What Would Happen If America Leaves NAFTA?

President Trump has always been against the decision of United States to be a part of the North American Free Trade Agreement (NAFTA). As a result, he keeps threatening to leave the agreement if Mexico doesn’t pay up for the border wall. The political class in Mexico is completely opposed to paying for this border wall. Hence the negotiations are going haywire and there is a reasonable chance that America may actually pull out of this free trade agreement.

Over the past couple of decades, many business decisions were taken by corporations on the assumption that NAFTA would continue to be in existence. If this trade agreement ends as a result of political skirmishes, there will be a significant political and economic impact. In this article, we will have a closer look at this possible impact.

Can Donald Trump Withdraw Unilaterally?

Trump has been single-handedly criticizing NAFTA for stealing American jobs. He believes that as soon as NAFTA was signed, all companies started relocating their factories and plants to Mexico. He often says that these jobs were “stolen” by the Mexican and that NAFTA was the enabler of this theft.

The vast majority of people in the American Congress do not agree with President Trump. However, there is still a lot of fear that Trump might unilaterally call off this agreement. The NAFTA trade agreement does allow any party to pull out of the agreement by giving a six months’ notice. Critics of Donald Trump were hopeful that any motion to move out NAFTA would be blocked in the Congress. However, legal experts have studied that NAFTA agreement and come to the conclusion that the agreement does not mention the requirement of Congressional assent to exit the arrangement. Hence, the reality is that Donald Trump could single-handedly decide that he wants to leave NAFTA regardless of what anyone thinks!

Losing Trade Allies

The NAFTA converts the entire North American continent into a tariff-free zone. This has ensured that the trade between these nations has risen rapidly. Canada and Mexico are the second and third largest exporters to America respectively.

China still holds the first position when it comes to exporting goods to America, but the other two nations have seen their trade triple after the introduction of the NAFTA. At the same time, these two nations are also leading importers of the goods and services that are produced by America.

Pulling out of the NAFTA would mean that this trade dynamic would change drastically. Both the imports from and exports to these nations would be heavily affected. As a result, it is likely that Mexico and Canada will be negatively impacted by this behavior. In the long run, this will create a bad image for the United States for being a selfish trade partner. America extensively relies on foreign trade and foreign capital and this image will have a negative impact on their economy.

Decreased Corporate Profits

Multinational companies stand to lose huge sums of money if Donald Trump were to indeed go through with his threat and exit the NAFTA arrangement. This is because these companies have made huge amounts of investments all across the American continent. The idea was to build an efficient supply chain that can benefit by exploiting the price differences that did exist in different places on the continent. Now, if these companies suddenly have to adhere to national borders, their supply chains will simply become redundant.

A lot of these high-end facilities that were built with massive investments will have to be sold off at a huge discount. Also, many of these facilities may have to be rebuilt in the United States. This will lead to a monetary loss to each and every multinational corporation that conducts business in the United States. The fact that Fed is likely to raise interest rates is already spooking the financial markets. If Trump’s exit from the NAFTA becomes a certainty, we could witness a massive fall in the American stock markets.

Increased Inflation

The lower cost of production that has resulted from moving jobs to Mexico has also benefitted the American consumer. For many years, Americans have become used to lower prices. However, if Trump pulls out of the NAFTA, companies will be forced to pay more to the workers and even to government agencies. This will translate into higher costs which will eventually be passed on to the consumers. This is the reason why many consumer advocate groups in North America are opposing Donald Trump’s decisions.

The loss of American Exports

Trade experts believe that if America exits NAFTA, the entire agreement will have to be dismantled. It is likely that all three countries will go back to the World Trade Organization recommended tariff rates. This is where America could again be at a disadvantage. Under the WTO regime, the tariffs recommended for America were close to 3.5% on an average. However, Mexico was imposing a tariff of close to 9% on American goods. The same is the case with Canada which is allowed to charge more tariff than the United States.

Therefore Donald Trump would end up making the imports marginally more expensive. However, his actions would have a negative impact on the exports of America making the trade deficit even worse.

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