While Latin America policy will likely not be a priority for the administration of Donald J. Trump, the president-elect has staked out a large part of his campaign—directly and indirectly—on issues deeply important to the region and its citizens. The real estate magnate famously launched his campaign by calling Mexican immigrants rapists and criminals and announcing his now-famous pledge to build a wall along the 2,000 mile U.S.-Mexico border. Later on the campaign trail he promised he’d return 11 million undocumented immigrants to their original countries, repeatedly railed against the North American Free Trade Agreement (NAFTA) calling it the worst “trade deal ever” and, in a campaign stop in Florida speaking to Cuban-Americans, promised he’d roll back President Barack Obama’s loosening of the U.S.-Cuba embargo. As a result Latin Americans, Hispanics and hardline Cuban-Americans—for better or worse—believe they have a lot vested in a Trump administration’s future policy towards the region and its migrants.
But will he, or even can he, do them?
From trade to Cuba, Global Americans will be analyzing the top five campaign promises that Trump made that will affect Latin America and Hispanics. Many of the things he pledged on the campaign trail will be difficult, if not impossible, to do without the full support of Congress. And even the changes he could implement solely with presidential authority would likely provoke negative economic, commercial and diplomatic consequences.
For the first of the series we look at his pledge to dramatically remake NAFTA in favor of U.S. workers and nationally based manufacturing.
Renegotiate NAFTA: Both in the debates and on the campaign trail, Trump called for the renegotiation of the North American Free Trade Agreement (NAFTA) that links the three economies of North America—Canada, Mexico and the United States. Blaming the agreement for the loss of manufacturing jobs in the United States, after his election the President-elect wasted no time in calling out (via Twitter, of course) auto manufacturers he claimed were planning to expand production in Mexico and has threatened a 35 percent import tax on companies that build cars south of the border to be sold in the U.S. market. In the case of Ford the PEOTUS took credit for the company’s decision not to build a $1.6 billion plant in San Luis Potosi and instead expand production in Michigan; The Washington Post, though, noted that the change was more likely due to the availability of higher skilled labor north of the Rio Grande.
At the same time, the transition team has continued to allude to its plans to renegotiate the agreement. In his Senate confirmation hearings, Commerce Secretary-designate Wilber Ross continued with the theme, arguing that renegotiating NAFTA would be one of the first priorities of the administration to make it work better for the U.S. and saying that “all aspects” were on the table.
The agreement collectively accounts for 28 percent of world GDP—though only 7 percent of global population—and has linked the U.S.’s two largest trade partners together since 1994 into a geography-busting-mega-market for the U.S. representing more than 30 percent of the U.S.’s export market in 2010.
So, what is actually possible?
First, the proposition that a President Trump could arbitrarily slap a border tax or tariff on a company that produces overseas is impossible. The Constitution grants the power to tax to Congress—because the Founders believed that legislators were closer to the people and therefore in a better position to respond to and protect citizens against excessive, arbitrary taxation. Second, it’s unlikely that the U.S. Congress would support such a measure. What President Trump could do under the agreement is return to the tariffs under Most Favored Nations status, the one-time lowest common denominator under the World Trade Organization—which would impose restrictions on trade above NAFTA.
Such a move would likely trigger retaliatory action from Mexico, with the southern country’s market representing the U.S.’s second largest export market totaling $236 billion in 2015—with Mexicans buying everything, on the manufacturing side, from U.S.-made vehicles, machinery, minerals, and plastics to $18 billion of U.S. agricultural products. Many of these goods, from high-end manufactured goods to corn are produced across the U.S. (even in the red states). As a result, a move to place indiscriminate tariffs on Mexican products—a move that would require congressional action—is unlikely to pass the lower house, let alone the upper house.
Mexico’s 2009 action over the U.S. Congress’ refusal to implement a NAFTA agreement that would permit Mexican truckers to ship products north from Mexico is illustrative. In response to Congress’s rolling back of a trial program to permit limited cross border trucking, the Mexican government selectively applied targeted tariffs on more than 100 U.S. imports. Congress swiftly reversed course and allowed Mexican truckers to ship in the United States.
