On January 1, 2008 the last provisions of NAFTA (North American Free Trade Agreement) will be fully implemented. These final items account for less than 1 percent of U.S. trade with Mexico and will mark the end of a 14 year transition period. The close of the transition period is not the end of continuing changes in the NAFTA relationships.
The leaders of the U.S., Canada and Mexico have reiterated their commitments to full implementation of NAFTA. After the March 24, 2006 meeting of the NAFTA Free Trade Commission meeting in Acapulco, Mexico, trade ministers from the three countries released a joint statement including, “We reaffirmed our commitment to NAFTA as the cornerstone for strengthening North American competitiveness in today’s global economy. We have committed to achieving concrete, commercially-relevant results that will continue to ease the flow of goods, services, and capital between our three countries.”
Their bosses made similar comments about economic integration in Cancun, Mexico on March 31. Presidents Bush and Fox and Prime Minister Harper focused on the Security and Prosperity Partnership the three countries launched last year. The five priority initiatives for the coming year include the North American Competitiveness Council of business people to consider ways to further increase economic integration and competitiveness and the North American Energy Security Initiative for energy research and development, market transparency and regulatory compatibility.
The Bush Administration’s support for NAFTA goes down to specific issues like sugar. When Dr. J.B. Penn, Under Secretary for Farm and Foreign Agricultural Services of USDA, testified to the Senate Agriculture Committee on May 10 at a hearing on implementation of the current sugar program he also addressed NAFTA. He said, “One alternative the United States will not consider is any reopening or renegotiation of the NAFTA. As noted above, with respect to new trade agreements, any attempt to limit the long-agreed to access to our sugar market for Mexico will frustrate the expectations of our corn, bean and dairy farmers that have waited 14 years for the elimination of Mexico’s barriers to their products.”
President Bush and Prime Minister Harper will be in power on January 1, 2008, but President Fox will not. A presidential election will be held in Mexico July 2, 2006, with installation of the new president on December 1.
The broad support by leaders of the three countries does not mean there is no need for changes. John Melle, Deputy Assistant USTR for North America, in testimony on trade with Mexico to the House of Representatives Committee on International Relations on April 28, 2006, pointed out that Mexico and the United States have been reducing trade barriers with other countries since NAFTA was begun. The average U.S. duty on imports from all countries in 1993 was 3.2 percent; in 2005 it was 1.4 percent. Mexico had one free trade agreement in 1994 (with Chile) and now has agreements with 42 countries. All three countries face increased competition for goods and resources from countries like China, India and Vietnam.
USTR Rob Portman explained in his remarks after the March 24 NAFTA Commission meeting that in 1993 the U.S. had only one trade agreement and now it has agreements with 15 different countries. He said, “We’ll analyze how it (NAFTA) could be updated to reflect the most advanced thinking in our subsequent FTAs, to take the best practices. Our goal is to harmonize, to the extent possible, the procedural requirements between NAFTA and the more recent FTAs in order to further facilitate trade, to offer more opportunity and economic growth.”
Melle noted that trade policy commitments under the World Trade Organization (WTO) also govern trade among the NAFTA countries. The Mexican tax on soft drinks with high fructose corn sweetener was ruled to be in violation of WTO commitments. Some groups in Canada have talked of bringing a case to the WTO against the U.S. corn program. Until the recent settlement, the U.S. and Canada pursued cases on softwood lumber under both NAFTA and the WTO for over 20 years.
One issue that has been slighted in the public pronouncements about the benefits of NAFTA is that Mexico’s economic growth has been relatively slow. Real GDP growth from 1993 to 2005 was 49 percent for Canada, 48 percent for the U.S. and 40 percent for Mexico. Given the developing country nature of Mexico, the Mexican economy should have grown at a faster rate than the U.S. and Canada, not at a slower rate. The gap is even wider than it looks considering that Mexico also has a faster growth in population. The economic crisis in Mexico in 1995 and 1996 certainly pulled down the growth rate over the past 12 years. Some analysts have argued that the overall investment climate is not as good in Mexico as in some other developing countries even though foreign direct investment into Mexico has average $15 billion per year since 1994 compared to only $3 billion per year in the 1980s. NAFTA is an important opportunity for all three countries, but each country must make internal policy decisions to maximize the benefits.
In a world of rapidly changing trade policy and trading relationships, NAFTA is “old news.” While some groups are still trying to undo NAFTA, the reality is that the trading relationships spawned by NAFTA need to continue to be updated to reflect 21st century trade activities if the three countries are to take full advantage of the economic synergies afforded them.