In January 1994, the North American Free Trade Agreement (NAFTA) was signed into law.1 The agreement between the United States, Canada, and Mexico, was created to facilitate free trade across the North American countries by eliminating tariffs and making it easier for companies to move from the U.S. to Mexico.2 The agreement was controversial during the time it was being negotiated, with 1992 and 1996 presidential candidate Ross Perot stating that NAFTA would cause American industry to relocate to Mexico with a “giant sucking sound,” costing 5.9 million American jobs.3 Following on his goals of halting the migration of U.S. jobs and factories to Mexico, President Donald Trump has stated that he will take steps to renegotiate NAFTA with Canada and Mexico.4 Although he has not yet provided concrete details on what he plans to change, this post will address a few of the alterations that President Trump might aim for, along with the impact those changes will have on businesses within North America.
One of the options that the new administration may explore is to simply withdraw from the deal entirely. Article 2205 of NAFTA allows a country to withdraw with 6 months notice.5 Without NAFTA, U.S.-Mexico trade would be governed by World Trade Organization rules, which would roughly double the average tariff on products coming into the U.S. from Mexico.6 Such barriers could make doing business prohibitively expensive for companies that have taken advantage of the free trade zone created by NAFTA by relying heavily on Mexican manufacturing.7 In particular, major U.S. companies such as General Motors, IBM, and Coca-Cola, which manufacture parts in Mexico to have them shipped back to the U.S., would find costs to rise and would likely pass this increase to customers.8 Furthermore, some small business owners have expressed concerns that a complete withdrawal from NAFTA would render their current business models obsolete as they would have to move manufacturing back to the U.S.9
Rather than completely ending U.S. participation in NAFTA, President Trump could adjust certain aspects of the current agreement in a renegotiation. With his goals of “buy American” and “hire American,” he might target auto manufacturing as a specific area for change.10 The administration could focus on “rules of origin,” which govern what counts as a finished good produced within the free trade area.11 These rules, for example, state how many of the parts in a steering wheel assembled in Mexico can be made in China to still be counted as a Mexican-made steering wheel.12 If the required share of North American auto parts in finished products was increased from its current level of 62.5%, this could give a boost to American manufacturing companies by reducing competition with low-wage countries in Asia.13 Furthermore, a renegotiated deal may prevent Canadian and Mexican companies from bidding on U.S. government contracts.14 This would also serve to reduce the threat of foreign competition to domestic businesses, which would only have to compete with each other for these contracts.15
All in all, the potential benefits or detriments to North American businesses depends on the path that President Trump takes in his alterations of NAFTA. Should his administration end the deal without renegotiation, there is a great likelihood for detriment to U.S. businesses with complex supply chains that utilize free trade between the U.S., Mexico, and Canada. However, if the alterations take the form of smaller tweaks of the current agreement, there could be some benefits to domestic business at the expense of foreign companies.
North American Free Trade Agreement, Can.-Mex.-U.S., Dec. 17, 1992, 32 I.L.M. 289 (1993); Patrick Gillespie, NAFTA: What it is, and why Trump hates it, CNN Money (Nov. 15, 2016), http://money.cnn.com/2016/11/15/news/economy/trump-what-is-nafta. ↩
The ‘Great Debate’ Over Nafta, N.Y. Times (Nov. 9, 1993), http://www.nytimes.com/1993/11/09/opinion/the-great-debate-over-nafta.html. ↩
Donald Trump Says He’ll Soon Begin Renegotiating NAFTA With Mexico And Canada, Fortune (Jan. 23, 2017), http://fortune.com/2017/01/23/donald-trump-trade-canada-mexico-nafta. ↩
Neil Irwin, What Is Nafta, and How Might Trump Change It?, N.Y. Times (Jan. 25, 2017), https://www.nytimes.com/interactive/2017/upshot/what-is-nafta.html. ↩
Monika Gonzalez Mesa, Lawyers Say Killing NAFTA Will Have Repercussions for U.S. Businesses, Corporate Counsel (Nov. 15, 2016), http://www.corpcounsel.com/id=1202772430730/Lawyers-Say-Killing-NAFTA-Will-Have-Repercussions-for-US-Businesses. ↩
See id. ↩
Tami Luhby, Yes, ‘President Trump’ really could kill NAFTA – but it wouldn’t be pretty, CNN Money (July 6, 2016), http://money.cnn.com/2016/07/06/news/economy/trump-nafta. ↩
Jeremy Quittner, If Trump Kills NAFTA: What Small Businesses Think, Fortune (Jan. 27, 2017), http://fortune.com/2017/01/27/trump-kills-nafta-small-business. ↩
Theophilus Argitis, How Trump Would Rework Nafta—and What Mexico, Canada Want in Return, Bloomberg Politics (Jan. 24, 2017), https://www.bloomberg.com/politics/articles/2017-01-24/trump-s-nafta-revamp-may-hinge-on-partners-willingness-to-talk. ↩
Irwin, supra note 5. ↩
See Theophilus Argitis, How Trump Would Rework Nafta—and What Mexico, Canada Want in Return, Bloomberg Politics (Jan. 24, 2017), https://www.bloomberg.com/politics/articles/2017-01-24/trump-s-nafta-revamp-may-hinge-on-partners-willingness-to-talk. ↩
See id. ↩