How Does the 2016 US Election Impact US-Mexico Business Relations?
With the Republicans and Democrats having their publicity shows in back to back weeks in Cleveland and Philadelphia respectively, now is a great time to talk US Politics, business in Mexico and NAFTA. My grandmother always told me to try and avoid two topics of conversation at almost all costs: politics and religion. Sorry Granny, I can’t avoid this one. But actually I’m not going to disobey my late, sweet Granny. I’m not going to take any sides in this blog post for or against any candidate. I will not be praising or condemning any views or comments made by Donald Trump or Hillary Clinton in this campaign. I will simply state historical facts about American government, free trade and what a president of the United States can and cannot do in regards to policy. I will give my opinion on one thing; that is the future of NAFTA as I see it with any President as well as the benefits and drawbacks for the United States, Mexico and Canada in this nearly 22-year- old trading pact.
The most common question I get from clients, blog readers, and just people I meet is a simple one:
“If Donald Trump becomes president, won’t we cancel NAFTA, and greatly reduce our trade with Mexico”
The answer is most likely a resounding “NO” for several reasons. Let us be clear that Mr. Trump has stated on a number of occasions that America signs up for some of the worst trading agreements on earth, and that he will “Make drastic changes or revoke NAFTA” when he becomes President. Although interestingly, if you visit the Trump campaign’s official website, it says nothing about NAFTA and focuses instead on reforming the US-China trade relationship. But for the sake of argument and discussion, let’s take a hypothetical that many people believe; that Mr. Trump plans to rip up NAFTA should he become President. Will he single handedly be able to do this? Answer again: No! Why not? Simple answer: He can’t!
What are the powers of the President of the United States with regard to NAFTA?
For those of you who may be unsure of the powers of a President of the United States in regards to trade, it’s time to take a little trip down memory lane to those high school history, civics and government classes.
The United States of America has a rather unique history in regards to the way the nation was founded. We had to fight a revolutionary war to win our independence from a foreign colonial power. That’s nothing rare; most of the entire Western Hemisphere had to fight wars against England, Spain, France or another European colonizer in order to gain power. What’s unique about the United States is that the Revolution was fought and then the nation subsequently founded on the premise that government, and especially one person, should not have too much power. In short, perhaps more than any other nation on earth, Americans have an innate distrust for government. It’s all in our founding documents such as the Declaration of Independence, US Constitution and the Bill of Rights. While on the topic of our Constitution (the oldest active constitution on earth), lets see what power the President has to make law and implement treaties and trade agreements such as NAFTA. The answer is essentially none:
Article I Section 1 of the Constitution of the United States of America:
All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.
This is quite clear and in line with America’s Founding Fathers’ mistrust of government and their distaste for monarchy following their colonial experiences with the British Crown. They didn’t want one man to have lawmaking power, so they entrusted it to an elected Congress.
Let’s be clear about something: be it a Republican or Democrat controlled Congress, the chances of both houses ever voting to revoke NAFTA in the foreseeable future is about as likely as a blizzard in Honolulu. Why is this? Perhaps you should read our book (link to Amazon page) as we talk quite a bit about NAFTA and the American, Mexican and Canadian economies’ marriage to the agreement. The bottom line is this: love it or hate it, since the implementation of NAFTA in 1994, trade between the United States and Mexico has steadily increased through the years (with some dips as a result of economic factors such as the 2008 financial crisis). In 2015 there was over $583 billion in trade between the United States and Mexico and over $660 billion in trade between the United States and Canada. With such staggering numbers, there is no feasible way that the United States, Mexico or even Canada could realistically strike down the trade agreement and get into tariff wars with one another. It’s simply economically unfeasible.
Does this mean that NAFTA has been great for everyone? No! Certain workers and industries in all countries have lost out; US factories in the Midwest have packed up shop for cheap labor in Mexico, Canadian timber workers have lost as they can’t quite compete with cheaper imports from the American Northwest, Mexican corn farmers have gone out of business because they can’t compete with US government subsidized corporate farms in states like Iowa and Nebraska. One of the controversial things about free trade in general is that no matter how much economic growth it creates and no matter how many industries and workers win in every country and region, some people are destined to suffer as a result of these agreements. But once again, it doesn’t mean that it is feasible or economically sound for a country to simply withdraw from these pacts. Because certain industries and workers suffer from protected, closed economies as well. Just look at the recent economic problems in Latin American countries such as Venezuela, Brazil and Argentina! All three of the aforementioned countries have massive trade barriers in the form of import duties to protect domestic industries. But the evidence that these countries are better off as a whole is not really there.
Moving back to the topic of Mr. Trump, we must recognize that he is a businessman and a successful one at that. He has investments and business interests all over the world, including in Canada and Mexico. I personally find it hard to believe that he would truly begin to attack trading agreements and alliances when in the Oval Office (at least not with the force that he is promising). Such practices would be against his own self-interest. I don’t believe this just based upon his business background, but upon history.
Every US President since the inauguration of Ronald Reagan in January of 1981 has generally pushed for stronger, more open trade with other countries, and especially with those in the NAFTA trading block. But not all Presidents supported free trade on the campaign trail. When NAFTA was being debated in the early 1990s, Bill Clinton voiced opposition to the pact when running for president in 1992. Yet after he became President, he warmed up to the idea of free, open commerce with Canada and Mexico. We all remember the night on Larry King Live in 1993 when Al Gore and Ross Perot debated NAFTA! Ronald Reagan’s two Republican heirs to the White house, George H.W. Bush and George W. Bush were both avid free traders. Although after the financial meltdown in 2008, Barack Obama spoke of the evils of free trade when originally running for President. Yet in his first term Mr. Obama changed his position as he signed free trade agreements with Colombia, South Korea and Panama, and then boasted his accomplishment as a key to economic growth in his re-election convention speech in 2012.
My point is that although some American Presidents campaign against free trade as candidates, most tend to warm up to the practice once they move into the mansion on Pennsylvania Ave. Will this be the practice with a President Trump? It’s possible. However it’s also possible that as President, Mr. Trump will attempt to alter America’s trading pacts just as Bernie Sanders would. But as explained from our review of the Constitution, any proposed changes by Mr. Trump will have little to no chance of Senate ratification.
In summary, in all likelihood NAFTA is here to stay (or even be replaced by the larger TPP) regardless of who wins the White House in November. Politicians tend to like to talk tougher than they like to act on trade, taxes, foreign policy as well as domestic social issues. But sometimes, in a case like NAFTA, the status quo might be the best option available for the people and the politicians.