Despite pre-election rhetoric in the U.S., renegotiating the North America Free Trade Agreement (NAFTA) would be so disruptive that in practice it is unlikely to happen. In the 23 years since the creation of NAFTA there has been a remarkable process of rational economic integration among member countries, allowing them to benefit from their relative comparative advantages and resource endowments. A sudden breakup of such symbiotic relationship would inflict pain on all countries involved.
Let the numbers speak for themselves. Goods and services exports from the U.S. to Mexico have grown over six times from $51.9 billion in 1993 to $316.4 billion in 2015 according to Office of the United States Trade Representative, more than twice the increase in nominal U.S. GDP and total U.S. exports during the same period.
Of course U.S. imports from Mexico have also increased significantly since NAFTA, but a 2015 paper by the Congressional Research Service reports that 40 percent of the content of U.S. goods imports from Mexico are of U.S. origin. For reference, U.S. imports from China are estimated to have only 4 percent U.S. content.
A 2011 study by the Woodrow Wilson Center calculated that total two way trade activity between Mexico and the U.S. was responsible for 6 million U.S. jobs. These are jobs that, according to a 2005 study by the Institute for International Economics, pay 13-16 percent higher than average wages.
Adding trade with Canada illustrates the magnitude of NAFTA's economic dimensions. From 1993 to 2015, trade in goods and services among the three countries has grown to close to U.S.D 1.3 trillion. In fact, the U.S.'s trade activity with its two neighbors is larger than that with Japan, China, South Korea, Brazil, Russia, India, and India combined.
Beyond the headline numbers, NAFTA is also a story of regional economic integration via the creation of efficient cross-border production chains, as illustrated by the large export content of U.S. imports from Mexico and Canada. U.S. imports from Mexico ranging from auto-parts to airplane parts allow U.S. companies to compete successfully in global markets.
When it comes to the agricultural industry, Mexico is estimated to satisfy close to 45 percent of the U.S. consumption of fruits and vegetables, while Mexico depends heavily on U.S. imports of meat, dairy and grains. Mineral and fuel imports from Canada support competiveness in U.S. manufacturing in the northern states. Renegotiating NAFTA and re-imposing tariffs on these and other Mexican and Canadian imports would mean higher prices for the U.S. consumer and more expensive inputs for U.S. industry.
The damage of undoing NAFTA would go beyond that inflicted on regional good and services flows. Intra-regional foreign direct investment (FDI), currently protected by the investment chapter of NAFTA, would be negatively affected as well. U.S. companies are the largest source of FDI in Mexico, accounting for a stock of over U.S.D 100 billion. Mexican FDI in the U.S., while substantially lower than its counterpart, has also increased rapidly, from U.S.D 1.2 bn in 1993 to close to USD 20 billion today, an increase of over fifteen times.
Given the large negative consequences, it seems unlikely that the new U.S. president would be willing to pull the trigger on NAFTA's article 2205 or to reopen negotiations. Even if he or she did, there would be significant opposition from segments of the U.S. Congress as well as Mexico, Canada and multilateral organizations.
The last two and a half decades have led to the building of a mutually beneficial and deeply intertwined trade and investment relationship among NAFTA members. Still, anti-trade rhetoric is running so high that businesses and investors should be on their guard.