Auto Research Group: NAFTA Withdrawal Would Hurt—Not Help—American Manufacturing

January 20, 2017; Forbes and Brookings Institution

At last week’s inauguration, President Donald Trump made clear that his administration will make major changes intended to impact America’s manufacturing sector, with promises to limit trade deals and protect the U.S. from the “ravages of other countries making our products, stealing our companies and destroying our jobs.”

However, researchers from the Brookings Institution and elsewhere question the efficacy of the planned changes. As Brookings’ Dany Bahar put it last week, “Trump strongly believes that protectionism is what will protect the American workers. He is wrong.”

The new president has indicated an intent to renegotiate NAFTA, ending a 22-year trade bloc between the U.S., Mexico and Canada. The White House has issued a statement saying that if Mexico and Canada don’t agree to better terms for the U.S., “the president will give notice of the United States’ intent to withdraw from NAFTA.”

An even bigger trade shift could be coming if the president makes good on proposals to increase the import tariff on products manufactured overseas. In December, via—what else?—a series of tweets, Trump threatened to impose an import tariff of as much as 35 percent on goods manufactured overseas by American companies.

While the purpose of any trade policy shift would be to bring manufacturing jobs back to the U.S., researchers say that withdrawing entirely from NAFTA or increasing tariffs would be detrimental to U.S. employment. A study from the Center for Automotive Research (which was funded by an automotive trade group) found that withdrawing from NAFTA would negatively affect the auto industry’s ability to produce cars in North America. Without NAFTA and without a replacement trade treaty for NAFTA, the use of American-made parts in Mexican-assembled vehicles would drop drastically. Manufacturers in the U.S. could be forced to buy American, but the increased price of all-American materials would likely decrease demand. Both effects would result in job loss. In addition to rising manufacturing costs, American manufacturers could suffer from retaliatory tariffs placed by America’s trading partners, which could cut international trade and, therefore, American jobs. The study concluded that withdrawing from NAFTA or increasing tariffs to 35 percent “could result in the loss of at least 31,000 U.S. automotive and parts jobs.”

Auto manufacturing workers wouldn’t be the only victims of a NAFTA withdrawal, of course. The U.S. Chamber of Commerce estimates that 6 million American jobs rely on open trade with Mexico. Undoing NAFTA would also impact American consumers, who would likely see a major increase in prices, especially in the automotive sector and on imported goods.

It is not unreasonable to conclude that the entry into the North American Free Trade Agreement in the 1990s cost some American jobs—along with a complex array of other factors, such as automation and increasingly competitive manufacturers from non-NAFTA countries. But a total rollback of the U.S.’s current integration into the global economy is unlikely to provide relief to U.S. manufacturing workers.

The best outcome of a NAFTA renegotiation would not be withdrawal, but a series of data-backed updates. NAFTA’s weak standards on environmental and labor provisions could be updated and enforced. The Mexico Institute’s Christopher Wilson wrote on Monday about changes that would benefit American manufacturers: for example, the elimination of obstacles to service exports or certain customs rules to encourage more Internet sales from the U.S. to Canada.

But these changes alone cannot strengthen the U.S. manufacturing sector, Wilson wrote. “Liberalizing trade opens U.S. workers to greater competition from around the world. Americans…need support in the form of greater investment in workforce development.”

Bahar’s Brookings piece also advocates training programs to transition workers to skilled manufacturing jobs. Manufacturers need skilled workers, and the U.S. is on the precipice of a major shortage. The Wall Street Journal reported in 2015 that the number of open manufacturing jobs actually stood, that year, at a fifteen-year high. The openings were largely due to issues employers faced in filling skilled roles. According to one recent publication from Deloitte and The Manufacturing Institute, manufacturers are facing an increasing skills gap that could affect jobs significantly over the next decade. Job training programs are typically run at the state or local level, often with educational institutes or nonprofits. While Trump’s campaign promised increased federal support for such programs, that piece of his economic plan hasn’t received as much post-election talk.

Trump’s inauguration speech blasted past administrations for not doing enough to protect American manufacturing interests: “Politicians prospered, but the jobs left and the factories closed. The establishment protected itself, but not the citizens of our country.…Their triumphs have not been your triumphs.”

Whether Trump’s triumphs will be ours certainly remains to be seen.—Lauren Karch