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By John Goodrich email
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It’s an election year and once again free trade agreements
such as NAFTA are being bantered about in the mainstream media tossed
from one political candidate to another as if in some national game
of hot potato. And once again the facts regarding the agreements
seem to fall victim to political rhetoric and expediency. The pandering
from the politicians is unfortunate and appears to presume we, the
electorate, are incapable of understanding the fundamentals of trade
policy and appreciating the nuances of public policy.
This article is not intended to take on any particular candidate
or political party or to attempt to address the question of whether
or not NAFTA is good or bad public policy. It is, however, intended
to reintroduce factual information into the discussion so that we
can have a reasoned debate on the issue. If I am guilty of taking
sides it is siding with the facts. Call me naïve, but I still
do believe that better government comes out of informed public discourse.
Let’s look at some of the facts:
Expansion in Trade
The U.S. Trade Representative (USTR), who is tasked with tracking
these sort of things, posts the following facts on its website:
- Overall trade in goods among the United States, Canada and Mexico
has grown from $297 billion in 1993 to $883 billion in 2006, an
increase of 198%.
- U.S. goods exported to Canada and Mexico grew from $142 billion
in 1993 to $364.6 billion in 2006, an increase of 157%.
- U.S. goods imported from Canada and Mexico grew from $151 billion
in 1993 to $500.7 billion in 2006, an increase of 231%.
- U.S. services exported to Canada and Mexico have increased
by 125% since 1993, reaching $61.7 billion in 2006 (preliminary
estimate) and exceeding services imported from these two countries
by $23.4 billion.
- U.S. foreign direct investment (FDI) in Canada and Mexico has
increased by 289 percent since 1993, reaching $331.2 billion in
2006 (latest data available) and exceeding Canadian and Mexican
FDI in the United States (stock) by $166.1 billion.
The USTR puts the above statistics in context with the following
factoids:
- Each day the NAFTA partners conduct nearly $2.4 billion in trilateral
goods trade—that’s $1.7 million a minute.
- U.S. two-way trade in goods with Canada and Mexico in 2006
more than exceeded U.S. two-way trade with the twenty-seven members
of the European Union and Japan combined.
Clearly there has been considerable growth in trade between the
three NAFTA countries since the agreement has been in force. Have
all parties benefited uniformly? Has the economic growth had a net
benefit or detriment to the three nations? Given the above facts,
let us have an informed conversation.
Pre-Existing Preferential Trade
- In 1988, five years prior to the implementation of the NAFTA,
the United States and Canada implemented a sweeping free trade
agreement that reduced trade barriers between the two countries.
- Prior to the implementation of the NAFTA the U.S. permitted
imports from Mexico either duty free or at reduced duties under
a variety of programs such as the Generalized System of Preferences
or the Maquiladora programs. Conversely, U.S. goods shipped into
Mexico were subject to duty rates as high as 20%.
Based on the above information one might ask how much NAFTA can
be credited for the trade growth detailed above.
Effect on Labor
Perhaps the most contentious and complex questions surrounding
the NAFTA have to do with its effects on labor. Differing sides
within the debate argue that NAFTA has had dramatic negative or
positive effects on labor.
A review of www.factcheck.org
debunks some of the public assertions made by politicians, trade
and labor organizations. The website quotes the following neutral
and or bipartisan studies:
- A 2004 study by the Carnegie Endowment for International Peace
noted that a total of 525,000 American workers had been certified
by the Department of Labor (USDOL) as losing employment due to
NAFTA. This data comes from the USDOL’s NAFTA transitional
adjustment assistance program.
- The Carnegie Endowment for International Peace found that NAFTA’s
net effect on jobs in the United States has been minuscule, given
the size of the U.S. economy and the importance of other trading
partners. The best models to date suggest that NAFTA has caused
either no net change in employment or a very small net gain of
jobs.
- A 2004 report by the non-partisan Congressional Research Service
concluded that NAFTA "had little or no impact on aggregate
employment."
It appears based on the above that the discussion regarding NAFTA
and labor can be framed in macro or micro economic terms. Clearly,
if your job was displaced directly due to NAFTA it does not help
that the net effect of the agreement was neutral. You may have a
more favorable opinion of NAFTA if your job, community or industry
was positively affected by it.
No Such Thing as Free Trade?
As trade compliance professionals we all know and have experienced
that participation in NAFTA costs our companies considerable administrative
time and effort along with risk of regulatory action. NAFTA requires
our companies to maintain copious records and to properly complete
a country of origin certificate.
How does your company view NAFTA? Have the benefits of NAFTA outweighed
its regulatory risk and administrative costs? Has your company expanded
or contracted as a direct result of the agreement? Have other economic
issues beyond the NAFTA been the result of your company’s
successes and failures?
Add to the Facts
Now that some of the dispassionate facts are on the table, let
us have a reasoned conversation and explore the benefits and weaknesses
of NAFTA. I encourage you to research further and supplement your
knowledge of the NAFTA and our U.S. trade policy. I also encourage
you to question sources that view NAFTA in black and white terms
in favor of those that explore its benefits and unintended consequences.
Given the facts, we can now begin to explore the questions:
- Is NAFTA a public policy that should continue?
- Why is NAFTA so polarizing?
- What should be done to mitigate any unintended consequences
of NAFTA or other free trade agreements?
- Given the plethora of global and regional free trade agreements
does the U.S. even have an option to disengage from free trade
in the world?
- What lessons have been learned from NAFTA and other free trade
agreements that can be addressed in future policies and agreements?
- What would happen to the U.S. and global economies if the U.S.
opted out of free trade?
Now, let the reasoned conversation begin!
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By Prema Nakra, Ph.D. email
| bio
In 1994, Mexico joined a North American Free Trade Area.
