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More Than Just Mexico’s Economy at Stake in NAFTA Talks

Feb 01, 2018
Kip Beckman
Principal Economist
World Outlook

The NAFTA negotiations failed to make any meaningful progress at negotiations in Mexico last autumn, and another round was held in Montréal in late January with only limited results. There was more tough bargaining, as the U.S. continues to make demands that Canada and Mexico find unacceptable. U.S. President Donald Trump has threatened on numerous occasions to pull the United States out of the North American Free Trade Agreement if Canada and Mexico stand firm and refuse to give into what they consider to be unfair demands.

What might take place in the U.S., Mexico, and Canada if the deal is scrapped? A look at what could happen to one of North America’s most popular consumer products—the flat-screen TV set—provides key insights into this question and highlights Mexico’s particular vulnerability.

The Wall Street Journal notes that every year Canadian and American consumers buy over 40 million high-definition, flat-screen television sets, and every year prices for these TVs drop as new models are developed and retailers offer deeper discounts to boost sales. Behind these popular TV sets that we all enjoy is a business model that, because of the slim profit margins in the manufacturing process, depends crucially on tariff-free trade between the U.S. and Mexico. Most of the value in the TVs comes from Asian factories that produce the glass LCD panels, chips, transistors, and capacitors. These parts are shipped to ports in the Los Angeles area and then loaded onto trucks that deliver them to factories in Tijuana, Mexico. After assembly, the TV sets are, once again, loaded onto trucks and sent back to distribution centres in California.

Under NAFTA, TV manufacturers in Mexico don’t have to pay the 5 per cent tariff that, under WTO rules, applies to most other countries. If President Trump cancels NAFTA, the competitive advantage that Mexican manufacturers currently have over competitors in Asia would disappear and the factory operations in Mexico would likely shift to lower-cost countries such as Vietnam. Still, even if manufacturers and retailers were to absorb at least part of the higher costs linked to the tariff, the result of scrapping NAFTA would likely still be higher prices for American and Canadian households.

While we might have to pay more for our favourite TVs, the consequences for Mexico are far direr. Up to 15,000 Mexicans are employed in the manufacturing of flat-screen television sets, and these jobs would be at risk if NAFTA is cancelled and some of the production shifts to Asia. Jobs at auto plants and other manufacturing operations in Mexico could also be eliminated due to increased tariffs.

The Canadian and U.S. economies would also be damaged, and jobs would be lost in certain sectors in both countries. Our analysis of the impact that the scrapping of NAFTA would have on the Canadian economy this year indicates that real GDP would increase by 1.5 per cent, versus a gain of 2.0 per cent if NAFTA remains in place. And the U.S. economy wouldn’t emerge unscathed from the demise of NAFTA, despite what the U.S. president says. We found that, by the end of 2019, employment in the U.S. would be 145,000 lower without NAFTA, while real GDP would be $35 billion less. Those losses would certainly be unwelcome, but they would be unlikely to lead to recession in either country.

The Globe and Mail’s Doug Saunders points out that the stakes for Mexico go far beyond even the large job losses that will hit the country if President Trump cancels NAFTA. Life without NAFTA could mean the end of ongoing attempts by some Mexican politicians to move Mexico away from its nationalist, statist past.

When Mexico signed on to the NAFTA agreement in 1994, the country began the lengthy process of changing its economic system from a state-owned one that was generally closed to the rest of the world to an export-oriented one that has managed to boost living standards and develop a thriving middle class. The transformation has been fraught with difficulties and remains incomplete. Most regions in the southern part of Mexico remain poor and have missed out on much of the trade-related growth of the past few decades. But for the country as a whole, steady progress has been made—progress that would be in jeopardy if NAFTA is scrapped.

The worry revolves around the upcoming presidential election in Mexico, which is set for July. Current president Enrique Peña Nieto, a central-leftist, has become increasingly unpopular among the country’s voters, who haven’t forgotten his 2016 invitation to then-presidential candidate Trump to visit Mexico. That invitation came after Trump had referred to Mexicans as “rapists and drug dealers” and had already threatened to tear up NAFTA. Mexicans have increasingly turned their backs on conventional politicians and political parties as President Trump’s rhetoric has increased. Instead, many have thrown their support behind the far-left populist candidate, Andrés Manuel López Obrador. He currently leads the opinion polls and has gained support among urban and educated Mexicans, some of whom view him as a Mexican Che Guevara. Like other populist politicians, Obrador has made many vague, unrealistic promises that, if elected, could easily set off an economic crisis in Mexico as he attempts to pull Mexico out of its North American orbit.

Nobody in North America will benefit if Mexico becomes a less stable trading partner. Let’s hope—for everyone’s sake but especially for the sake of the Mexican people—that an agreement can be reached to save NAFTA.

Sources:

Doug Saunders, “A NAFTA Collapse Could Push Mexico Over the Edge,” The Globe and Mail, November 17, 2017.
Robbie Whelan and Santiago Perez, “Why Your Flat-Screen TV Would Cost More if NAFTA Ends,” The Wall Street Journal, November 24, 2017.


Related Webinar

After NAFTA: The Potential Economic Impact for Canada
The Conference Board of Canada, March 8, 2018 at 02:00 PM EST
Live Webinar by Brent Dowdall, Matthew Stewart