This post is inspired by the Trump administration's most recent moves on trade including the steel tariffs across many countries worldwide and the particular tariffs aimed at China. There's been a lot of discussion regarding these moves by the Trump administration on whether or not we will see global trade wars. Some of my regular readers may recall my old posts on how monetary expansion is basically a way for countries to start currency wars. In a sense, currency wars are trade wars. Using this line of reasoning, the Trump administration is not the one starting the trade war.
Anyways, it's important to note that out of the entire US economy, ~13% of US GDP is from exports. This makes the US one of the least reliant economies in terms of its need for external demand to sustain domestic demand. Also note that ~45-50% of that 13% of GDP in exports is within NAFTA. As long as NAFTA is held together, the impact of large-scale trade wars on the US economy is minimal.
If we account for all non-NAFTA exports, we reach a number that yields a total of ~6-7% of GDP. Note that much of that 6-7% is also in the non-NAFTA energy market (the largest net exporters of oil/energy to the US are Canada and Mexico). That means only ~5% of the US economy is actually exposed to large, rapid shifts in external demand if we exclude energy and if we go outside of the North American continent.
NAFTA:
What does all that mean? Firstly, it means NAFTA is so central and layered into the American economy that any large disturbance or removal of NAFTA could yield a major depression and create serious problems for Canada, the US, and Mexico. If such a scenario did occur, Canada would likely still have preferential access to US markets and would probably be mostly fine. Mexico, especially the parts of Mexico that've industrialized and seen the most foreign investment (mostly parts closer to the US), would get hammered. Canada won't be impacted much and could slightly gain (or lose) depending on how the NAFTA repeal played out.
Not only would Mexico be devastated, but the entire situation would likely cause fragmentation and a depression across large parts of the country as supply-chains fracture. The resulting impact would be very hard on US states near the Southern border--both economically and socio-politically. As a result, illegal immigration into the US from Mexico would likely rise as the rising Mexican living standards we've witnessed in the last ~15-20 years would suddenly fall apart giving migrants more of an incentive to come to the US. Drug cartels would likely gain more sway in Mexico, especially in areas further away from Mexico City (like near the US border).
NAFTA is so integrated into the economies of US and Mexico that discarding it would create real problems for both countries involved. Not only that, but it'd create a scenario where pretty much everyone in North America would be a loser. Hence, I'm highly skeptical of the Trump administration scrapping NAFTA.
Non-NAFTA:
The largest surplus countries/regions in the world are the Eurozone (concentrated in Northern Europe), Japan, China, Japan, and Asian Newly Industrialized Economies (NIEs; countries like Korea, Taiwan, Singapore among others). The main countries running current account surpluses are from Central or Northern Europe and the Far East.
Starting a trade war necessarily means that overall trade between the countries in question drops. So how can the US benefit much in a trade war if the overall trade between countries drops? The only way is by capturing a larger share of the trade balance.
Considering that the US doesn't export much to the rest of the world (especially if NAFTA is stripped out) and considering that the US has been far less protectionist than most of its competitors globally, a protectionist turn towards non-NAFTA members would lead to a significant rise in the US share of global exports. This would be very bad for most of the economies in the rest of the world, especially economies heavily reliant on exports to sustain their economic models.
Of course, the countries that won't be hurt very much are countries that don't rely on running current account surpluses to drive growth. What are these countries? For the most part, they're Anglo countries like the UK. You can add India, and probably Mexico (although in NAFTA), to that list of countries.
Conclusion:
In the situation NAFTA gets smashed, everyone in NAFTA loses (except maybe Canada, but even that is dubious). The best deterrence for Mexico and Central/South American migrants is if their countries are prosperous. Any policy shift that damages Mexico and Central/South American country economies will create serious problems for the US and such a shift would not be positive for the US. The ramifications and 2nd and 3rd order consequences of such a policy benefits no one. That said, I fully expect NAFTA will not be discarded.
In the case NAFTA remains and gets renegotiated, we will likely see the US trade balance improve and we will see the NAFTA countries current account balance improve relative to the non-NAFTA part. In this case, a trade war with pretty much any non-NAFTA country would lead to a benefit for the US. The primary countries that're threatened would be large surplus countries like Japan, China, Germany, Korea, much of Southeast Asia, much of Northern Europe, and some additional countries. Those countries' economies would be hammered in a global trade war where the US goes protectionist.