The underlying agreement commonly referred to as the North
American Free Trade Agreement (NAFTA) was signed by the United
States, Mexico and Canada amid heated controversy in all three
countries. Looking back it can be argued that ultimately the
free trade agreement has brought economic benefits to all
three countries.
In this first of three articles on Mexico, I will focus on
the economic miracle of Mexico and the reason why multinationals
and growing companies, especially those based in the United
States, cannot help but take a second look at a country that
is so near and yet so distant.
Introducing Mexico
Today Mexico represents an open economy and a regulatory
climate that favors private business and provides national
treatment for U.S. and Canadian suppliers under the NAFTA.
Over the past decade Mexico has made significant progress
towards macroeconomic stability. It has launched important
structural reforms to further open the economy to trade and
investment improving the functioning of markets for goods
and services as well as developing the financial sector. These
efforts have yielded relatively good performance. After a
strong 2006, the output growth is expected to be close to
potential, between three and one-half and four percent over
the next two years.
Mexico has substantial oil reserves, plentiful natural resources
and raw materials and is one of the most competitive producers
worldwide of cement, glass, petrochemicals and metals. Inflation
is low, life expectancy is high, and climate and terrain are
good. Ciudad Juarez has the same climate and terrain as El
Paso, and the beaches of Cancun look every bit as good as
those in Fort Myers. Further, economists and analysts reason
that Mexico is much better positioned to weather an American
recession than it was in 2000; inflation is low, the public-sector
deficit is close to zero, and the current-account deficit
is much smaller than it was six years ago.
Nor is growth just coming only from exports. Mexican banks
are lending again, and Mexicans are taking advantage of the
availability of low-interest mortgages and consumer loans.
Little wonder Mexico is now considered the second most competitive
economy in the hemisphere (after Chile) and the most competitive
manufacturer in Latin America.
Mexico’s Value Proposition
Mexico’s value proposition is reflected in its relatively
young work force, privatization of the logistical system,
rapidly growing domestic demand, and a high level of consumer
confidence. All these macro environmental factors are critical
to success in any country market.
A relatively young workforce of more than 30 million people
has proved capable of delivering world-class quality at substantially
lower cost than in the advanced industrialized economies.
As a rapidly developing country with incredible resources,
Mexico has both a deep and technically educated labor base
that is comparable to China and India.
Since the privatization of the rail system 10 years ago,
there have been measureable advances in areas of rail connectivity,
safety, security, technology and rolling stock. Located next
to the world’s strongest economy, Mexico is connected
by multimodal chains, both rail and highway, to enjoy the
quickest access to the U.S. border.
A favorable economic landscape in a rapidly growing domestic
market of more than 107 million people, with about half under
20 years of age, has buoyed credit access for larger segments
of the population.
Luxury buys such as cars, consumer electronics and even homes
are coming into the reach of a much broader spectrum. Mexican
incomes have grown as the economy has expanded. Between 1999
and 2005, the credit available to buy cars increased 340%.
The country's steadily growing middle class and its demographic
advantage over other major emerging markets bolster the platform
for growth.
In recent years, low interest rates and economic growth in
emerging markets has led to significant growth in consumer
lending. In housing, the trend is equally strong with some
750,000 new mortgages to be granted in 2006 versus 560,000
last year.
After five years of disappointing growth, consumer confidence
is at near-record highs, and the Mexican economy is expanding.
Mexico is uniquely positioned to continue on the path of strong
and sustainable growth throwing up a myriad of interesting
investment opportunities over the short- through medium-term.
The peso and the stock market sailed through the 2006 presidential
elections with barely a blink. This economic stability provides
a robust basis for faster growth.
Mexico has moved beyond NAFTA to form trade agreements with
Europe, Israel and several Latin American and Asian Countries.
Mexico can count on several assets to boost productivity and
output growth: a relatively young population; geographical
proximity to—and a free trade agreement with—the
largest market in the OECD; a solid macroeconomic policy framework;
and a healthy financial system.
Signs of Economic Growth
Signs of economic growth as discussed here are reflected
in the transformation of metropolitan cities, the development
of the manufacturing base for sophisticated products, the
entry of global retailers, and heightened customer confidence
as reflected in the purchase of luxury and durable products.
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In Ciudad Juárez, across the border
from El Paso, industrial parks, shopping malls and brand-new
housing estates in faux-colonial style stretch out endlessly
into the Chihuahua desert. Monterrey, the industrial hub
of Northeast Mexico, has become a handsome North American
city of swirling freeways and glass office blocks, just
the place to hold international conferences. Despite increasing
security concerns, traffic has continued to flow more or
less smoothly across the border. Look back a dozen years
and Mexico has indeed achieved much.
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Building jet airplanes has long been the
domain of advanced industrial nations. Now, Mexico is trying
to join the club by hitching a ride with a Canadian aerospace
company. Montreal-based Bombardier Aerospace broke ground
this month in this central Mexican city on a massive complex
to build wiring harnesses, fuselages and flight controls.
The company, best known for its Lear jets and other executive
jets, employs 450 workers here. It plans to have 1,200 by
the end of 2008.
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The gleaming new Wal-Mart Supercenter in
this far-flung suburb of Mexico City built on former site
of a bull ring is emblematic of a wave of development rolling
across Mexico. Over the last two years, developers and retailers
have spent at least $1.5 billion to build shopping centers,
and the pace is picking up.
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Mexico produced a record two million cars
and light trucks in 2006, exporting three-fourths of them,
while more than $4 billion in foreign investment poured
into the sector. The government anticipates much more manufacturing
activity will move to Mexico as Detroit's cash-strapped
automakers head south for cost savings.
While Mexico’s economy is growing, there are some challenges
to entering this market. In the second article of this series,
I will discuss the complexities and challenges for marketing
success in Mexico.
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