One of the first things that President Trump did after his inauguration was to issue an executive order to officially withdraw the United States from the Trans Pacific Partnership (TPP). During the presidential campaign both candidates often raised their concerns and discontent with TPP, and this action should not have come as a surprise to anyone. President Trump also heavily criticized the North American Free Trade Agreement (NAFTA), as well as our current trading position with China.
TPP is a trade agreement originally accepted by twelve nations: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. This TPP group of nations represents approximately 40% of the global economy and 25% of world trade. Trade between the United States and other TPP countries would have represented about 40% of the overall U.S. goods trade. Each country had to ratify this agreement and President Obama was not successful in his attempts to introduce TPP to Congress.
The United States currently has 14 free trade agreements in place with the following 20 countries: Australia, Bahrain, Chile, Colombia, DR-CAFTA (Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua), Israel, Jordan, Korea, Morocco, NAFTA (Canada and Mexico) Oman, Panama, Peru, and Singapore.
According to the Office of the U.S. Trade Representative (USTR), the U.S. goods and services trade deficit with Mexico in 2015 was $49.2 billion, while the U.S. goods trade deficit alone was $58 billion. Mexico was the third U.S. largest goods trading partner in 2015 with $531 billion in total. According to the U.S. Census Bureau the trade deficit with Mexico through November of 2016 was almost $59 billion. The top commodities imported from Mexico in 2015 were vehicles, electrical machinery, machinery, mineral fuels, and optical and medical instruments. A high priority for the Trump administration is the renegotiation of the NAFTA as early as possible. The auto industry imported passenger vehicles and auto parts into the U.S. from Mexico and Canada worth almost $150 billion in 2015. President Trump is adamant that manufacturing jobs in this industry must be brought back to the U.S. or face a “big border tax”, a value added tax (VAT), or a total withdrawal from NAFTA if the terms of the agreement are not improved for the United States. Several of the auto makers have already committed to create new jobs in the United States. Ford, for example, cancelled plans to build a $1.6 billion plant in Mexico early in January, and instead will invest $700 million in Michigan to create 700 new jobs. Several other companies have pledged the creation of new jobs in the U.S. as well.
The White House Press Secretary Sean Spicer informed the media on Thursday the 26th that President Trump among many choices has decided to seek funds for the construction of the U.S. southern border wall by imposing a 20% tax on imports from Mexico, which would result in the collection of approximately $10 billion per year based on the current import levels. This certainly is a stunning number. Soon after, and as a result, the President of Mexico, Peña Nieto, announced the cancellation of his meeting with President Trump scheduled for Tuesday, January 31st.
Canada is in a much better trading situation with the United States. According to data provided by the USTR, U.S. goods and services trade with Canada totaled an estimated $662.7 billion in 2015 and the U.S. had a trade surplus of $11.9 billion in this category. In 2015, the U.S. goods trade deficit with Canada was $15 billion, while the U.S. posted the services trade surplus at $27.1 billion. Canada was the U.S.’ second largest goods trading partner in 2015 with $575 billion in total. The U.S. Census Bureau shows a trade deficit with Canada through November of 2016 of approximately $9.2 billion.
Countries in the Dominican Republic – Central America – United States Free Trade Agreement (DR-CAFTA or CAFTA) are also considered a good trading partner block to the U.S. according to the new administration. The U.S. Census Bureau shows a trade surplus for the U.S. of $4.8 billion with this region through November of 2016.
Trade with China poses greater challenges, as it is the U.S.’ largest trading partner. The U.S. Census Bureau shows a goods trade in deficit above $319 billion through November of 2016. The U.S. goods and services trade deficit with China was $336.2 billion in 2015 and the U.S. goods trade deficit was $366 billion according to the USTR . President Trump’s problems with China include currency manipulation, unfair subsidies, intellectual property rights, and political and geo-political issues.
Tax consequences affecting importations are also being considered to discourage manufacturing overseas. Certain post importation expenses or cost of goods sold that are now tax deductible could be eliminated, however, tax benefits for goods exported from the United States would remain in place.
This does not mean that the era of free trade agreements is over. President Trump has expressed his desire to establish individual free trade agreements with each of the TPP countries, and today he will meet with the British Prime Minister, Theresa May, at the White House to discuss trade relations with the United Kingdom. While the U.S. withdraw from TPP does not automatically affect any of the other trade agreements at this time, companies that import goods under any of these agreements should remain vigilant about their import scenarios, and how they could be affected if import rules change. Evaluating sourcing alternatives in order to cope with any negative changes is a prudent step to take at this time, since political decisions can drastically and unexpectedly alter the course of the import and export industry as we know it today.