One of the promises that won Donald Trump the US Presidential election was renegotiation or even scrapping of some of the treaties that were supposed to disadvantageous to Americans. He has a special grouse against the North American Free Trade Agreement (NAFTA), which he called, “the worst trade deal ever made.”
To give the US President his due, he has been meticulously carrying out all his election promises, however crazy they may be. Talks to renegotiate the NAFTA have already begun and he has been trying to arm-twist Mexico and Canada, the other two partners, to agree to his terms. In one of his twitter rants, Trump had said, “NAFTA, which is under renegotiation right now, has been a bad deal for USA. Massive relocation of companies and jobs, Tariffs on Steel and Aluminum will only come off if new and fair NAFTA agreement is signed.”
What is it?
The US had originally signed a bilateral trade agreement with Canada, the US-Canada Free Trade Agreement, which was brought in to force in 1989. In 1991, the US began talks with Mexico, in which Canada joined, resulting in the North American Free Trade Agreement that was enforced from January 1, 1994. This agreement resulted in dismantling most of the tariffs between these three countries. All duties and restrictions on imports were gradually eliminated.
The NAFTA also deals with migration, customs procedures, government procurement, investment, trade in services, protection of intellectual property rights, and dispute settlement procedures.
In May 2017, US Trade Representative Robert Lighthizer announced that the US intends to commence negotiations with Canada and Mexico with respect to the NAFTA. It was stated that the intention of the negotiations was to support higher-paying jobs in the US and to improve the terms of trade that US had with Canada and Mexico.
Why is it important?
Many experts are of the view that re-negotiating the NAFTA is unlikely to result in creating new jobs or result in better opportunities for US businesses. According to Business Roundtable, an association of CEOs of leading American companies, withdrawing from the NAFTA would reduce
American companies’ global exports by 2.5 per cent, reduce purchasing power of American households by $654 per household due to higher prices and shift economic activity away from the US towards China, thus reducing GDP growth by 0.2 per cent. Agriculture, textiles and automobile companies in the US are expected to be impacted negatively if the tariffs and trade restrictions return.
Both Canada and Mexico appear ready to give a tough fight. Canadian Prime Minister Justin Trudeau has said that he would be ready to let NAFTA die altogether rather than accept certain hardline demands.
The newly elected leader of Mexico, Andres Manuel Lopez Obrador, is also prepping for a blistery fight. He has stated that Mexico will not be a piñata (a container often made of papier-mache or pottery, filled with small toys or candy and then broken as part of a ceremony) and he will stand up to the POTUS to protect his country’s interest.
Why should I care?
Re-thinking trade pacts that have promoted globalisation over the last half-century is something to get seriously worried about. If each country attempts to protect its businesses and adopts a tariff structure accordingly, then there will be chaos as countries with exportable surplus resort to dumping their products in other markets. This is likely to have an impact on global growth as well.
Indian imports and exports will be impacted as the newer treaties re-align the demand-supply equations in various commodities. The less tolerant stance on immigration adopted by Trump and displayed in the Brexit referendum has consequences for the millions of Indians who aspire to study, work or settle outside India.
The bottomline
Chaos and disorder is likely to rule as long as Trump holds the reins.
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