NAFTA: 20 Years On, Time for a Change

Christopher Wilson, Mexico Institute, 12/17/12

The North American Free Trade Agreement was signed twenty years ago today by US President George H.W. Bush, Mexican President Carlos Salinas, and Canadian Prime Minister Brian Mulroney, and while an update is long overdue, the one needed is probably of a different nature than many would expect.

To be sure, the agreement was no panacea, but it is still fundamentally strong. NAFTA eliminated barriers to trade and investment, and as a result, US trade with Mexico has more than quintupled while bilateral foreign investment holdings have risen to more than six times their pre-NAFTA levels.

The change truly needed is one of perception. Popular opinion on NAFTA and free trade is still mired in the same tired debates of twenty years ago. Modern day refrains of Ross Perot’s “giant sucking sound” still echo. Opponents of trade agreements still measure job loss by subtracting imports from exports, while free traders still retort that a bigger trade pie means more to eat for everyone.

The debates are the same, but the world is not. Globalization has changed the very nature of trade, and if our perception does not catch up with reality, there is little doubt that we will be caught with a strategy from yesterday in the world of tomorrow.

At one point, imports and exports were what they appeared to be—the purchase of foreign products and the sale of domestically produced goods abroad. This is no longer the case. US imports from Mexico, for example, actually contain, on average, 40% US content. The tag may say Hecho en Mexico, but almost half of the labor, materials and parts that went into an import from Mexico were actually made right here in the United States. That means imports from Mexico, not just exports, strongly support US jobs and industry.

Far from a North American peculiarity, the regionalization and globalization of supply chains is occurring worldwide. Two decades ago when NAFTA was signed, 20% of the value of global exports came from a country other than the one selling the product, but that portion has since doubled. That is, 40% of the materials, parts and services that go into building an export are now first imported.

An iPhone, for example, according to the fine print on the back, is “Designed by Apple in California Assembled in China.” In truth, many more countries contribute significantly to its production. Only 4% of the value of the iPhone actually comes from China, but its entire value—several hundred dollars—is credited to China in the traditional trade accounting methods used to create national import and export statistics.

Globalization ruled for much of the last two decades, but the most recent trend is toward a regionalization of supply chains. High energy costs have made transportation more expensive, and the increased use of computers and robots in advanced manufacturing is decreasing the need to chase cheap wages across the globe. The regional nature of many supply chains means that US inputs are not used equally in production throughout the world. While goods we buy from our neighbors, Canada and Mexico, contain 25%-40% US content, goods from China are just 4% US-made.

This brings up the second major paradigm shift needed regarding NAFTA. Canada and Mexico are not the United States’ economic competitors, but our partners. With parts whizzing back and forth across our borders several times as a product is manufactured, the competitiveness of North American products on the global market depends on the ability of each partner to build its parts efficiently and to transport them quickly to next step in the supply chain.

Instead of seeing ourselves as individual actors in a zero-sum game where one country’s win is another’s loss, the United States, Mexico and Canada must work together as a bloc, as an economic alliance, to promote North American exports to the world. This means working cooperatively to eliminate blockages to trade within the region, such as long and unpredictable wait times at the US land borders, while also joining forces to open markets around the world. The accession of Mexico and Canada to the Trans-Pacific Partnership negotiations is a good start, but the ultimate goal must be the opening of the BRICs, which are still among the most closed major economies in the world.