Trump isn’t the only factor that could derail NAFTA

Trump isn’t the only factor that could derail NAFTA

Representatives of Canada, Mexico and the United States recently concluded in a fourth round of negotiations to revise the North American Free Trade Agreement (NAFTA), created in 1994. Negotiations began in late summer in Washington, D.C. and negotiators have signaled that talks will likely continue into 2018. However, mid-2018 presidential elections in Mexico and congressional elections in the United States could have a greater impact on NAFTA’s future.  

President Donald J. Trump swept into office with very public criticisms of NAFTA and other trade deals. He has threatened to withdraw from NAFTA as recently as this month, even with negotiations underway. His grievances center on NAFTA being unfair to US workers, especially manufacturers and small businesses, as well as the current US trade deficit with Mexico, which stands at around $64 billion.

His administration has also made several demands that complicate negotiations, including raising the US-made auto parts requirement, from the current 62.5% to 85%. Additionally, they have proposed eliminating NAFTA’s Chapter 19 dispute settlement mechanism, which allows companies to appeal trade decisions by domestic courts through an independent panel. Canada and Mexico strongly oppose each of these demands.

Amid the rhetoric, it is easy to overlook the fact that political forces in the US and Mexico are likely to be at least as significant as Trump. Mexico has a general election in July 2018 and the United States has congressional elections in November of that year. These elections generate a range of political scenarios, some favorable, but some leading to more polarization between the US and Mexico.

US mid-term congressional elections

A unilateral, near-term decision by Trump to withdraw from NAFTA appears highly unlikely. President Trump’s grievances are shared by some labor unions and Democratic constituencies. However, many Republicans and trade associations traditionally support free trade from an ideological standpoint. In fact, an August poll by Livingston International found that only six percent of Americans believe the US should withdraw from the agreement, and only 13 percent favor a renegotiation. More importantly, seven of the top ten US states most dependent on NAFTA for commerce voted overwhelmingly for Donald Trump. North Dakota sends 82 percent of its exports to Canada; Texas and Arizona send 30% of their exports to Mexico. Additionally, NAFTA has created 5 million U.S. jobs that depend on free trade with Mexico. Consequently, squashing NAFTA could affect Trump’s voter base and threaten conservative majorities in Congress.

If Democrats obtained the majority in one or both chambers of Congress, they would be more favorable to NAFTA. A 2017 Gallup poll showed that 67% of Democrats say NAFTA has been positive for the US, compared to 22% of Republicans. The fear of Democrat electoral gains on the basis of popular dissatisfaction with NAFTA talks is also likely to hold Trump back from a sudden unilateral withdrawal.

Mexico presidential elections

Even if negotiating parties reach a new deal on NAFTA, Mexico’s presidential elections in 2018 pose a threat to NAFTA’s survival, or at least its long-term effectiveness. Mexico’s current president, Enrique Peña Nieto, supports NAFTA. However, he has a very low approval rating, to the point that he has decided not to seek another term. Furthermore, intense anger in the Mexican public toward Donald Trump’s statements on Mexico has elevated interest in the platform of leftist populist candidate Andres Manuel Lopez Obrador (AMLO). AMLO now holds a slight lead in polls for 2018, with 23% of voters indicating that they would vote for his MORENA party, ahead of 20% stating support for the conservative National Action Party (PAN).

Complicating matters, former first lady, Margarita Zavala, announced on 6 October that she will consider running as an independent candidate, breaking from her conservative National Action Party (PAN). Zavala based her decision on PAN’s May announcement that it would create an alliance with the left-wing Democratic Revolutionary Party (PRD), aimed at defeating Peña Nieto’s party. Zavala’s independent run could dilute conservative votes and strengthen AMLO’s chances.

What if AMLO wins?

An AMLO win would likely exacerbate the caustic rhetoric between the two countries. Essentially, it would pit two outspoken populists from opposite ends of the political spectrum against each other. AMLO has proposed ending the NAFTA “straitjacket” and Mexico’s “subordination” to the United States. He has also threatened to reverse reforms that opened up Mexico’s petroleum sector to private investment, suggesting a willingness to renationalize the industry. AMLO is unlikely to honor any NAFTA renegotiated agreement reached before his taking office. This, combined with Trump’s lukewarm personal commitment to sustaining NAFTA, would place its future at risk in the longer term.

Center-right victory

The most favorable scenario for NAFTA would be that parties reach a renegotiated deal in early 2018, followed by a win by virtually any of the three primary contenders to AMLO: the conservative PAN-PRD coalition, the independent Zavala, or the incumbent PRD party. The dilemma is that Peña Nieto’s low approval, combined with AMLO’s rising popularity, leaves little room for error in marketing and implementing the new agreement. Since a deal will likely be reached while Peña Nieto remains president, he must sell a renegotiated deal acceptable to a plurality of voters in his country that have largely tuned him out, and on behalf of a political party polling poorly without a strong candidate to succeed him. Furthermore, the PAN-PRD coalition and independent Zavala will likely advocate for NAFTA, but must also distinguish themselves from the unpopular Peña Nieto, a difficult balance.

Regardless of AMLO’s threats, a full Mexican exit from NAFTA remains highly unlikely, as the United States purchases 80% of Mexico’s exports. Any actions that jeopardize that revenue stream could result in economic woes for Mexico and public backlash. Additionally, the Mexican Peso has performed well this year against the US Dollar. Theoretically, a stronger Peso would enable Mexican firms to afford more US goods, thereby chipping away at the trade deficit. In the end, a renegotiated NAFTA with minimal alterations remains the most likely short-term scenario, but the 2018 elections in the US and Mexico will determine its long-term fate.

Categories: Economics, North America

About Author

Samuel Schofield

Sam works as a strategy and operations consultant for Deloitte Consulting LLP in its federal services practice in Washington D.C. As a contributing analyst for GRI, Sam writes on political, economic and security risks in Latin America that influence US trade and diplomatic posture toward the region. He has an MBA from American University's Kogod School of Business and a BA in International Affairs from the University of New Hampshire. He previously worked at the US Department of State as a budget analyst and as a program officer at an NGO focused on rural development projects in Mexico and Central America. He also has led a consulting engagement supporting a Colombian aquaculture company with expanding to US markets. The views expressed here are those of the analyst and do not necessarily reflect the views of his current, former, or future employers or any organization with which he is associated.