President Donald Trump sent out a series of tweets Monday morning referencing the North American Free Trade Agreement (NAFTA)—a deal between the U.S., Canada, and Mexico that Trump has fixated on since the presidential campaign.
These tweets come as the the U.S., Canada, and Mexico are racing to renegotiate the terms of the 24-year-old trade agreement, with reports that the goal is to reach a deal in the next few weeks—ahead of Mexico’s presidential election on July 1 and before the 2018 midterm elections.
Trump has repeatedly harangued NAFTA, which he has called bad for American workers, and he has threatened to pull out of the agreement, if a renegotiation deal could not be reached. (It still remains legally dubious if a president has that authority, or if Congress is needed to pull out of NAFTA.)
While in theory exiting NAFTA could spark manufacturers to move production to the U.S. to avoid high tariffs, it could also push manufacturers to move factories to Southeast Asia, according to the New York Times’ in-depth look at what would happen if NAFTA were repealed. The Times also notes that repealing NAFTA could hurt industries such as agriculture, automobiles, apparel, and more. And it could impact the consumer, who may pay more for food and cars.
Since August of 2017, the U.S. Trade Representative Robert Lighthizer has been working with representatives from Canada and Mexico on renegotiating the trade agreement. But what would a renegotiated NAFTA mean for consumers? American industry? Or American labor? Fortune spoke with Brian Peck, director of the Transnational Law and Business Center at the University of Southern California, to gain an understanding of what a new NAFTA could look like. It’s important to note that the deal is far from finished, so this is based on what the U.S. government has proposed for renegotiations.
First, what is NAFTA?
NAFTA is a trilateral free trade deal between the U.S., Canada, and Mexico. It went into effect in 1994 and it lifted most tariffs and barriers to trade and investments between the three countries. “Liberalization of trade in agriculture, textiles, and automobile manufacturing was a major focus,” according to the Council on Foreign Relations. “The deal also sought to protect intellectual property, establish dispute-resolution mechanisms, and, through side agreements, implement labor and environmental safeguards.”
While the deal has been beneficial to all three countries, the Trump administration has railed against free trade’s impact on manufacturing jobs (some of which have moved to Mexico where there is cheaper labor). President Trump has also expressed frustration with the trade deficits the U.S. has with Mexico and Canada.
Right behind China, Canada and Mexico are the United States’ second and third-largest trading partners, respectively. In 2017, Canada did $582.4 billion and Mexico did $557 billion in goods trade with the United States (excluding services). In terms of where the U.S. exports good, in 2017 Canada and Mexico were one and two: Canada imported 282.4 billion in goods (or 18.3% of U.S. exports), and Mexico imported 243.0 billion in goods (or 15.7% of U.S. exports). The U.S. also imports a lot from these countries. Mexico and Canada were two and three respectively (after China). Still, the U.S. has a trade deficit (we import more from them than they import from us) with both Mexico and Canada, and Trump has made reducing trade deficits a part of his agenda.
What do U.S. lawmakers want from the negotiations?
Prior to the negotiations, the office of the U.S. Trade Representative released a summary of objectives of the renegotiations. They are meant to, in part, modernize NAFTA given developments in sectors such as telecommunications, energy, and digital trade.
Other proposals are in line with Trump’s protectionist stance. “Rules of origin, particularly on autos and auto parts, must require higher NAFTA content and substantial U.S. content,” Ambassador Lighthizer said in a statement during the first round of negotiations. “Country of origin should be verified, not ‘deemed.’ Labor provisions should be included in the agreement and be as strong as possible.”
The Trump administration is also seeking “provisions to guard against currency manipulation, dispute settlement provisions should be designed to respect our national sovereignty and our democratic processes,” and “equal access and reciprocity in government procurement and agriculture.”
Some of these requirements have morphed and changed during the multiple rounds of negotiations; for example, the U.S. originally sought to raise the auto rules of origins standard from 62.5% NAFTA-made autos qualify for tariff free trade to 85%. Reuters reported that this demand has softened in order to get the deal done swiftly.
What could this mean for consumers?
“I think in terms of what is being proposed by the U.S. for renegotiation of NAFTA, the two sectors that would have the most impact on consumers would be autos and agriculture,” Peck explained.
The impact on the price of automobiles is twofold. “The U.S. proposals on autos would likely raise the price of autos available in the United States that are being manufactured in any of the three NAFTA countries, particularly in Mexico where a large majority of autos are now being manufactured,” Peck said. “No matter what ends up being the final deal, and there’s a lot of proposals and a lot of information about how some of these original proposals have been modified, but the bottom line is that it would increase the requirement of parts to a higher level of percentages being produced within one of the three NAFTA countries.” The second way the renegotiated deal impacts auto consumers is labor: The deal could increase the wages for Mexican workers, which could potentially mean higher cost of production, which is passed off onto the consumer.
