Economic Nationalism

NAFTA’s Litmus Test

  • Why it matters

    Why it matters

    The Trump White House is intent on renegotiating NAFTA. This could threaten the global supply chains of German companies like Volkswagen and BMW.

  • Facts

    Facts

    • The United States’ trade deficit with Mexico stood at $64 billion in 2016, its fourth-biggest deficit last year.
    • According to the 1994 agreement, each of the three participating countries can freely trade goods with a total volume of up to $1 billion per day without having to pay customs or duties.
    • Volkswagen currently operates a plant in Puebla, Mexico, while BMW is slated to start production in Mexico in 2019.
  • Audio

    Audio

  • Pdf
Volkswagen-Motorenwerk in Mexiko
End of the road for Volkswagen de México’s sprawling plant in Puebla? Source: DPA/Friso Gentsch

Whatever is said about Donald Trump, this much seems to be true: When it comes to trade, the US president’s goals are obvious. At the top of his cabinet’s agenda for this week is the renegotiation of the terms of the North American Free Trade Agreement, or NAFTA. Last month, the office of Mr. Trump’s top trade negotiator released the administration’s list of negotiating objectives for talks with Mexico and Canada. The goal of the talks could hardly be more clear: “Improve the US trade balance and reduce the trade deficit with NAFTA countries.”

For Mr. Trump, the country’s deficits serve as proof that the US has been fleeced by its two NAFTA partners, Canada and Mexico, for decades. In his eyes, trade is only fair if it flows equally in both directions. Adherence to this brand of economic nationalism led Mr. Trump to terminate the Trans-Pacific Partnership (TPP) – a trade agreement with 11 Asian countries – shortly after he assumed office. He’s also gone so far as to antagonize China, setting the stage for a difficult trade dispute. On Monday, Mr. Trump once again upped his rhetoric, threatening trading partners with penalties should what he called theft from US companies continue. And to be sure, he also has Germany and its export-driven economy firmly in his sights.

Mr. Trump is fighting his trade war on multiple fronts. In the coming days, his focus will largely be on trade with Mexico and the need to renegotiate the 23-year-old NAFTA agreement. “Too many Americans have been hurt by closed factories, exported jobs, and broken political promises,” said US Trade Representative Robert Lighthizer a month ago. He promised to negotiate a “fair deal.” The president put it a lot more bluntly: “NAFTA is a disaster.” As a presidential candidate, Mr. Trump routinely pilloried the 1994 agreement.

“German carmakers in particular should be worried”

Gary Hufbauer, economist, The Peterson Institute for International Economics

Now as president, Mr. Trump needs to show that he can deliver on his inflammatory trade rhetoric. His goals with regard to trade are undoubtedly ambitious: he’ll only consider his policy a success if he achieves a significant reduction in the trade deficit with Mexico, which totaled $64 billion, or €54.6 billion, in 2016. “That can’t be reached through trade policy alone,” said Chad Brown, a former economic advisor to former President Barack Obama. The economist predicts that Mr. Trump will fall well short of his goal.

If the American president is to remain “strong” in his trade ambitions, he’ll need to follow through on his promises to scupper at least parts of NAFTA. For analysts at US banking giant Citigroup, the consequences would be overwhelmingly negative: “The US would then attempt to secure bilateral trade agreements with Canada and Mexico, and this would cancel out the benefits of NAFTA,” the bank’s economists warn.

According to the agreement, each of the three participating countries can freely trade goods with a total volume of up to $1 billion per day without having to pay customs or duties. NAFTA, however, was set up to also allow for multinational companies to benefit from low trade costs and to secure footholds in the North American market. These companies are referred to as a “fourth NAFTA country” by Citigroup’s economists. Carmakers Volkswagen and Audi, for example, are two German companies which fall under the fourth group and which have profited greatly from the agreement by delivering cars and parts from Mexico to the US. With its plans to open a plant in Mexico in 2019, BMW will soon follow suit.

16 p06 Nafta – US Foreign Trade Partners-01

With elections looming in the United States and Mexico in 2018, political leaders are under increased pressure to clarify the future of NAFTA. Investors and businesspeople would also favor a quick decision. The longer the uncertainty surrounding the agreement prevails, the more the economic insecurity is allowed to fester.

For their parts, German companies in Mexico haven’t been fazed by the looming renegotiation. To this point, no German firm has canceled a planned investment. But: “Some are limiting their investments a little bit more than planned, and they aren’t shooting the moon when it comes to production capacity,” says Johannes Hauser, head of the German-Mexican chamber of industry and commerce (Camexa).

For Gary Hufbauer, an economist at the Peterson Institute for International Economics in Washington, the outlook for German companies with operations in Mexico is far from rosy. “German carmakers in particular should be worried,” he told Handelsblatt. While Mr. Trump is taking aim at Mexico, he’s also directing some of his ire at foreign companies that import goods into the US from Mexico, according to Mr. Hufbauer. In fact, after his election, Mr. Trump warned BMW that he would impose a 35 percent import tax on its cars if it went ahead with plans to open a factory in Mexico.

16 p06 Economies in the NAFTA Zone-01

The concrete danger to German companies doing business in North America is that the US could enact stricter requirements when it comes to the origins of the goods it imports. German firms which ship unfinished manufactured goods to Mexico and then finish the products in Mexico before exporting them to the United States under NAFTA could see dramatic changes to their production lines. In this way, a German carmaker like Volkswagen, which ships parts to Mexico and then assembles its Jettas, Golfs and Beetles at its plant in Puebla, would stand to lose a great deal if the free trade agreement is renegotiated, said Mr. Hufbauer. Similarly, Thomas Beck, the president of the German-Canadian chamber of industry and commerce, emphasized that access to the US market for German companies which invest in Canada is a central selling point. “At the moment, we’re seeing a cautious wait and see approach when it comes to new investments,” he told Handelsblatt.

Mr. Trump has been straightforward when it comes to his central trade goal: boosting US exports. A weakening dollar will certainly help him achieve this goal. Taking aim at NAFTA and the foreign competitors that benefit from it sends a clear message: he’s not afraid of changing the rules of the game mid-play to boost his agenda and make real his lofty campaign promises.

 

Gerd Braune is Handelsblatt’s correspondent in Canada. Klaus Ehringfeld is a Handelsblatt correspondent based in Mexico City. Moritz Koch has been Handelsblatt’s Washington correspondent since 2013. Torsten Riecke is Handelsblatt’s international correspondent and former New York bureau chief, reporting on international business and finance. To contact the authors: braune@handelsblatt.com, ehringfeld@handelsblatt.com, koch@handelsblatt.com, riecke@handelsblatt.com.

 

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!