The North American Free Trade Agreement (NAFTA) had its twentieth year anniversary of implementation on January 1, 2014. When President Obama meets with Mexican President Nieto and Canadian Prime Minister Harper at the North American Leaders’ Summit in February in Mexico, a logical question would be what comes next to reenergize NAFTA to further integrate the economies of the three countries to increase competitiveness in global markets.
Some people still want to argue about jobs and investments being gained or loss, but the reality is that the producers and consumers in the three countries bordering each other would have pursued cross border trade, with or without NAFTA. It would take government officials with guns on highways and train lines at the border and at international airports and seaports to prevent trade from naturally occurring. NAFTA was unique in its time as a genuine free-trade agreement with provisions for most industries.
Trade liberalization was occurring in the three countries before NAFTA. The U.S. and Canada were founding member of the General Agreement on Tariffs and Trade (GATT) formed in 1947 to undo the high industrial tariffs of the 1930s. The Uruguay Round of GATT negotiations that included agriculture for the first time began in 1986 and concluded in 1994 with creation of the World Trade Organization (WTO) in 1995. The NAFTA negotiations were begun and concluded within the time of the beginning and ending of the GATT talks on freer trade for agriculture.
After years of trade protectionism and limited trade, Mexico joined the GATT in 1986 and participated in the Uruguay Round of negotiations. In the early 1990s Mexico unilaterally lowered some agricultural trade and investment barriers, which created a pathway toward NAFTA that removed all tariffs and quota in agricultural trade by 2008. The Canada-U.S. Free Trade Agreement came into force in 1989 and was integrated into NAFTA in 1994. It removed all tariff and quotas in agriculture for both countries, except dairy products for both countries, peanuts, cotton and sugar for the U.S. and poultry and eggs for Canada.
Given the large population in the U.S. compared to Mexico and the production of commodity crops like corn and soybeans, it is no surprise that according to USDA estimates the U.S. buys 75 percent of Mexican agricultural exports and supplies 73 percent of its imports. The percentages are smaller for Canada, with the U.S. buying 50 percent of Canada’s agricultural exports and supplying 59 percent of the imports. U.S.-Mexico agricultural trade is largely complementary (each exports different products), with grains, oilseeds, meat, and related products accounting for three-fourths of U.S. exports to Mexico and beer, vegetables, and fruit accounting for two-thirds of U.S. agricultural imports from Mexico. Much of Canada-U.S. trade is intra-industry (each export to the other within certain industries) such as grains and feeds and beef and pork.
NAFTA has also encouraged foreign direct investment by providing equal treatment of foreign and domestic investors and prohibiting certain performance standards–such as a minimum amount of domestic content in production–for foreign investments. Companies that have developed expertise in one of the countries can apply it in the other two without government imposed limits.
NAFTA’s success as a trade area is partly due to its geography, which, obviously, isn’t going to change. The three countries are more than twice the size of Europe in area with almost as many people. They have ports on the Atlantic and Pacific Oceans allowing for efficient trade in agricultural commodities, energy and manufactured items like automobiles. The oceans also provide a national security buffer. Natural resources and arable lands are relatively abundant with river transport systems. These elements in common make the three countries a hub for all kinds of global economic activity.
Mexico may be thought of as the weakest part of the trade area, but is actually its most dynamic part. Its lower-wage scale provides the opportunity to keep manufacturing in the area that would otherwise migrate to other regions of the globe. Mexico’s labor pool is expected to grow by 58 percent between 2000 and 2030. While almost half the people still live in poverty today, it will have a growing middle class as it continues to integrate with the U.S. and Canada economies. Autos already account for a quarter of all Mexican exports and a huge manufacturing facility by Canadian company Bombardier will make it an aerospace exporter. High-tech exports accounted for 17 percent of Mexico’s GDP. Mexico has many problems as seen daily in news reports, but economic growth spurred by outside investment in export industries will help the country overcome them.
The three countries have backdoored their way into pursuing a new free trade agreement (FTA). The U.S. with seven other countries in South America, Asia and Oceania had been negotiating a Trans-Pacific Partnership (TPP) FTA since 2010. Canada and Mexico independent of each other asked to join in 2012, and were accepted. The TPP group has now grown to twelve countries, including Japan. If successful, the FTA will take the three countries to a new level of integration.
The U.S. has taken a further step in trade by opening talks with the EU on a Transatlantic Trade and Investment Partnership (TTIP). Last year Canada completed an agreement with the EU and TTIP is expected to similar, but broader. Mexico also has had a trade agreement with the EU since 2000. The U.S. should bring Mexico in as a full partner in the TTIP talks. That would complicate the process, but would be better than patching together something after the fact to recognize that Mexico cannot be separated from the U.S. and Canada on trade. Mexico has shown a commitment to free trade by negotiating 14 FTAs.
NAFTA is a geopolitical grouping that is unique in the world and has had staying power in global trade. The TPP and TTIP negotiations are opportunities for the U.S., Canada and Mexico to cooperate further to the benefit of all three countries. Closer cooperation would require faster flows of products at the borders, more harmonization of government regulations and other changes that would lower costs and further improve international competitiveness.