Why Renegotiating NAFTA Could Disrupt Supply Chains

Supply chains have become increasingly interlinked across the U.S.-Mexico border. The North American Free Trade Agreement (NAFTA), allowing tariff-free commerce between the United States, Canada, and Mexico, has facilitated this integration. Some critics of NAFTA are concerned about the bilateral trade deficit and have proposed stricter rules of origin (ROO), which would make it more cumbersome for firms to access the zero tariff rates they are entitled to with NAFTA. We argue that measures that make it costlier for U.S. firms to import will also hurt U.S. exports because much of U.S.-Mexican trade is part of global supply chains.