The crisis is so bad, America’s Retail Industry Leaders Association says we are facing “economic catastrophe.”
What is this crisis? It’s NAFTA, the North American Free Trade Agreement. It is unraveling like a ball of yarn. The future of the trade agreement is in doubt. It’s being renegotiated right now. And it’s not looking good.
I’ll show you why in two charts.
First, cross-border trade with Canada has soared since NAFTA started in 1994.
Second, it’s not just Canada. Though along with Mexico, Canada is one of the top destinations for U.S. exports.
Raising trade barriers is a two-sided sword. Yes, domestic manufacturers can produce more. But it potentially raises the costs for everything from lumber to car parts to just about everything else that can be manufactured and put on a truck.
And guess who pays those higher costs? Consumers. Me. And You.
President Trump has called NAFTA “the worst trade deal ever made” and repeatedly threatened to withdraw the U.S. from the agreement.
And President Trump isn’t the only one. Leo Gerard, president of the United Steelworkers union, says NAFTA was sold to the American public with “a bag full of lies.”
So, it’s being renegotiated. It’s going so well, they’ve pushed the negotiations off into 2018.
Psst! That means it’s not going well at all! In fact, Canadian Foreign Minister Chrystia Freeland accusing the United States of bringing a “winner-take-all mindset” to negotiations.
But we don’t even have to wait for next year for the fallout. The U.S. slapped tariffs totaling 31.7% on Canadian lumber. Boeing is pushing steep tariffs on Canadian jet maker Bombardier through Congress.
So, what happens if there is no NAFTA?
If it falls apart, trade among Mexico, Canada and the United States then comes under World Trade Organization rules. That means modest average tariff rates and an established but clunky process for resolving disputes.
The good news is the tariff rates would be relatively low. The bad news is the tariffs would be higher on U.S. exports than on U.S. imports.
Meanwhile, Canada and Mexico have a sneak-around. They could export goods through free-trade agreements they recently forged with Europe. Those agreements levy tariffs at zero.
Still, Mexico would likely suffer worse than we do. So, if the real goal in Washington is to make Mexico suffer, they have that option.
But we won’t be unscathed, either. U.S. exports to Mexico would go from a tariff of zero to 7.1%. And U.S. goods going into Canada could face an average tariff of 4.2%. Many trade experts say that would hurt U.S. exporters of everything from corn to auto parts.
Auto parts are made on both sides of the border. Let me give you a real-life example: Depending on what you buy, the cost you pay for a car could go up by hundreds of dollars … maybe more than a thousand dollars per car.
NAFTA is a tangled mess. There aren’t any easy answers. But if you enjoy the low prices that come with free trade, you probably won’t like what’s being brewed up in Washington.
The iShares MSCI Mexico ETF (EWW) was unchanged in premarket trading Friday. Year-to-date, EWW has gained 20.84%, versus a 15.49% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Money And Markets.