By William F. Shughart II
February 14, 2019 at 5:00 am ET
The president stood firm in his commitment to revitalizing free trade in his State of the Union address, calling for the timely passage of the United States-Mexico-Canada Agreement. Free and open international trade is a cornerstone principle of economics and a recipe for prosperity, facilitating global competitiveness and opening access for consumers to high-quality goods at the lowest-possible prices.
Time certainly is of the essence when it comes to the USMCA. Recently, Iowa senator and Senate Finance Committee Chairman Chuck Grassley (R) called for withdrawing from the North American Free Trade Agreement to spur ratification of the USMCA. Although Grassley quickly walked his proposal back, if the withdrawal from NAFTA were to happen without USMCA ratification, reciprocal trade provisions benefitting North American businesses would disappear entirely. The absence of existing provisions would handicap energy trade across North American borders, cripple national economies and threaten oil and gas production and refining, among many other consequences.
Just how costly could a total loss of NAFTA be? Consider that, today, businesses and consumers in the three North American nations pay very low or no taxes on goods that cross borders. Without a ratified trade deal in place, tariffs on some goods could rise to as high as 150 percent, causing prices to spike and company profits to erode.
In fact, should tariffs revert to each country’s respective World Trade Organization average levels, goods exported from the United States could face mean tariffs of 4.2 percent in Canada and 7.1 percent in Mexico. That would be a significant blow, considering that in 2017 alone, U.S. companies sold Mexico and Canada nearly $80 billion worth of goods, accounting for a third of all U.S. exports.
Failure to shore up North American trade by ratifying the USMCA will hit a number of economic sectors particularly hard. Chief among those sectors is energy. The United States, Canada and Mexico have benefited considerably from open cross-border flows of oil and gas.
Today, the United States is a net importer of natural gas from Canada, although at declining rates, and we are a net exporter of natural gas to Mexico. The top-two global destinations for U.S. petroleum product exports are our North American trading partners; together, Mexico and Canada buy more than a million-and-a-half barrels per day from U.S. oil producers.
Mexico, particularly, is a thriving market for U.S. natural gas, buying more than a trillion cubic feet per year shipped via pipelines and liquefied natural gas tankers. A seamless border also allows electricity grid managers across North America to improve supply reliability and efficiency by calling on power generation assets across borders.
The stakes are high for other sectors, as well, including agriculture and apparel. Canada and Mexico nowadays are the first- and third-largest markets for U.S. food, respectively, making up 28 percent of total U.S. total agricultural exports in 2017. With agricultural exports to those two nations growing by 450 percent since 1994, agricultural trade across North America now sustains more than 325,000 American jobs.
When it comes to clothing, American textile producers exported goods worth more than $11 billion to Canada and Mexico in 2016. Those exports are poised to increase because of the inclusion of e-commerce clauses in the USMCA, which would create additional jobs and economic benefits here at home. However, should tariffs revert to World Trade Organization average levels across North America, U.S. textile exports to Canada and Mexico could be saddled with tariffs as high as 20 percent.
Lawmakers should heed the request of the president to ratify the USMCA trade pact as soon as possible so that American businesses can thrive under secure trade protections in 2019. Congress this year should address, and ultimately ratify, the USMCA, creating a freer and more certain North American trade landscape and plotting a course for the U.S. economy’s continued growth.
Without trade protections for domestic businesses, supply chains will suffer, not just in 2019, but in years to come. Congress must ride the momentum of the State of the Union address and work to protect North American supply chains so that the domestic economy can continue to grow and prosper under the Trump administration.
William F. Shughart II, research director of the Independent Institute, is the J. Fish Smith Professor in Public Choice at Utah State University’s Jon M. Huntsman School of Business.
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