America’s heartland states will ultimately hold NAFTA together

It is quite a paradox that it is farmers and manufacturing firms in the Midwest that have become the frontline defenders of the North American Free Trade Agreement before the repeated threat of withdrawal from the Trump administration. It is a paradox on two counts. One, NAFTA has been blamed many times for the economic difficulties in Midwestern states such as Ohio, Michigan, Wisconsin and Pennsylvania, among others. Two, it is precisely the electoral success of candidate Donald Trump in these states that made him president.

It appears there is a divorce between the strong anti-NAFTA rhetoric in the Rust Belt and the region’s economic prospects going forward. There is a common misperception that the Rust Belt and NAFTA go together. Nothing further from the truth. The expression “Rust Belt” predates NAFTA by some 20 years and, rather, it reflects the significant changes in the steel industry that were driven by the disruption caused by the growth of mini mills. The most striking of paradoxes is that one of the main forces arguing against NAFTA today is Dan DiMicco, chairman emeritus at Nucor, the main engine of the technological development that relies on the use of scrap for the production of steel in mini mills.

{mosads}The second common misperception is that Midwestern states are negatively impacted by trade with Canada and Mexico. North America has become a long, successful and highly competitive, assembly line that runs from Ontario in Canada to Querétaro in Mexico. The country at the end of the assembly line is Mexico, which by definition has a trade surplus, because that’s where many of the products are finished and sold in the region at first, and then around the world. This surplus or deficit is in no way harmful for the region. Rather, it reflects joint production and deep integration. The key going forward is how to increase net North American exports to the world.

The heart of this assembly line is the Midwestern states of America. This heart beats much better as it jointly works with Canadian provinces and Mexican states. Canada and Mexico play an economic role that is more than proportional for the success of the Midwest compared to other countries around the world. For example, exports to Canada and Mexico represented 65 percent of total Michigan exports in 2016. For Ohio, Canada and Mexico represented 52 percent of total exports. For Wisconsin, 46 percent, Indiana, 47 percent, Illinois, 43 percent, Minnesota 33 percent, and Pennsylvania, 37 percent.

NAFTA also extends the economic integration of the Midwest down to the Corn Belt of Iowa, Nebraska and Kansas, and further south to Texas, whose exports to Canada and Mexico represent a whopping 49 percent of sales to the world. U.S. coastal states rely on trade with Asia or Europe to compete globally. The U.S. heartland can only rely on its natural partners, Mexican states and Canadian provinces.

NAFTA is an outgrowth of the economic integration of the central U.S. with its neighbors in the north and south. It is exactly for this reason that the main defenders of NAFTA hail from the heartland. The blueprint for the new Trump administration trade policy can be traced to the lobbying of the steel industry, now very well represented in the high echelons of the U.S. government.

Steel has legitimate concerns vis-à-vis trade with China, whose excess capacity hugely distorts world markets. Mexico and Canada are also victims of this imbalance. However, it is misguided and counterproductive for the Midwest to put at risk NAFTA if the objective is to better compete with China. The strategy should be precisely the reverse. Only by working with Canada and Mexico will the Midwest compete successfully in world markets.

Luis de la Calle is an economist based in Mexico City. He previously served as undersecretary of international trade for Mexico.