Understanding Why NAFTA Exit is a Forgone Conclusion…

President Trump will pull the U.S. out of NAFTA and direct the U.S. Trade Representative to engage in bilateral trade deals with Canada and Mexico individually.   There is no other possible alternative and here’s why.

First, the essential problem with NAFTA was an evolution over time.  In its current form NAFTA became an exploited doorway into the coveted U.S. market.  Asian economic interests, large multinational corporations, invested in Mexico and Canada as a way to work around any direct trade deals with the U.S.

By shipping parts to Mexico and/or Canada; and by deploying satellite manufacturing and assembly facilities in Canada and/or Mexico; China, Asia and to a lesser extent EU corporations exploited a loophole.  Through a process of building, assembling or manufacturing their products in Mexico/Canada those foreign corporations can skirt U.S. trade tariffs and direct U.S. trade agreements.  The finished foreign products entered the U.S. under NAFTA rules.

Why deal with the U.S. when you can just deal with Mexico, and use NAFTA rules to ship your product directly into the U.S. market?

This exploitative approach, a backdoor to the U.S. market, was the primary reason for massive foreign investment in Canada and Mexico; it was also the primary reason why candidate Donald Trump, now President Donald Trump, wanted to shut down that loophole and renegotiate NAFTA.

This loophole was the primary reason for U.S. manufacturers to relocate operations to Mexico.  Corporations within the U.S. Auto-Sector could enhance profits by building in Mexico or Canada using parts imported from Asia/China.  The labor factor was not as big a part of the overall cost consideration as cheaper parts and imported raw materials.

If you understand the reason why U.S. companies benefited from those moves, you can begin to understand if the U.S. was going to remain inside NAFTA President Trump would have remained engaged in TPP.

As soon as President Trump withdrew from TPP the problem with the Canada and Mexico loophole grew.  All corporations from TPP nations would now have an option to exploit the same NAFTA loophole.

Why ship directly to the U.S., or manufacturer inside the U.S., when you could just assemble in Mexico and Canada and use NAFTA to bring your products to the ultimate goal, the massive U.S. market?

From the POTUS Trump position, NAFTA always came down to two options:

Option #1 – renegotiate the NAFTA trade agreement to eliminate the loopholes.  That would require Canada and Mexico to agree to very specific rules put into the agreement by the U.S. that would remove the ability of third-party nations to exploit the current trade loophole. Essentially the U.S. rules would be structured around removing any profit motive with regard to building in Canada or Mexico and shipping into the U.S.

Canada and Mexico would have to agree to those rules; the goal of the rules would be to stop third-party nations from exploiting NAFTA.  The problem in this option is the exploitation of NAFTA currently benefits Canada and Mexico.  It is against their interests to remove it.  Knowing it was against their interests President Trump never thought it was likely Canada or Mexico would ever agree.  But he was willing to explore and find out.

Option #2 – Exit NAFTA.  And subsequently deal with Canada and Mexico individually with structured trade agreements about their imports.  Canada and Mexico could do as they please, but each U.S. bi-lateral trade agreement would be written with language removing the aforementioned cost-benefit-analysis to third-party countries (same as in option #1.)

All nuanced trade-sector issues put aside, the larger issue is always how third-party nations will seek to gain access to the U.S. market through Canada and Mexico.  [It is the NAFTA exploitation loophole which has severely damaged the U.S. manufacturing base.]

This is not direct ‘protectionism’, it is simply smart and fair trade.

Unfortunately, the U.S. CoC, funded by massive multinational corporations, is spending hundreds of millions on lobbying congress to keep the NAFTA loophole open.

The U.S. has to look upstream, deep into the trade agreements made by Mexico and Canada with third-parties, because it is possible for other nations to skirt direct trade with the U.S. and move their products through Canada and Mexico into the U.S.

Additionally, with Canada now joining TPP it has become impossible for the U.S. to remain in NAFTA and simultaneously conduct trade negotiations with TPP nations.

EXAMPLE: If the U.S. remained in NAFTA all TPP nations would engage in trade discussion knowing there was a Canadian and/or Mexican option to gain access to the U.S. market.  Therefore, despite the size of our market, we could never negotiate a better trade agreement than the deal existing between Canada, Mexico and their TPP partner nations.

President Trump, Commerce Secretary Wilbur Ross and U.S. Trade Representative Lighthizer well understand this structural problem.  ONLY Trump, Ross, Mnuchin and Lighthizer are willing to confront this problem.  If Trump had lost the election, Clinton would have joined the multinationals and U.S. workers would have suffered greatly.

Lastly, the issue of Canada and Mexico making trade agreements with other nations (especially China), while brokering their NAFTA position with the U.S. as a strategic part of those agreements, is a serious issue that cannot adequately be resolved while the U.S. remains connected to NAFTA.

