PHOENIX - President Trump's decision to renegotiate a trade agreement with Mexico and Canada could leave some states and localities weakened long-term for a deal that may not benefit the United States very much.
After frequently criticizing the North American Free Trade Agreement during his campaign, Trump said last week that he had been prepared to withdraw from the 1994 treaty when he received phone calls from the leaders of Mexico and Canada urging him not to kill the treaty. He said he has instead decided to begin the process of renegotiating it. Trump subsequently qualified, however, that he is still prepared to cancel American involvement in the deal if he is unable to negotiate better terms.
NAFTA eliminated most tariffs on products traded among the three nations, and many economists have credited strong trade growth over the last 20 years at least in part to NAFTA’s influence. Canada and Mexico are the largest export markets for American goods, according to U.S. Census data, and Mexico ranks second and Canada third as the nations of origin for imported goods.
Some economists and voters have blamed NAFTA for exposing more American industry to less expensive competition, particularly in Mexico, resulting in domestic job losses. Other studies have found a more modest impact.
S&P Global Ratings said in a report this week that it currently sees “no immediate credit impact on states and local governments as a result of the planned NAFTA renegotiation,” but that policy missteps could hamper U.S. economic growth and that “state and local governments whose economies are tied in part to NAFTA could be vulnerable to changes in trade terms.” Border city mayors, particularly in Texas, have expressed worry that an elimination of NAFTA could be damaging to their economies.
S&P particularly examined the relationships that Mexico and Canada have with Texas, California, and Michigan. All three are major international trade states with close ties to the other NAFTA members.
Mexico accounted for 40% of Texas’ total exports in 2016, according to Census Bureau data, while Canada accounted for 7%. Mexico represented 11% of California’s export market, and 5% of Michigan’s. Canada was the destination for 9% of Michigan’s exports.
The Houston, Dallas, and El Paso metropolitan areas were the largest international exporters in Texas. Los Angeles, San Francisco, and San Jose were tops in California. The Detroit area accounted for the vast majority of Michigan’s exports at 69% of the state’s total, with transportation equipment dominating both its export and import markets.
S&P said that its analysts believe that trade negotiations will take time, and that short-term credit quality among the states and localities most integrated into Canada-Mexico trade will remain stable.
“While the credit quality of U.S. states and local governments is unlikely to change during 2017, the ultimate credit implications on both sides of the border will depend on the Trump administration's approach and the approval of Congress, Canada, and Mexico on a revised agreement,” the rating agency concluded.
Some observers were skeptical President can meaningfully advantage the U.S. by revising the deal.
“The issues are somewhat different between Canada and Mexico," said Barry Bosworth, chair of international economics and a senior fellow of economic studies at the Brookings Institution in Washington D.C. "With Canada there are a set of specific product arguments that have been ongoing for years. They are softwood lumber, dairy, drug patent protection and some other minor issues. The two countries are close to balance in their bilateral trade.”
“With Mexico the differences are greater because of large wage differentials and a significant bilateral trade deficit," Bosworth continued. “I think that the U.S. will focus on changes in the rules of origin to restrict third countries bringing goods into Mexico to later send to the U.S.”
Bosworth said he doesn’t believe that anything Trump can do on NAFTA will improve the situation for the U.S., and changes could actually just make things worse.
“In nearly all cases, these are issues that could have been dealt with in the normal course of business, rather than threatening to cancel,” Bosworth said. “The US has a declining competitive position in the global market in many low-skill industries and if the jobs did not go to Mexico, they would leave the US in any case, probably to Asia. The problems are largely among low-skilled less-educated Americans. In general, most Americans have done very well by their participation in the global economy with an expansion of high-skilled, high-wage jobs, and unemployment is not high in the U.S. in either a historical or cross-country context.”
Rather than retool the trade agreement, the U.S. should focus on improving its workforce, Bosworth said.
“The U.S. has a significant jobs problem among the unskilled, but it needs to be addressed through improvement of skill training within the United States," he said. "There is no significant change in the NAFTA rules that would make the U.S. much better off. The risk is that we will lose more that we can potentially gain and that renegotiation will make it worse for all three countries.”