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NAFTA: In Defense of the Idea

In this year's first Presidential debate, Republican Donald Trump declared the North American Free Trade Agreement (NAFTA), “the single worst trade deal ever approved in this country.”

Clinton, meanwhile, defended her husband's administration, noting “incomes went up for everybody. Manufacturing jobs went up also in the 1990s, if we're actually going to look at the facts.”

Trump loves to point to large American companies, like Ford, outsourcing work to Mexico in his arguments against NAFTA. But the U.S. and Mexico also have strong relationships when it comes to tech companies. These newer businesses—and the innovative products they create—are set to suffer if NAFTA is eliminated.

In recent years, Mexico has become a hotspot for companies transitioning manufacturing from China, as Chinese labor rates have increased to make Mexico cost competitive. For the United States, this “nearshoring” has been a fruitful relationship, as our neighbors to the south have provided not only cheaper goods, but increased manufacturing jobs here in the states. In particular, countless tech products cross the border (in both directions) each year as the relationship strengthens. According to the Office of the United States Trade Representative, the United States imported $63 billion worth of electrical machinery (including phones and appliances) last year, and exported $41 billion worth of the same to Mexico.

Surprised at how much the U.S. exports to Mexico? Much of it ends up back in the States. Mexico imports parts from the US to make the finished products it then sends back. About 40 cents of every dollar that the United States imports from Mexico comes from the US. That's compared to just four cents of every dollar in Chinese imports, according to the Woodrow Wilson Center.

However, just the uncertainty of NAFTA's future puts businesses—and ultimately, consumers—in a tight spot. Whether or not things actually change, the seed of doubt has been planted. It's that uncertainty that stops investment. Just look at Brexit: while the world is still in speculation mode, the cost of uncertainty caused the pound to drop to a thirty year low.

And confident investment is especially important to the wealth of tech companies that have been cropping up in Guadalajara, Mexico. U.S. venture capitalists have invested over $100 million in over 300 startups in the region, according to the Wall Street Journal. Among the newcomers, industry veterans like Cisco also have set up successful branches. Jalisco annually exports $21 billion in tech products and services to the US, a boon to both American consumers and Mexico's growing industry.

If the U.S. were to impose a tariff, Mexico would likely respond with tariffs of its own, hurting sales of American products south of the border. This would curtail their purchases and hurt manufacturers here. And according to data from Moody’s Analytics, up to four million American workers would lose their jobs.

To deal with the added cost, companies would first look to import materials from other countries that still have preferential trade agreements with the U.S. However, companies would be forced to pass along residual costs to suppliers and customers.

Studies have shown that enacting tariffs will only increase the costs of trade between U.S. and Mexico, eventually hurting businesses, consumers, and the economy. Additionally, a study by the National Foundation for American Policy (NFAP) suggested that the tariffs can produce a 30.5% spike in the price of competing domestic producer goods, slashing consumers' wages.

To put what's at stake into context, the top U.S. imports from Mexico last year totaled $259 billion, spanning the automotive, electrical, machinery, mineral fuels, medical, and agriculture industries. A disruption in those tariff-free trades will undoubtedly cause a shakeup in manufacturing. Companies like Ford, GM, Honda, Samsung, LG, Intel, and Sony would head back overseas to China, where smaller parts would be less likely to be U.S.-sourced, threatening American manufacturing.

If NAFTA does get eliminated, South American countries may find themselves a hub for manufacturing. And if the U.S. is able to garner more favorable trade relations, the proximity would create a second-best scenario outside of Mexico, as the distance, or lack thereof, would lend itself cost-efficient. But it's important to keep in mind that there are major variables at play: large corporations who seek cost-cutting advantages, regions fighting to become the next manufacturing hub, and politicians who are trying to get the best deal for their country.

As we've seen from both political candidates, the key aspect of this issue revolves around the US getting more out of trade relations than it currently does—which will require tough negotiation, and perhaps a bit of luck.

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