The US Congress has to ratify the United States-Mexico-Canada Agreement (USMCA), if it fails to do so, the US could likely withdraw from NAFTA. Analysts at Wells Fargo point out that it would not have meaningful macroeconomic effects for the US economy in the short run, but they warn it could lead to significant adjustment costs for individual industries, especially for the automotive industry.

Key Quotes: 

“The leaders of the United States, Mexico and Canada reached agreement late last year on a trade deal that would reform NAFTA, but the U.S. Congress has not yet ratified the accord. If Congress does not ratify the USMCA, the Trump administration could potentially withdraw the United States from NAFTA. In that event, trade between the United States and its North American neighbors would no longer be duty free, as it has been over the past 25 years.”

“Revocation of duty-free trade likely would not have meaningful macro effects, at least not in the short run, on the U.S. economy. The United States levies single-digit tariff rates on imports of goods from most countries, so inflation likely would not rise significantly if duties would be imposed on Canadian and Mexican goods. Tariffs would raise the prices on American goods entering Canada and Mexico, but final spending in those two countries accounts for only 2% of the value added that is created in the U.S. economy.”

“The inefficiencies that are associated with the pricedistorting effects of tariffs could compound the negative macroeconomic effects over time. Moreover, individual industries, especially the automotive industry, could be significantly affected if trade between the United States and its North American neighbors is no longer duty free.”

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