The landmark 1994 North American Free Trade deal (NAFTA) is currently in the midst of a three-country re-negotiation. It looks like things are not going well in these talks – to no one's surprise – and the situation was raised by Canadian Prime Minister Justin Trudeau when he visited President Trump this week.
With that backdrop, I thought it would be interesting to go back and look at where trade was at when the original deal was signed in 1993 and what has happened to the NAFTA countries – the U.S., Mexico and Canada – since then.
So what was the world like back in the days of NAFTA 1.0?
As the current administration points out, there was a small trade surplus that the U.S. had with Mexico at the time NAFTA was started. In the present day, that small surplus has turned into a deficit to the tune of $64 billion.
On a related note, the dollar-to-peso exchange rate went from 4 at that time to nearly 19 today. That means at constant prices, Mexican goods are much cheaper now.
The situation with Canada is very different. The U.S. and Canada have the second largest trade relationship of any two countries in the world. While Canada typically runs either a small trade surplus or deficit with the U.S., the amounts are actually relatively small when compared to the overall trade between the two countries.
Broadly speaking, imports and exports between the U.S. and Canada have largely evened out in recent years.
A bigger question is: Is the trade deficit we currently run with Mexico truly due to NAFTA? For that we need to look at the value of the Mexican peso.
In theory, the peso would be more likely to strengthen, not weaken, if the U.S. were importing more goods from Mexico. The reason it has weakened recently can be attributed to overall global macroeconomic factors.
For instance, the peso is on investors' radar as an emerging market currency. It tends to be lumped in with Latin America currencies any time there are financial jitters in that region.
Also, the strong preference for U.S. assets after the Great Recession of 2008 boosted the dollar in general against most currencies.
My View: The U.S. trade deficit with Mexico is not primarily due to NAFTA. However, the idea that it is has been heavily influencing the current NAFTA re-negotiations. As a result, that process is not going well. I would advise a more careful and prudent approach going forward.
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