Donald Trump may be about to end Nafta, plunging the US, Canada and Mexico into uncertainty



In London the speculation is that the UK might seek to join Nafta, the North American Free Trade Agreement launched in 1994, once it is no longer a member of the EU. Here in Washington the speculation is that pretty soon there may be no Nafta at all.

The story goes like this. Persuading countries that free trade leads to greater prosperity for all has long been tricky. After the Second World War, the victorious allies were determined to avoid the trade wars that had weakened the world economy in the 1930s. They set up the International Monetary Fund and the World Bank, to help finance trade and development, and wanted to found an International Trade Organisation to break down trade barriers and set the rules for freer trade.

As it happened there was political resistance to the ITO, and so the aim of free trade was negotiated under a treaty, rather than by an organisation, called the General Agreement on Tariffs and Trade. Gradually a series of negotiating rounds under the GATT cut down trade barriers, and the success of these led to the creation of the World Trade Organisation in 1995.

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But for a number of reasons, including frustration with the slow progress towards free trade, a number of regional trade agreements were reached. The European Economic Community (now the EU) was an early example, Nafta a later one. So now countries trade at three levels. There is the overlay of WTO rules, there are regional trade groups, and there are bilateral agreements between countries.

In the UK we are leaving the regional trade group of the EU, and the question is whether we will negotiate a bilateral trading agreement with it. The question for the US is whether it will leave Nafta, in effect breaking it up, and do bilateral deals with Canada and Mexico instead.

I had not realised it until I came here but there is a real possibility that Nafta will die. Donald Trump attacked it before he was elected, arguing that it killed American jobs, but somehow that seemed outlandish. Some lower-skilled jobs might indeed have been exported to Mexico but the US has got unemployment down to 4.2 per cent. As for Canada, the supply chains are so integrated, particularly for the car industry, that putting up barriers would seem ridiculous. There is no political dimension with Nafta, as there is with the EU, and in theory at least Canadians and Mexicans do not have the right to work in the US, or vice versa.

So what’s gone wrong? Quite a lot. The issues with Mexico and Canada are different.

With Mexico the core issue is cheaper labour competing against American workers. There is the immigration issue, and the Trump wall. There are the US auto plants in Mexico. There are other areas where cheap food imports (though welcomed by US consumers) have arguably hit domestic producers – tomatoes and avocados are alleged examples.

With Canada it is more complex. There is profound suspicion in the US about government subsidies. We have seen that with the challenge over the support for the Bombardier C-Series aircraft – a dispute now made more complex by Airbus taking the dominant role in the rather troubled programme, and with the UK caught in the crossfire, as some parts of the plane are made in Northern Ireland. There is a long-running dispute over lumber, Canadian timber exports to the US. Little (or what to an outsider would seem little) disputes keep coming up. There is for example a row about the price of some Canadian dairy products. And now the US wants to increase the US content of Canadian-assembled cars to at least 50 per cent.

So Nafta is not a mature, established creature that simply needs to be cared for responsibly. It is continually evolving, continually being challenged, and continually the focus for dissent. Just this week on Tuesday the current round of talks about Nafta ended, not with any substantive progress, but with the agreement to carry on the talks beyond the initial December deadline, through to March next year. That was by the markets regarded as good news – the Canadian dollar and the Mexican peso went up – which shows how low expectations have become.

In Mexico, it seems that many large businesses are planning on the basis that Nafta is dead. Mexico’s ambassador to China said that this was the impression he got from talking to their chief executives.

As for Canada, the question is whether trade will move to a bilateral basis, as it did before Nafta was created. Would this be as good as Nafta? Well, no. You can always trade under country-by-country agreements, but they are cumbersome. The Canadian foreign minister, Chrystia Freeland, put it this way:

“We have seen proposals that would turn back the clock on 23 years of predictability, openness and collaboration under Nafta. This is troubling.”

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