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NAFTA at Twenty

December 16, 2013 Topic: EconomicsTrade Region: CanadaUnited StatesMexico

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.

So where do we go from here? First, we need to stop the debate over NAFTA—it succeeded. Second, we do not need to reopen the agreement—it achieved what it set out to, but it needs to be viewed more as a pilot project than as a final product. Removing burdensome regulatory trade barriers is one key initiative. We already have two separate regulatory cooperation councils with Canada and Mexico, but we need to merge these efforts to better deal with the reality of our continental value chains. Next, we need to reduce the thickness of the border and make it easier for goods to cross; expanding preclearance at ports of entry is an excellent way to achieve this. All three countries would benefit from more cooperation and collaboration between their customs and border agencies.

Furthermore, since roughly 70 percent of our trade is transported by land, we need to invest in better infrastructure (particularly at the borders)—including new roads, bridges, and railways—all of which will create more U.S. jobs right here at home. Beyond this, the NAFTA governments also need to seriously consider the option of deepening economic integration through the formation of a customs union. Not only would this simplify customs procedures and allow products to move expediently across our borders, but it would also eliminate cumbersome rules of origin costs.

It is true that there are limitations to greater integration in North America, but the majority of these are self-imposed restraints. North America is a region, but as Robert Pastor has noted in The North American Idea,“the very idea of ‘North America’ has not penetrated our consciousness.” Perhaps we simply have not let it. Thinking ‘North American’ will allow us to better focus on improving our economic situation through the achievement of tangible goals, instead of elusive trade agreements whose benefits will not be felt for many years down the road. A twenty-first century trade policy requires that we examine our options for growth in a new context and not be afraid to challenge conventional thinking. If we hope to remain competitive, we need to seize real opportunities to invest right here on our continent, and continue the NAFTA success story. The last twenty years of NAFTA have provided exponential growth and market opening; now it’s time to focus on what the next twenty years should look like.

Inu Barbee is a Graduate Associate at the Center for North American Studies at American University.