Gregory Daco, chief US economist at Oxford Economics, explains why he considers NAFTA a good deal for the US, and the consequences the country could face if Trump pulls out of the agreement.
I don’t necessarily agree with the concept or the idea that NAFTA is the worst trade deal the US has ever signed. If anything, I think it’s been a positive deal, a deal that has increased trade flows between three major trading partners: Canada, the US and Mexico. It’s increased the amount of flows of goods and services that are transferred between those three countries and it’s generally supported increased economic activity, increased job growth. If you are to enter an environment where the US would remove itself from NAFTA then it would likely actually be the loser in terms of economic activity.
And I wouldn’t be surprised to see Canada and Mexico deciding to forgo the United States as a partner and create an alliance of their own. Removing oneself from trade agreements in general, is putting yourself in a difficult situation, which generally is not conducive to stronger growth.
If you think about trade agreements from a personal or household perspective, then you have to factor in a number of elements. You have to factor in jobs, that are created via these exchanges between countries, you have to factor in inflation, those are two of the big elements. In terms of jobs, you have to think about supply chains that are global in nature.
If you think of some of the great lake cities, those are heavily intertwined with Canada and Mexico in terms of the automotive sectors, so a lot of jobs that relate to the automotive sectors are in one way or another, trade related. Likewise, if you think of inflation and the ability of the United States to produce some goods and services, they do have the ability to produce a lot but not necessarily at the same low cost as other countries might.
So if you are to substitute your imports, say from Mexico or even China for domestic production, that’s likely to lead to higher inflation so your average household will actually see higher prices when they go to the store for the same good and generally, that wouldn’t be positive for consumer spending.