There has been plenty of talk south of the border by U.S. presidential candidates about revamping or even scraping free trade deals. In a new TD Bank report, Beata Caranci, Chief Economist, TD Bank Group, says that while the candidates might talk tough, even the U.S. president has limited power when it comes to unravelling done deals.
Is there something different this time?
Because this has happened quite a bit in the past.
Yeah, what people forget is even President Obama in 2008 and 2009 had protectionist rhetoric in his campaign as well and enacted in some form on it by putting tariffs, for example, on China and country of origin rules on Canada and Mexico.
So when you hit election periods, it's quite common to have rhetoric on trade protectionism really spike up.
The costs of free trade tend to be very observant in specific industries or specific regions, but the benefits are quite diffused in terms of lower consumer prices and industry-wide supplier chains.
So it's an easy target during election campaigns to sway people or pull votes towards you.
But after presidents get elected, you tend not to see them act on the measures in any full extent of what they were campaigning on.
I would say the one difference-- maybe you can tell me if this really is a material difference-- we've got Hillary Clinton saying she'd like to modify NAFTA, which I believe is what Obama said when he was running as well.
But Donald Trump is a little more emphatic about what he wants to do with NAFTA.
Does that change things from your perspective in terms of the who is running this time?
Well, we have to remember that presidents in terms of modifying actual trade deals that are in existence in law like NAFTA, they really don't have as much authority as we assume they do.
NAFTA was put in place through an executive congressional agreement.
So both the House and the Senate voted for it and then put it into law.
So if Trump were to become president and wanted to put tariffs on Mexico, which would run afoul to NAFTA and wanted to repeal it, that would likely have to go all the way into a vote into Congress.
And Republicans, historically, and including with NAFTA, have voted more in favor of trade deals than even Democrats have.
So it's unlikely, I would suspect, that Congress would vote in favor of completely throwing out NAFTA.
You highlight in this report-- it's a great report-- three reasons why you think-- again, the bark is worse than the bite.
One was, you mentioned Congress.
Basically, this is not just purely a presidential-- their power to do something.
But second was it would hurt US business.
And third was that just generally, the bark is worse than the bite.
Tell me about hurting US business.
So this is the notion that the way manufacturing and production now works in the global economy is there are huge supply chains.
And so one country's exports still incorporate another country's products as part of the production process.
So for example, in Canada, for every product we're shipping, about $0.10 of the content comes from the US.
Even though it's made in Canada.
And for Mexico, it's even higher.
Their global supply chains are much more integrated in that country between the US and Mexico.
And so it's somewhere between $0.12 on the low end of the estimate and as much as perhaps $0.40 on the dollar.
So when you put a tariff on a country, you're actually hurting your own supplier chains that are feeding into those countries' production processes.
So this is the notion that you're trying to target the country, but in fact there is blowback onto your own supplier chains.
And your consumers absorb higher prices as a result of lifting prices up globally.
So on net, you tend not to get any major benefits.
And in fact, you tend to be on the losing side in terms of higher prices.
We don't find evidence that you get strong increases in jobs or any at all.
On net, it could cost you jobs, because you're losing jobs on those supplier chains.
And in fact, if you're raising consumer prices that means people are spending less in other areas.
And so that costs you jobs in those areas as well.
You also point out here-- I thought was fascinating-- that if for example, if we take a look at the US and Mexico, if jobs did, a few, trickle back into the states there might be fewer because of higher productivity in the States.
The US is significantly more productive than Mexico.
And one of the reasons that companies go to Mexico is because of the lower cost of labor.
It's a tradeoff.
Do you want to have higher cost of labor in the US or Mexico?
So they go to Mexico.
If you were to repatriate some of those jobs back or attempt to do so, it is more likely that American firms will substitute labor for capital, meaning their production processes in the US are much more capital intensive than they are labor intensive.
So you can't take 10,000 jobs in Mexico and say, oh, that's going to equate to 10,000 jobs in the US.
It absolutely will not.
You'll get a fraction of those jobs and at a higher price.
Let me ask you, so again, first point was Congress.
Second was that it would fully integrated, hurt US businesses.
Third was is that actually when people get elected, there is a more moderate governing policy that tends to come into place.
This is right.
Because I think you have to be pragmatic at the end of the day.
One, with a strike of a pen, you can't eliminate a trade deal that was put in place by law.
There are these groups-- there's a recognition that, for example, if I want to put a tariff to benefit one segment of the American industry, you are putting a cost onto another segment, because countries will retaliate.
We have evidence of that strongly in the data.
China is very active in terms of retaliating when the US puts tariffs on them that are unjustified.
So it's not an easy thing in terms of, I'm going to get elected.
And Donald Trump's comments have been 35% tariffs on China or Mexico.
That would be unlikely to occur in terms of one, being able to do it, and two, the pragmatic approach that you will incur a cost by doing it.
Well, let's talk a bit about that.
Because one thing that you highlight in the report, I think, is when President Obama earlier in his term decided to take action with China on tires.
Obama in 2009 did put tariffs on Chinese-made tires that were being imported into the US.
And he put tariffs at a high level, 35%, and then the following year at 30% and then 25%, so three years.
In that period, consumer prices really went up significantly.
And it was estimated that it cost consumers in America about a billion dollars more to pay for tires.
And yes, imports from China did drop off.
But imports of tires did not, because all that happened is that suppliers substituted from China to other countries.
So Thailand and Malaysia-- Got a boost.
So you import substituted.
So Americans ended up with higher prices.
And imports did not fall on net and likely cost jobs on the US side, because if you're paying more for tires, you're paying less in other areas of the economy, which has trickle-down effects to those jobs in those industries that would have benefited.
I've got this picture of this little boy with his finger in the dam kind of thing.
And another one springs a leak as he goes over there.
That's exactly right.
Let me ask you then, again, you're saying it's not likely that you think NAFTA would get scrapped.
What if it did?
What would be the impact to Canada?
Well, it's significant.
There's a 1 and 1/2 billion dollars in goods that are flowing between Canada and the US every single day.
So it's a significant amount of trade relationship that we have with them.
It is not clear what would happen at that stage.
Canada and the US had a free trade agreement in advance of NAFTA, and so it's likely that we would revert at least back to that one, if not something else.
It would have to be negotiated on that front.
If the US decided to scrap NAFTA and that received Congressional approval, they would have to provide at least six months notice of doing so.
So there would be a lead time in terms of what would be negotiated at that point, or what it might look like.
But you do hit uncharted territories, because we haven't had a precedent of that happening before.
And again, you think very unlikely this would happen.
Beata, great report.
Thanks for joining us.