February 16, 2018
Interviewed by: Privcap
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How a NAFTA Withdrawal Would Harm the Middle Market

Privcap interviews Joe Brusuelas, chief economist for RSM on the impact of U.S. withdrawal from NAFTA. Based on volume 38 of RSM’s The Real Economy report, available for download here.
Privcap interviews Joe Brusuelas, chief economist for RSM on the impact of U.S. withdrawal from NAFTA. Based on volume 38 of RSM’s The Real Economy report, available for download here.

How a NAFTA Withdrawal Would Harm the Middle Market

If the U.S. exits NAFTA, what effect would it have on the middle market?

Joseph Brusuelas, RSM:
Over the past 25 years, the U.S. and its main two trading partners, Canada and Mexico, have built a North American supply chain that has deep roots into U.S. auto manufacturing in general and manufacturing writ large. So, if the U.S. decides to just withdraw, a lot of the gains in terms of efficiency and output would be lost. That’s a generation’s worth of work.

Now, the reason why that will disproportionately affect middle markets is the large companies who created the ecosystems that spawned from the supply chains and the value chains have decided essentially that they’re going to just take the hits on increasing tariffs and continue to produce offshore or across the border. Then, they will pass along those price increases to middlemarket companies that participate in those ecosystems. So, the middle market will bear the disproportionate cost of the burden of adjustment from any withdrawal from NAFTA.

What kind of tariffs are we talking about?

Brusuelas: When you look at the way the tariffs reset, they’re going to reset asymmetrically. We talk about them in general as resetting 3.5% for the U.S., 4.1% for Canada and 7.2% for Mexico. OK, that’s an easy discussion. But, once you really take a look at what’s going on and dig into the data, what you see [is that] those asymmetries are really significant. I don’t think it’s well known among the public that, if the U.S. withdraws from NAFTA, tariffs on U.S. exports of chicken, for example, will increase by 75%. That’s just one example of the farreaching effect that the shift in trade regime would have on middlemarket companies.

What are the fallacies behind the withdrawal from NAFTA?

Brusuelas: One of the two basic fallacies is that it’s a win-lose proposition or a zero-sum game, when, in truth, the gains from free trade are plentiful. It increases the welfare of all. Those welfare benefits are distributed asymmetrically. The second major fallacy of the move toward protectionism is that it will tend to benefit companies across the spectrum in different industries, who will benefit from increased trade barriers. That’s not true. Those companies are embedded in an integrated North American economy and supply chain. They will see their costs go up. Well, in the short term, you may add a few jobs here and there. Overall, though, to the medium and long term, you will tend to lose jobs and I think that’s the important thing to remember here when we talk about disrupting patterns of trade.

If you could rank Canada, Mexico and the U.S., who comes out worst in a NAFTA withdrawal?

Brusuelas: Mexico’s facing the biggest risk. Our forecast is that if there is a U.S. withdrawal from NAFTA, followed by a tit-for-tat series of retaliatory moves, you’ll see the Mexican economy in 2019 contract by 2.9%. You’ll see imports, exports and capital investment decline by high double digits. Moreover, you’re likely to see their central bank lift their policy rate up to 8% to stem currency outflows out of the country. Mexico’s economy will contract sharply and they would face some gut-wrenching policy decisions in the aftermath of this.

Canada would likely see a 0.5% hit in terms of growth that would last 18 to 24 months and then they would emerge. The U.S. would see loss of roughly 0.2% to 0.3% on growth, but you would see some seriously significant dislocation in terms of jobs, trade and capital flows. And, of course, you’ll see tariffs reset, which we should not talk about them as tariffs. What we should talk about them bluntly as is what they are: they’re taxes on middlemarket firms and consumers downstream.

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