The US policy configuration to withdraw from the NAFTA would adversely affect her economic status. For instance, it is unclear whether such withdrawal would still uphold an open trade and investment between the US, Canada, and Mexico or the partners would institute new legislation to bar importation of US goods. Generally, the country would experience a drastic drop in total output and income as would be reflected in her labor market. Again, US would be endowed with less skilled workers in addition to the massive layoff of employees leading to serious permanent unemployment over longer durations as regards the need for fewer workforces (DeLong, 2017).
Additionally, the US global production would reduce tremendously due to limited trade activities and inability to access diverse markets coupled with unfavorable tariff rates. For example, if the country raises her tariffs to MFN rates for imports from Canada and Mexico. In this case, the duo shall correspondingly increase tariffs to MFN levels for imports from the US as they maintain an open trade between them (Swan, 2018). Economists further anticipate poor economic impacts on the US economy about the effects the withdrawal will have on worker wages and industrial capital stocks and their relationships with a shift in investments.
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Precisely, US withdrawal from the NAFTA can lead to the reduction in US‘s competitiveness regarding both her domestic and international business operations. This is due to the probable reduction of her exports that in turn make the general output more expensive and eventually becoming less competitive in the market. Hence, the shift in trade and investment strategies would cause inefficiency and significantly affect the levels of production of goods and services (DeLong, 2017). The effects of the NAFTA withdrawal on US output shall be felt immediately since they would be reflected in the annual reduction in output and eventually loss of national output and GDP. Currently, the fall in output has been projected at an annual rate of 0.6% with a GDP loss of approximately $119 billion with a respective fall in exports by around 2.5%. This will greatly impact on the US employment about the aforesaid dismissal of workers due to fewer jobs available. Generally, the US withdrawal would lead to a situation of intense uncertainty in both industrial and agricultural fields coupled with trade disruptions, especially in North America. Politically, the withdrawal limit decisions of the United States in international policy-making and this would force her to restructure legislations leading to unforeseeable damages.
Domestic steel and aluminum producers in the US would enjoy massive benefits from the 25% tariff increment because increased taxes on imported products would limit competition. The trade action would lead to increased costs of the domestic metals, and this would threaten the economic interests of Americans. The specific groups that would greatly suffer are those that purchase the same aluminum products to produce other consumables (Singh & Shivdas, 2018). For instance, manufacturers of cars, plane, bridges and other products would not want to incur losses resulting from the higher prices of foreign steel due to increased Trump tariffs. Therefore, they can either pass on the costs to consumers or layoff personnel rather than lowering their profit margins. Still, even if the companies resort to the use of locally produced steel, they would not be able to handle the surge in demand for steel; and this would create a gap in the US market.
Furthermore, the failure of US steelmakers to meet market demands would cause inflation due to failure to keep pace with foreign goods. This is because the US factories are not fully equipped to produce all the steel designs that conform to the customers’ demands. Hence, this may compel the local steelmakers to adapt production to diverse grades of steel. Resultantly, other producers apart from aluminum and steelmakers would suffer due to increased prices that directly affect household spending. For instance, the extra amounts the consumers will spend to meet the 25% increase in steel products will cut down on their expenditures on other products, both local and foreign ones alike.
The UK has approximately £19.8 billion trade surplus in her operations with the EU. The country controls exports of about 44% and around 53% imports in the trade with other EU members. Again, a greater percentage of the UK’s major trading partners are members of the European Union. This explains how the UK and the EU are mutually important to each other regarding the trade involving both manufacturing and service segments. Therefore, the Brexit would have enormous ramifications on British trade both domestically and internationally.
The country’s Gross Domestic Product (GDP) would decline following the Brexit to an estimated 9.5%. The loss of GDP implies that the levels of employment will reduce significantly based on macroeconomic analysis. Some economists have projected a 0.5% loss in the UK's GDP following every 1% decrease in UK exports to the EU. As a result, the country would experience a reduction in trade activities and the ultimate ramification of the same would be economic stagnation. Hence, their final products would lose competitiveness in the market owing to the increased prices associated with higher production costs.
Again, UK’s agricultural sector would be the most negatively impacted as regards the Brexit since the greatest percentage of the EU’s budget have always been directed towards subsidization of farming. Evidently, the UK recently exported around 65% to the EU and imported about 70% of EU agricultural products. This implies that farmers would lose the subsidies upon the UK's Brexit that would prevent her integration into the EU's agricultural markets (Giles, 2016). Resultantly, the country would raise her production costs and the general price levels in addition to lower average real wages. In connection with this, the foreign direct investments (FDI) in the UK would reduce by around 22% due to increased tariffs and trade costs in the country. Ideally, the country will lose a number of investors since she will cease being part of the single market and would not export to other EU member states. This is an advantage that has always prevented high-cost barriers related to tariffs (Singh & Shivdas, 2018).
Further, around 3.3 million jobs will be lost due to decreased demand for UK goods and services, which amount to approximately 12% of the country’s exports to EU market. Majorly, the UK economy greatly relies on the service sector that drives job creation and export demands (Giles, 2016). Therefore, the financial and business services, manufacturing sectors like cars, aerospace, electronics, and pharmaceuticals would be negatively affected following the Brexit. This is because the country will have limited access to the export markets that facilitate job creation; thus the Brexit would thwart extension of the single market and eventually progress. Additionally, the shift in foreign investments would lead to a massive redistribution of jobs in the UK, and she would greatly lose ground in effect.
