NAFTA: implications of termination

While U.S. government negotiators prepare to enter into the seventh of the North American Free Trade Agreement (NAFTA) discussions in Mexico City, a new report has been published by the Business Roundtable and Trade Partnership Worldwide, LLC, Terminating NAFTA: The National and State by State Impact on Jobs, Exports and Output.

The executive summary of this report issues dire warnings of the negative consequences the United States would fact should it terminate the NAFTA agreement.

Using a methodology that enables us to capture the full impacts (both positive and negative; direct and indirect) across the U.S. and international economies, we find that a termination of the North American Free Trade Agreement (NAFTA) would have significant net negative impacts on the U.S. economy and U.S. employment, particularly over the immediate years after termination. Termination would re-impose high costs of tariffs on U.S. exports and imports, which would reduce the competitiveness of U.S. businesses both domestically and abroad. U.S. exports would drop, both to Canada and Mexico and globally, as U.S. output becomes more expensive and therefore U.S. businesses would be less competitive in these markets. Foreign purchasers would shift away from U.S. goods and services in favor of lower-cost goods and services made in other international markets, particularly those made in Asia.

These efficiency losses and trade shifts would have an impact on U.S. production of both goods and services, and thus also on U.S. employment. We estimate that, if NAFTA is terminated and most-favored nation (MFN) duties are re-imposed for U.S. trade with Canada and Mexico, the level of U.S. real output would fall 0.6 percent below levels that would prevail if NAFTA were in effect in each of the first one to five years after termination. Lower output means less employment after all the gains and losses are tallied: on balance 1.8 million workers would immediately lose their jobs in the first year with full termination and the return of MFN tariffs.

While the focus of our study is the short- to medium-term, we also examine the national impacts of terminating NAFTA over the longer term (i.e., 10 years and after). Terminating NAFTA would have negative impacts on jobs, exports and output even after new supply chains are formed. In this longer run, we estimate that U.S. GDP would remain depressed by over 0.2 percent, permanently.

A January 30 Market Watch article pointed out that despite slow progress, Merrill Lynch reduced the odds of the United States exiting NAFTA this year to just 25 percent. A few months ago, many trade watchers thought the chance of a U.S. withdrawal was at least 50-50, if not higher.

As always, we will continue to keep you abreast of the status of the negotiations.