Publish in Analysis - Wednesday, December 5, 2012
NAFTA was signed into law 20 years ago this month. (Collage of the flags of the United States, Mexico and Canada by Alex Covarrubias).
Trade and investment has jumped, but NAFTA now needs further reforms.
BY JOACHIM BAMRUD
The North American Free Trade Agreement is marking an important milestone. On December 17 it will be 20 years since presidents George Bush and Carlos Salinas of the United States and Mexico – along with Canadian prime minister Brian Mulroney – signed it into law.
“NAFTA has made both the U.S. and Mexico more competitive and more productive through the opening of our markets and the increase of our interdependence,” Carla Hills, the US Trade Representative who lead the U.S. negotiations for NAFTA, writes in this week’s issue of Latinvex.
U.S. Chamber President and CEO Thomas J. Donohue also hails the agreement. “NAFTA has supported millions of good jobs, raised standards of living, and enhanced the competitiveness of North American industry in a rapidly changing global economy," he said at the NAFTA20 North American Summit in San Antonio last month that marked the 20th anniversary of the signing of the treaty. "NAFTA's tremendous benefits for American workers, farmers, and companies are hidden in plain sight. Today more than ever, we need the millions of jobs and the huge boost to our competitiveness that NAFTA has provided.”
NAFTA significantly increased trade and investment in the three countries of North America and strengthened supply chains allowing for more joint production, points out Robert Pastor, director of the Center for North American Studies at American University. From 1994– its first year of entry -- to 2001, the share of the world product produced by North America increased from 30 to 36 percent.
Since NAFTA entered into force in 1994, Mexico’s trade with the rest of North America has increased 416 percent and the average annual flows of foreign direct investment (FDI) from North America to Mexico have increased 506 percent, according to Beatriz Leycegui, who was Mexico’s Undersecretary of Foreign Trade from 2006 to 2011 and who served as director of legal analysis at the Mexican office in charge of NAFTA negotiations.
“The increase on trade and investment flows has occurred because of the legal certainty given to the economic actors in the region and the tariff preferences acquired through NAFTA,” she says.
US trade with Mexico has boomed. Exports of American goods and services jumped from $51.9 billion in 1993 – the last year before NAFTA entered into force – to $223.5 billion last year, according to the US Chamber of Commerce. Meanwhile, imports of goods and services from Mexico also leaped – from $47.3 billion to $277.1 billion.
Yet, despite that success, NAFTA has been controversial. “I could not have imagined that after its first seven years of spectacular success in tripling trade and quintupling investment, NAFTA would have become a veritable piñata for pandering pundits and politicians,” Pastor says. “The irony is that the heaviest criticism came after NAFTA had been fully absorbed by all three economies and after integration peaked.”
The U.S. Chamber of Commerce briefly addresses three major myths about NAFTA in a new report called NAFTA Triumphant.
The first myth is that NAFTA sent U.S. factory jobs abroad with a “giant sucking sound.”
“It never happened,” the chamber says. Instead, U.S. manufacturers added more than 800,000 jobs in the four years after NAFTA entered into force, according to the Bureau of Labor Statistics. “This boom in factory jobs came after a period before NAFTA entered into force (1980-1993) when the United States shed nearly two million manufacturing jobs,” the chamber says. “The only “giant sucking sound” was that of surging U.S. exports to Canada and Mexico, which have tripled since NAFTA entered into force and topped $560 billion in 2011.”
A second myth is that NAFTA added to the U.S. trade deficit. Instead last year, the United States registered trade surpluses with its NAFTA partners in manufactured goods ($14.5 billion), services ($40 billion), and agricultural products ($2.6 billion). “The fact that U.S. petroleum imports from Canada and Mexico contribute to the overall U.S. trade deficit stems from U.S. energy policy and geology — not NAFTA,” the chamber says.
A third myth is that NAFTA has contributed to U.S. unemployment. In fact, the unemployment rate was markedly lower in the years immediately after NAFTA came into force (it averaged 5.1 percent in 1994-2007) than in the period immediately before (it averaged 7.1 percent in 1982-1993), the chamber points out. Trade with Canada and Mexico supports nearly 14 million U.S. jobs, and nearly five million of these jobs are supported by the increase in trade generated by NAFTA, according to a comprehensive economic study commissioned by the U.S. Chamber.
There have also been major disputes between the United States and Mexico, chiefly the ones caused by the United States when it blocked Mexican trucks entry (as NAFTA called for) and recently when it wanted to restrict tomato prices at the behest of Florida tomato growers who compete with Mexican growers.
“There are continuing trade tensions because the President and Congress yield to special interests - like the teamsters union and Florida tomato growers - rather than protect the national interests,” says Pastor, who served as national security advisor on Latin America during the Carter Administration. “The President and Congress have done so, in part, because they have not grasped the importance of constructing a "North American Community" - a seamless market for goods and services for the entire continent, which requires that all three countries follow the rules.”
Moving ahead, even its supporters acknowledge that NAFTA can be improved.
One area that needs more focus is how to obtain more benefits from the North American Development Bank, argues Leycegui. She also sees the need to promote closer ties between the private sectors of the three countries in order to establish an advisory council representative of the industries.
Hills sees room for improvement in two areas: Removing unnecessary impediments at the borders that clog supply chains and expanding markets for NAFTA products through free trade agreements with other areas and countries. Hills also argues for increased awareness about NAFTA. “The task of educating our citizens of the untapped potential of this powerful economic relationship cannot be left to government alone,” she writes in her column.
However, two major improvements would be to develop a single continental transportation plan and the creation a common external tariff, as Pastor recommends in his new book The North American Idea: A Vision of a Continental Future.
“With a common external tariff, border officials would focus on drug-trafficking, migration, and illicit trade and leave the legitimate commerce, including trucks, to transit expeditiously,” he says.
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