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Carla Hills signs NAFTA in December 1992 flanked by Mexican trade minister Jaime Serra Puche and Canadian trade minister Michael Wilson, while presidents Carlos Salinas and George Bush and Canadian prime minister Brian Mulroney look on. (Photo: USTR)
Wednesday, December 5, 2012

NAFTA Made U.S. More Competitive

NAFTA has made both the U.S. and Mexico more competitive and more productive through the opening of our markets and the increase of our interdependence.


On this 20th anniversary of the signing of the North American Free Trade Agreement (NAFTA) it is an appropriate time to evaluate the impact the agreement has had. 

We can begin by recalling that the NAFTA, which became operative in 1994, created a regional market of over 400 million people erasing industrial tariffs, opening a broad range of services, providing protections for intellectual property, protecting investors against expropriation, and removing agricultural barriers between the United States and Mexico, a move that still stands as an example to the rest of the world.  Today the largest export markets for Canada, Mexico, and the United States are right here in North America.


In the intervening years, economic activity between the United States and Mexico soared by 500 percent, and the GDP of both nations has grown by more than 50 percent.  Specialization has boosted productivity on both sides of the border.  In 2011 U.S. exports to Mexico topped $197 billion about 13 percent of our nation’s total exports, exceeding our sales to Brazil, Russia, India, and China---the so-called BRICs---combined.


Today Mexico buys more U.S. goods than all the rest of Latin America combined and more than the newly industrialized countries of Asia.


With 113 million consumers and a purchasing power of over $1 Trillion, Mexico offers substantial opportunity to U.S. entrepreneurs, large and small.  Small and medium size enterprises benefit hugely from Mexico’s proximity and its openness to our trade.  Mexico purchases about 11 percent of their total exports, which is important in terms of job creation as small and medium size enterprises are the backbone of job creation.


The United States also derives significant benefits from our imports from Mexico.  America’s value-added in purchases of manufactured goods from Mexico is 37 percent which is roughly 20 times higher than U.S. value-added in our purchases of similar goods from Japan and 10 times higher in our purchases from China’s.


In addition for every dollar that Mexico earns from its exports, 50 cents is spent of U.S. goods.  As a result of the high percentage of U.S. content in the goods that Mexico exports and the fact that Mexico uses half of its export earnings to purchase American goods, Mexican exports both to us and to others creates a benefits for the United States that is quite unusual.



Cross border investment is substantial as well.  Since the signing of the NAFTA, Mexico has made significant investments in the United States particularly in the sectors of cement, bread, dairy, and retail that contribute to our job creation. 


U.S. investment in Mexico has also increased substantially.  A very large percentage of the output from our investments in Mexico come back to us as imports of intermediate goods adding to our productivity and competitiveness in the production of finished products.


Also the products that are shipped abroad from U.S. production centers in Mexico benefit from favorable market access accorded shipments from Mexico as a result of its network of free trade agreements with 43 countries that represent over one billion consumers.


Our solid and beneficial bilateral economic relationship is based on geographic proximity, supply chain integration, cultural bonds, and the certainty of rules provided by the NAFTA.  The NAFTA has made both nations more competitive and more productive through the opening of our markets and the increase of our interdependence.


We have had disputes in the intervening years such as those involving cross border trucking and the import of tomatoes.  Trade differences arise in all major trade relationship just as disputes arise from time to time in the best of families.  Trade rules provide a framework in which to resolve such disputes.


In spite of the enormous benefits derived from our growing partnership made possible by the NAFTA, we could do more.  The World Bank estimates that North America has achieved an integration level of 50 percent, whereas Asia is already at 53 percent and the European Union is at 73 percent.



I believe that we need greater effort in three areas.  First, we need to collaborate more effectively to remove unnecessary impediments at our shared borders that clog our supply chains. That means increasing regulatory compatibility and updating the NAFTA rules of origin that currently drive up cross-border sourcing.


Second, to ensure our continued growth and competitiveness, we need to work more effectively to open global markets to products, services, and investment originating in North America so that our supply chains can work at maximum efficiency.  The rest of the world is not standing still.  Trade agreements are proliferating.  The European Union (EU) has proposed a free trade agreement with the United States.  Why not with all of North America?  The EU already has an agreement with Canada.


Third, publications, universities, think tanks, and employers need to talk more broadly about the benefits of the North American relationship.  The task of educating our citizens of the untapped potential of this powerful economic relationship cannot be left to government alone.  We need to make our citizens aware of the enormous benefits that the NAFTA provides us today and how those benefits could multiply tomorrow with just a little more effort.

Ambassador Carla A. Hills, Chair and CEO of Hills & Company, served as US Trade Representative from 1989 to 1993, during which time she led the US negotiations with Mexico and Canada for the North American Free Trade Agreement.  She wrote this column for Latinvex.

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