NAFTA – What Happens Next

NAFTA – What Happens Next

The North American Trade Agreement (NAFTA) came into effect on 1^st January 1994 and it formed one of the World’s largest free trade zones.  It laid down the foundations for a strong economic growth for the United States, Canada and Mexico. While there is ample evidence of its shared positive economic impact, but how about its costs to the United States?
Over the last couple of months, the question has been raised as to how positive NAFTA is, especially to the United States. During the Presidential election campaign, Donald Trump repeatedly said that the Agreement is only beneficial to Canada and Mexico and has threatened to end it with the two nations.
 
» Impact on the US economy
Since NAFTA has been in place, the United States trade with Canada and Mexico has more than trebled, growing faster than trade with countries around the world. Most statistics suggest that NAFTA had positive impact on the US GDP of around 0.5 percent (total addition of up to $80 billion) to the US economy.
One of the reasons why NAFTA is criticised is for destroying around half a million jobs and lowering the wages.  The US has also seen its trade deficit has widening during that period. An exodus of US manufacturers across the border saving on labour costs has resulted in thousands of US manufacturing jobs lost to their Mexican neighbours. That is one of the reasons Donald Trump is pushing to renegotiate the agreements and bring back jobs to the US.

US manufacturing jobs from 1993 to 2016

Source: BLS

It is hard to say with certainty if NAFTA is directly responsible for the decline in the manufacturing jobs sector since the biggest drop we have seen was from around 2000 to 2002. It is worth pointing out that China joined the World Trade Organisation on 11^th December 2001 so that may have had an impact on the drop in the manufacturing jobs too. It has been noted that the automotive industry was one of the most affected industries since the agreement came into place back in 1994.

Forex – USDMXN and USDCAD since Trumps decision to renegotiate NAFTA

Click to enlarge

Click to enlarge

Source: GO Markets MT4

 
» What happens next?
It looked like the NAFTA agreement was on its way out but on 27^th April Donald Trump announced he received phone calls from both the Prime Minister of Canada and the President of Mexico to make him change is his mind.  President Trump decided to make a surprising U-turn and will instead renegotiate NAFTA but on only one condition – if the deal is a fair for all three countries as he is pushing to bring back jobs to the US.
There is no timeframe of when renegotiations will begin between the three countries but it is worth keeping an eye for further development as it will most likely re-shape world trade in the years to come.

-By Klavs Valters