This week, while his country is renegotiating the North American Free Trade Agreement, Mexican President Enrique Peña Nieto was in China to pursue his country’s Plan B. Rumblings of a free-trade deal between the two nations have grown since President Trump took office this year, but they’ve mostly been seen as political posturing. But with Trump threatening regularly to dump the deal—even taking time last Sunday, during Hurricane Harvey, to say he “may have to terminate” NAFTA—the possibility of Mexico opening up to China seems ever more real.
Trump’s stated goal to end NAFTA is to raise tariffs and incentivize U.S. companies to stop outsourcing jobs. Whether or not that will work is a separate matter, but what he has done is to push Mexico, which counts the U.S. as its largest trading partner by far, into pursuing other options. Peña Nieto’s will participate in the BRICS summit in China, named for its participants, Brazil, Russia, India, China, and South Africa. And he also met with Chinese President Xi Jinping, a sign the two countries are seeking a closer trading relationship.
NAFTA’s collapse would likely put the U.S. and Mexico on unstable ground, but economists say they doubt it would devastate either country in the short term. Without NAFTA, trade between Mexico and the U.S. would fall back on World Trade Organization(WTO) tariff standards. Signatories to the pact have agreed to “bound rates” for tariffs, which establish a ceiling. These rates differ by industry, but items like agricultural products can have high limits. NAFTA changed the way the U.S. eats, and without NAFTA, consumers stand to lose their perennially fresh and cheap vegetables. But the sector that stand to lose the most is auto manufacturing, because U.S. companies have invested heavily on being able to send car parts to Mexico, assemble them there, then bring them to the U.S. to be sold. The WTO tariffs for the auto sector are much higher than for most other industries, so not only would consumers have to pay more for cars, but it would likely disrupt the current chain of manufacturing. Collectively, however, the average applied tariff for the U.S. is 3.51 percent for all products imported from WTO member countries. Trump has threatened to raise tariffs to 35 percent in order to push companies to build products in the U.S., but this is unlikely because it could spark a trade war. So if NAFTA did end, it’s trade would likely continue at WTO tariff rates, making many products from Mexico more expensive, but leaving intact the flow of trade.