Zeeshan Aleem ·
Wednesday, November 16, 2016, 12:11 pm
Donald Trump plans to bring down the hammer on trade from the first day he enters the White House.
According to a memo drafted by the president-elect’s transition team and obtained by CNN Tuesday, Trump is preparing for a wholesale reevaluation and renegotiation of trade policy that could potentially upend economic relationships the United States has held for decades.
"The Trump trade plan breaks with the globalist wings of both the Republican and Democratic parties," the memo states. "The Trump administration will reverse decades of conciliatory trade policy. New trade agreements will be negotiated that provide for the interests of US workers and companies first."
The document lays out a 200-day plan governed by five major objectives: renegotiating or withdrawing from the North American Free Trade Agreement, or NAFTA; stopping the Trans-Pacific Partnership trade deal; stopping “unfair imports”; ending “unfair trade practices”; and pursuing bilateral trade deals. The memo also notes that the Trump White House will be guided by a commitment to “retain and return manufacturing jobs” by lowering taxes and regulations on businesses.
The memo makes it clear that transforming or discarding NAFTA, the free trade accord between Canada, Mexico, and the United States that President Bill Clinton signed into law in 1993, is the first order of business. Trump plans to launch a study into the process and possible consequences of withdrawal on day one, and will consider a formal withdrawal from the agreement by day 200, according to the memo.
As radical as that sounds, it’s completely doable. But pursued recklessly, it could set off a trade war that wreaks havoc on the American economy.
Could Trump actually renegotiate NAFTA?
Since it went into effect, NAFTA has become a staple of economic relations across North America. The 22-year-old agreement, which eliminated most tariffs on products traded between the US, Canada, and Mexico, has caused an explosion in cross-border business dealings and made the continent’s economies highly interconnected. It’s also blamed for hammering America’s manufacturing sector and contributing to the loss of several hundred thousand jobs in the US — a dynamic Trump turned into a centerpiece of his anti-trade diatribes on the campaign trail.
Yet America’s membership in NAFTA isn’t set in stone, and Trump could carry out his promise of pulling the US out of the pact.
Article 2205 of NAFTA specifically lays out that one of the three countries “may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties.” If a country like the US were to pull out of the pact, the deal would still “remain in force for the remaining Parties.”
Now suppose Trump wants to keep the US in the pact but put his self-professed negotiating skills to work in crafting what he insists would be a better version of the deal. He could, again, carry out his promise of reopening the deal. But it would be very, very risky.
Here’s why. Opening new talks about the deal would mean getting Canada and Mexico to come to the table, and any new agreement would yank Congress into the process. Both those realities are going to create their own sets of complications.
Canadian Prime Minister Justin Trudeau has said that he’s willing to renegotiate NAFTA, but Mexican leaders have indicated that they’re not open to it.
And corralling Congress into signing on to a new deal will be immensely difficult. Trump’s anti-trade sentiment proved popular with the electorate, and some prominent members of both parties — including leading liberal senators like Bernie Sanders and Elizabeth Warren — share the president-elect’s skepticism about free trade deals.
Warren and Sanders, joined by many Republicans, helped scuttle the TPP, which would have been even bigger than NAFTA. Given the ferocity of the opposition to free trade on Capitol Hill, and the fact that NAFTA was used as a political punching bag throughout the campaign, the odds that lawmakers would approve a tweaked version of the trade deal seem slim.
What changes would Trump want to make to NAFTA?
Let’s assume Trump decided to roll the dice and try to change the deal anyway. His basic goal is to penalize American businesses for sending jobs out of the country. On the campaign trail, he deemed outsourcing practices like Ford Motor Co.’s decision to build a $1.6 billion assembly plant in Mexico an “absolute disgrace.” He wants to find some way to either curb those kinds of moves or reverse them altogether.
There are a number of ways to pursue that end goal, but Trump’s rhetoric suggests he wants to do it by raising tariffs on imports from Mexico. That’s something he’d have difficulty getting Mexico to agree to, so he’d have more latitude to do it if he were to actually withdraw from NAFTA. But withdrawal is a tricky business, given how deeply the countries’ economies rely on each other.
“After the 9/11 terrorist attacks, we sealed the border with Mexico and Canada, and within a week auto plants in Michigan had to begin shutting down because they were not getting access to parts they depended on from Mexico,” Rob Scott, director of trade and manufacturing at the Economic Policy Institute, a left-leaning think tank in Washington, DC, told me.
Withdrawal wouldn’t be a smooth process. It would require loads of American businesses bringing existing components of their supply chains and outsourced services back onshore to avoid tariffs or other penalties — a process that takes time and money. It would also potentially increase costs for those businesses going forward.
If that’s enough, the move could set off a trade war by prompting Mexico to raise tariffs on American goods in response. That could cause a downturn in the US economy and a spike in the unemployment rate that would undermine the very reason Trump is considering withdrawing from NAFTA; while some jobs would be created, more jobs would be lost as American exports grow more expensive for foreigners. And domestic demand would drop as cheap foreign goods hit with tariffs become more expensive, meaning Americans would probably buy fewer of the Mexican-made goods that stock the shelves of Walmart and other major American retailers.
The upshot? Trump’s departure from the decades-long bipartisan consensus was politically brilliant. His promise to put America first resonated with tens of millions of Americans who know that agreements like NAFTA have caused job losses in the US. But following through on his promise is going to be difficult. The murky future of NAFTA may be one of the first places where Trump disappoints his followers; it won’t be the last.
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