PubPol 201 NAFTA and Its Renegotiation as USMCA Module 3: - PDF document

Class 6 Outline PubPol 201 NAFTA and Its Renegotiation as USMCA Module 3: International • What is NAFTA? Trade Policy • What happened under NAFTA? • Issues in renegotiation Class 6 • USMCA NAFTA and Its Renegotiation as USMCA Lecture 6: NAFTA & USMCA 2 Class 6 Outline NAFTA – What is it? NAFTA and Its Renegotiation as USMCA NAFTA • What is NAFTA? “The single worst trade deal ever approved in this country” Donald Trump 2016 • What happened under NAFTA? • Issues in renegotiation • USMCA USMCA “A wonderful new trade deal” & “the most important trade deal we’ve ever made, by far” Donald Trump 2018 Lecture 6: NAFTA & USMCA 3 Lecture 6: NAFTA & USMCA 4 NAFTA – What is it? NAFTA – What is it? • A Free Trade Agreement (FTA) including • FTA provisions: US, Canada, and Mexico – Zero tariffs on imports from each other – Expanded a previous US-Canada FTA – Doesn’t change tariffs on outside countries – Negotiated under President George H. W. – Rules of origin Bush • Goods cross borders tariff-free only if they “originate” in the NAFTA countries – Enacted 1993 under President Bill Clinton • ”Originate” defined in terms of how much of a good – Went into effect Jan 1, 1994 was produced here • Example: Autos require 62.5% North American content Lecture 6: NAFTA & USMCA 5 Lecture 6: NAFTA & USMCA 6 1

NAFTA – What is it? NAFTA – What is it? • Other provisions • Also Side Agreements on – Some liberalization in services – Labor – Foreign investment – Environment • ISDS in Chapter 11 – Gives foreign investors right to dispute policies that reduce profits – Decided by 3-person panel, who may make states pay – Intellectual property rights – Opening of government procurement • Governments must let NAFTA suppliers bid Lecture 6: NAFTA & USMCA 7 Lecture 6: NAFTA & USMCA 8 Class 6 Outline NAFTA - What happened? NAFTA and Its Renegotiation as USMCA • What happened? – Not much, at first, in 1994 • What is NAFTA? – Mexico kept peso pegged to the dollar • What happened under NAFTA? – Resisted devaluing peso in run-up to • Issues in renegotiation presidential election • USMCA – Assassinations in 1994 included • Mar 23: PRI presidential candidate Colosio Lecture 6: NAFTA & USMCA 9 Lecture 6: NAFTA & USMCA 10 What Happened: Mexico NAFTA - What happened? Reserves Fell at Once • Peso Crisis (aka “Tequila Crisis”) NAFTA Mexico Reserves Peso Crisis – December 20, 1994 (after the election) Quarterly 1988-2005 • Crisis hit the foreign exchange market 70.0 • Mexico devalued the peso 60.0 – Devaluation had devastating effects on the 50.0 $ billion 40.0 Mexican economy 30.0 20.0 • Mexico had borrowed in dollars to pay for assets in 10.0 pesos 0.0 • Devaluation meant that debt was suddenly higher 1988.1 1989.2 1990.3 1991.4 1993.1 1994.2 1995.3 1996.4 1998.1 1999.2 2000.3 2001.4 2003.1 2004.2 than assets for many Lecture 6: NAFTA & USMCA 11 12 Lecture 6: NAFTA & USMCA 2

What Happened: Mexico What Happened: Mexico GDP Fell after Peso Crisis Peso Dropped One Year After NAFTA Mexico Real GDP Peso Crisis NAFTA Peso Crisis Mexico Exchange Rate 1993=100 Quarterly 1988-2004 160 0.5 140 120 0.4 100 $/peso 0.3 80 60 0.2 40 0.1 20 0 0 Q1 1988 Q2 1989 Q3 1990 Q4 1991 Q1 1993 Q2 1994 Q3 1995 Q4 1996 Q1 1998 Q2 1999 Q3 2000 Q4 2001 Q1 2003 Q2 2004 Q1 1988 Q2 1989 Q3 1990 Q4 1991 Q1 1993 Q2 1994 Q3 1995 Q4 1996 Q1 1998 Q2 1999 Q3 2000 Q4 2001 Q1 2003 Q2 2004 Lecture 6: NAFTA & USMCA 13 14 Lecture 6: NAFTA & USMCA What Happened: Mexico What Happened: Mexico Imports Fell after Crisis; Exports Rose Wages Fell NAFTA Peso Crisis Mexico Trade 1988-2004 Mexico Nominal Wages Quarterly 1990- NAFTA 2005 Peso Crisis 60.0 50.0 Index 1993.4=100 120 40.0 $ billion 100 30.0 80 20.0 60 10.0 40 0.0 20 1988.1 1989.2 1990.3 1991.4 1993.1 1994.2 1995.3 1996.4 1998.1 1999.2 2000.3 2001.4 2003.1 2004.2 0 1990.1 1991.2 1992.3 1993.4 1995.1 1996.2 1997.3 1998.4 2000.1 2001.2 2002.3 2003.4 2005.1 Exports Imports 15 Lecture 6: NAFTA & USMCA 16 Lecture 6: NAFTA & USMCA What Happened: Mexico What Happened: U.S. Real Wages Plummeted! Unemployment: No effect (or fell) NAFTA US Unemployment Rate Peso Crisis Mexico Real Wages, Quarterly 1990-2005 Quarterly 1988-2005 NAFTA Peso Crisis 120 Index 1993.4=100 9.0 100 8.0 80 7.0 6.0 60 Percent 5.0 40 4.0 3.0 20 2.0 0 1.0 0.0 1990.1 1991.2 1992.3 1993.4 1995.1 1996.2 1997.3 1998.4 2000.1 2001.2 2002.3 2003.4 2005.1 1988.1 1989.1 1990.1 1991.1 1992.1 1993.1 1994.1 1995.1 1996.1 1997.1 1998.1 1999.1 2000.1 2001.1 2002.1 2003.1 2004.1 2005.1 17 Lecture 6: NAFTA & USMCA 18 Lecture 6: NAFTA & USMCA 3

