NAFTA: The Worst Deal Ever? The North American Free Trade Agreement Explained

There is not a more Trumpian topic than trade: The issue is important to his base and central to his campaign promises—even Democrats relish using the term “free trade” against him (or “fair trade” as he calls it). For the past few decades, American presidents have embraced free trade with allies as an issue paramount to continued growth and prosperity. Trump’s approach is different as he attempts to get America out of these so-called “unfair” trade deals.

One of these trade deals is the North American Free Trade Agreement (NAFTA). It has been in effect since 1994 and establishes a trilateral trading block in North America between Mexico, Canada, and the United States. Since Trump’s inauguration, he and his administration have been hellbent on renegotiating NAFTA to put “America First” and get out of what he calls “the worst trade deal ever signed anywhere, but certainly ever signed in this country.”  

NAFTA has formed the basis for U.S. trade in North America over the past 24 years, creating trillions of dollars in trade between the countries. As a result of NAFTA, the economies of the United States, Mexico, and Canada have become so intertwined that disconnecting them could have catastrophic economic and geopolitical consequences. So, is NAFTA a “bad deal” for the United States? Are we really losing in our trade deal with Mexico and Canada?

U.S. Trade Under NAFTA

The premise behind the United States renegotiating NAFTA is that the United States is getting the shaft in its current trade agreement with Canada and Mexico. Sure, the U.S. has a trade deficit with Mexico, and sure, Trump claims that the U.S. has a trade deficit with Canada, but it’s a bit more complicated than that. 

Trade With Mexico Under NAFTA

According to the Office of the United States Trade Representative, the trade deficit with Mexico was $64.1 billion in 2017. Taking a closer look at the numbers, the U.S. had a $71.1 billion deficit for goods but a $7 billion surplus for services with Mexico.

Even with a trade deficit for goods, the U.S. exported $243 billion, making Mexico the United States’ second largest goods export market. Additionally, Mexico serves as the largest supplier of agricultural imports to the U.S., including fresh fruits and vegetables, snack foods, and wine and beer.

Trade With Canada Under NAFTA

Contrary to Trump’s assertions, according to the Office of the United States Trade Representative, the U.S. had a trade surplus of $8.4 billion. Again, taking a closer look at the numbers, the U.S. had a $17.5 billion trade deficit for goods but a $25.9 billion trade surplus for services with Canada. Even though the U.S. had a trade deficit for goods with Canada, it exported $282.5 billion, which made Canada the United States’ largest goods export market.

Ultimately, Canada and Mexico are the two largest export markets for the United States, respectively. Even though the U.S. has a deficit in goods with its North America trading partners, it has a surplus for services, such as travel, software and technology, and financial services, which is a growing aspect of its service-based economy (the U.S. has been transitioning away from a manufacturing economy for years). In fact, the U.S. service sector accounts for around 90 million jobs, which is nearly 80% of private-sector GDP.

The Importance of Services for the United States’ Economy

Most importantly, the United States seems to be “winning” the service trade with Mexico and Canada. In terms of sheer value, not only does the U.S. export more services than it imports from Mexico and Canada, but service exports are growing at a faster rate than service imports. Why is this important?

The service economy includes the financial sector, retail, healthcare, and education sector. However,  the service economy is not limited to these sectors. Many products have a service component after they are manufactured. A good example of this is IBM. While IBM manufactures hardware, the core focus of its business is solutions and services. The same can be said about Apple’s business. An important component of Apple is its service business, including App Store, Apple Music, Apple Care and Apple Pay, and indeed, Apple’s service business is its fastest-growing asset. Jobs in Apple’s service business comprise most of its American workforce.

The Importance of NAFTA for the United States 

In addition to services, U.S. manufacturing exports benefit heavily from NAFTA. One of the major benefits of NAFTA is that there are zero tariffs on most U.S. exported goods, which makes it easier to sell goods to Mexico and Canada. Without NAFTA, this trade system would cease to exist. Instead, tariffs would revert to the World Trade Organization (WTO) standards, which are significantly higher for U.S. exports.

Additionally, many products sold by American companies have complex manufacturing processes with many component parts being made outside the United States. For example, a gas grill that is made in the U.S. could have knobs that are imported from another country. While the grill is still manufactured in the U.S., the component part is imported to help make the final product. Canada and Mexico are first and third, respectively, in providing imported component parts used in U.S. manufactured exports.

