NAFTA reform must carefully mitigate risk

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United States Trade Representative Robert Lighthizer arrives at the Office of The United States Trade Representative, Tuesday, Aug. 28, 2018, in Washington, ahead of the arrival of Canadian Foreign Affairs Minister Chrystia Freeland. Canada, America's longtime ally and No. 2 trading partner, was left out of a proposed deal Trump just reached with Mexico and is scrambling to keep its place in the regional free-trade bloc — and fend off the threat of U.S. taxes on its vehicles. (AP Photo/Andrew Harnik)

United States Trade Representative Robert Lighthizer arrives at the Office of The United States Trade Representative, Tuesday, Aug. 28, 2018, in Washington, ahead of the arrival of Canadian Foreign Affairs Minister Chrystia Freeland. Canada, America’s longtime ally and No. 2 trading partner, was left out of a proposed deal Trump just reached with Mexico and is scrambling to keep its place in the regional free-trade bloc — and fend off the threat of U.S. taxes on its vehicles. (AP Photo/Andrew Harnik)

On Aug. 27, 2018, Mexico and the United States reached a bilateral agreement regarding North Atlantic Free Trade Agreement (NAFTA) reform.  NAFTA was enacted in 1994 to lower trade barriers between Canada, Mexico, and the United States. It quadrupled trade between the three countries, eliminated tariffs, increased United States GDP by approximately $127 billion per year, created approximately 5 million United States jobs and lowered prices for U.S. consumers, all of which invigorated the economy. Some counter that NAFTA cost the United States approximately 1 million jobs and suppressed wages in the manufacturing industry through outsourcing (the production of goods in other countries). 

Likewise, the current administration has admonished China’s likely use of Canada and Mexico as manufacturing middle men to forego tariffs. Due to these reasons, the United States has remained ambivalent on NAFTA; Democrats typically in opposition and Republicans typically in favor.

Regardless of perception on the need for NAFTA reform, most would agree that the efforts to restructure the deal is historical. They could change the manufacturing industry in the United States, as well as how businesses outsource. Future generations will learn about what is occurring now in their history and political science classes. However, it is unclear if the potential benefits outweigh the costs.

A core provision of the reform is increasing manufacturing wages to encourage local production. It should be highlighted that mandated wage increases need to be reasonable for businesses to maintain long term without adding tremendous liabilities to their balance sheets. Doing so will weaken their financial health and may lead to the increased costs being shifted to consumers.

For instance, the agreement mandates a $16 per hour price floor for manufacturers of 40 to 45 percent of parts within automobiles sold within the United States. This may hypothetically incentivize humane manufacturing in Mexico or bring United States manufacturing back home. Realistically, though, it is unreasonable to presume that businesses will readily shift from paying factory workers the minimum $4.71 per day in maquiladoras to $16 per hour without finding loopholes or inflating prices which can damage the global economy. Likewise, the freedom to outsource must be protected as it creates higher quality products due to open market competition.

Almost 88 percent of manufacturing job losses in the United States from 2000-2010 was due to technological progress, not globalization. Since NAFTA was enacted, United States manufacturing output has increased by 87 percent while employment decreased by 17 percent due to automation and other forms of increased efficiency. The United States is now a service oriented or developed economy, and is thus no longer fueled by domestic manufacturing as it was during the Industrial Revolution. This simply means that skilled labor drives it, not that it is weaker.

According to a 2014 Peterson Institute for International Economics study, approximately 15,000 United States jobs are lost per year due to NAFTA. However, for every job lost, the United States economy adds approximately $450,000 in lowered prices and increased productivity. It is also true that since 1965, the United States has lost approximately 1 million manufacturing jobs, but it has also tripled the number of service jobs. It is no surprise that most Fortune 500 companies are now service, not manufacturing, companies

This means that while the cost of education and healthcare have skyrocketed over the last few decades, the cost of manufactured goods such as apparel, food, furniture and more have become increasingly affordable. As technology continues to advance and manufacturing costs for human labor could increase, manufacturers will be even more incentivized to turn to automation as opposed to hiring more workers. Harvard economist Lawrence Katz summarized that “automation’s been much more important [than foreign direct investment]—it’s not even close.”  If the concern is that the United States is losing manufacturing jobs to other countries, NAFTA reform will likely not resolve it.

Likewise, the utopia in which most to all manufactured goods are made in America comes at a cost. According to the Associated Press, 75 percent of Americans would rather buy “Made in America” products, but only 30 percent would pay more for them. The Boston Consulting Group concluded that Americans would only pay 5 percent more, and thus NAFTA reform must consider such supply and demand balances.

However, loopholes for countries using NAFTA as means to ignore tariffs should be closed, as leaving them sets a poor precedent for the U.S.’s role in international trade. Likewise, the new deal requires that an increase from at least 62 to 75 percent of automobile parts be made in North America which may help hedge against other countries foregoing tariffs.

Still, the true impact of the plan will remain unclear until long term implementation, the over 1,000 page deal is released, and Canada, the United States Congress, and the International Trade Commission weigh in. Likewise, trade policy reform with China could also alter cost-benefit analyses. We can be sure that Canada, Mexico and the United States must work together for trilateral success.


Christine Savino is a campus correspondent for The Daily Campus. She can be reached via email at christine.savino@uconn.edu.

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