By David Henderson
“I have long contended that NAFTA was perhaps the worst trade deal ever made,” said President Trump at an October 1, 2018 White House ceremony where he touted its proposed replacement, the United States Mexico Canada Agreement (USMCA). A little over 14 months later, we are close to having the USMCA replace the North American Free Trade Agreement. Some people are referring to the USMCA as NAFTA 2.0. When we use such a numbering system for software, the higher the number the better the product. So software 2.0 is presumably better than software 1.0. In this case, though, USMCA is likely inferior to NAFTA. So USMCA could reasonably be labeled NAFTA 0.0.
In some small ways, USMCA is better than NAFTA. But in the main ways in which it differs, it’s worse. Of course, to judge any policy, you need a few criteria. My main criterion for trade agreements, which I share with the vast majority of economists, is: does the agreement move towards, or away from, free trade? On net, the USMCA is a move away.
These are the opening paragraphs of my latest Hoover article, “NAFTA 0.0,” Defining Ideas, December 20, 2019.
Despite his claim that NAFTA was so bad for the United States, Donald Trump has never bothered to explain why he thinks that. So let’s try to fill in the blanks. Trump’s statements over the last 30 years suggest that he is what economists call a mercantilist, someone who judges trade to be good if a country exports a lot and imports little. Adam Smith, in his 1776 classic, The Wealth of Nations, refuted mercantilism and economists ever since have bought Smith’s reasoning and added nuance and evidence. More on that shortly. But even if Smith hadn’t refuted mercantilism, NAFTA would have been good even by mercantilist standards. What mercantilists tended to favor was high tariffs on imports to their own country and low tariffs on exports to other countries. So they would have disliked the tariff structure that preceded NAFTA. Mexico’s tariffs on imports from the United States were approximately 10 percent and U.S. tariffs on imports from Mexico were approximately 4 percent. By reducing tariffs in both countries to zero, therefore, NAFTA reduced Mexico’s tariffs on U.S. goods much more than it reduced U.S. tariffs on Mexican goods. Even by mercantilist standards, that’s a win.
Read the whole thing.