Should I Stay or Should I Go: NAFTA

By Ashley Bleckner, CFP®, MA

The future of NAFTA (the North American Free Trade Agreement) has recently been thrown into the public eye. President Trump has repeatedly placed a target on the trade agreement, threatening to withdraw the U.S. unless certain terms are renegotiated. Trump has labeled NAFTA as “the single worst trade deal ever approved in this country,” adding that “NAFTA was one of the worst things that ever happened to the manufacturing industry and the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.”

Is Trump’s tough language simply leftover campaign rhetoric, a strategic negotiating tactic or an indicator of his true economic intentions? Opinions on this vary. But what is known is that Trump can pull the U.S. out of NAFTA with six months-notice to Mexico and Canada.

Let’s take a deeper dive into the implications.

What is NAFTA?

The North American Free Trade Agreement is a set of rules for trade and investment between the U.S., Mexico and Canada. The goal is to increase business investments, reduce trading costs and act as a catalyst to ensure North America becomes more competitive in the world market. The agreement was envisioned by Ronald Reagan, executed and championed by President George H.W. Bush and signed into law by President Bill Clinton on January 1, 1994. Since that time, NAFTA has eliminated most tariffs,  along with many other barriers to free trade and investment between the three North American countries.

Has NAFTA been effective?

Like most economic debates, this depends on who you ask. Public Citizen’s report concludes NAFTA has been a complete failure, citing a $181 billion U.S. trade deficit with Mexico and Canada, loss of 1 million net U.S. jobs and doubling Mexican immigration to the United States. Conversely, NAFTANOW.org found NAFTA to be an absolute success. Its report states that trade among NAFTA countries has more than tripled, North American total employment has grown by almost 40 million jobs since 1993 and U.S. manufacturing output rose by 62% between 1993 and 2008 (compared to 42% between 1980 and 1993).

So, What Does This All Mean?

Headlines love to depict NAFTA as an absolute failure or a total success. The truth is a little more complex and likely somewhere in between. However, there is a general consensus that if the U.S. were to withdraw, things would get messy.

First, it would immediately impact (and hurt) American companies. Companies like GM and Coca-Cola that use Mexico to manufacture its parts before shipping them back to the U.S. would face a large financial burden. Popular imports like this include televisions, auto parts, telephones and refrigerators. This would force the U.S. companies to shift parts of their supply chains back to the U.S. to avoid tariffs, almost certainly passing along costs to you and I – the consumers.

Second, a NAFTA withdraw would hinder U.S. sales in Mexico. Mexico is America’s second largest market for exported goods, accounting for $214 billion in 2017. This would have a significant effect on the machinery, vehicle and plastic industries.

Finally, Mexico could retaliate to a NAFTA withdrawal by engaging in a trade war with the United States. This could result in a downturn for the U.S. economy, drop in the stock market and a disruption to the U.S. unemployment rate.

However the situation materializes, it is unlikely that a withdrawal would truly help U.S. workers the way Trump claimed during his presidential campaign. While some of these jobs may make their way back to the U.S., it would result in higher labor costs which would impact U.S. companies’ profit margins.

So, if NAFTA remains intact, we may get cheaper goods but less manufacturing jobs. If NAFTA is dissolved, we may have more manufacturing jobs but higher priced goods. Which is a better scenario for the U.S.?

As a financial advisor, I don’t know the answer. Take this: Since Trump was elected in November, the Mexican peso’s value has dropped by 20%. This can be interpreted as the “markets” initially thinking the U.S. leaving NAFTA would have a greater negative effect on Mexico than the United States. Then again, the peso market loss could be because of a combination of other variables – like Trump’s campaign promise to build a border wall.

One thing I do know for certain in all this uncertainty: diversification is more important than ever.