Via Global Trade Magazine
A new report prepared by Trade Partnership Worldwide for the Business Roundtable finds that a termination of the North American Free Trade Agreement (NAFTA) would have significant negative impacts on the US economy and US employment. Termination would re-impose high costs of tariffs on US exports and imports, which would reduce the competitiveness of US businesses both domestically and abroad.
It’s a subject worth considering, as President Donald Trump regularly threatens to pull the US out of the trade accord and negotiations aimed at revising the agreement hit multiple speed bumps.
US exports would drop, to Canada, Mexico and globally, as US output becomes more expensive and US become less competitive. Foreign purchasers would shift away from US goods and services in favor of lower-cost goods and services made elsewhere, in Asia.
US Transpacific Ocean Cargo Continues to Trend Eastward“These efficiency losses and trade shifts,” says the report, “would have an impact on US production of both goods and services, and thus also on US employment.”
The report estimates that, if NAFTA is terminated and most-favored nation (MFN) duties are re-imposed for US trade with Canada and Mexico, the level of US output would fall 0.6 percent below levels that would prevail if NAFTA were in effect in each of the first five years after termination. Lower output will translate to less employment: 1.8 million workers would lose their jobs in the first year.
In the longer term, terminating NAFTA would have negative impacts on jobs, exports, and output after new supply chains are formed. The report estimates that US GDP would remain depressed by over 0.2 percent, permanently.
Terminating NAFTA would cause US GDP to drop from levels reached in 2016 by between 0.6 percent and 1.2 percent for each year the agreement is no longer in effect during the first five years. up to and including the first one to five years after termination. This represents a hit to US economic output of between $119 billion and $231 billion.
The output declines would impact nearly every sector of the US economy. Services sectors would be hit the hardest because they are the largest component of the US economy and would suffer as manufacturing, agriculture, and energy also decline. Lower incomes and higher unemployment means reduced spending power for the nation’s 126 million households, at a rate of between $654 to $1,264 per household per year in the first five years after NAFTA’s termination. As households pull back on spending, services like education, entertainment, and healthcare will feel the brunt.
Goods exports will fall across all sectors, prompting investors to shift capital away from the most adversely impacted sectors—and out of the US as a whole.
Reduced output would hit employment, with most job affecting workers in lower-skilled occupations, including production workers in manufacturing and agriculture and lower-wage workers in services industries. Wages would also decline, by 0.9 percent to 1.9 percent.
The drop in US output will be attributable in part to a decline in US exports to the world. US producers will be less competitive in global markets, the report found, and imports will also drop, thanks to their higher costs.
Among US states, California would be hit hardest by the termination of NAFTA in terms of economic output with a loss of $16.7 billion. Withdrawal from NAFTA would also reduce California’s exports to Mexico and Canada by nearly $10 billion and would cost the state over 215,000 in the first year.
In the less egregious of two scenarios presented in the report, New York and Texas would each lose almost $10 billion in economic output in the short to medium term. Texas and Michigan would each lose $4.4 billion in exports to the world while South Carolina and Ohio would each lose around $2 billion. Without NAFTA, Texas will lose 154,000 jobs in the short to medium term, New York will lose 117,000 jobs, and Florida, 110,000.
“Terminating NAFTA would be expensive to the United States by any measure,” the report concludes. “Terminating NAFTA would permanently reduce U.S. economic output, exports and employment,” but would be a win for trading partners outside the NAFTA region. “As supply chains shift to take advantage of relatively lower-cost production opportunities in non-NAFTA countries,” the report explains, “those economies would grow faster and, with that growth, expand employment.”