President Trump is gearing up to do something about "the worst trade deal ever."
That's what he once called the North American Free Trade Agreement (NAFTA), the 1994 bipartisan trade deal that lowered barriers to commerce and investment between the United States, Canada, and Mexico. Trump railed against NAFTA on the campaign trail for destroying American jobs, and roughly half of U.S. voters think the deal should be retooled. And Trump looks like he'll try to keep his promise: CNN reported on Sunday that the president aims to begin renegotiating NAFTA when he meets with Canadian and Mexican leaders as early as this month.
So what, practically speaking, can Trump do?
Renegotiating NAFTA would be a massively complex undertaking. Not only would Congress have to agree to the new terms, but so would the Canadian and Mexican governments.
Getting the former to come to the bargaining table might not be too hard, though. Justin Trudeau's government is already signaling a willingness to negotiate a new bilateral agreement with the U.S., separate from Mexico. Seventy percent of all Canada's trade is with America, and they're actually one of the biggest buyers of our exports. While the total flow of goods between the two countries is quite large, the imbalance is pretty small: Our trade deficit with Canada was only about $15 billion in 2015 and $9 billion in 2016. This is probably a big reason why the Trump administration is much more focused on Mexico, and why Canada is eager to avoid becoming "collateral damage" in that dispute.
That brings us to Mexico itself. We import a bit more from them compared to Canada, but export a great deal less, resulting in a trade deficit with Mexico of almost $60 billion in 2015. So any re-negotiation Trump attempts will almost certainly be aimed at raising trade barriers back up. Mexico is also signaling a willingness to renegotiate terms, but they've made it clear that any new tariffs slapped on their exports to the U.S. will be counterbalanced by equal tariffs on our exports to them. That could get touchy.
So what if Trump just pulls America out of NAFTA unilaterally? It sounds like he could do it. NAFTA's Article 2205 presumably allows the president to pull the U.S. out of the trade deal without any input from Congress. All he has to do is provide six-months written notice.
No one's ever actually tried this before, though. America hasn't walked away from a commercial treaty since 1866. And it's an open legal question whether the executive branch can really just unilaterally withdraw from a treaty. So the White House could get sued right out of the gate by any number of businesses who rely on trade across the North American continent. Congress also passed a number of laws to put NAFTA's terms into effect. Those would remain regardless of NAFTA's fate, and would have to be scrapped by the normal legislative process.
But if Trump does unilaterally end U.S. involvement in NAFTA, Canada and Mexico would presumably revert to their pre-NAFTA trade status. For Mexico in particular that could mean new tariffs, which brings us back to Mexico's threat to retaliate.
So no matter which route Trump picks, it will be a big mess that probably ends with higher barriers and less trade.
Would less trade help or hurt the U.S.?
In the decades since the implementation of NAFTA, North American supply chains have become pretty complex and interwoven. NAFTA didn't just make it easier for goods made in one country to be shipped to another; goods made in one country often rely on parts and imports from the other two NAFTA countries. About five million jobs here in the U.S. are bound up with trade with Mexico in some form. And we import a third of our fruits and almost two-thirds of our vegetables from Mexico.
So opponents of fiddling with the trade agreement paint the results of Trump's policies in bleak terms: Lost U.S. jobs and more expensive consumer prices. The adjustment probably would be temporarily unpleasant, but the benefits of low trade barriers also tend to be way over-hyped. Our decentralized markets would simply adapt.
The bigger issue is the trade deficits. All other things being equal, when America has a trade deficit with another country, there are fewer jobs created in the U.S., meaning not only higher unemployment, but slower wage growth too. So even if Trump's actions result in less trade with Mexico overall, the smaller trade deficit would theoretically create a few jobs in the U.S. and boost some workers' incomes.
Trump's problem is that businesses who import from Mexico won't automatically shift to buying American. More likely, they'll turn to the next cheapest supplier somewhere else in the world. If Trump wants to reform American trade in a way that really helps domestic jobs, he needs to get his arms around the trade deficit we run with the rest of the globe — roughly $500 billion in 2015 — which dwarfs the one with Canada and Mexico.
So renegotiating NAFTA alone won't do it.
Instead, you would need something like a universal set of tariffs on imports from any foreign country, or monetary policy interventions to bring the value of the dollar back into balance with other currencies. Or you could just live with trade deficits, and counteract the drag they produce on jobs with higher government deficit spending.
Trump might actually be up for all three solutions, but each would come with their own set of difficulties. First, Trump just hasn't shown anything like the policy sophistication necessary to pull off a monetary intervention or higher deficit spending. Second, tariffs and monetary interventions would upend multiple trade agreements and cause a hugely complicated mess for Trump and Congress to unwind. And third, good luck getting Republicans in the House and Senate to agree to deficit spending.
So no matter which way you slice it, Trump's anti-NAFTA crusade is likely to cause a big political and international to-do. But the results may be middling too imperceptible.