NAFTA at Twenty

Two decades of a great deal.

As the North American Free Trade Agreement (NAFTA) turns twenty, the debate over its ultimate impact remains hotly contested. Opponents of the agreement, however, largely base their claims on misinformation about the trading relationship between Canada, Mexico and the United States, which has been perpetuated by a number of politicians pandering to various constituencies. What this anxiety over NAFTA speaks to is a greater problem in U.S. trade policy that fails to openly acknowledge the positive impact of trade agreements like NAFTA on all segments of society. President Obama has been overly focused on boosting exports, while forgetting that in today’s world, products are made in more than one place, through global value chains, which require both imports and exports.

NAFTA has embodied this reality with great success. The high level of U.S. imports from both Canada and Mexico are not just an indication of U.S. consumption. Rather, it also involves the import of intermediate goods for further processing and reexport. It thus reflects the growth of intraindustry and intrafirm trade since NAFTA’s entry into force. The most integrated sector is the auto industry, which in 2005 accounted for 20 percent of intra-NAFTA trade. Internal reforms in Mexico to attract foreign investment from the US, Japan, and Germany have been an important factor in the expansion of this production chain, which has taken advantage of being able to use specialization in parts manufactures and assembly plants where they are most efficient. American cars are no longer just made in America, but are part of an intricate value chain that is truly North American.

With $3.2 billion of daily trade with Canada and Mexico, NAFTA is the most important trading relationship for the United States. In 2011, 48 percent of American, Canadian and Mexican merchandise exports had their final destination in one of the three NAFTA countries, for a total of $1.1 trillion. This is more than twice the total of U.S. merchandise exports to Asia ($476 billion) and nearly triple what the US exports to Europe ($382 billion).

U.S. trade with Canada and Mexico is also qualitatively different from U.S. trade with the rest of the world: the value of U.S. content in imports from Mexico is 40 percent, and 25 percent from Canada. (By contrast, the equivalent figures for other countries’ imports are much lower: 4 percent value-added in imports from China, 3 percent from Brazil, and 2 percent from the European Union.) This means that for every dollar we import from Mexico, 40 cents of that is U.S. value added (and 25 cents for Canadian imports); it is difficult to support Ross Perot’s “giant sucking sound” of jobs fleeing the country, when so much of what is produced in Canada and Mexico still requires significant U.S. input, and with it, creates American jobs. In fact, trade with Canada and Mexico supports 14 million U.S. jobs, 5 million of which are a direct result of NAFTA, according to a recent U.S. Chamber of Commerce report.

And with all this talk about how great the Trans-Pacific Partnership (TPP) will be for the U.S., it is important to remember that 82 percent of U.S. exports to TPP countries go to Mexico and Canada. Furthermore, the Brookings Institution’s recent “Metro North America: Metros as Hubs of Advanced Industries and Integrated Goods Trade” project shows that U.S. trade with Canada and Mexico equals U.S trade with the BRICs, Japan, and Korea combined. It is therefore not hard to see where our interests lie; it also puts the ‘Asia Pivot’ in perspective, which seems less about increasing trade and more about strategic gains. If our concern is improving the economy, we don't need to look across oceans.

It is time to refocus the trade agenda and acknowledge the real successes we have achieved instead of chasing after an ambitious TTP agreement, which at this rate, looks like it will never get past the negotiating stage. North America is the place to start. Though NAFTA succeeded at what it set out to do—expanding trade and investment exponentially—it did not address other important economic and policy issues that affect North America today. NAFTA was crafted for the concerns of the time, and it did not create a framework that would evolve as the integration process grew more complex. Therefore, any anger expressed towards NAFTA as part of the twenty-year-anniversary debate is misplaced—we should not be upset at what NAFTA accomplished, but rather at what it failed to imagine.