NAFTA Marks 20 Years Trade Indicators Up, Boost Supply Chain From U.S.

One trade milestone marks its 20th anniversary: NAFTA – the North American Free Trade Agreement – originally signed in December 17, 1992, begins its third decade.

If ever a multi-national trade agreement has caused controversy and misunderstanding for this generation and maybe the next, NAFTA takes the cake.

A look back at a couple of news situations concerning NAFTA and trade sets the stage for discussion and further research:

NAFTA Day 1: As the regional spokesperson for a Fortune-Ten company and living on the border at El Paso, NAFTA had no sooner been signed, sealed and delivered than two El Paso television stations called asking to interview me next to the flags on top of the Bridge of the Americas. Each told me what the first question would be: "How many new plants are you going to open in Mexico now that the North American Free Trade Agreement is in place?"

Answer over the phone: "None. We have been here since 1978. We have around 15 plants in the State of Chihuahua. Why?"

The interviews never took place; the reporters didn't like the answer and dropped the request.

NAFTA 1998: A major U.S. television network reporting on a strike against General Motors said NAFTA was one issue. Could they possibly view a supplier plant in Ciudad Juarez and ask a few questions?

Answer: (And contrary to some corporate thinking, and veiled career- ending threats received from headquarters) "As long has your story has not been written, let's go, ¡Vámonos!"

That network agreed. While surprised by the cleanliness and operations at the plant -- that contrary to what some told them to expect -- their "B-Roll" (the backing video) centered on racks and racks of components. Close ups revealed the addresses of origin on those boxes represented Postal Service alphabet soup: PA, OH, IN, MI, IL, MN and dozens of others from the United States – even a few saying ON or QC from Canada. Billions of components made in the U.S.A by workers in the U.S.A. headed to the maquiladoras; that's billions with a "B." The term "supply chain" gained new prominence in the debate.

NAFTA Year 20: These questions invariably arise: Is NAFTA good or bad? Are we better off with NAFTA?

As much as any business person – really any stakeholder – would like some impartial umpire to offer ironclad answers to these closed questions, it just won't happen. Bias exists in any organization or with the individual; situations are unique. As there is no alternative history to compare, "What if" could not be applied with certainty to a scenario where NAFTA did not ex ist. Business and complexity go hand in hand. As the business sector would testify, reducing non-value added regulations – a stated purpose in the treaty -- often spell the difference between business viability and historical footnotes. Debate the regulations.

BUSINESS POINT OF VIEW

In a definition provided by the American Chamber of Commerce in Canada, "NAFTA is a comprehensive trade agreement among Canada, the United States and Mexico. It provides importers with the opportunity to substantially reduce or eliminate duties if their products can be proven to meet very specific NAFTA eligibility requirements."

Translation: Meet the rules of origin, then through more competitive pricing and the U.S. consumer pays less. More competitiveness usually means more jobs. It is an issue mass media tend to avoid.

Officials of the U.S. Chamber of Commerce have taken a very positive view of NAFTA at 20. In their report NAFTA Triumphant Assessing Two Decades of Gains in Trade, Growth and Jobs, the chamber pointed out that North America has become a virtually tariff-free trade zone, and a host of non-tariff barriers to international commerce have been eliminated as well. Their report shows NAFTA has succeeded "spectacularly" in boosting cross-border trade, economic growth, and good jobs.

Data from the Chamber shows a three-and-one-half fold rise in U.S. commerce with Canada and Mexico over the past 15 years. For example, U.S. trade in goods and services with Canada and Mexico rose from $337 billion in 1993 to $1.182 trillion in 2011. The report pointed out that each day the United States conducts over $3.2 billion in trade with its North American neighbors. At the same time, NAFTA partners Canada and Mexico, the two largest markets in the world for U.S. exports, purchase nearly one-third of U.S. merchanmerchandise exports ($478 billion in 2011 or 32% of total goods exports). Global connections HABC predicts exports from the U.S. to increase at about six percent a year from 2013 to 2015, Mexico's at about eight percent.

