June 28, 2017    4 minute read

NAFTA: Trump’s Rhetoric vs. Reality

China Ready to Trump Both the US and Mexico?    June 28, 2017    4 minute read

NAFTA: Trump’s Rhetoric vs. Reality

On November 8th 2016, for the first time since 1988 the States of Michigan and Pennsylvania voted for a Republican nominee for President of the United States. Its two biggest cities Detroit and Philadelphia were facing unemployment rates well above the American average (11.3/7.0% to 4.8%)  and struggling to adapt to an economy in which manufacturing was playing an ever-diminishing role. Donald Trump had appealed to the disillusioned through a promise to “Make America Great Again”. Key to this was the belief that American jobs had been sacrificed abroad to Mexico and China and that a trade deficit of $500bn was a sign of economic weakness. At the heart of Trump’s scorn lay the North American Free Trade Agreement (NAFTA), amiably described by him as “the worst trade deal in the history of the world”.

Mexico’s Trade Surplus

With his election, Mexican markets stuttered, led in large part by the effect repealing NAFTA could have on a country which relies on the USA for 80% of its exports. Mexico has a trade surplus of $63 bn to the USA, led in its entirety by a surplus of $74bn for the automotive industry. Indeed if you discounted this industry, Mexico would actually have a trade deficit of $11bn.

Trump’s logic or at least his rhetoric was that by repealing NAFTA and increasing the tariffs, much of the automotive manufacturing that had once presided in cities like Detroit and Philadelphia would once more return. Americans would be happy to accept a slight increase in the price of their cars due to the increased labour costs as long as Americans got their jobs back.

Populist and popular within parts of the USA no doubt, Trump must tread incredibly carefully. Insular in the extreme, Trump’s stated aims for the automotive industry pose with it unquestionable risks.

Globalisation

The first of these is the president’s favourite place “China”. In late June Ford announced their intention to build the Ford Focus, the world’s most popular car, not in its ancestral homeland but in China, citing a market of 26 million potential customers and a low-cost base. What’s important about this decision is that Ford decided against building their factory in San Luis Potosi, Mexico. In an environment in which free trade exists through NAFTA, Ford already saw the cost benefits of building their factory in China and importing to the USA. This is in spite of a tariff of 25% on imports from China to the USA.

After 2019, Ford intends to import all their Ford Focus models in this way. Removing NAFTA and raising tariffs leads the question, why would the USA suddenly become more attractive to automotive companies when they can already see cost benefits outside North America?

What’s more the current free trade agreement with Mexico retains some of the benefits of an industry on the USA’s doorstep. Bloomberg estimates that 40% of the value of vehicles made in Mexico comes from the USA, through parts supplied by American companies, sustaining thousands of jobs across the country. Compare this with a car made in China and the figure is only 4%.

As much as Trump has painted Mexico’s relationship with the USA as give and no take, the realities of any change to NAFTA will have to be weighed against not only these arguments but also America’s interests in maintaining trade with Mexico.

The New York Times reports that a quarter of Mexico’s electricity is produced by natural gas from the USA. This has created a vast amount of wealth for states such as Texas across 17 pipelines, and two of its chief proponents play a crucial role in Trump’s administration.

Vested Interests

Rick Perry, Governor of Texas, Energy secretary and a man who has recently sat on the board of a pipeline company pumping gas to Mexico, has aimed to strike a conciliatory tone:

“I see this as an opportunity to allow an American natural resource to help bolster both countries’ economies… the overall goal of the Trump administration is to sell what Americans make to bolster this economy.”

Indeed looking further, Trump has appointed Rex Tillerson, former CEO of Exxon Mobil from 2006 to 2016, as Secretary of State. It would seem beyond reasonable comprehension that the natural gas industry’s interests in Texas and in preserving trade will go unnoticed.

So whilst the case for ripping up NAFTA and its effects are unclear, it seems vested interests and not logic will be the deciding factor in ensuring that any decisions made to “Make America Great Again” will not indeed make parts of it worse off.

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