of  total employment in the manufacturing sector, which is average for the G-7 economies.

Furthermore, only about 5% of mass layoffs, or job loss when a plant is shut down and workers lose their jobs (mostly due to outsourcing) in spite of overall economic growth, owe to trade with Mexico. A policy brief by the Peterson Institute for International Economics is very revealing on this matter, as it asserts that although 4 million jobs were lost annually due to mass layoffs, only 200,000 of such losses were due to increased Mexican-American trade, and the rest were due either to outsourcing to other nations, such as China, or to domestic developments in productivity caused by automation. Another brief adds that each lost net job lost added $450,000 to the U.S. economy overall. This can be attributed to lower costs for consumers and comparative advantages in production.

Talking about abandoning NAFTA is dangerous because many sectors of American industry, such as automotive, textile, and computer manufacturing, are designed for integration into webs of trade with Mexico and Canada that are determined by NAFTA. In fact, estimates show that goods imported from Canada are 25% comprised of American inputs, and goods imported from Mexico are 40% American in inputs. Job loss for American workers is objectively, for fear of sounding like Trump, sad. Nonetheless, promising the disheartened, laid off American worker that the answer to his or her economic hardship lies the withdrawal from NAFTA is even sadder.

There are so many other solutions to economic sluggishness that should be calling the president’s attention, such as working to close the trade deficit with China, or calling on the promises that investment in renewable energies and infrastructure hold. NAFTA is not the cause of the vast majority of job loss in the U.S., and it is irresponsible for Trump to resort to a simplistic solution to people’s economic hardship, attributing so much of it to an agreement put in place when Hillary Clinton’s husband was president. Trump cannot in a desperate attempt to accomplish something so hastily threaten to withdraw from NAFTA. Such a political “victory” for Trump would have great economic consequences, both in terms of the tariffs that would be reinstated, and the message it would send to the world about how America views trade.