American President Donald Trump's proposal to withdraw from the 'NAFTA' would bring unforeseen consequences to the regionalisation of world politics. Elaborate. (UPSC CSE Mains 2017 - Political Science and International Relations, Paper 2)
North American Free Trade Agreement (NAFTA):
- NAFTA is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America.
- The agreement came into force on January 1, 1994.
- According to Donald trump, NAFTA is the “worst trade deal ever made by United States”. Thus, he is planning to renegotiate or replace it.
Mexico-U.S. Agreement:
- Agreement details: 75% of automobile content must be made in the U.S. and Mexico, up from the current level of 62.5%.
- Further, 40-45% of such content must be manufactured using labour that costs at least $16 an hour.
- Benefits for U.S.: The U.S. hopes that this will discourage manufacturers from moving their facilities to Mexico, where labour is available at rates lower than in the U.S.
- Way ahead: Trump administration has also invited Canada to join talks for a renegotiation of trade terms in favour of U.S. interests.
Comment on ongoing trade war:
- Mexico’s decision could set an example for other countries like China which have resorted to retaliatory tariffs to deal with Trump’s aggressive trade war against them
- Retaliatory tariffs can only cause further harm to the world economy by increasing the burden of taxes on the private sector, which is crucial to fuel growth and create jobs. Further it deprives domestic consumers of access to useful foreign goods.
- The right response to Trump’s trade war will be to abstain from any mutually destructive tit-for-tat tariff regimes while simultaneously pushing for peace talks.
If Trump just pulls America out of NAFTA unilaterally
- NAFTA’s Article 2205 presumably allows the president to pull the U.S. out of the trade deal without any input from Congress. All he has to do is provide six-months written notice.
- However, America hasn’t walked away from a commercial treaty since 1866. And it’s an open legal question whether the executive branch can really just unilaterally withdraw from a treaty. So the White House could get sued right out of the gate by any number of businesses who rely on trade across the North American continent.
- Congress also passed a number of laws to put NAFTA’s terms into effect. Those would remain regardless of NAFTA’s fate, and would have to be scrapped by the normal legislative process.
- But if Trump does unilaterally end U.S. involvement in NAFTA, Canada and Mexico would presumably revert to their pre-NAFTA trade status. For Mexico in particular that could mean new tariffs, which brings us back to Mexico’s threat to retaliate.
- So no matter which route Trump picks, it will be a big mess that probably ends with higher barriers and less trade.
Renegotiating NAFTA would be a massively complex undertaking. Not only would Congress have to agree to the new terms, but so would the Canadian and Mexican governments. Getting the former to come to the bargaining table might not be too hard, though. However, given the context a careful reconsideration is required.
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