China Wins if NAFTA Dies

Much is made of the perils of ending NAFTA for Mexico, and rightly so. The 23-year-old agreement has helped the nation not only boost trade but also transform its economy, moving from a commodity to an advanced manufacturing exporter. With 80 percent of its exports headed north, even the threat of change has hurt Mexico’s currency, limited its ability to attract foreign direct investment, and cut the country’s current and future economic growth.

Largely overshadowed in all the tough renegotiation talk is what might happen to the U.S. companies that sell into Mexico’s $1 trillion dollar economy and to its 120 million consumers. With NAFTA’s zero tariffs and legal guarantees, the U.S.’ southern neighbor has become a top export market, buying over 15 percent of everything made in America and then sold abroad, topping $230 billion in 2016.

Best known and most tweeted about are the industrial behemoths – Caterpillar, Ford, General Motors, and Medtronic – as a part of their tens of billions of dollars in market capitalization are backed by sales of machines, cars and medical equipment to Mexico. More vulnerable are thousands of small and medium-sized American businesses, which are more likely to export to Mexico than anywhere else in the world. All told, these companies big and small employ some 5 million Americans, and help support hundreds of communities across dozens of states.

This could all change if NAFTA ends. Tariffs on U.S. exports would rise to an average 7 percent; on some crops and apparel fees would jump to double digits. These new charges would make corn, soy, beef, or pork from far away Argentina and Brazil more economically, not to mention politically, attractive. The tariffs would also enable EU made helicopters, generators, engines and other car parts to edge out American producers, gaining market share. All told, U.S. companies would be at a disadvantage vis-à-vis the past and vis-à-vis the 45 other nations that have free trade agreements with Mexico, and the end of NAFTA would level the playing field for those still without a preferred arrangement.

By far the biggest winner will be China. Even with tariffs, Chinese goods already flood the Mexican market, selling billions in cellphones, computers, TV parts, and innumerable tchotchkes. The Asian giant has been stealing market share from U.S. makers since they entered the WTO in 2001, cutting U.S. sales to Mexico from 4 out of every 5 dollars of imports to less than 1 in 2.

View full text of article, originally published in Americas Quarterly