How Donald Trump could take America out of NAFTA

By M.J.

DONALD TRUMP has consistently slammed the North American Free-Trade Agreement (NAFTA). He has called it “the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country”. He blames it for the loss of America’s carmaking jobs, a quarter of which have vanished since 1994. And he promises to renegotiate or even withdraw from the deal. Could Mr Trump take America out of NAFTA, and what would be the consequences if he did?

Perhaps the biggest question about the incoming administration since the election is whether the president-elect intends to pursue his campaign agenda, or whether he was simply using the rhetoric he needed to get himself elected. On outsourcing jobs, Mr Trump has been consistent. In recent weeks, using his Twitter account, he has pressured Carrier, a manufacturer of air-conditioners, to maintain a factory in Indianapolis that it had planned to relocate to Mexico—preserving around 800 jobs. One of America’s biggest carmakers, Ford, scrapped a plan to build a new plant in Mexico a month later, instead announcing it would also invest $700m on a new venture in Michigan to build electric cars. Mr Trump has also threatened GM and Toyota with a “big border tax” if the companies export Mexican-assembled vehicles into America.

Tariffs would violate the terms of NAFTA. However Mr Trump might try to use executive authority to impose them anyway, perhaps as an “emergency” measure. It would then be up to the courts to strike them down. But Mr Trump also has the power to leave NAFTA altogether, without consulting Congress. To do so, he would have to give just six months’ notice to Canada and Mexico. After leaving NAFTA, tariffs on goods between America and its two big neighbours would revert to so-called “Most Favoured Nation” rates, under the rules of the World Trade Organisation. For most goods, these are around 3.5%, though some sectors are taxed at a higher rate. In order to achieve the rates befitting of a “big border tax” (he has mentioned a rate of 35%), Mr Trump could use a subsection of a 1962 trade act that permits higher tariffs to offset a threat to national security, or, more realistically, legislation from 1974 that allows the president to respond at his discretion to “discriminatory” behaviour on the part of any trading partner.

What would Mr Trump get for his trouble? A full withdrawal from NAFTA would cause chaos for firms with supply chains woven across America’s southern border. Almost 60% of imported goods from Canada and Mexico are inputs into American manufacturing. America’s economy would take a big hit, especially in states near the border. Mexico, which depends heavily on exports, would probably enter recession. This would encourage more northward migration (so Mr Trump might need to build a bigger wall). The main long-run economic effect would be pricier goods for consumers. More Americans might report for work in the country’s car plants, but fewer of them would be able to afford a shiny new SUV.