Reducing U.S. trade deficits in NAFTA renegotiations could prove difficult

BY  | FROM  | 2017-08-24 15:18

Renegotiations on the North American Free Trade Agreement (NAFTA) will hardly reduce the overall U.S. trade deficit and unemployment, experts said.

The United States, Canada and Mexico kicked off the first round of renegotiations on NAFTA in Washington on Wednesday.

"We need to assure that huge trade deficits do not continue and we have balance and reciprocity. This should be periodically reviewed," U.S. Trade Representative (USTR) Robert Lighthizer said in his opening remarks.

However, economists believe reducing U.S. trade deficits through NAFTA renegotiations could prove to be difficult.

TRADE DEFICITS

"Certainly the opening statement by USTR Lighthizer suggested that he would try. But it will not reduce the overall trade deficit," Richard Cooper, a professor of international economy at Harvard University, told Xinhua in a recent interview.

Trade negotiations lead to agreements regarding the rules for trading, which generally lead to more trade that can change a trade balance in any direction, said Paul Wachtel, a New York University economics professor.

"The negotiations are not going to have any direct consequences for the U.S. trade deficit," said Wachtel.

Statistics from Eric Lascelles, chief economist at RBC Global Asset Management Inc, show that U.S. companies tend to pay higher tariffs when conducting business in foreign markets than foreign firms do in the United States.

"But trade is a delicate issue. Incentivizing or pushing trading partners to lower barriers is one thing; imposing new tariffs is another," said Kelly Bogdanov, a portfolio analyst at RBC Wealth Management. "The latter usually doesn't end well -- especially between major trading partners."

MANUFACTURING JOBS

Lighthizer also claimed in his opening comments that the United States "cannot ignore the huge trade deficits, the lost manufacturing jobs, the businesses that have closed or moved" because of incentives in the current agreement.

However, Wachtel said U.S. manufacturing employment would increase if U.S. business is competitive, "not as a consequence of a trade negotiation."

Cooper thought the renegotiations' effect on employment would be determined by the details, which are yet to be seen.

"But whether it is plus or minus, it is likely to be small relative to overall U.S. employment," said Cooper.

Meanwhile, the labor market in the United States is fairly strong, Stephen Gallagher, the U.S. chief economist at Societe Generale, told Xinhua in an interview on Friday.

U.S. total nonfarm payroll employment increased by 209,000 in July, well above market expectations, and the unemployment rate was little changed at 4.3 percent, according to the U.S. Labor Department earlier this month.

"We have to make sure it (the labor market) is fair, some people have been hurt in the United States based on trade practices. That is the overall element. I do not know how much more we can add on in term of jobs at the current moment," said Gallagher.

EFFECTS ON MARKETS

Many analysts believed renegotiations would barely influence the financial markets right now, as investors decide to take a "wait-and-see attitude."

Cooper said "many investors will await the outcome before deciding where and how much to invest; thus it will inhibit investment in NAFTA countries until the outcome becomes clearer."

The markets would not be affected unless the Trump administration takes some unwise position that "threaten the agreement altogether," Wachtel said.

"Trump's campaign rhetoric on trade and 'Make America great again' induced fears of protectionist policies and the potential for a trade war. So far, President Trump has avoided these worst-case outcomes," said Gallagher.

Furthermore, the financial markets usually focus on economic data and earnings reports. Unless there will be some huge downside risks to multinational corporations after the renegotiations, the chances that markets will be hit are quite limited.

However, a bumpy negotiation that extends beyond this year might add fluctuations to financial markets due to uncertainty.

"Uncertainty will delay investment and is likely to increase volatility in asset prices in the region," said Carlos Capistran, chief Mexico economist at Bank of America Merrill Lynch.

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