The Give and Take of Trade Renegotiations

This month I attended a discussion on the effects of the North American Free Trade Agreement (NAFTA) at a workshop with the USDA Economic Research Service in Washington DC. Today it appears that the U.S. and Mexico may be approaching a revised trade deal. Although much of the political conversation regarding NAFTA focuses on loss of jobs and income in industries with high levels of imports from Mexico and Canada, free trade agreements can also benefit exporting industries, consumers, and industries along the supply chains of imported goods. As a case study, Gary Williams (Texas A&M University) spoke at the workshop about the economic benefits of U.S. imports of Hass Avocados from Mexico. While protectionist trade policies may preserve domestic jobs in the short run in industries where neighboring countries have a comparative advantage, these policies can also prevent expansion and growth of industries and jobs in the supply chains of imported goods.

Joe Janzen spoke recently on Montana Ag Live about the administration’s goals in renegotiating NAFTA, the potential risks, and the expected losses to U.S. agricultural producers that export to Mexico. The U.S. administration’s primary objective is to reduce the United States’ trade deficit. The U.S. imports a greater value of goods from Canada and Mexico than it exports, and the administration would like to reduce (or even reverse) that imbalance. A 2016 study finds evidence that wages decreased after NAFTA was implemented in industries that compete with Mexican imports and in locations with high concentrations of these industries. However, every renegotiation requires some give and take from each party. The United States has a trade surplus with Mexico and Canada in agricultural goods, so U.S. agricultural producers are not expected to benefit from renegotiations.

While it is typically understood that net exporters have much to lose in trade renegotiations, discussions rarely account for the benefits of imports to consumers and producers in the supply chains of imported goods. Increased imports generate economic profits through activities such as border and inspection services, transport, wholesale and retail trade, marketing, infrastructure, and value-added processing. Take Williams’ example of avocado imports. Import value of avocados increased 359 percent between 2010 and 2017, primarily driven by an outward shift in demand. Mexico is currently the primary supplier of avocados to U.S. markets. This trade imbalance benefits not only Mexican producers and U.S. consumers, but also workers and industries along the supply chain. Williams and his coauthors find that every dollar of avocado imports from Mexico in 2015 generated $1.41 in U.S. GDP, and for every US$1 million of avocado imports 12.3 U.S. jobs were created along the supply chain.

Trade negotiations are delicate. Protectionist policies may benefit workers in industries that compete with Mexican or Canadian imports, but protectionist policies can also increase consumer prices and hinder employment growth and expansion of industries along the supply chains of imported goods. Discussion of trade negotiations should account for all impacted players—though in practice this is very difficult since every transaction has many indirect effects.

(Photo by Internet Archive Book Images is licensed under CC BY 4.0)

(Photo by Tsahi Levent-Levi is licensed under CC BY 4.0)