NAFTA Is America’s Most Powerful Foreign Policy Tool

    Frank Lavin, Hanna Deringer, Fredrik Erixon

    Economics, North America

    Cargo vessels and containers

    NAFTA’s deterioration would not only mean a decrease in U.S. competitiveness, but it would also mean that the United States has less reach and negotiating power around the world.

    As U.S. trade negotiators debate NAFTA, even hinting at withdrawal, they should bear in mind the critical role the trade treaty plays in helping the United States compete in global trade. Indeed, the indirect benefits NAFTA provides the United States might be almost as important as the direct benefits. We can see these indirect benefits in three aspects: First, a high percentage of U.S. global exports have NAFTA inputs. Second, a high percentage of U.S. imports from NAFTA have U.S. inputs. Third, an increase in U.S. trade competitiveness induces trade collaboration around the world.

    Global Value Chains in NAFTA

    The U.S. economy not only depends on NAFTA as an export market, but it also depends on it as a source for imports. The U.S. sources almost 15 percent of the value of its exports from foreign countries and this chart breaks down that value by country of origin. The latest available data shows 14.5 percent of the foreign value in U.S. exports was sourced from Canada and 8.6 percent was from Mexico. Taken together, NAFTA partners are responsible for 23.1 percent of foreign value added in U.S. exports.

    If we look at the foreign-value-added share of U.S. exports by industry in this chart, then we see a similar pattern. Out of the top seven U.S. exporting industries, the industries most dependent on NAFTA inputs are the basic metals and metal products sector, which has 8.2 percent of its export value coming from NAFTA partners, followed by the chemicals industry and the transport equipment (including motor vehicles) sector, which gets 6.5 percent and 6.2 percent of its export value from those partners.

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