Last updated on October 23, 2017
Mexico City, Mexico — The collapse of the North American Free Trade Agreement (NAFTA) would likely damage, but not derail, the continent’s economy and global corporations’ business models.
Such is the conclusion of economists who try to foresee life after the agreement that’s been in effect for 23 years, as increasingly tense negotiations on how to reform it feed versions that US President Donald Trump will fulfill his threat of withdrawal.
Without NAFTA, the United States and Mexico would charge each other the highest tariffs they currently impose on other members of the World Trade Organization. These amount to 7 percent on average in Mexico and 3.5 percent in the United States, although Canada and the United States could resort to a free trade agreement prior to NAFTA.
An increase in taxes could affect growth, cost jobs and raise inflation in all three countries. Bloomberg Intelligence and Moody’s Analytics predict that the hardest hit would be Mexico.
But none of the countries would be pushed into recession, according to Moody’s. The agency projects that the worst would occur in the first two years after the end of the treaty, assuming that the United States and Canada work on a bilateral agreement.
“It will be bad for businesses, but not catastrophic,” said Mark Zandi, chief economist at Moody’s Analytics. “It will disturb the supply networks.”
Mexico has benefited the most from the pact between the three countries. Several companies, from General Motors to Caterpillar, transferred production south of the US border to take advantage of lower wages, which helped Mexico stabilize its economy after the debt crisis of the 1980s.
The country also has the most to lose if NAFTA is terminated. Mexico would lose nearly 1 million low-skill jobs, compared to just over 250,000 in the United States and 125,000 in Canada, according to Colorado-based economic consultant ImpactEcon.
Similar to the anticipated impact of the separation between the United Kingdom and the European Union, perhaps the biggest barrier to business is not tariffs.
The end of the pact would dismantle the system of independent courts that govern investments in the continent. For example, US companies would lose protection that prevents Canada and Mexico from confiscating their assets.
Some companies are likely to shift production back to the United States if Trump withdraws from the agreement, said Michael Stumo, chief of the Coalition for Prosperous America, a non-profit association that supports the administration’s skepticism about free trade.
However, addressing currency imbalances would be a more lasting way of modifying trade flows, he added.
But others argue that companies would simply shift production to lower-cost production centers in Asia instead of returning the United States to its golden age as a manufacturer.
“The end of NAFTA is unlikely to generate much employment in the United States,” said Michael McDonough, global director of economic research at Bloomberg Intelligence.
“Companies are likely to shift consumer price rises instead of spending billions over several years to bring capacity back to the United States.”