Trump wants to renegotiate NAFTA. So what does that really mean?

The World
Trucks wait in a long queue for border customs control to cross into the U.S. at the Otay border crossing in Tijuana, Mexico, February 2, 2017.

Here’s the central question: Is renegotiating NAFTA, the North American Free Trade Agreement, an opportunity or a mistake? Simple question, tricky answer.

“If you take the view that this is just updating the agreement, then I think it can be a good thing for all three countries,” says economist Marc Melitz with Harvard University.

Most economists agree: The 23-year-old trade deal could use some revisions. So does President Donald Trump. He’s soon expected to call for the renegotiation of NAFTA, which has governed the rules of trade between the US, Canada and Mexico since 1994.

Here’s one area worth tackling: updating rules governing digital services like cloud computing across national boundaries.

“In the early 1990s, there wasn’t a lot of digital trade, the internet barely existed,” says economist Lee Branstetter with Carnegie Mellon University in Pittsburgh. “We didn’t need international legal arrangements to undergird the exchange of petabytes and petabytes of data across national borders. Now we do.”

Updating NAFTA could also provide opportunities for US companies to help Mexico more efficiently update its energy infrastructure and extract its oil.

Many on the left side of the political spectrum would like to see more protections for labor and the environment built into any NAFTA updates.

“It has to be an opportunity, but it’s a huge threat as well,” says Timothy A. Wise with the Small Planet Institute in Cambridge, Massachusetts.

Wise — who is critical of NAFTA and argues that the trade deal has not worked well for workers — says opening up the treaty could be a threat because he doesn’t trust Trump’s motivations: “His priorities are prying open markets for US exports and bullying Mexico into making more concessions so that fewer manufacturing jobs leave or that some might even come back.”

That might sound great to an American working in manufacturing, but Mexico isn’t going to sign an agreement that makes its situation worse.

“The president of Mexico arrives at the negotiations with the goal of making Mexico great again, not the goal of making American great again,” says Wise.

Many trade and diplomacy experts worry about Trump’s take-it-or-leave-it prenegotiating attitude.

“If you’re telling a country that we’re building a wall to keep you out and then you try and go to the negotiating table, you have to wonder, what kind of attitude are they going to bring to the table? A negotiation requires a level of trust between the two parties,” says Michael Klein, a chief economist with the US Treasury Department’s office of international affairs during the Obama Administration.

Klein, who is now back at The Fletcher School at Tufts University, is concerned that Trump is fixated more on short-term political gains and less on improving the North American economy.

Klein, and other academic economists, recently launched EconoFact — a website geared at policymakers and journalists — to highlight hot-button economic and social policy issues. Klein is highly concerned that the Trump administration is ignoring basic economics on issues like NAFTA.

“In the Trump administration, there are virtually no Ph.D. economists, no people who have thought about this long and hard and have a framework that allows you a wide perspective,” says Klein. “So it’s somewhat disturbing to me that you aren’t going to have people sitting around the table who can give you a perspective based on years of study and analysis.”

But hold on. Many politicians tell us that NAFTA was a job killer. Why shouldn’t we just rip it up? Exactly how many jobs has NAFTA cost the American economy over the past 23 years?

“My estimate is right around zero,” says Melitz.

You heard that right: NAFTA cost the US economy zero jobs. Melitz, and many economists, say it’s extremely hard to answer the “jobs question.” Free trade agreements like NAFTA destroy some jobs and create new ones. It’s a constant churn. 

Politicians often highlight factory workers who lost jobs to Mexico, and for those people and those communities, the pain is real. But economic research, even at the high end, indicates that overall job losses from NAFTA are pretty minimal, especially when you spread them out over two decades.

And along the way, because of NAFTA, US consumers have been able to enjoy fresh fruit year-round and cheaper products on their shelves.

Economists worry that if Trump fails to get a better deal and simply walks away from NAFTA, all that’s gone. And worse.  

“Let me give you a small vignette to illustrate the impact this could have,” says Branstetter. “After 9/11, the US government effectively shut off the border between Mexico and the United States. Within days, US automotive production lines started shuddering to a halt because the components that they needed that were coming from Mexico were being held up at the border.”

Here’s another wrinkle facing Trump: Most Republicans in Congress like free trade and they like NAFTA. Republican Senate Majority Whip John Cornyn of Texas said this recently about NAFTA and Mexico: “We can’t get a divorce. We need to figure out how to make this marriage work.” 

Whether President Trump also believes that ... we’ll soon find out.

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