Trump Vetos NAFTA Withdrawal

In another reversal of his campaign promises, President Trump has rescinded his call for an immediate withdrawal from the North American Free Trade Agreement (NAFTA), which streamlines trade between Canada, the United States, and Mexico. The declaration, which comes less than a week after the President criticized NAFTA as being harmful to American workers, may signal a shift on economic issues mirroring Trump’s recent foreign policy shifts. The decision to focus on renegotiating NAFTA, instead of scrapping it completely, came after phone calls to Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto, which were described as “pleasant and productive.”

Trump changes stance on NAFTA and advocates for renegotiation.

Bi-Partisan Effort Led to NAFTA Ratification

NAFTA was put in place in 1994, and was meant to encourage free trade between the three countries which make up the North American continent. Presidents Ronald Reagan, George Bush, and Bill Clinton both pushed for the treaty as an answer for the newly minted Eurozone, which allowed the majority of European countries to be treated as being contained within a single border for the purpose of commerce and investment. This competition was deemed to threaten the growth of non-member states.  Since its ratification, trade between the three countries has increased by 400 percent, reaching $1.14 trilllion annually as of 2015.

NAFTA Hit American Jobs and Mexican Farms

However, critics point out that while prices have gone down, there have been significant costs in terms of employment and the environment. Cheap labor in Mexico led to American jobs moving south from union heavy states such as Michigan and New York. Estimates of the number of displaced workers range from 500,000 to 750,000 people, primarily in the manufacturing industry. However, there have also been consequences for Mexico, as Mexican farmers were forced to compete with American mega-farms, which receive ample subsidies. The Mexican farmers were often forced to work with maquiladoras, manufacturing plants near the border between Mexico and the U.S. which offer low wages and hazardous working conditions.

U.S. Concerned about Trade Deficits and Disputes

While campaigning, President Trump referred to NAFTA as the “worst trade deal the U.S. has ever signed.” The administration’s primary concerns appears to be reducing the trade deficit which currently exists between Mexico and America, as well as addressing the growing number of trade disputes that are being legislated between U.S. and Canadian companies. On Tuesday, just prior to announcing his agreement to allowing NAFTA to stand, Trump’s new Commerce Secretary discussed new tariffs on Canadian lumber to reduce dumping, while implying that a similar stance may be in store for the dairy industry if Canada does not accept more American exports.

Trudeau and Trump Pursue Opposite Political Strategies

Trade issues are not the only areas of contention between Trump and his counterparts to the north and south. Prime Minister Trudeau has been consistently critical of Trump’s handling of global issues, including the suspension of visas for Syrian refugees. In response to Trump’s increased enforcement of immigration policy, several Mexican immigrants have also crossed over into Canada to request asylum. Talks between the two leaders have been frosty, with Trudeau accusing Trump of a populist agenda, while Trump has asked Canada to participate more in global affairs.

Can Trump Salvage America’s Relationship with Mexico?

Still, when compared to the relationship between Trump and Mexican President Peña Nieto, Trudeau could consider himself lucky. Even before assuming office, Trump was advocating for a border wall to reduce the number of undocumented Mexican laborers crossing the border to work in the United States. This puts in jeopardy nearly $26 billion in remittance payments from Mexican citizens to family members back home. Trump has also lobbied hard to keep American plants from moving south, while also exploring increased taxes on Mexican imports. However, financial analysts caution that backing out of NAFTA would depress the peso, leading to an even higher incentive for companies to switch their base of operations.

How Will the Continued NAFTA Policy Affect Trading?

Look for an improvement for the DOW and S & P 500, as several major businesses breathe a sigh of relief over cross-border commerce. A number of manufacturer’s including most of the major auto companies, rely on tariff free movement of goods in order to deliver products at low cost. Both GM and Ford should also see increased share prices. Finally, gold prices should drop, as the switch to a renegotiation strategy bolsters the image of President Trump as fundamentally committed to reasonable trade goals.