How an end to NAFTA would hurt the Midwest and Southwest

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DALLAS — With talk of a trade war escalating, Fitch Ratings sees a threat to economies of the Southwest border states and upper Midwest if the North American Free Trade Agreement collapses in the process.

The seventh round of negotiations over continuing or modifying NAFTA ended Monday with no resolution. President Trump, who has voiced support for a trade war, said his recent decision to impose tariffs on aluminum and steel would only be removed if an acceptable agreement on NAFTA is reached.

Talks between the U.S., Mexico and Canada concluded “with only modest evidence of progress on the major issues, continued aggressive rhetoric between the U.S. and Canada and the last-minute ‘wild card’ of potential new tariffs on imported steel and aluminum products,” Fitch analysts Michael D'Arcy, Jose Acosta and Robert Rowan wrote in their report Wednesday.

“The new tariff measures render the completion of a ‘NAFTA 2.0’ agreement less certain given the administration's linkage of tariff exemptions for Canada and Mexico with the realization of a new NAFTA deal that is more consistent with U.S. negotiating positions,” they wrote.

A U.S. withdrawal from NAFTA would result in the re-imposition of tariffs on specific goods between the U.S. and the other two nations, Fitch said.

“The number of goods and services that are tariffed could also rise,” analysts said. “Mexican tariffs on some classes of U.S. products could be as high as 45%.”

Mexican and Canadian businesses and consumers could respond to greater U.S. protectionism by substituting goods and services from other Trans-Pacific Partnership nations, China, and the European Union for U.S.-grown and made products, they said. Shortly after taking office, President Trump canceled U.S. participation in the TPP, which was designed to counteract China’s influence on world trade.

Trump recently told The Wall Street Journal that a wall across the U.S.-Mexico border is a prerequisite for renegotiating NAFTA and that Mexico can pay for the wall through concessions on the trade agreement.

“NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A.,” Trump declared in a March 5 tweet. “Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.”

Tariffs would pose more risk to less populous states with smaller and more energy- and agriculture-dependent economies such as Iowa, North Dakota and Montana, according to Fitch. States with a higher exposure to Mexican trade are at greater risk of economic loss, they noted.

“Texas, Arizona and New Mexico each send roughly 40% of their exports to Mexico, raising their exposure to high Mexican tariffs,” analysts said. “Michigan would be doubly affected, as it sends 43% of its exports to Canada and 22% to Mexico. Michigan's critical role as the center of the North American automotive supply chain ensures that its economy would be disproportionately affected.”

Under the World Trade Organization’s 'most favored nation' rules, Mexico could impose tariffs on many common classes of U.S. goods ranging from 5% to 25%. Automotive product tariffs would be in the 5% to 10% range under MFN rules. Tariffs on farm livestock products could be much higher, analysts said, averaging around 23%. However, if Mexico were to impose 'bound tariffs' -- which are higher than MFN tariffs, but permissible under WTO rules -- then tariffs on pork could be set at 37%, while tariffs on poultry could reach 75%.

On the southern U.S. border are 48 crossings into Mexico, organized into 26 ports of entry. According to the U.S. Department of Transportation, in 2016, 5.8 million trucks crossed the border into the U.S., 2.1 million of them at Laredo, Texas. Most of the border crossings in Texas are on bridges financed with toll revenue bonds. Over 10,400 trains entered the US, containing 508,300 loaded rail containers, 487,100 empty rail containers, and nearly 14,500 passengers. About 88% of train crossings into the US occurred along the Texas-Mexico border, primarily through Laredo and Eagle Pass.

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