What Happened: U.S. What Happened: U.S. Trade: Continued growth Real Wage: No Change NAFTA US Trade Peso Crisis US Real Wage NAFTA Peso Crisis Quarterly 1988-2004 Quarterly 1988-2005 500 120 Index 1993.4=100 400 100 300 80 200 $ billion 60 100 Deficit started to grow more in 1998 40 0 20 -100 1988.1 1989.1 1990.1 1991.1 1992.1 1993.1 1994.1 1995.1 1996.1 1997.1 1998.1 1999.1 2000.1 2001.1 2002.1 2003.1 2004.1 0 -200 1988.1 1989.2 1990.3 1991.4 1993.1 1994.2 1995.3 1996.4 1998.1 1999.2 2000.3 2001.4 2003.1 2004.2 -300 Exports Imports Current Acct. 19 Lecture 6: NAFTA & USMCA 20 Lecture 6: NAFTA & USMCA What Happened: Bilateral Trade Grew: But more To US than From NAFTA NAFTA Peso Crisis US-Mexico Trade 150 100 $ billion 50 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Mexico to US US to Mexico 21 Lecture 6: NAFTA & USMCA Lecture 6: NAFTA & USMCA 22 23 Lecture 6: NAFTA & USMCA 24 Lecture 6: NAFTA & USMCA Source: Congressional Research Service Source: Congressional Research Service (2015) (2015) 4

Supply Chains • Much of the growth of trade within NAFTA has been supply chains – Final goods are produced in one country with inputs from another – Inputs are in turn produced with inputs from yet another – And so forth • Supply chains in much of manufacturing now cross the two borders many times Lecture 6: NAFTA & USMCA 25 Lecture 6: NAFTA & USMCA 26 NAFTA Analyses • Posen (2014) – “For every 100 jobs US manufacturers created in Mexican manufacturing, they added nearly 250 jobs at their larger US home operations” – Unemployment in US was actually lower after NAFTA than before (until the 2008 financial crisis) – Critics say NAFTA cost 45,000 jobs a year. • That may be true • But this is only 0.1% of normal job turnover in the US, where 4m-6m workers leave or lose jobs per month) Lecture 6: NAFTA & USMCA 27 Lecture 6: NAFTA & USMCA 28 NAFTA Analyses • Hakobyan and McLaren (2016) – They look for effects on local labor markets, where – industries – and/or communities • were vulnerable to large tariff cuts against Mexico – They find • Substantial variation across localities Source: Hakobyan Lecture 6: NAFTA & USMCA 29 30 Lecture 6: NAFTA & USMCA and McLaren (2016) 5

NAFTA Analyses (Consistent Public-Use • Hakobyan and McLaren (2016) Microdata Areas) – “ … even workers in a nontraded industry— waiting on tables in a diner, for example—saw a sharp reduction in wages if they were in a vulnerable location that lost its protection quickly.” 31 Lecture 6: NAFTA & USMCA Lecture 6: NAFTA & USMCA 32 Source: Hakobyan and McLaren (2016) NAFTA Analyses Discussion Question • Disruption of some industries and localities • Do you know anybody who was hurt by – Some was expected NAFTA? – May have been larger than expected • Do you know anybody who was helped by – Has not been dealt with adequately by TAA NAFTA? – Nonetheless was still small – But provides easy ammunition for critics Lecture 6: NAFTA & USMCA 33 Lecture 6: NAFTA & USMCA 34 Class 6 Outline Issues in the Renegotiation NAFTA and Its Renegotiation as USMCA • Issues (US) – ISDS – Trade imbalances • What is NAFTA? – State-owned – Reciprocal duty- • What happened under NAFTA? enterprises free market • Issues in renegotiation access – Labor standards • USMCA – Rules of origin – Chapter 19 – Regulations – Procurement – Services – Currency manipulation – Digital trade Lecture 6: NAFTA & USMCA 35 Lecture 6: NAFTA & USMCA 36 6