However, the U.S. also exports component parts to Canada and Mexico, so it goes both ways. The U.S. automobile industry, for instance, is a complicated import/export business. Last year the United States imported 1.6 million vehicles from Mexico; however, about 40 percent of the value of the components in those vehicles came from the United States! Therefore, limiting car imports from Mexico would likely mean a reduction in the number of jobs in the automotive sector in the United States. Existing manufacturing jobs in America are dependent on NAFTA.

NAFTA Isn’t Killing Manufacturing Jobs

However, for those that ardently demand that our trade imbalance with Mexico and Canada is destroying American manufacturing jobs, it’s important to understand that our trade deficit on goods with Mexico and Canada is not the culprit. While Mexico and Canada have been a destination for jobs outsourced from the United States, many experts agree that a large driving force for the dwindling number of manufacturing jobs is due to automation and advanced manufacturing techniques, not cheap labor overseas. In fact, a RAND study found that China shed 25 million manufacturing jobs between 1994 and 2004, 10 times more than the U.S. lost in the same period.

While NAFTA critics are right that manufacturing employment in the U.S. has declined steadily, these jobs peaked in 1979—25 years before NAFTA. Today, more jobs are high-tech and require highly specialized training, and with the rise of artificial intelligence, this will only get worse. Even as manufacturing jobs have decreased in the U.S., manufacturing output has increased considerably, which is a result of automation and efficiency in manufacturing. Ultimately, protectionist and nationalist trade policies will not reverse the impact of automation and the ever-growing service-based economy in the United States.

NAFTA isn’t perfect, but it provides numerous advantages for all three countries involved. While it may be worth evaluating and renegotiating over time, it’s apparent that having NAFTA in place is important for trade in North America and beneficial to the U.S.—it’s certainly not the “the worst trade deal ever signed anywhere.”

As Eric Farnsworth, former White House State Department and currently the Vice President at Americas Society/Council of the Americas states:

NAFTA works. It was an experiment when initially negotiated, and the agreement can usefully be updated and improved, that’s true, but just think how far and how fast the global economy has moved since 1994…But NAFTA has done what it has been designed to do, which is to increase trade and investment among all three parties of the agreement, including Canada, Mexico, and the United States.”

In the end,  it looks like NAFTA is not that bad for the U.S. after all.

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NAFTA: The Worst Deal Ever? The North American Free Trade Agreement Explained

There is not a more Trumpian topic than trade: The issue is important to his base and central to his campaign promises—even Democrats relish using the term “free trade” against him (or “fair trade” as he calls it). For the past few decades, American presidents have embraced free trade with allies as an issue paramount to continued growth and prosperity. Trump’s approach is different as he attempts to get America out of these so-called “unfair” trade deals.

One of these trade deals is the North American Free Trade Agreement (NAFTA). It has been in effect since 1994 and establishes a trilateral trading block in North America between Mexico, Canada, and the United States. Since Trump’s inauguration, he and his administration have been hellbent on renegotiating NAFTA to put “America First” and get out of what he calls “the worst trade deal ever signed anywhere, but certainly ever signed in this country.”  

NAFTA has formed the basis for U.S. trade in North America over the past 24 years, creating trillions of dollars in trade between the countries. As a result of NAFTA, the economies of the United States, Mexico, and Canada have become so intertwined that disconnecting them could have catastrophic economic and geopolitical consequences. So, is NAFTA a “bad deal” for the United States? Are we really losing in our trade deal with Mexico and Canada?

U.S. Trade Under NAFTA

The premise behind the United States renegotiating NAFTA is that the United States is getting the shaft in its current trade agreement with Canada and Mexico. Sure, the U.S. has a trade deficit with Mexico, and sure, Trump claims that the U.S. has a trade deficit with Canada, but it’s a bit more complicated than that. 

Trade With Mexico Under NAFTA

According to the Office of the United States Trade Representative, the trade deficit with Mexico was $64.1 billion in 2017. Taking a closer look at the numbers, the U.S. had a $71.1 billion deficit for goods but a $7 billion surplus for services with Mexico.

Even with a trade deficit for goods, the U.S. exported $243 billion, making Mexico the United States’ second largest goods export market. Additionally, Mexico serves as the largest supplier of agricultural imports to the U.S., including fresh fruits and vegetables, snack foods, and wine and beer.

