President Trump assumed office with one of the more purposeful trade agendas in modern history: he pulled the US out of the Trans-Pacific Partnership, launched a renegotiation of the US-Korea Free Trade Agreement, and is now threatening to take the US out of NAFTA. He is also considering other measures that would reduce trade activity – most of it supposedly to reduce the US trade deficit. The US Administration needs a new trade policy strategy if it wants to keep economic growth on track and reduce the trade deficit.
The most likely effect of a defensive and protectionist trade policy is that economic growth would slow and the US trade deficit would go up. In the case of NAFTA, US firms are deeply integrated into North American supply and value chains, and there is a large share of US value-added in the country’s imports from Canada and Mexico. Cutting access to the imports of intermediaries from NAFTA partners would drive up the cost of US production and cut its global competitiveness. Therefore, leaving NAFTA would reduce US exports, not only to NAFTA partners but to other markets as well. At the same time, increasing the trade costs of trade with NAFTA partners would not lead to much repatriation of jobs to the US: it is more likely that other countries would substitute for production in Canada and Mexico that is now exported to the US.
The steel sector is a case in point. Steel is an input product for construction and industrial manufacturing, and raising the cost of inputs will drive down the competitiveness of these sectors (e.g. the automotive sector), leading to blue-collar job losses. US steel protectionism in NAFTA is misplaced if the argument is that the trade deficit should be reduced: NAFTA steel trade is in balance. US steel protectionism against other exporters to the US – for instance, through a Section 232 tariff hike – is not compatible with the ambition to raise US exports.
If the trade balance is your religion, free trade agreements should be your church. In other words, if the US Administration wants to reduce its trade deficit, it should rather deepen NAFTA. The rapid economic growth of India and China has obscured the more pedestrian fact that US-NAFTA trade has grown more than with any other trading partner over the past two decades.
Indeed, the US needs to pursue additional FTAs. The US trade deficit with non-FTA partners is nine times higher than its trade deficit with FTA partners, reflecting the simple fact that FTAs help to open foreign markets for more US exports. Contrary to the trade rhetoric of the Administration, the US could directly improve its trade balance through additional FTAs, which would also help to build pressure on countries like China to accelerate reforms to open up its economies.
Frank Lavin was the US Undersecretary of Commerce for International Trade between 2005 and 2007, and the US Ambassador to Singapore between 2001 and 2005. He is now the Founding CEO of Export Now.
Hanna Deringer is Trade Policy Analyst at ECIPE.
Fredrik Erixon is the Director of ECIPE.
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This policy brief was originally posted here.