Trump threatens to pull out of NAFTA, but there’s a reason he’s probably bluffing

  • President Donald Trump has talked tough on trade, but concrete actions have been more sporadic.
  • A new report from Pictet suggests Trump is bluffing when he threatens to pull out of NAFTA.
  • The analysis is based on the notion that Trump needs a Republican majority that still mostly favors open trade in order to pass tax cut legislation.

President Donald Trump’s trade agenda has been at best erratic, at worst counterproductive.

On the semi-bright side, the president has not followed through on his more draconian promises of sharply raising tariffs on imported goods from China and Mexico, although he did immediately yank the United States out of a long-negotiated Trans-Pacific Partnership agreement, and that action has given China a leg up on trade in the Asia-Pacific region.

Meanwhile, Trump’s campaign description of the North America Free Trade Agreement as the worst trade deal ever signed has been followed up more by bellicose rhetoric than concrete action against key trading partners.

And there’s a big reason why Trump will likely continue to avoid drastic action on trade in the near future.

Thomas Costerg, economist at Pictet, says the president’s need for cohesion among Republicans to pass his tax cut plan, widely criticized for favoring corporations and wealthy individuals over middle-class taxpayers, makes his latest wave of threats to withdraw from NAFTA hollow – for now.

“We see little risk of NAFTA falling apart in the near term, but question marks remain about the US’s commitment to free trade in the longer term,” Costerg wrote in a research report to clients.

NAFTA renegotiation talks, stalled by American intransigence, are set to reopen this month in Mexico.

“Our view is that Trump is unlikely to withdraw from NAFTA in the coming months, despite some recent tweets, even if the upcoming NAFTA trade talks are inconclusive,” Costerg said.

Unilateral US withdrawal from NAFTA would risk alienating an already fractured Republican majority in Congress, which Costerg described as “acting as a crucial ‘firewall’ for NAFTA membership.”

“Trump’s focus is more likely to be on the passage of tax cuts than on NAFTA in the coming months,” Costerg writes.

The long-term risk for NAFTA is that Congress could become more like Trump in its dislike of past trade deals, as politicians on both sides of the aisle place mostly misplaced blame on trade for massive job losses in manufacturing.

“There is the risk of a long-term erosion of support for NAFTA in Congress. Its current pro-trade, pro-NAFTA stance could be dented as soon as the next midterm elections, especially if more populist candidates make headway,” Costerg wrote.

The chart below from Costerg’s report highlights the importance of NAFTA to US international trade:

Costerg NAFTA

source
Thomas Costerg/Pictet

Check out Costerg’s full report here.