by Daniel Griswold
As talks resume with Canada this week over revising the North American Free Trade Agreement (NAFTA), President Trump is threatening to terminate the accord if our northern neighbor refuses to agree to U.S. terms, including the scrapping of its protectionist dairy program. While the almost 25-year-old agreement is due for a tune up, ending it with Canada would be a huge mistake.
Negotiations so far have yielded mixed results. In bilateral talks, the United States and Mexico agreed to add a chapter enhancing digital trade, and for Mexico to raise its “de minimis threshold” exempting small shipments from customs inspections and duties to $100. Other rule changes would protect intellectual property and reduce non-tariff barriers against agricultural trade.
On the downside, the tighter rules of origin on motor vehicle production that Mexico agreed to will only serve to reduce the overall competitiveness of the North American auto industry. It will drive up the cost of production for U.S. automakers, leading to higher prices for consumers and lower sales, including exports. Its provision requiring that 40 to 45 percent of content be made by workers earning $16 an hour or more also sets a bad precedent of government micromanagement in the production process.
The most disturbing development so far in the negotiations is the Trump administration’s threat to exclude Canada from any final agreement if it refuses to accept its demands on dairy and other provisions. Excluding Canada from the agreement would disrupt a mutually beneficial economic relationship and sabotage any hope of support in Congress for a final agreement.
Canada is the top market in the world for U.S. exports of goods and services. The U.S. and Canadian auto sectors have been integrated since the U.S.-Canadian Automotive Products Agreement of 1965. The two nations implemented the U.S.-Canada Free Trade Agreement in 1988, which became NAFTA when Mexico joined in 1994. Our economic relationship with Canada has been about as close to free and fair as two nations can achieve.
President Trump rails against Canadian dairy tariffs, and he’s right that foreign farm protection injures U.S. farmers. But Canada’s protectionist “supply management” program also hurts Canadian families by driving up the domestic cost of milk and cheese. It is very much the exception in U.S.-Canada trade. Since the implementation of NAFTA, 100 percent of U.S. manufacturing exports and 97 percent of U.S. farm exports enter Canada duty free. Despite Canada’s dairy program, the United States runs a large trade surplus with Canada in dairy products.
The U.S. government’s hands are not clean when it comes to agricultural trade. The U.S. dairy industry also benefits from subsidies and supply management, and the U.S. sugar industry benefits from strict quotas on sugar imports. In fact, in its 2005 free-trade agreement with Australia, the United States refused to allow any additional sugar imports from Australia, yet despite that exception the overall agreement has been a success. There is no reason why the dairy issue should disrupt our equally beneficial trade relationship with Canada.
At the root of President Trump’s belligerent approach to NAFTA is his fundamentally false assumption that the agreement has been “a disaster.” As with any elimination of trade barriers, NAFTA did cause a shift of productive resources in the United States away from less competitive industries and towards those that are more competitive. Some jobs were lost, others gained. The impact on total employment was a wash and the impact on the overall economy modestly positive.
Critics of NAFTA paint a surreal picture of devastated industries and lower wages, but that is not the reality of America today. Since NAFTA went into effect in 1994, the U.S. economy has added 36.6 million jobs. The unemployment rate is below 4 percent. Real compensation per hour (wages and benefits adjusted for inflation) for non-farm workers is up 28 percent. While the number of manufacturing jobs has fallen, real manufacturing output is up 44 percent. The strong economy routinely touted by President Trump is that way in part because of NAFTA and other trade-opening agreements.
No change in NAFTA can be made without approval by Congress. This is not “interfering” in the NAFTA negotiations, but rather Congress exercising its proper authority over trade policy as granted by the U.S. Constitution. It was Congress that passed legislation implementing the original agreement in 1993. And it was Congress that approved the more recent Trade Promotion Authority law that allows the administration to seek an agreement to modernize NAFTA, but not to terminate it or to exclude Canada at the expense of the American public.