What Happens if the U.S. Exits NAFTA and Deals with Canada?

The United States, Canada, and Mexico are locked in tense negotiations over the future of NAFTA, and the latest news isn’t reassuring. President Donald Trump confirmed the possibility of tearing up the treaty and working on a bilateral trade agreement with Canada after his meeting with Prime Minister Justin Trudeau on October 11. Canada is our second largest trading partner with $544.0 billion in bilateral trade. A new deal makes sense on paper; we share a lot of the same business laws and values. But what would this mean for average consumers and the auto industry?

Trump’s rhetoric makes perfect sense. Critics on the left and the right have complained about Mexico’s inclusion in the tripartite trade agreement for decades. Canada and the United States have similar wages, labor laws, and environmental protections but Mexico does not. U.S. and Canadian workers can’t compete with southern labor standards. Over the years, automakers were eager to ship production to Mexico to decrease costs, and our workers have paid the price. When he first entered office, Trump railed at manufacturers like Ford and Toyota to pull up stakes in Mexico, to little effect. Billions are tied up in capital investment. Domestic automakers are happy to build high-margin trucks at home, but they’re desperate to manufacture low-margin compact cars in Mexico.

So what are our options? Canada wants to tighten labor laws and environmental protections in Mexico to level the playing field. That would take a lot of work, but it’s a solid proffer. The United States wants to change the rules of origin for manufactured goods and require more domestic content (from 62.5 percent to 85 percent) for duty-free trade across the border. The U.S. negotiator may include a demand for 50 percent American content, but that might not fly with the Canadian and Mexican representatives and violates the spirit of trilateral trade. Automakers also don’t want tighter rules of origin as it would increase the cost of auto parts.

Then there’s the nuclear option: plug on NAFTA and sign a new trade deal with Canada. This would allow the United States to impose stiff tariffs on Mexican imports. Let’s be clear, this is the nuclear option. American companies have billions of dollars invested in Mexico. Any tariffs could spark a trade war that hurts American exports like machinery and corn. While we have a trade deficit with Mexico in total, there are still tons of American industries that rely on healthy trade with Mexico. A new trade deal would cause massive disruption and temporary job losses for tens of thousands of Americans. At the same time, U.S. and Canadian workers would benefit from more balanced competition with our southern neighbor. Substantial tariffs could induce reshoring of manufacturing plants and force automakers to make more cars in the United States, especially if we hike the rules of origin at the same time.

Sounds good, right? Just remember that the car lobby and chambers of commerce across the country warn that any alteration to the deal could see a spike in car prices, full stop. More expensive workers mean more expensive products. When the Trump Administration considered a tax on Mexican vehicles the Center for Automotive Research calculated that a levy would raise the average sticker price by $2,000 per car. This all adds up fast. It’s worth keeping in mind that the center is funded by automakers that have a horse in this race. But don’t think for a second that Ford, GM, and FCA won’t pass any added costs on to consumers.

At this point, we have to ask: what is the price we’re willing to pay for backing out of NAFTA? There’s no magic bullet that protects American jobs and lowers prices the same amount as foreign labor at the same time. So, how much are you willing to pay to make America great again?