During NAFTA's era U.S. exports of goods and services to Canada and Mexico have tripled from $169 billion in 1993 to $560 billion in 2011. U.S. imports from Canada and Mexico have also risen substantially under NAFTA, reaching $622 billion in 2011. In a November 2012 speech in San Antonio, Thomas Donohue, U.S. Chamber president and CEO declared, "The bottom line is that 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."

GAIN IN ANNUAL INCOME?

While the interest may center on boosting exports to drive the bottom line and support jobs, in a trade part nership imports from Canada and Mexico provide direct benefits to Americans as well. The Chamber acknowledged imports could mean lower prices for American families on certain items as they try to stretch their budgets as well as for companies seeking raw materials and other inputs. In recent decades, lower tariffs have stimulated U.S. productivity through greater competition in the marketplace and brought greater product choices to U.S. producers and consumers. According to the Peterson Institute for International Economics, this has brought "a gain in annual income of about $10,000 per household."

A sound bite used in that 1998 network television interview said in so many words, "It is not Mexico versus the U.S. It is Mexico and the U.S. competing together in a global market." This past year's summary by the Chamber said the same, pointing out two decades of economic integration under NAFTA have made it "less and less relevant to look at North American trade through a mercantilist lens." As officials and business leaders in Canada, Mexico, and the United States have pointed out with growing frequency, North Americans increasingly "make things together," employing "global value chains" that cross national borders.

OPPOSITION

Labor provided much of the initial opposition to NAFTA. Generally labor's disdain for NAFTA continues today, often intertwined with partisan politics. Various labor or pro-labor organizations in the U.S. cite perceived job losses over the past 20 years. Opposition to NAFTA in political terms was not necessarily party-centric. Both Democrats and Republicans in the United States offered support or opposition depending on constituent circumstances.

Other opponents from 1993 to today have included "America First" advocates; H. Ross Perot and his "giant sucking sound" reference to U.S. jobs; environmental groups pointing to perceptions of weak Mexican standards, as well as an amalgamation of anti- big business groups, according to a recent Duke University study.

In an August 2012 report in Bloomberg Business Week, author Harold Sirkin noted that critics make a valid point: Some U.S. jobs have migrated to Mexico in the years since NAFTA took effect. However, Sirkin added "almost all of these jobs would have moved offshore with or without NAFTA. What the NAFTA experience tells us is that good intentions are not enough."

Regarding unemployment in the United States over the NAFTA era, statistics provided by the Chamber showed the U.S. unemployment rate was markedly lower in the years immediately after NAFTA came into force – averaging 5.1 percent in 1994-2007, than in the period immediately before which averaged 7.1percent in 1982-1993. 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.

In a mid-1990's presentation, U.S. President Bill Clinton and Mexican President Ernesto Zedillo offered public and private sector attendees in Mexico's National Auditorium video testimonials from business people from both countries. In one segment, a U.S. business person pointed out, "If a job has to leave the United States, you want that job to go to Mexico!" His point being that material sourcing for those moved jobs more likely than not comes from the United States. Move the job to Asia and sourcing would likely be an Asian business opportunity, one lost for the United States, he said.

MEXICO BENEFIT

A number of studies, including one by Angeles Villareal in the Congressional Research Service in 2010, stated that NAFTA has brought economic and social benefits to the Mexican economy as a whole, but the benefits have not been evenly distributed throughout the country. Most studies after NAFTA have found that the effects on the Mexican economy tended to be modest at most. While there have been periods of positive growth and negative growth after the agreement was implemented, much of the increases in trade began in the late 1980s when the country began trade liberalization measures. Though its net economic effects may have been positive, NAFTA itself has not been enough to lower income disparities within Mexico, or between Mexico and the United States or Canada.

