NAFTA must be mutually satisfying
The North American Free Trade Agreement, better known as NAFTA, is poised to be superseded by bilateral agreements between its three members, the U.S., Canada and Mexico.
Whether breaking up a regional trade pact that now serves nearly 490 million people into separate agreements will be more beneficial remains to be seen, especially for the individual states. Thirtytwo states have declared Canada as their largest export market while six others — including Texas and California — count Mexico as theirs.
To be clear, over the last 24 years NAFTA has delivered on most of its promises as phased-out tariffs boosted economic output and lowered consumer prices for the entire North American market.
For the United States, the top criticism was that too many manufacturing jobs moved to Mexico in the automotive, textile, computer and electrical appliance industries. Yet a recent study by the Congressional Research Service concluded that these so-called losses have been more than offset by significant job gains in the services sector. Ultimately, the study reported, it is the rise of cross-border supply chains improving American competitiveness for all these industries that is the largest contribution of trade pact, especially for the automobile production, which is now a lot less vulnerable.
For Mexico, where Enrique Peña Nieto is president, the biggest payoff unquestionably has been the surge in foreign investment that, in addition to creating manufacturing jobs, significantly boosted its tourism industry while accelerating the modernization of its previously protectionist economy. But the trade pact has yet to reduce the levels of poverty. Although the industrialized maquiladora zone has seen wages improve the national averages still lag those of non-NAFTA countries such as Brazil and Chile.
For Canada, America’s largest trade partner over the last 60 years, the relationship has been mutually beneficial but not markedly more than before, as the positive impact of the trade pact on its midsized companies was offset by the sharp reduction in auto manufacturing jobs to the benefit of Mexico. The World Bank estimates that since the inception of NAFTA, Canada’s tradedependency factor — defined as the average of all global imports and exports as a percentage of gross domestic product — remained unchanged at 32 percent while Mexico’s jumped from 15 percent to 38 percent. The American factor moved from 10 percent to 13 percent, but mostly because of China.
Which is why the recent decision to impose tariffs on Canadian steel and aluminum is baffling. Since the United States had an $8.4 billion trade surplus (rather than the mistakenly declared deficit) with Canada last year — mostly due to the services sector — why risk retaliatory tariff barriers?
It seems that the Trump administration’s thinking was colored by the real and serious trade deficit problem originating mostly in China, but which only recently started to manifest itself with Mexico as well. But moving away from NAFTA into a country-specific deal will do nothing to address an important cause of that Mexican trade imbalance: exchangerate instability.
Mexico has seen its peso depreciate by more than half relative to the dollar since the Great Recession of 2008. Such a large move in its currency value made many American imports look a lot more expensive, contributing to the creation of larger trade deficits. The notion that extreme exchange-rate instabilities affect and distort trade imbalances is not a secret. However, our so-called “better deal” approach has not yet explored a mechanism for improved exchange-rate stability with both of America’s neighbors.
With Canada, where Justin Trudeau is prime minister, an area always in need of improvement has been labor mobility. As it stands, the trade agreement between Canada and the United States does not differentiate itself from any other transAtlantic or trans-Pacific deal, as it does not capitalize on the geographic proximity and linguistic commonality for displaced workers to seek employment in either country. Facilitating the free flow of people — alongside goods, services and capital — would be useful for the stability and endurance of a future trade agreement, as clearly demonstrated in modern Europe.
Regardless of the choices made to improve or replace NAFTA, trade pacts must be mutually satisfactory to survive the test of time. It’s all about a long-term “win-win” vs. what looks in the short run like a better deal.