NAFTA

Balance of 20 Years!

MEXICONOW Staff Report

The U.S., Canadian, and Mexican economies have all benefited from NAFTA. Not as much as they should have perhaps, because—even after 20 years—the three countries still haven’t properly integrated their economies. This is something which makes them competitive in many areas where there should be more cooperation. 

The United States, Canada, and Mexico have unique strengths that perfectly complement each other. Canada has abundant natural resources and energy supplies. Mexico has a significant, comparatively young, low-cost labor force in close proximity to the U.S.. The U.S. has one of the world’s top higher education systems and is the global leader in technology and innovation. For our economies to benefit fully from NAFTA, each of these strengths needs to be fully integrated.

On January 1st, 1994, a new phase began for Mexico in their relationship with the United States and to a somewhat lesser degree with Canada. This agreement has really transformed the three countries and after two decades of functioning now is a great opportunity to initiate an evaluation of its development and analyze what might be coming in the future.

Canada: One in five jobs in Canada is in part linked to international trade, and Canada’s prosperity is built on its openness to international trade and investment. As such, the North American continental partnership is without a doubt an important competitive advantage for Canada. Canada is using this continental platform as a way to help Canadian business embrace commercial opportunities around the world.

The United States: It has the largest and most diversified economy in the world. The United States is a market economy whose businesses are world leaders in the manufacturing and high-tech sectors, especially computers, medical equipment, and aerospace. They are also leaders in services, including financial services and telecommunications, and we also have to include agriculture.

Mexico: Trade liberalization has transformed and modernized Mexico’s vibrant economy. It has done this by successfully boosting trade and investment flows. Within just a few years, Mexico’s exports have diversified from primarily oil to include an array of important manufactured products, thus making Mexico one of the largest exporters in the world.

In the U.S. they have already started prospecting efforts and an important historical review. The Council of Foreign Relations in New York formed a committee on the subject of the integration of North America. The effort was headed by Robert Zoellick, former World Bank President, former Secretary of State and was Special Representative of Commerce, along with David Paetreus, retired U.S. Military and former Director of the CIA. Earlier he was the general in charge of the U.S. troops in Afghanistan. 

In this context, Jorge Castañeda predicted: “For one year they will seek a ‘big idea’ for the future of the region. This will be partly inspired by the book by Robert Pastor (committee member) referred to as “The North American Idea”. In Mexico there is no possibility of something big like that happening, but at least we can expect an excellent discussion on NAFTA balances.”

In regard to Mexico, the challenge will be to achieve a substantive debate on the following question: How have we grown compared to neighboring countries during the same period (Chile, Brazil) or distant nations in similar situations like Southern Europe for instance? 

For the U.S. and Canada the question has to be focused on the fact that NAFTA made it possible for many of their manufacturers to move jobs to lower-cost Mexico.

Since NAFTA came into force on January 1st, 1994, trade between the three countries has tripled and the economies of the region have doubled. In addition, the number of jobs has grown 23%. This is a figure equivalent to the net creation of over 39 million jobs. 

The NAFTA market consists of 460 million consumers and the total rises to almost 900 million buyers due to treaties that Mexico, the United States and Canada maintain with other countries. The President of the Canadian Manufactures and Exporters, Jayson Myers, for example, considers that the future of NAFTA will result in 20 years in the creation of a greater North America Agreement, one that will include Europe as well as the Transpacific. This will mean a dynamic open market for hundreds of millions of consumers.

However, as tariff barriers have been lifted, the free movement of people has been restricted. Different opinions agreed, however, that within 20 years there could be full liberalization. John D. Breidensteine, who is the Minister for Commercial Affairs for the Embassy of the United States, said that in 20 years one could easily imagine an open border without restrictions. 

As we said, trade between the three countries has tripled since the Agreement entered into force in 1994 with (US$352 Billion). This meant capturing US$1.1 Trillion in commerce between the three countries in 2012. Total commerce between the three Countries from the time period January 1st of 1994 to December 31st of 2012 accounts for a grand total of US$13.6 trillion. This data comes from the Ministry of the Economy of Mexico and is corroborated by the U.S. Census Bureau and the U.S. Department of Commerce. The total commerce from 1994 through 2012 between the three countries is shown in Exhibit 1. 

NAFTA has brought continuous growth in bilateral trade among the three member nations. It is remarkable that during most of the years since 1994 the U.S. has shown a negative balance in their commerce with the other two countries. Driving this deficit were U.S. imports of crude oil from Canada and Mexico. This reached US$68 billion and US$40 billion in 2011, respectively, numbers representing about one-third of total U.S. crude imports. 

Trade between the U.S. and Canada is the highest of the Region. Exhibit 2 shows the trade balance between the U.S. and Canada which has always experienced continuous growth, with the exception of the years 2001 and 2009. This was when the global crisis affected both economies. The year 2012 is when total commerce registered the highest total, which is very similar to the year 2008 (previous to the global crisis). This was a time when the commerce between the two countries passed the US$600 million for the first time.

