Sam Bacevich explores how US businesses plan to cope with the new Trump administration
On November 8, Donald Trump was elected President of the United States, and the US equity market went on a two month “sugar high.” Now, the honeymoon period is coming to an end for many US businesses and investors as Trump has formally notified Canada and Mexico of his intentions to renegotiate the North American Free Trade Agreement (NAFTA), and to pull out of the Trans-Pacific Partnership (TPP).
NAFTA has been a pillar of security and continued growth not only for the United States, but also for Canada and Mexico. Since NAFTA’s inception in 1994, trade between Mexico, Canada, and the United States has quadrupled from 297 billion to 1.14 trillion. NAFTA now represents a greater aggregate GDP than the 28 member countries of the European Union, benefitting over 450 million people.
The TPP was not very important economically for the United States, with real GDP improving by 0.15% by 2032. The TPP—as President Obama pointed out numerous times—pushed against China’s influence in the region. By securing US interests in Asia and the Pacific, the TPP ensured that trading partners would turn to the US instead of China to solve disputes. The TPP would have been the largest free trade agreement in the world, representing 40% of global GDP and over 1/3 of all world trade. If the US had ratified the agreement, the TPP would have provided the US with $905 billion in exports and $980 billion in imports. However, President Trump withdrew America’s support from the TPP on January 23, causing the whole deal to collapse.
Value of Free Trade for US Business
Throughout the presidential race, the American people questioned both Trump’s ability to lead the country, and the validity of his claims about trade and the state of the American economy. Is Trump’s open hatred of NAFTA warranted, or is NAFTA just another political target in the President’s push towards protectionism? In reality, NAFTA has produced mixed results for the American people. NAFTA increases the United States’ wealth by $127 billion every year. However, with a population of 320 million, this only translates to about $400 dollars per person out of a GDP per capita of above $50,000. NAFTA has also resulted in the loss of 5 million high-wage manufacturing jobs from the Rust Belt States, which are home to Trump’s main supporters. However, recent studies have shown that only about 5% of all jobs lost since 1994 can be explained by NAFTA; the majority of jobs have gone to China or Southeast Asia.
These economic statistics fail to demonstrate the importance of NAFTA for US businesses. United States businesses depend on NAFTA to maintain supply chains that cross both the Canadian and Mexican borders. When General Motors needs a seat belt, the nylon is produced in Mexico before being sent to Canada to be dyed and stitched. Once the fabric is finished, it is sent back to Mexico for assembly before being tested and adjusted in the US. This integrated supply chain has been crucial to competing with foreign firms. NAFTA is largely credited with the survival of US manufacturing during the onslaught of cheaper products from Asia in the 1990’s.
The TPP, on the other hand, represents a “what if” scenario for US businesses. By breaking down tariff barriers in countries such as Vietnam and Malaysia, US companies would have had more efficient supply chains for their labor-intensive products. However, TPP is also the first multilateral trade agreement to address the trade concerns of small and medium enterprises. By removing red tape and opaque trade rules, small businesses across the Americas and Asia-Pacific can trade more effectively in new international markets. For companies like Exxon Mobil and Intel, the TPP would have further broken down tariff barriers for their goods. The TPP would have continued to give US multinationals access to the extremely profitable developing economies and investment protection, which would allow them to compete with previously government owned enterprises that still dominate their “home” markets in Southeast Asia.
What Should US Firms Do Under the New Trump Administration
US multinationals should not arbitrarily bring manufacturing jobs back into the United States if it will negatively impact their performance. Yes, firms have a responsibility to their employees, and should consider the repercussions of relocating jobs overseas. However, they also have obligations to their shareholders to maintain profitability, and their customers to continue to offer affordable products. Even before the ratification of the TPP, many US firms were already investing heavily in Vietnam and other Southeast Asian countries. In reality, the removal of free trade will negatively impact US firms, but not so significantly as to disrupt international supply chains. This begs the question of why did Ford Motor Company, for example, reallocate a $1.6 billion investment originally earmarked for Mexico back to the United States? The Trump administration quickly took credit, saying “Ford to scrap Mexico plant, invest in Michigan due to Trump policies,” but Ford was already planning to move jobs back to the United States. Ford’s proposed Mexican plant would increase the production capacity of their popular Ford Focus sedan and hatchback, which is expected to decline in demand in the upcoming decade. In light of this prediction, Ford decided to invest in their production of high margin SUVs and their luxury brands which are already produced in the United States. Ford took a purely strategic decision, and repackaged it in order to appease a new president who sees globalization as the root of all America’s woes. Trump, with one tweet, can send a company’s stock into a downward spiral. When Trump tweeted at Boeing about the expenses incurred in building the new Air Force One, Boeing stock fell over 1% in premarket trading. Ford coolly avoided this threat by giving the president what he wanted to hear, while simultaneously making a sound business decision.
In a worst-case scenario, negotiations between Donald Trump and Mexican president Enrique Peña Nieto breakdown. If NAFTA is completely scrapped, many US companies would no longer be able to compete as effectively in the global marketplace. In this situation, US companies will need to invest more heavily in countries with bilateral trade agreements. Trump extolls the virtues of bilateral trade agreements, and the US has not pulled out of a bilateral trade agreement in over a century. Countries like Nicaragua, Panama, and Peru all have bilateral free trade agreements with the US, each offering ideal environments to produce labor intensive goods while also maintaining relatively close proximity to the US. Even with NAFTA in place, US multinational businesses would save significantly by moving some manufacturing processes to developing countries with bilateral trade agreements like Panama. If US firms hope to weather the uncertainty during Trump’s term, they should consider increasing foreign investment into countries such as these, where the manufacturing benefits are effectively the same, but will not be harmed by Trump’s rhetoric.
The Future of US Business
There is a reason for US businesses to fear the outcome of Trump’s proposed renegotiation of NAFTA. The disruption to their global supply chains could cause substantial losses. Moreover, shifting manufacturing jobs back to the US is not the best solution because high wages and labor laws will increase the price of goods. US businesses need to find a compromising ground with the Trump administration. US businesses should follow Ford’s example of repackaging sound business decisions as political appeasement, while making investments into countries with bilateral agreements with the US. The small investment back into the US will satisfy the Trump administration, while the larger foreign investment in nations with bilateral trade agreements would allow any US company to maintain its competitive edge in the global market.