Why Donald Trump wants to change NAFTA? What is NAFTA?

NAFTA, or North American Free Trade Agreement, is a 23-year-old pact allows nearly unrestricted access for goods and services between Canada, Mexico and the US

Donald Trump is now swiftly changing his thoughts about withdrawing US from NAFTA, rather he agreeing with negotiations with his counterparts Canada and Mexico to update the deal.

trump-nafta
US President Donald Trump lambasted the agreement during his campaign as “the worst trade deal maybe ever signed anywhere” and had threatened to terminate it once elected. Photo: Jim Lo Scalzo/Pool Image via AP

 

It might now be renegotiated the White House said on Wednesday, after Canada and Mexico agreed to do so “swiftly”.

US President Donald Trump lambasted the agreement during his campaign as “the worst trade deal maybe ever signed anywhere” and had threatened to terminate it once elected.

Here are details on what NAFTA is and who it benefits.

The agreement took effect in 1994 and is one of the world’s the most important trade pacts, allowing nearly unfettered access for goods and services to a combined market of 478 million people in Canada, Mexico and the United States. It was negotiated by the republican administration of George H.W. Bush but signed by his democratic successor Bill Clinton.

Nafta replaced a 1989 bilateral free trade deal between Canada and the United States which Ottawa has said it would fall back on if the current agreement was dumped.

Nafta removed most tariffs on goods traded between the three partners, eased investment rules and allowed for more movement of workers between the countries.

Some goods are exempted from the accord, such as softwood lumber and dairy products, the source of recent tension between Canada and the United States.

Prior to Trump’s election officials in the United States, Canada and Mexico routinely promoted free trade, notably praising their close ties under Nafta and pointing to the jobs and wealth resulting from the agreement.

According to the Nafta secretariat, nearly 40 million new jobs were created, including 25 million in the US, over the first 15 years after the pact was ratified.

Canada raked in the largest share of foreign investment meanwhile.

With the elimination of tariffs, commerce between the three nations has surged, but trade imbalances between Mexico and the US have also skyrocketed.

Mexican exports to the US increased sevenfold between 1993 and 2016, but less than threefold to Canada.

The US trade deficit with Mexico soared from a $1.6 billion surplus on the eve of Nafta to a $60 billion deficit last year, US government data shows.

Canada’s trade deficit with Mexico also widened to $7.5 billion in 2016, according to Canadian government statistics.

Moving factories and jobs from the US to Mexico has changed the dynamic of the trade relationship. Some 80% of Mexican exports go to the US.

US automakers often send parts back and forth across the border before a car or truck is fully assembled. High-end products like computers and electronics are exported in both directions.

Trade in agricultural and food products is balanced, but the US has a small deficit with Mexico in clothing and textiles.

Despite attracting US and Canadian companies and creating jobs under Nafta, Mexican economic growth continues to trail that of its northern neighbours.

Mexican per capita GDP grew by a factor of 1.6 between 1993 and 2015, according to the World Bank. Canadian and US per capita growth more than doubled, meanwhile.

With a per capita GDP of about $9,000 in 2015, Mexico is well behind Canada ($43,300) and the US ($56,100).

Donald Trump has tweeted : “I received calls from the President of Mexico and the Prime Minister of Canada asking to renegotiate NAFTA rather than terminate. I agreed…..subject to the fact that if we do not reach a fair deal for all, we will then terminate NAFTA. Relationships are good – deal very possible!.”

US President Donald Trump(L) greets Canada's Prime Minister Justin Trudeau
US President Donald Trump(L) greets Canada’s Prime Minister Justin Trudeau upon arrival outside of the West Wing of the White House on February 13, 2017 in Washington, DC. / AFP / MANDEL NGAN (Photo credit should read MANDEL NGAN/AFP/Getty Images)

the Trump administration announced a preliminary decision to impose a 20% tariff on Canadian softwood lumber imports. The move stems from an ongoing trade issue that dates back at least to the Reagan administration, which is poised to hurt both the US and Canadian economies if the countries can’t resolve it.

Lumber mills in Canada and the U.S. essentially have different ways of buying timber. In Canada, timber comes mostly from trees grown on government-owned lands, while U.S. lumber mills mostly buy their timber from private landowners through competitive bidding. At issue is that the US views Canada’s practice as a subsidy to its lumber industry giving it a competitive advantage over U.S. producers. And since Canada also restricts its log exports, this depresses Canadian timber prices even lower, increasing the advantage Canadian lumber has in the U.S. market.

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