Then there’s agriculture. “The Trump administration had proposed new measures that would basically decrease the access of seasonal agriculture products to help American producers supply the U.S. market rather than, say, less expensive certain produce or agriculture products that, because they are off season here, are supplied from Mexico,” he explained. “Avocados would be an example, where we, as consumers here in the United States, have access to avocados during the off season here.”
Peck is careful to note that this is based on the U.S. proposal, and that the deal is not final, so this could change.
What could this mean for U.S. industries?
The impact on U.S. sectors is mixed. Certain industries, including telecommunications, energy, and digital trade, stand to benefit from the modernization of NAFTA, which would open up markets in Canada and Mexico.
Also, if the Trump administration’s government procurement proposal is accepted into the final deal—meaning Mexican and Canadian companies would be subject to the same procurement access to government projects as the U.S. does in Canada and Mexico—U.S. companies stand to gain a leg up in U.S. government procurement projects.
U.S. companies could lose, however, when it comes to the Trump administration’s proposal to make Chapter 11 optional, which deals with investor-state dispute settlements, as these rules have helped U.S. companies in the past.
Another possible provision that could impact industries—in all three countries—is if there’s a five-year review provision added to the agreement. “That’s another controversial proposal, both with our trading partners, NAFTA partners, but also for businesses as well, because it heightens a level of uncertainty and places a chill on investments and business positions,” Peck noted.
Finally, companies will likely have higher labor costs, which brings us to our next category.
What could this mean for labor?
American workers are a huge reason why Trump has said he wants to renegotiate or exit NAFTA. Automobile manufacturing jobs moving to Mexico has been one of the president’s major NAFTA boogymen.
“NAFTA’s been very, very bad for our country,” he said in April of 2017. “It’s been very, very bad for our companies and for our workers, and we’re going to make some very big changes, or we are going to get rid of NAFTA for once and for all. Cannot continue like this, believe me.”
If two of the Trump administration’s proposals go into place—automobile rules of origin, and higher wages for Mexican workers—labor stands to benefit. Their implementation in the final deal would also “make our domestic manufacturing operation of autos, finished autos, or auto parts more competitive,” Peck explained.
He also notes that while free trade has been blamed for job loss in certain sectors, there is currently a manufacturing symbiosis between Mexico and the United States in terms of automobile manufacturing.
“It’s important to note that currently, under the current NAFTA agreement, 42% or 42 cents for every dollar of a car that is manufactured in Mexico actually is U.S. parts, so although the manufacturing line for the finished product may be in Mexico again 42% or 42 cents of every dollar value of that car is from U.S. auto parts manufacturers in states in the midwest and so-forth,” Peck explained. “So admittedly, there are some loss of jobs in certain sectors, but that being said, the three economies have become so integrated that the manufacture of the finished autos in Mexico is keeping the auto parts manufacturers in the U.S. in business.”
What about immigration?
Trump has repeatedly threatened to tie immigration to the NAFTA deal—including on Monday, which Mexican Foreign Minister Luis Videgaray called an “unacceptable” term of negotiation, according to Reuters. It’s also possible that the U.S. Congress may not be pleased with an immigration proposal in a free trade agreement. “The trade agreement has to be approved by both houses of Congress, and Congress, historically, has been very adamant about not having free trade agreements cover immigration,” Peck explained. “There’s one exception, the Australia-U.S. agreement has some obligations in terms of visas, but that was the only agreement.”
Speaking of Congress, what role do they play in the deal?
Beyond balancing what Canada, Mexico, and the U.S. want from NAFTA, what the U.S. wants is broken down into what the Trump administration, congressional Democrats, and congressional Republicans want. Whereas Trump leans towards “American First” policies, some Republicans in Congress are not only supportive of free trade, but are also looking out for industries in their respective states. Democrats in Congress are pushing for higher labor and environmental standards.
While Congress may have allocated some of its power to the executive branch to regulate international commerce through the Trade Promotion Authority, which speeds up the ratification process, the legislative branch is still required to vote on the deal.
And this is part of the reason why the negotiations have been sped up. The president must present the terms to Congress, which has 90 legislative days—days when Congress is in session—to approve it. Both houses of Congress must pass the deal with an up or down vote, and no amendments can be added. Because of this, the Trump administration wants to get the negotiated deal to Congress soon, in case there is a change in party control after the 2018 midterm elections.
In terms of whether a NAFTA deal will be reached that is acceptable to the U.S. (the Trump administration and Congress), Canada, and Mexico, Peck thinks that the biggest question mark will ultimately be Congress.