This report cautioned that to see Mexico's economy today as a total effect of NAFTA may be misleading. "Trade-related job gains and losses since NAFTA probably accelerated trends that were ongoing prior to NAFTA and are not totally attributable to the trade agreement. Isolating the economic effects of NAFTA from other economic or political factors is difficult. Mexico has experienced at least two major events outside of NAFTA that had significant economic consequences. Unilateral trade liberalization measures prior to NAFTA and the currency crisis of 1995 both affected economic growth, per capita GDP, and real wages in Mexico."

She also cited a 2005 World Bank study assessing some of the economic impacts from NAFTA on Mexico. The study concluded that NAFTA helped Mexico get closer to the levels of development in the United States and Canada. The study noted that NAFTA helped Mexican manufacturers to adopt U.S. technological innovations more quickly and likely had positive impacts on the number and quality of jobs.

Another finding was that since NAFTA went into effect, the overall macroeconomic volatility, or wide variations in the GDP growth rate, has declined in Mexico. Business cycles in Mexico, the United States, and Canada have had higher levels of synchronicity since NAFTA, and NAFTA has reinforced the high sensitivity of Mexican economic sectors to economic developments in the United States. Several economists have noted that it is likely that NAFTA contributed to Mexico's economic recovery directly and indirectly after the 1995 currency crisis. Mexico responded to the crisis by implementing a strong economic adjustment program but also by fully adhering to its NAFTA obligations to liberalize trade with the United States and Canada. NAFTA may have supported the resolve of the Mexican government to continue with the course of market-based economic reforms, resulting in increasing investor confidence in Mexico. The World Bank study estimates that FDI in Mexico would have been approximately 40 percent lower without NAFTA.

NAFTA by no means represents Mexico's total interest in trade agreements, even with the United States as its largest single partner. In its effort to increase trade, Mexico has 12 free trade agreements involving 44 countries. These include most countries in the Western Hemisphere including Chile, Colombia, Costa Rica, Nicaragua, Peru, Guatemala, El Salvador, and Honduras. In addition, Mexico has negotiated free trade agreements outside of the hemisphere with Israel, Japan, and the European Union.

SMARTER SOURCING

El Paso-based business and governmental consultant and academician Dr. Donald Michie restated the NAFTA benefiting U.S. consumers and businesses theme: "The people who benefit are those who fulfill the rules of origin. The primary purpose of NAFTA was industrial competitiveness – reducing the total cost of business to benefit primarily NAFTA region consumers. What drives these agreements is the benefit to the consumer. NAFTA reduced the cost of consumer expenditures primarily for products and services to a significant degree."

Michie also pointed to job maintenance and creation. "If the U.S. or North American product is more competitively priced, the consumer is going to buy it. If the rule of origin gives preferential treatment to the North American products – specifically U.S. – the evidence of that is in the local or NAFTA content."

Michie's contention about NAFTA sourcing also carried over to the maquiladora industry. Most of the products manufactured in Mexico and within North America are at least 60-to-80 percent U.S. "direct material" content. He cautioned: "If you ship your production to Asia, Europe or out of North America, the average U.S. content – for example from Asia – is from 2 to 5 percent. Then you are losing jobs as you are supporting Asian workers. What NAFTA really does by attracting direct foreign investment to North America preserves the value of U.S. content and facilitates U.S and North American employment."

Writing in the New York Times in early July 2012 when elected, Mexican presidential candidate Enrique Peña Nieto said that building on NAFTA and "further integrating our economies" will be a priority for his administration.

Donohue went on to summarize, "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. However, the United States cannot rest on its laurels. Elected officials and business leaders in Canada, Mexico and the United States must work together to build on this foundation in the years ahead."

A FOOTNOTE

A Bloomberg News report on New Year's Eve 2013 pointed to the Obama Administration's plan for an 11-nation Pacific trade deal that could mean $108 billion in business a year. The emergence of China as an economic threat could be a catalyst here. Ironically "China" represents the traditional gift for a 20th anniversary. And to think 20 years ago, much of the worry was Mexico.

Déjà vu all over again?