Could The New NAFTA Hurt The US Economy?

The House Approves Updated Trade Deal

On December 19, 2019, the House of Representatives overwhelmingly approved the new US-Mexico-Canada trade deal that will see an inclusion of tougher labor and automotive content rules. The New trade deal is set to replace the North American Free Trade Agreement (NAFTA) which has been in existence since 1994. The measure is now set to be approved by the Senate, with the timing for the approval remaining unclear. According to President Trump, the USMCA deal “is the best and most important trade deal ever made” as vast parts of the economy will benefit from the deal. The approval of the new trade deal, seen as an improvement of NAFTA, came after months of “difficult talks” involving Trump’s administration, House Speaker Pelosi, Democrats, Canada, Mexico, business executives, and a host of other interest groups.

What Was There Before?

NAFTA was a trilateral trade agreement signed by the US, Mexico, and Canada and came into effect on January 1, 1994. The agreement replaced the Canada-US Free Trade Agreement signed in 1988. The idea of having a regional trade bloc in North America was conceived by President Ronald Reagan as part of his campaign. The trade bloc remains one of the largest in the world by GDP. Although NAFTA has benefited the economies of North America, it has also harmed small minority workers, especially in industries that cannot keep up with the competition. As a result, President Trump, during his presidential campaign, promised to abolish or renegotiate the trade agreement.

The US Is Expected To Greatly Benefit From The Deal

According to the US International Trade Commission (USITC), the country is likely to benefit from the USMCA deal. The Commission expects the new deal to boost the economy by adding 176,000 jobs in the next 15 years as well as increase economic output by about $68.5 billion annually. The new NAFTA will also preserve the country’s model for e-commerce, internet, and digital service improvement. These three industries did not exist when NAFTA was negotiated in the 1990s. The food safety barriers to products from the US farm products will also be eliminated by the new deal. Perhaps the major change will be the increased number of cars and trucks built in the region. The new deal will see the number increased by 12.5% to 75%.

Is The New Deal Good For The Economy?

While the majority of people have welcomed the new deal with excitement, some economists have already warned of the negative impact of the USMCA deal. These economists doubt whether the new NAFTA will result in the economic growth the president has been talking about. According to the Peterson Institute of International Economics, the new trade agreement will result in a 0.12% growth decline as opposed to a 0.35% growth suggested by USITC.

Economists Jeffrey Scott and Mary Lovely believe that autoregulatory mandate will likely restrict trade and hurt the US economy. While the 12.5% increase in car components made in the region may bolster the sector, the move could increase input cost, leading to an opposite outcome. The increased cost of production will result in higher auto prices which in return will reduce demand.

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