Michigan’s manufacturing industry could stand to gain jobs if the U.S. were to withdraw from the North American Free Trade Agreement, according to an analysis from economists at the University of Michigan.
But that seemingly good news comes with a major caveat: Those gains are contingent on Canada and Mexico not imposing retaliatory tariffs of their own.
In that admittedly unlikely scenario, the Michigan economy would add 6,400 jobs, in large part because its major export industry — vehicle assembly, particularly for light trucks — could benefit from tariff protection, said Gabriel Ehrlich, director of the University of Michigan Research Seminar in Quantitative Economics (RSQE).
According to Ehrlich, Michigan could withstand a “soft” NAFTA withdrawal “better than a lot of people might think” despite its manufacturing sector being closely tied with international markets.
However, he said it remains probable that Canada and Mexico would levy tariffs on U.S. goods.
In that case, the state still fares better than the overall domestic economy, but would lose 7,000 jobs, including 3,900 in the manufacturing sector. Meanwhile, the U.S. stands to lose about 300,000 jobs, according to Ehrlich’s projections.
“It’s a loser for the United States in both scenarios,” he told MiBiz.
Free trade promotes economic efficiency, so the idea of withdrawing from a 24-year-old trade agreement comes across as a “very risky” move, Ehrlich added.
“But you do have to take in account that Michigan stands to benefit from getting protection in one of its major industries,” he said. “(A NAFTA withdrawal) could be not as bad for Michigan as it could be for the country as a whole.”
Given President Trump’s continued tough rhetoric on NAFTA, it’s likely that the U.S., Canada and Mexico will have to rethink or renegotiate some parts of the agreement to continue the movement of goods and services across the countries’ borders, said Jim Robey, director of regional economic planning services at the W.E. Upjohn Institute for Employment Research in Kalamazoo.
“Certainly, fair trade is the essential issue,” he said. “I think (the renegotiation) has to be done in a way that protects workers, too, and the environment. … It’s got to be a situation that is good for all three countries for it to work for the workers, the consumers, (and) the people who make stuff.”
Fair trade that moves goods and services back and forth across borders, “not unlike in the Eurozone, is a good thing,” Robey said.
Given the shift of the automotive industry and its supply chain to southern states and Mexico in the last couple of decades, Robey believes NAFTA should be revisited before more Michigan manufacturers are forced to move production elsewhere.
“Much of that export car business in Mexico would move to the Pacific Rim, and that would have a pretty detrimental effect on supply chains that come from Michigan,” Robey told MiBiz. “If you look particularly at West Michigan, there are a lot of auto parts suppliers here. We have seen a shift in production over the last 10 years from Canada to Mexico, while the U.S. has been fairly stable. I think (changing NAFTA) would have a large impact on us.”
According to a recent study from the Dartmouth University Tuck School of Business, U.S. trade with Canada and Mexico nearly quadrupled under NAFTA from $337 billion in 1994 to about $1.4 trillion in 2016.
A complete U.S. withdrawal from NAFTA could severely harm the automotive industry and result in the loss of more than 20,000 jobs, according to the study. The supply chain would fare worse, with nearly 50,000 job losses. The move would also add $330 to $440 to the cost of automobiles.
“The idea that more domestic content per vehicle means more domestic jobs ignores that uncompetitive companies make fewer cars,” according to the Dartmouth report.
Moody’s Investor Service, a global financial firm, reported last month that preserving or renegotiating NAFTA is necessary for the future of North American manufacturing.
The firm expects NAFTA will be successfully renegotiated, but that forecast came with a warning: “If the pact is dissolved, and replaced with trade tariffs that are higher than the World Trade Organization (WTO) levels, manufacturers in various sectors with integrated supply chains across all three countries would face higher costs and difficult investment decisions.”
This could have consequences for local economies in both the U.S. and Canada, specifically Michigan, which Moody’s reports is one of four states that “are most vulnerable to a termination of NAFTA.” Specifically, the firm cited Michigan’s automotive and banking sectors as the most likely to feel the effect of a withdrawal from the pact.
Ehrlich from U-M also thinks the countries will come to a resolution.
“We still think that is the most likely outcome,” he said. “But things are getting to a point where we have to start thinking seriously about what (a withdrawal) would be like.”