The NAFTA Renegotiation: What If the US Walks Away?

Abstract

The request by the United States to renegotiate the North American Free Trade Agreement (NAFTA) opens up the possibility of the trade agreement lapsing. We evaluate what would happen if trade between Canada, the United States and Mexico reverted to the rules under the World Trade Organization using a computable general equilibrium model. We report on three scenarios: NAFTA lapses with all three trading relationships reverting to WTO rules; NAFTA lapses but the earlier CUSFTA between Canada and the United States remains in place; NAFTA lapses, CUSFTA remains in place, and Canada and Mexico continue their NAFTA commitments under a separate free trade agreement. We take into account the implications of imposing new tariff walls and removing the services and investment commitments under the NAFTA. The key findings are that NAFTA lapsing hurts all three parties. The US suffers relatively small negative effects but these are concentrated in key sectors. This concentration of negative impacts represents a potential political poison pill for NAFTA termination. By the same token, the quantitative analysis suggests protracted talks because the basis of a deal is not on the table and termination is politically infeasible.

Keywords: NAFTA, Canada, Mexico, United States, CGE, regional trade agreements

JEL Classification: F13, F15