President Donald Trump says he plans to terminate NAFTA and replace it with the US-Mexico Trade Agreement, excluding Canada. Trump made the comments while speaking with the Mexican President on speakerphone in the Oval Office. (Aug. 27)
Jaime Chamberlain, a produce distributor in Nogales, remembers when fruits and vegetables shipped to or from Mexico immediately got more expensive when they crossed the border.
“We used to pay tariffs of up to 35 percent on (imported) cantaloupes,” Chamberlain said, referring to the days before NAFTA took effect in 1994.
Chamberlain and many other business people have worried that President Donald Trump’s vow to gut the North American Free Trade Agreement would constrict commerce with Mexico and Canada, Arizona’s largest foreign trade partner, possibly driving up consumer costs or leading to layoffs in certain industries.
But he and others are breathing a little easier after Trump on Monday announced that the U.S. has reached a preliminary deal with Mexico to rewrite parts of the 24-year-old trade pact, possibly with a new name.
Key negotiating provisions were focused around automobiles and other manufacturing industries, as well as agriculture.
“It’s fantastic,” Chamberlain said about the announcement.
Other Arizona business leaders have echoed the refrain, though quickly adding that they want Canada to be included in any ultimate deal.
“We’re very pleased with the agreement between the U.S. and Arizona’s top export market, by a lot: Mexico,” said Glenn Hamer, president and CEO of the Arizona Chamber of Commerce. “But we want Canada to join the fold.”
Donald Trump called NAFTA the “worst trade deal maybe ever signed anywhere.’’ So he wants to renegotiate it — or kill it altogether. So just what is NAFTA? (May 18)
Scope of the agreement
The White House on Monday reported that a preliminary agreement was reached with Mexico covering new rules that would, among other things, encourage the use of more U.S.-made automobile parts, strengthen intellectual-property protections and reduce “trade-distorting policies” in agriculture.
Reaction in the media characterized the deal more as a “rewrite” of NAFTA than a wholesale replacement of the trade agreement.
Arnold Maltz, an associate professor emeritus at Arizona State University, said it’s significant that the U.S. appears to have dropped its prior insistence on a “sunset clause” that could have ended the trade agreement every five years if trade balances remained wide or ballooned.
Maltz, a supply-chain expert in ASU’s W.P. Carey School of Business, said the risk of the treaty lapsing after five years would have created great uncertainty among businesses seeking to make big, long-term capital investments.
Mexico is Arizona’s top trading partner, accounting for more than one-third of the state’s exports and imports. Arizona shipped $7.6 billion worth of goods to Mexico last year, according to the Arizona Commerce Authority, and made purchases worth $7.9 billion.
Canada, another top Arizona trade partner, still hasn’t rejoined the talks, and the contentious issue of steel and aluminum tariffs isn’t solved.
But the mood quickly shifted to upbeat, with stock prices rallying and both the Mexican peso and Canadian dollar gaining ground, signalling confidence in their economies.
Suspiros Cakes is one of the latest Mexican businesses to use Arizona as a foothold as it expands into the United States. The bakery opened its first U.S. shop in February in Tucson and has since opened four other locations in southern Arizona.
Arizona relatively vulnerable
Dennis Hoffman, an economist at ASU’s W.P. Carey School of Business, said the anti-NAFTA rhetoric coming from the White House over the past year and a half has unsettled many Arizona business leaders.
If the preliminary agreement eases some of that angst, that would be a positive development, he said.
While the trade negotiations largely have been centered around industries that aren’t concentrated in Arizona, including auto parts and oil/gas, the state still has a lot of skin in the game.
Affected industries here range from semiconductors to logistics, agriculture to tourism. Some of the Arizona’s most prominent corporations have operations in Mexico, including electronics distributor Avnet Inc. and trucking giant Knight-Swift Transportation.
In fact, Arizona would be the ninth-most vulnerable state if NAFTA were scrapped and not replaced by a new deal, according to a report late last year by BMO Capital Markets. At the time, the Toronto investment firm estimated 1.6 percent of Arizona exports could be affected by a disruption of trade with Mexico and Canada.
Word of the preliminary agreement is “potentially good news for Mexico and the U.S., but raises more questions than answers for Canada,” wrote Douglas Porter, BMO’s chief economist, in an update.
Tourism and agriculture
Of foreigners who visit Arizona, Mexicans represent the largest pool of international tourists — nearly two-thirds of the total, according to the Arizona Office of Tourism.
Visits by Mexicans have dropped slightly, owing to dollar strength against the peso that resulted partly from trade friction.
During a visit to Phoenix this month, Roger Dow, president and CEO of the U.S. Travel Association, said he was worried about the impact of tariffs and trade tensions on the U.S. tourism industry.
“Travel can inadvertently get looped in,” he said.
Tourists, including domestic visitors, directly support an estimated 187,000 hotel, restaurant, retail and other jobs in Arizona.
Agriculture is another trade-dependent sector for the state.
U.S. Secretary of Agriculture Sonny Perdue, who met with Arizona farmers earlier this year, said locking in access to Mexican buyers is “critical to supporting farm income and strengthening rural communities” across the U.S.
“Mexico has historically been a great customer and partner, and we are happy to have this resolved for our agricultural producers,” Perdue said in a prepared statement following word of the preliminary agreement.
Stefanie Smallhouse, president of the Arizona Farm Bureau, echoed the positive reaction to the preliminary trade deal, noting that Arizona sends significant exports of milk, eggs, meat, wheat and produce to Mexico.
“NAFTA has been quite a success for us,” she said. “Mexico and Canada both are huge markets for us, and it certainly would help if Canada rejoins the talks.”
A trade agreement with Mexico, and possibly Canada later, could help keep prices low for many products. “The U.S. has some of the lowest food prices in the world, and it’s partly because of great trade agreements,” Chamberlain said.
However, Hoffman at ASU cautioned about the potential for higher car and truck prices based on the preliminary new trade agreement with Mexico.
He cited one provision that calls for a higher North American content of auto parts in new cars and trucks and another that would encourage parts suppliers to pay at least $16 an hour to their workers.
Those provisions could drive up prices for new vehicles or result in fewer dealer incentives.
“Now could be a good time to buy an auto,” Hoffman said.
Reach the reporter at [email protected] or 602-444-8616.
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