Mexico and the U.S. have a special commercial relationship. Since NAFTA entered into force in 1994, that was the only year when the Trade Balance was positive for the United States. This is a good reason to justify why the North America Free Trade Agreement has been positive for Mexico. Exhibit 3 illustrates the trade balance between the U.S. and Mexico, a trend that has experienced stable growth since that time, with the exception of the year 2009. The year with the highest commerce between those two countries was 2012 with US$472 million. 

Exhibit 4 summarizes the Trade Balance between Mexico and Canada. It shows that commerce between the two countries reached its maximum level last year in 2012. What really stands out is that since 2000 commerce between Mexico and Canada has been evolving very satisfactorily. It has been following an exciting path of continuous growth. Total commerce between the two countries and reciprocal action brought in a grand total of US$20.83 billion during the year 2012. This was in trade between the two partners.

Economic growth is measured in terms of an increase in the size of a nation’s economy. A broad measure of an economy’s size is its output. The most widely used is the GDP. Exhibit 5 features how the three Member countries of NAFTA have featured outstanding growth in their GDP since the Agreement entered into force. This holds true but with the exception of the multi-mentioned year 2009. In all this time Mexico has shown the lowest GDP and the United States the highest, but it is interesting to note that after the year 2011 Canada presented the highest Gross Domestic Product. 

Voices: 

Enrique Peña Nieto, President of Mexico: “Building on NAFTA and further integrating our economies will be a priority for this administration.”

Barack Obama, President of the United States: “The U.S. Economy is now so integrated with the rest of the world, and digital commerce so widespread, that it´s hard to even imagine much less enforce, an effective regime of protectionism.” 

Penny Pritzker, Commerce Secretary of the United States: “The three Countries are committed to resolve technical issues that affect cooperation in trade, tourism and foreign investment. This is where there are things we can improve to boost our economy.”

Edward Fast, Canadian Minister of Commerce: “I highlight the impact that NAFTA has had on North America. As I believe, it has been the engine that has strengthened our markets.”

Francisco Gonzalez, Director ProMexico: “We will celebrate the 20th anniversary of NAFTA and of course it must be renewed in many aspects. At the time we had an economy that was nothing and there was no Internet. This renewal is part of the strategy of our country to move seamlessly with the countries of North and South America as well as the Asian Pacific.”

Valentin Diez Morodo, President of the Mexican Council for Foreign Trade (Comce):“North America is the heart of our foreign trade and we will take care as we have been doing.”

Ildefonso Guajardo, Secretary of Economy of Mexico: “There has been a great success, which can be seen in the volume of trade between Canada, Mexico and the United States. It has now reached a figure of US$3billion of direct investment and the flows on average have quadrupled. One of the main challenges is precisely the border logistics and how to establish specific strategies to minimize the waiting time not only of individuals, but of the cargo crossing the border.”

The Benefits of NAFTA can be summarized as follows:

Investment: With limited exceptions, NAFTA requires investors to be treated in the United States, Mexico and Canada, just like those countries treat their own investors or investments. This applies to any other country in regard to the establishment, acquisition, and operation of investments. NAFTA also guarantees investors the right to receive fair market value for property in the event of an expropriation. The protections of NAFTA’s Investment Chapter are backed by a transparent, binding international arbitration mechanism. Under this umbrella investors may, at their own initiative, bring claims against a NAFTA government for an alleged breach of the chapter. The NAFTA parties have agreed to make public their submissions in investor-state disputes, and also to make arbitral hearings open to the public. 

Services: NAFTA establishes a solid framework for trade in services through the elimination of barriers in nearly all service sectors and works to enhance regulatory transparency. U.S., Mexican and Canadian firms have been well-positioned to take advantage of NAFTA’s new market access opportunities. This includes service exports that have more than doubled under NAFTA and the exports greatly exceed service imports. With service industries often highly regulated, regulatory transparency is essential. Under NAFTA, regulatory authorities are to use open and transparent administrative procedures, consult with interested parties and publish all regulations.

Government Procurement: The government procurement provisions of NAFTA apply to the procurement of goods, services, and construction services. U.S., Mexican and Canadian suppliers are granted non-discriminatory rights to bid on contracts to supply most of their central government entities. This increases opportunities for U.S., Canadian and Mexican exports between each other in such sectors as construction, the environment, as well as computer software and design services. In addition, oil and gas field equipment and services, heavy electrical equipment, communications and computer systems, electronic, pharmaceutical products and medical equipment are included.

IPR: NAFTA recognized early on the importance of intellectual property protection and enforcement within the context of international trade agreements. The agreements were signed nearly two years before the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). NAFTA provides for the protection and enforcement of a broad range of intellectual property rights, including patents, trademarks, copyrights and test data.