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Impacts of Reversing NAFTA

ImpactECON report on the impacts of reversing NAFTA was cited in the Wall Street Journal on Monday, October 16, 2017.

As concerns rise about the demise of the new NAFTA negotiations, the Wall Street Journal, CNBC, CNN and the New York Times have cited ImpactECON’s working paper “Reversing NAFTA: A Supply Chain Perspective“. Here we try to answer a few recently asked questions.

Questions and Answers on the Impact of Reversing NAFTA

What is the impact of reversing NAFTA on the US economy?

Real GDP is estimated to decline by 0.09 percent in the next 2-3 years. Investment is estimated to decline by 1 percent, which means that growth will fall further in the long run.

What is the estimated impact of reversing NAFTA on US employment?

US employment is estimated to decline by 256,000, with many more workers having to relocate to other industries to find jobs. This figure assumes that skilled workers are willing to accept a decline in their wages, if not then US employment could decline by over 1,000,000.

What does reversing NAFTA mean for US Tariffs?

Reversing NAFTA means raising tariffs to Most Favored Nation (MFN) rates. MFN rates are the tariff rates that the US has agreed to levy on all WTO member countries without a preferential trade agreement or arrangement. Rates below the MFN commitments can be levied if there is a trade agreement or some other trading arrangement in place. Raising tariffs above these rates would potentially violate WTO rules and could be subject to appeal by US trading partners, including Canada and Mexico. The US MFN tariffs are relatively low, around 3.5 percent for motor vehicles. More details on MFN tariff rates can be found in the working paper.

What does reversing NAFTA mean for Canadian and Mexican Tariffs?

If the US leaves NAFTA or raises tariffs on goods from Mexico and Canada, then Canada and Mexico will be required to raise their tariffs on US goods to their negotiated MFN rates. This is because WTO rules require that a free trade agreement must include substantially all trade between the parties to the agreement.

What is the impact of reversing NAFTA on the Mexican and Canadian economies?

Real GDP in Mexico and Canada are expected to fall by 0.88 percent and 0.48 percent, respectively. Unemployment is expected to rise by almost 1,000,000 in Mexico, and 125,000 in Canada.

What would happen to the US Motor Vehicles industry if the US left NAFTA?

As a result of the implementation of NAFTA 24 years ago, production of motor vehicles (and other commodities) in the US, Canada and Mexico has become integrated. US firms supply the knowledge, skill and intermediate inputs, and Mexico supplies the unskilled workers and assembly. Motor vehicles or motor vehicles parts can therefore cross the border between the US, Mexico and Canada multiple times as they are being produced. When tariffs are raised, this means that each time a motor vehicles part crosses the border a tax is added to the cost, thereby raising the total cost of producing North American cars with North American parts.

As the rest of the world looks to reduce tariffs through the Trans-Pacific Partnership Agreement (TPP) and other trade deals, this makes American cars even more expensive relative to their Asian and European competitors.

Why do jobs in services fall so much?

With rising unemployment and falling wages, people’s incomes decline. Consumers demand for services will decline as people can no longer afford child care, cleaners, restaurant meals, holidays and other services. Firms also demand fewer services, such as electricity, as their production falls. The decline in services seems small in percentage terms – just 0.1 percent. But services make up 70 percent of the US economy and employ a large share of the US workforce and hence the fall in employment from this decline in production is significant.

This is one of the main benefits of the type of model we use – the model captures all the interactions that occur between industries, as well the impact of the policy on household income and spending.