Trade With Canada Under NAFTA

Contrary to Trump’s assertions, according to the Office of the United States Trade Representative, the U.S. had a trade surplus of $8.4 billion. Again, taking a closer look at the numbers, the U.S. had a $17.5 billion trade deficit for goods but a $25.9 billion trade surplus for services with Canada. Even though the U.S. had a trade deficit for goods with Canada, it exported $282.5 billion, which made Canada the United States’ largest goods export market.

Ultimately, Canada and Mexico are the two largest export markets for the United States, respectively. Even though the U.S. has a deficit in goods with its North America trading partners, it has a surplus for services, such as travel, software and technology, and financial services, which is a growing aspect of its service-based economy (the U.S. has been transitioning away from a manufacturing economy for years). In fact, the U.S. service sector accounts for around 90 million jobs, which is nearly 80% of private-sector GDP.

The Importance of Services for the United States’ Economy

Most importantly, the United States seems to be “winning” the service trade with Mexico and Canada. In terms of sheer value, not only does the U.S. export more services than it imports from Mexico and Canada, but service exports are growing at a faster rate than service imports. Why is this important?

The service economy includes the financial sector, retail, healthcare, and education sector. However,  the service economy is not limited to these sectors. Many products have a service component after they are manufactured. A good example of this is IBM. While IBM manufactures hardware, the core focus of its business is solutions and services. The same can be said about Apple’s business. An important component of Apple is its service business, including App Store, Apple Music, Apple Care and Apple Pay, and indeed, Apple’s service business is its fastest-growing asset. Jobs in Apple’s service business comprise most of its American workforce.

The Importance of NAFTA for the United States 

In addition to services, U.S. manufacturing exports benefit heavily from NAFTA. One of the major benefits of NAFTA is that there are zero tariffs on most U.S. exported goods, which makes it easier to sell goods to Mexico and Canada. Without NAFTA, this trade system would cease to exist. Instead, tariffs would revert to the World Trade Organization (WTO) standards, which are significantly higher for U.S. exports.

Additionally, many products sold by American companies have complex manufacturing processes with many component parts being made outside the United States. For example, a gas grill that is made in the U.S. could have knobs that are imported from another country. While the grill is still manufactured in the U.S., the component part is imported to help make the final product. Canada and Mexico are first and third, respectively, in providing imported component parts used in U.S. manufactured exports.

However, the U.S. also exports component parts to Canada and Mexico, so it goes both ways. The U.S. automobile industry, for instance, is a complicated import/export business. Last year the United States imported 1.6 million vehicles from Mexico; however, about 40 percent of the value of the components in those vehicles came from the United States! Therefore, limiting car imports from Mexico would likely mean a reduction in the number of jobs in the automotive sector in the United States. Existing manufacturing jobs in America are dependent on NAFTA.

NAFTA Isn’t Killing Manufacturing Jobs

However, for those that ardently demand that our trade imbalance with Mexico and Canada is destroying American manufacturing jobs, it’s important to understand that our trade deficit on goods with Mexico and Canada is not the culprit. While Mexico and Canada have been a destination for jobs outsourced from the United States, many experts agree that a large driving force for the dwindling number of manufacturing jobs is due to automation and advanced manufacturing techniques, not cheap labor overseas. In fact, a RAND study found that China shed 25 million manufacturing jobs between 1994 and 2004, 10 times more than the U.S. lost in the same period.

While NAFTA critics are right that manufacturing employment in the U.S. has declined steadily, these jobs peaked in 1979—25 years before NAFTA. Today, more jobs are high-tech and require highly specialized training, and with the rise of artificial intelligence, this will only get worse. Even as manufacturing jobs have decreased in the U.S., manufacturing output has increased considerably, which is a result of automation and efficiency in manufacturing. Ultimately, protectionist and nationalist trade policies will not reverse the impact of automation and the ever-growing service-based economy in the United States.

NAFTA isn’t perfect, but it provides numerous advantages for all three countries involved. While it may be worth evaluating and renegotiating over time, it’s apparent that having NAFTA in place is important for trade in North America and beneficial to the U.S.—it’s certainly not the “the worst trade deal ever signed anywhere.”

As Eric Farnsworth, former White House State Department and currently the Vice President at Americas Society/Council of the Americas states:

NAFTA works. It was an experiment when initially negotiated, and the agreement can usefully be updated and improved, that’s true, but just think how far and how fast the global economy has moved since 1994…But NAFTA has done what it has been designed to do, which is to increase trade and investment among all three parties of the agreement, including Canada, Mexico, and the United States.”

In the end,  it looks like NAFTA is not that bad for the U.S. after all.

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