At a recent rally in Arizona, the president called NAFTA “one of the worst deals that anybody in history has ever entered into.” He also indicated a willingness not just to renegotiate NAFTA, but even went so far as to predict that he would have to terminate the deal altogether.
This outrageous statement is big news for Michigan. Our state’s production and consumption both rely on the open global marketplace that NAFTA creates.
Consider the following thought experiment. If I run a restaurant in your town and a local ordinance pops up that eliminates half of the other restaurants in town, what happens? Business will be booming for me. Long lines to get seated will surely follow. Some people may decide not to eat out as much, but those who still want to eat out will fill the restaurants that remain.
However, if these remaining restaurants are going to serve anywhere near the number of people that were served by all of the restaurants before, they’ll have to increase the prices on their menus. Kitchen space and dining areas will all have to be added, and more servers, likely one’s who are more expensive or not as talented will have to be brought in. Soon enough, diners will recognize the price hike, realize the difference and regret the ordinance that forced all the other restaurants to close down in the first place. This is what would happen if we scrapped NAFTA. Tariffs will be back and will force some foreign producers to leave the market. Those producers that remain will need to raise their prices.
But the problem does not stop there for American consumers. Trade agreements reduce mutually destructive tariffs by triumphing over the politics of special interest groups. But if we get rid of our agreement not to throw a tariff on other countries, those other countries are likely to respond with tariffs of their own — meaning consumers will face higher costs on both ends. The goods we make will be more costly to produce because they require imported inputs that are now more likely to be taxed.
These realities will prove particularly problematic here in Michigan. Sixty-one percent of Michigan’s total intermediate good imports come from Canada and Mexico. These imports supply the state’s auto industry with parts, keeping the cost of cars assembled and made in Michigan low. Increase the cost of importing those goods, and our cars and other crucial products will inevitably rise in price.
And if you break it down in terms of individual trading partners, the realities become even more striking — and troubling. In the first three years after NAFTA, Canadian exports to the U.S. expanded by 22, then 14, then 7 percent. Michigan continues to rely heavily on this groundswell of Canadian exports. It also relies heavily on trade with Mexico. A recent article in the Economist organized the states based on what percentage of their GDP is made up of exports to Mexico. Michigan came in third, right after Texas and Arizona and just before Louisiana. The article also estimated how hard a state would be hit by potential tariffs, and Michigan ranked sixth.
In debates over trade agreements we often focus on the few producers who will benefit and the jobs that will be protected. However, Michigan consumers are right in the middle of the NAFTA debate. Tariffs will reduce the total supply and decrease competition between nations, meaning that even domestically made products will increase in price. This is not a matter of opinion — it is basic economics. Keeping free trade helps consumers, and that helps the economy. Savings for consumers create extra cash, which consumers then go on to invest or spend in different markets. Savings can also allow some enterprising Michiganians to open small businesses, creating more jobs and boosting the state’s economy.
It’s entirely possible Trump’s statements at the rally may have been nothing more than a negotiating tactic, designed to get us a better deal in the long run. I certainly hope this is the case. Michigan consumers and manufacturers alike need NAFTA to support their factories and their families. The best thing the president can do to support them is to rework — not reject — this vital trade deal.
Michael J. Clark is a professor of economics at Hillsdale College.