International economic and political consequences of US and UK policy choices
Internationally, the US withdrawal from the WTO would completely disentangle global trade, dealings which president Trump referred to as disasters. Therefore, both NAFTA and WTO’s member states would face discriminatory access to new markets through their efforts to achieve economic diversification (DeLong, 2017). This implies that they would not successfully complement economic restructurings that are politically controversial though very crucial regarding security and policy-based trading systems. Hence, the increased tariffs and the nontariff barriers would cause immense losses in each of the members of the WTO in consideration of the gross household income and real wages globally (Swan, 2018).
Policies intended for retaliation against US withdrawal from the WTO would spark off devastating situations in all other member countries. Implicatively, this can be due to overdependence on the US domestic market economies, and both Canada and Mexico would experience a disproportionate decline in their economies. Even though the other WTO members would counteract the situation by increasing tariffs, they would not effectively restore the already contracted global gross household income and real wages resulting from the US discriminatory policies. Hence, the US protectionist policies would compel other states to pass retaliation legislations against her, which would lead to pronounced economic bottlenecks that thwart the general globalization (Singh & Shivdas, 2018). Finally, even the US herself would not pass international economic legislations that govern trading activities of all NAFTA and WTO member states.
Similarly, the UK’s hard Brexit would curtail her political ambitions as regards passage of legislations guiding all the 163 EU member states especially during an upsurge in conflicting ideas. Albeit the far-right parties based in Western Europe would have domestic political influence, none of the party leaders would be elected in any EU country. Even though they would amass support from various corners to influence far-right and far-left political debates, government’s actions would not pass immigration policies since it will remain a case in point.
Still, the hard Brexit would tamper with the EU’s operations on an international basis since the ramifications will directly interfere with the internal equilibrium of the member states. In consideration to greater UK’s economic contribution to the EU, the Brexit would mean that non-euro states will contribute only 15% of the union’s economic output. Thus, such a scenario would boost Germany’s political and economic supremacy within the bloc. This is a political question that would accelerate turmoil between Germany and her trading partners.
From the foregoing, China’s reactions to the Brexit and the US withdrawal from the NAFTA and WTO including her trade tariffs under president trump’s administration would be quite negative and dangerous. For instance, due to her concerns about global economic growth upon the Brexit, she would devalue her Yuan (Weiss, 2017). This decision again relates to the probable reduction in the country’s gross domestic product that can be problematic to manage in the long run. And since the Brexit would cause a 10% fall in the value of Yuan, the prior devaluation implies that the currency holders will not need to keep their money outside the country after UK Brexit (Weiss, 2017). Similarly, the members of the G7 among other major economies have taken steps to enhance sufficient liquidity with a major aim of supporting the functioning of their markets. The use of liquidity instruments is a motive to counteract the probable volatile and disorderly fluctuations in exchange rates that would negatively impact on economic and financial stability.
For the case of US, as regards her recent tariffs, the EU would lodge enormous complaints at the WTO to avoid unfavorable effects of such actions on other member states. As a result, the EU would institute rebalancing measures that act as bottlenecks for distinct US exports especially within the jurisdiction of the member states (McNamara, 2015). Again, states like China would impose duties on many US agricultural and industrial products to counteract the probable losses. Even Mexico and Canada would target agricultural, industrial and manufactured products and impose heavy tariffs.
References
DeLong, B. (2017). Vox . NAFTA and other trade deals have not gutted American manufacturing — period. Retrieved from https://www.vox.com/the-big-idea/2017/1/24/14363148/trade-deals-nafta-wto-china-job-loss-trump
Giles, C. (2016). Financial Times. “Brexit in seven charts – the economic impact. Retrieved from https://canvas.wisc.edu/courses/101859/files/4556943/download?wrap=1
McNamara, K. (2015). Monkey Cage/Washington Post. "This is What Economists Don't Understand about the Euro Crisis – or the US Dollar." Retrieved from https://www.washingtonpost.com/news/monkey-cage/wp/2015/07/21/this-is-what-economists-dont-understand-about-the-euro-crisis-or-the-u-s-dollar/?utm_term=.85e05d89f7ff
Singh, R. K. & Shivdas, S. (2018). Reuters Business News. Trump blasts Harley plan to shift U.S. production to avoid EU tariffs. Retrieved from https://www.reuters.com/article/us-harley-davidson-tariffs/harley-davidson-to-move-some-production-out-of-u-s-to-avoid-eu-tariffs-idUSKBN1JL185
Swan, J. (2018). Axios. Exclusive: A leaked Trump bill to blow up the WTO. Retrieved from https://www.axios.com/trump-trade-war-leaked-bill-world-trade-organization-united-states-d51278d2-0516-4def-a4d3-ed676f4e0f83.html
Weiss, J. C. (2017). China and the Future of World Politics. American Political Science Association . Retrieved from https://canvas.wisc.edu/courses/101859/files/4885148/download?wrap=1