The countries least affected by a US lashing out at other countries protectionist policies would be countries with relatively liberal financial systems that run current account deficits like the UK and probably Mexico and India.
Anyways, it's important to note that out of the entire US economy, ~13% of US GDP is from exports. This makes the US one of the least reliant economies in terms of its need for external demand to sustain domestic demand. Also note that ~45-50% of that 13% of GDP in exports is within NAFTA. As long as NAFTA is held together, the impact of large-scale trade wars on the US economy is minimal.
If we account for all non-NAFTA exports, we reach a number that yields a total of ~6-7% of GDP. Note that much of that 6-7% is also in the non-NAFTA energy market (the largest net exporters of oil/energy to the US are Canada and Mexico). That means only ~5% of the US economy is actually exposed to large, rapid shifts in external demand if we exclude energy and if we go outside of the North American continent.
NAFTA:
What does all that mean? Firstly, it means NAFTA is so central and layered into the American economy that any large disturbance or removal of NAFTA could yield a major depression and create serious problems for Canada, the US, and Mexico. If such a scenario did occur, Canada would likely still have preferential access to US markets and would probably be mostly fine. Mexico, especially the parts of Mexico that've industrialized and seen the most foreign investment (mostly parts closer to the US), would get hammered. Canada won't be impacted much and could slightly gain (or lose) depending on how the NAFTA repeal played out.
Not only would Mexico be devastated, but the entire situation would likely cause fragmentation and a depression across large parts of the country as supply-chains fracture. The resulting impact would be very hard on US states near the Southern border--both economically and socio-politically. As a result, illegal immigration into the US from Mexico would likely rise as the rising Mexican living standards we've witnessed in the last ~15-20 years would suddenly fall apart giving migrants more of an incentive to come to the US. Drug cartels would likely gain more sway in Mexico, especially in areas further away from Mexico City (like near the US border).
NAFTA is so integrated into the economies of US and Mexico that discarding it would create real problems for both countries involved. Not only that, but it'd create a scenario where pretty much everyone in North America would be a loser. Hence, I'm highly skeptical of the Trump administration scrapping NAFTA.
Non-NAFTA:
The largest surplus countries/regions in the world are the Eurozone (concentrated in Northern Europe), Japan, China, Japan, and Asian Newly Industrialized Economies (NIEs; countries like Korea, Taiwan, Singapore among others). The main countries running current account surpluses are from Central or Northern Europe and the Far East.
Starting a trade war necessarily means that overall trade between the countries in question drops. So how can the US benefit much in a trade war if the overall trade between countries drops? The only way is by capturing a larger share of the trade balance.
Considering that the US doesn't export much to the rest of the world (especially if NAFTA is stripped out) and considering that the US has been far less protectionist than most of its competitors globally, a protectionist turn towards non-NAFTA members would lead to a significant rise in the US share of global exports. This would be very bad for most of the economies in the rest of the world, especially economies heavily reliant on exports to sustain their economic models.
Of course, the countries that won't be hurt very much are countries that don't rely on running current account surpluses to drive growth. What are these countries? For the most part, they're Anglo countries like the UK. You can add India, and probably Mexico (although in NAFTA), to that list of countries.
Conclusion:
In the situation NAFTA gets smashed, everyone in NAFTA loses (except maybe Canada, but even that is dubious). The best deterrence for Mexico and Central/South American migrants is if their countries are prosperous. Any policy shift that damages Mexico and Central/South American country economies will create serious problems for the US and such a shift would not be positive for the US. The ramifications and 2nd and 3rd order consequences of such a policy benefits no one. That said, I fully expect NAFTA will not be discarded.
In the case NAFTA remains and gets renegotiated, we will likely see the US trade balance improve and we will see the NAFTA countries current account balance improve relative to the non-NAFTA part. In this case, a trade war with pretty much any non-NAFTA country would lead to a benefit for the US. The primary countries that're threatened would be large surplus countries like Japan, China, Germany, Korea, much of Southeast Asia, much of Northern Europe, and some additional countries. Those countries' economies would be hammered in a global trade war where the US goes protectionist.
The countries least affected by a US lashing out at other countries protectionist policies would be countries with relatively liberal financial systems that run current account deficits like the UK and probably Mexico and India.
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