The Trade Numerologist: NAFTA's promise and peril

Americans shopping at Target on Black Friday didn't pay extra for mattresses, shirts or avocados from Mexico. One reason is that Donald Trump's administration has chosen so far to keep the US inside the North American Free Trade Agreement.

That could change. Trump won an election, with a lot of union support, on the promise to get "better deals" for the US, and his administration is currently renegotiating the agreement. Trade ambassador Robert Lighthizer has said that the US is "in the process of trying to rebalance" the NAFTA trade relationship.

Any adjustment to NAFTA, a free trade agreement uniting Mexica, Canada and the US, and signed by President Clinton in 1993, would be a big deal. Canada and Mexico are the US's second and third biggest trading partners, after only China.

Gauging the impact of trade deals is hard, but it's undeniable that NAFTA has been important in economically stimulating two regions of the continent.

It has lubricated manufacturing and commerce in the area between Canada and the Northern US states of Michigan, Indiana New York, Ohio, Pennsylvania and Illinois.

That region - Northeastern America + Southern Canada - hosts a well-lubricated supply chain that makes steel, aluminum, rubber, plastic, zinc and other materials and turns them into cars, trucks, wheels and other industrial parts.

US-Canada, top categories traded, first 9 months of 2017

The second place is northern Mexico, where companies have built plants, and hired Mexican workers, along the highways that run north from Mexico City to the US, where companies have built factories that make everything from soap to shoes. Those new plants, many built since 1993, help explain why the US now runs a trade deficit of over $60 billion a year with Mexico, according to data from IHS Markit's Global Trade Atlas.

US trade deficit with Mexico, 2011-2016

That deficit is especially driven by auto manufacturing. US imports of cars, trucks and parts made in Mexico increased to $74.8 billion in 2016 from $45.8 billion in 2011.

The US is now trying to get Mexico and Canada to stricter requirements on rules of origin for the auto sector, meaning it would be harder for companies to assemble pieces of something in China, then ship it to Mexico, finish building it, then move it to Texas tariff-free under NAFTA rules.

Under the proposed new US rules for carmakers who build in Mexico, including General Motors, Ford, Fiat Chrysler and Nissan, they'd have to show that 85% of their cars come from the US, Mexico or Canada, instead of the current 62.5%.

It's been a tough sell. Mexican leaders have said they won't accept that and other US demands like renegotiating NAFTA every five years, seasonal protections for US fruit growers and preferential treatment for US suppliers to the US government. And US automakers oppose changing the rules to require proving that parts aren't made in Asia, because they say it would cause carmakers to simply build their factories in Asia.

Instead, analysts say, US policymakers should look at ramping up its export of fuels, iron and steel, aircraft, and copper.

Fastest-growing US exports to Mexico, first 9 months of 2017

To be sure, it's unclear how serious the Trump administration is about blowing up free trade. Its cabinet is stacked with corporate free trade believers. And in the first nine months of 2017, US imports increased to $1.73 trillion from $1.62 trillion.

The US could take its ball and go home, but the US isn't the only player at this party. NAFTA stipulates that if one country pulls out, the deal remains active for the other two nations. The US could withdraw, leaving its two neighbors to trade with each other.

Mexico-Canada trade has held steady around $30 billion a year for all of this decade. It involves a lot of steel and cars and car parts heading south and fruit and vegetables going north. This year, that number was up, and was on pace to reach $32 billion after six months of the year.

Top categories, total Canada-Mexico trade, first 6 months of 2017

Those numbers are tiny compared to those with the US No matter how the Trump administration plays the NAFTA card, any change is going to have an impact on the citizens of the three nations involved, and manufacturing and logistics firms around the world who will have to readjust supply chains.