Will Trump administration get what it wants from NAFTA renegotiation?

Updated 2017-08-16 10:45:08 Xinhua

With renegotiation of the North America Free Trade Agreement (NAFTA) around the corner, questions have been raised about whether the Trump administration could attain its major objective to reduce trade deficits. Experts here have reached a consensus: the answer is "no."

In July, the U.S. Trade Representative (USTR) office listed "Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries" as the first and foremost goal for the renegotiation, which will take place in Washington, D.C. on Aug. 16-20.

It's the first time that the USTR has included deficit reduction as a specific objective for the U.S. trade talks with Mexico and Canada, reflecting the Trump administration's determination to address the issue.

U.S. President Donald Trump has called NAFTA a "disaster" and blamed it for the country's widening trade deficit with Mexico.

Statistics show that after the trade pact officially took effect on Jan. 1, 1994, the U.S.-Mexico trade balance swung from a surplus of 1.7 billion U.S. dollars to a deficit of 60 billion dollars.

However, according to trade experts, the attempt to narrow trade deficits through NAFTA renegotiation itself is quite problematic.

Alan Deardorff, professor of international economics and public policy at the University of Michigan, told Xinhua on Monday that the goal reflects some misunderstanding of the causes and effects of trade deficits.

"Trade deficits are not the result of trade agreements, not the result of trade barriers at home or abroad," Deardorff said, explaining that the situation stems from spending versus income in a country.

The U.S. trade deficit is "a very direct reflection that we spend far, far more than our income, we have to buy abroad because we are buying more things than we produce," he added.

Experts also say it is a mistake to simply label trade deficit as "bad" and equate a "reduced" trade deficit with an "improved" trade balance.

"Immediately after the 2008 economic crisis hit, the U.S. unemployment rate increased from 5.8 percent to 9.3 percent, U.S. GDP shrank by 300-billion U.S. dollars, and the U.S. trade deficit in goods with Canada and Mexico was slashed in half. None of those outcomes should be considered 'improvements,'" said Bryan Riley, a senior policy analyst of U.S. think tank the Heritage Foundation, in a recent interview with Xinhua.

Economists mostly agree that NAFTA, which caused a huge trade deficit for the United States, has overall provided benefits to the world's largest economy.

The U.S. trade with Mexico and Canada has more than tripled in the past 23 years, accounting for over one-third of its total trade.

Meanwhile, study by Congressional Research Service, a public policy research arm of the Congress, concludes that the deal had a modest but positive impact on the country's GDP of less than 0.5 percent, or a total addition of up to 80 billion dollars to its economy upon full implementation.

Herbert Stein, the late chairman of Council of Economic Advisers under President Richard Nixon's Executive Office, famously argued in 1987 that contrary to the general perception, the existence of a current account (or trade) deficit is not itself a sign of bad economic policy or bad economic conditions.

"The deficit is a response to conditions in the country. It may be a response to excessive inflation, to low productivity, or to inadequate saving ... If there is a problem, it is in the underlying conditions and not in the deficit per se," Stein once said.

In Deardorff's viewpoint, the Trump administration's efforts to list "reducing trade deficit" as a top priority are driven more by political concerns rather than economic development.

"I understand that politically they have to vow against the trade deficit. And I am sure whatever they end up negotiating, if they succeed and come with an agreement with Canada and Mexico, they will probably claim that what they have negotiated would reduce the trade deficit," Deardorff said.

"But that is just not true," he added.

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