by Viraj Shah
NAFTA, since its inception has been one of the most controversial trade agreements in the world. In its essence, it was bound to create some disturbances and radical shifts in the economies of the three nations- Canada, USA, and Mexico. However, NAFTA is now mostly discussed because of a seemingly unavoidable trade war between Mexico and US, an unfortunate event for regional and global trade if it happens.
— Bryan Dawson (@BryanDawsonUSA) January 27, 2017
A trade deficit with Mexico
President Donald Trump has repeatedly spoke about building a wall along the Mexico border that would keep illegal migrants from Mexico away. Trump is right in suggesting that Mexico has taken more advantage of the NAFTA than the USA. It is to be noted that after a 1994 financial crackdown of Mexico, the country has enjoyed a surplus trade deficit with the US. This clearly signals that Mexicans now enjoy more wealth, thanks to massive American investments in the country. In fact, Mexico became the automobile part supplier nation for the US because Ford, General Motors and others invested in cheaper resources in the southern land.
— Battle Beagle 🇺🇸 🇬🇧 (@HarmlessYardDog) January 27, 2017
Stats tell the story
First, NAFTA allows Mexico to export automobile parts to the US which helps in creating a huge surplus for the nation. It supplies crude oil, appliances, and even electronics to the US which help in creating a huge trade surplus for the country. US imports from Mexico amount to $295 billion as of 2016. The trade deficit US suffered in 2016 with Mexico was a staggering $60 billion which made up to 12% of the annual overall trade gap for the US. The other member of NAFTA, Canada, also enjoys a trade surplus but it is merely $9 billion.
— Rasmussen Reports (@Rasmussen_Poll) January 26, 2017
Because of NAFTA, a third of Mexican imports are for the automotive industry. In 2015, US companies employed 1.29 million Mexican citizens while Mexican firms employed only 78,000 Americans. However, all is not bad for the US. Border States have gained a lot of trade traction because of NAFTA. Exports to Mexico have climbed to $235 billion in 2016 from a mere $68 billion in 1994 and Arizona and Texas have been beneficiaries of trade. Note that migration to the US is going down. It reduced to 5.85 million in 2014 from 6.95 million in 2007.
Why is NAFTA important for Mexico?
NAFTA has been the key to Mexican development since 1994. It has helped in the creation of millions of jobs in the country and has also helped in making Mexico the hub of automobile sector in the region. Currently, our southern neighbor is already facing tough times. Corruption is rampant and drug cartels are creating troubles for the authorities. President Neito is also losing public acceptability and trust.
In times like these, the Mexican currency Peso pummeled when Trump was elected president for fears of a trade war and unfavorable policies. Under such circumstances, if America opts for a trade war with Mexico, it would not only make the vulnerable nation dive into recession but would also affect its own economic growth as cost as many as 300,000 jobs in its own land.
Now that Trump has officially declared his interest in building a wall along the Mexican border and pay for it by levying heavy taxes and duties on Mexican imports, the nation is in a bad situation. Clearly, Mexico is a much smaller nation with a more volatile economic and political structure now. Further devaluation of the Peso (predicted to reach 25 to 28 against the USD) could result in loss of purchasing power and lead to widespread unemployment. This may mean that more desperate Mexicans looking for jobs will enter the US border and find employment here. Moreover, drug cartels may also become more active as they may use the unemployed people to work for them for some money. Automobile companies are also waiting in silence for the next move of the government as they do not wish for their investments to go down the drain in Mexico.
If the US levies additional taxes, it would violate the NAFTA. Mexico may impose further retaliatory measures in place. Even though Mexico would be the state that suffers the most, the US could become an indirect victim of the Mexican economic sabotage. In Trump’s own words, a wealthy Mexico is a better neighbor for the US than an unstable nation with poverty and unemployment.