(Funny note: The NAFTA provision for free border traffic of trucking had drawn the sharp opposition of the U.S. Teamsters and led to a series of public messages that drew on false stereotypes of clapped-out, exhaust-spewing, dangerously unregulated trucks captained by unprofessional drivers careening down U.S. highways putting its citizens at risk. In the trial cross-border trucking program, the allegations/stereotypes were all proven false: Mexican trucks and their drivers actually had fewer infractions than their U.S. counterparts cruising around on Mexican roads.)
But could the administration re-negotiate NAFTA? Yes, but at a high and uncertain cost. According to the original treaty, any member country can pull out of the agreement with six months notice. But doing so, without the process of renegotiation already well underway if not finished, would cause unprecedented disruption in production of everything from automobiles to airplanes. The reason why is that over the course of NAFTA’s 23-year life, the economies and production facilities have become intertwined. According to a recent study, 40 percent of the goods Mexico ships to the U.S. come from inputs made in the United States. Partially because of that, according to The Economist, an estimated 5 million U.S. jobs depend on trade with Mexico.
At the same time, renegotiation would require re-opening the treaty to unpick specific provisions and beef up others that could not be done unilaterally. Campaign trail bravado aside, the U.S. would need to sit down with its other NAFTA partners to review the whole deal. Not only would the U.S. not be able to unilaterally dictate the new terms, its partners have concerns of their own that they would like to re-address: the Canadians have their soft wood concerns and the Mexicans their concerns over investment and the recapitalization of the NAFTA bank—whose former director is now the Mexican Ambassador to the United States. Add to that U.S private sector concerns over intellectual property, U.S. labor concerns over labor rights and wage differentials, and environmental group complaints over lax enforcement of environmental regulations, and, quite frankly, you have a mess.
Is NAFTA the “worst deal ever?” To be sure, as the first of the wave of FTAs that have now evolved to include a whole range of agreements on the environment and labor rights, there are areas that can be improved, such as protections on the environment and stronger provisions for intellectual property rights. But any serious re-do of the agreement would require U.S. Congressional confirmation, opening up a can of worms over free trade precisely at a time when the consensus—clearly—has withered.
One possibility short of re-negotiation is that the Congress could embrace a border adjustment tax. Advocated by some economists and the U.S. AFL-CIO, the reform would place a tax on the entire product entering the U.S. from overseas, rather than just on the profit the retailer gains by selling the product once in the market. The reform would also likely provide tax cuts for companies that build locally and export internationally—thereby providing a strong incentive for companies to keep or return factories to the United States for the U.S. market and for export. The problem with this seemingly quick and easy fix that stops short of re-negotiating the whole enchilada of NAFTA is that—as with any tariff—the costs would be passed on to consumers, by some estimates as much as 15 percent on goods sold in the United States.
The maneuver would also disadvantage the hundreds of companies that have set up complicated production chains across the U.S.-Mexico border, either burdening them with a regulatory mess or forcing them to re-locate entirely to the United States. Either option would turn out to be far more complex and expensive than it seems and likely provoke the opposition of the powerful and well-oiled lobbying machine of the Chamber of Commerce, just across Lafayette Park from the White House.
Meanwhile, in his confirmation hearings, Ross made vague references to areas of NAFTA that need to be updated to bring them up-to-date with the modern economy. Without knowing the specifics of what those are, it’s difficult to assess their plausibility and their impact on the U.S. and Mexican economies. Much will also depend on how they are done. Will they be done within the NAFTA agreement with other things on the table? Will they be done as part of a broader package of import/export focused taxes? Either way, without assurances and gradual implementation, such changes could very well have a disruptive effect. The Peterson Institute for International Economics estimated that if Trump’s words were put into action they could result in the loss of 4 million U.S. jobs.
In short, apart from side agreements to NAFTA, say on issues of manufacturing, exports and non-tariff incentives to keep manufacturing in the U.S. or a border adjustment tax, a wholesale NAFTA renegotiation would mean real renegotiation with reconfirmation and all the uncertainty that that will imply, not just for the trade agreement but for the 5 million U.S. workers currently employed thanks to NAFTA. In those cases, sheer bluster—especially when the U.S. economy and U.S. workers have real skin in the game—won’t be enough to seriously shift the terms in the U.S.’s favor. Other NAFTA partners have leverage too.