At the conclusion of Round #6, this was the direct issue at the heart of a very frustrated U.S.T.R. Lighthizer’s strongly worded response to Canada:

[…]  In another proposal, Canada reserved the right to treat the United States and Mexico even worse than other countries if they enter into future agreements. Those other countries may, in fact, even include China, if there is an agreement between China and [Canada]. This proposal, I think if the United States had made it, would be dubbed a “poison pill.” We did not make it, though. Obviously, this is unacceptable to us, and my guess is it is to the Mexican side also. (read full remarks)

So you see, if you just look at the pure economics of the options, and you remember that President Trump is constitutionally antithetical to anyone having influence over U.S. interests other than the American people inside the United States, you can clearly see there is only one-way this entire process ends.

President Trump will end NAFTA.

Withdrawal is not a matter of “if“, it is simply a matter of “when”.

The economic reality drives the “if”, the political reality drives the “when”.

POTUS Trump knows the multinational corporations and multinational banks will trigger their CoC purchased politicians in Washington DC as soon as Trump announces.  The GOPe Republicans and Corporatist Democrats will launch everything they have against him in a public relations effort to stop the exit.  There are trillions at stake.

As the tax reform benefits gain a foothold, American workers are realizing they are getting more money in their paychecks; and as the U.S. economy continues to gain momentum, that’s the backdrop for President Trump making the announcement.  Best Guess: likely around the end of February, beginning of March.

Plan your affairs accordingly.

This entry was posted in Big Government, Big Stupid Government, Canada, China, Economy, Legislation, media bias, Mexico, NAFTA, Notorious Liars, Paul Ryan, President Trump, Taxes, Tea Party, Trade Deal, Uncategorized, US dept of agriculture, US Treasury, USA, White House Coverup. Bookmark the permalink.

211 Responses to Understanding Why NAFTA Exit is a Forgone Conclusion…

  1. Duditz says:

    Another great article by Sundance! Thank you

    God Bless our President

    Liked by 10 people

  2. spacette55 says:

    My brother-in-law is an independent timber cruiser in Washington State. He evaluates standing timber volume and value for a variety of private customers to determine if harvesting the timber is likely to be profitable for the property owner and logging contractor. During the Obama years of EPA regulations and NAFTA, his work was sporadic, especially during the winter months. Under Trump, he’s so busy(even in winter) he’s longing for a break — his phone is ringing constantly. Kaaaaaa-ching!

    Liked by 13 people

  3. Donna in Oregon says:

    As an homage to NAFTA, we plan on having Nachos–instead of popcorn–while watching the MSM meltdown.

    Liked by 9 people

  4. Jack Daw says:

    Justin, Justin, Justin. Don’t you see? China never loved you. It was just using you to get to us.

    Liked by 9 people

  5. Madi says:

    Our American President standing for our country. America first because Americans are dreamers in their own country.
    Excellent reading. Sundance thanks to make us well informed citizens.

    Liked by 6 people

  6. thesavvyinvester says:

    “Plan your affairs accordingly.”

    Not Investment advice, however how could one not look at this and not be “Bullish” about America? Does American Centric Indexes see a flight of new investment capital too them vs, an International Large/Mid/Small Funds/ETF’s when you take on the exogenous risk and the baggage many countries bring to the plate, aka currency, tax policy, indebtedness because of legacy social programs and some with immigration issues. Put the risk aside, what winds in the sails of our GDP etc etc could occur because the command decision is going to made that we are going to make it here period, and this decision is real and etched in stone…

    That is a question that could have many zero’s to the right of the front digits…


  7. I have hated NFTA from day one and did not fully understand why until I read the details here on TCTH.. thanks for the clarification!! Part of that GDP growth will liberate Alaska from under the boot of the Imperial city.

    Liked by 1 person

  8. Pyrthroes says:

    Sir– your common-sense context and perspective is invaluable, en par with that of David P. Goldman (“Spengler”). We think of Sundance not as “conservative” but Realist. Whatever cognoscenti imbibe in treetop venues, make it a double.


  9. Fred Z says:

    I’m Canadian and I always thought that some parts of NAFTA were crazy bad for the US. I won’t cry too hard if NAFTA goes because many of those abusing NAFTA are the same ones abusing the less populated parts of Canada.

    I’m looking at you Ontario and Quebec, yes I am, and so is Mr. Trump, and I’ve got no power but Trump will kick your fat, smug, socialist arses good and proper.

    Liked by 1 person

  10. Fred Z says:

    My favourite economic Blogger, Tim Worstall, often asks the question with regard to Brexit, as to why the UK simply doesn’t unilaterally declare free trade.

    Likewise, why doesn’t the USA? Protecting an inefficient and expensive steel making sector makes no sense at the expense of a larger steel manufacturing sector and large increases to consumer costs.

    Mr. Worstall frequently points out that “more jobs” is a bad thing, a cost not a benefit and that we ought to be minimizing both jobs and exports, also a cost, and maximizing imports, which are the benefit. The whole point of an economy, its only point, is consumption. Production, consisting of jobs and exports, is merely a necessary evil.

    In a perfect world my micro-economy of me would have unlimited imports of goodies for me and no exports by me of any kind, neither goods, nor especially services, ie jobs, work, ugh.


  11. bzman says:

    Is there. a time frame that the new deal needs to be ratified? Also What if it is not and Trump leaves can the next guy/lady just say the old nafta is the “law” of the land again?


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