NAFTA: Q&A on Impact

Latinvex asks two leading experts about the impact of NAFTA 20 years after it was signed into law.

BY LATINVEX STAFF

What is the main benefit NAFTA has had on Mexico and the United States? Why do sporadic trade tensions between the United States and Mexico continue despite NAFTA? What needs to be done to make NAFTA even more successful?

Latinvex asked two leading experts: Beatriz Leycegui, former Mexican Undersecretary of Foreign Trade, Secretariat of Economy who served as director of legal analysis at the Mexican office in charge of NAFTA negotiations and Robert Pastor, director of the  Center for North American Studies at American University and National Security Advisor for Latin America  during the Carter Administration.

Latinvex: What is the main benefit NAFTA has had on Mexico and the United States?

Pastor: The main benefit to all three countries of North America is that it created a continental market and made goods produced in North America more competitive.  

Leycegui: The most important benefit that NAFTA has had on Mexico is related to its general objective, which is the increase on trade and investment flows in North America. This objective has been  accomplished. Since the Agreement entered into force in 1994, Mexico’s trade with the region has increased 416 percent and the average annual flows of foreign direct investment (FDI) from North America to Mexico have increased 506 percent. Since the entry into force of NAFTA, Mexico has received $174 billion in FDI from the United States, which amounts to 52 percent of the total received. In the same period, Mexico has received $13 billion in FDI from Canada (4.2 percent of the total). The increase on trade and investment flows has occurred because of the legal certainty given to the economic actors in the region and the tariff preferences acquired through NAFTA.

The former is relevant because more than half of Mexico’s economic growth since 2004 is associated to its export activity. In 2011, Mexico’s gross domestic product grew 3.9 percent, 2.2 percent accounted to its export activity. The fact that  82 percent of its total exports went to this region demonstrates the relevance that North America and the Agreement has to Mexico. In addition, one of every five jobs relates to Mexico’s export activity. Moreover, the wages paid by companies that export are 37 percent higher than those that do not export.

Certain analysis have estimated  that a 1 percent increase on  U.S. GDP produces a positive effect of about 1.9 percent on  Mexico’s total export growth. In the absence of NAFTA, Mexico’s exports would have been 50 percent lower and FDI flows 40 percent lower. In the case of imports, without such increase Mexico would not have been able to absorb technology as it has.

Latinvex: Despite NAFTA, there continues to be sporadic trade tensions between the United States and Mexico (trucks, tomatoes, etc). Why?

Leycegui: In 2011, trade between Mexico and the U.S. amounted to more than $449 billion. From each thousand dollars traded worldwide, 120 are produced or consumed in the U.S. and Mexico and twelve dollars are exchanged between both. In other words, between Mexico and the United States $49.9 million are traded per hour and $832,000 per minute. As a consequence of  such intense bilateral relation disputes tend to arise. It is relevant to  measure the value of trade and investment flows affected by the disputes that have ocurred. Such value has been small when compared with the total value of trade and investment flows registered. For example, in the case of investment, from 1994 to 2011 Mexico was ordered to pay under investor-state disputes the amount of $215 million, equivalente to 0.06 percent of the $336 billion of foreign direct investment received by Mexico during the same period.

Pastor: There are continuing trade tensions because the President and Congress yield to special interests - like the teamsters union and Florida tomato growers - rather than protect the national interests. The President and Congress have done so, in part, because they have not grasped the importance of constructing a "North American Community" - a seamless market for goods and services for the entire continent, which requires that all three countries follow the rules.

Latinvex: What needs to be done to make NAFTA even more successful?

Leycegui: To maintain the dynamic trade relation originated since NAFTA, reduce costs of doing businesses and to turn the region into one of the most innovative and attractive for investment in the world, it is fundamental to attend with a greater sense of urgency the competitiveness agenda. The following are some of the aspects that this agenda should include.

·         Achieve a 21^st century border in terms of physical and technological infrastructure and to give continuity to the working program of the Mexico-United States Executive Steering Committee on Twenty-First Century Border Management

·         Establish mechanisms to facilitate trade regarding technical regulations and sanitary and phistosanitary measures such as harmonization, equivalence and mutual recognition of such regulations and of the  conformity assessment procedures.

·         Compliance of the commitments under NAFTA and the settlement of the  old trade disputes.

·         Flexibilization of the  rules of origin when necessary.

·         Agreement on  a common tariff policy towards other countries in products where tariffs applied by the three countries are the same or similar.

·         Further discipline the application of unfair trade practices measures within North America.

·         Negotiate mechanisms of cumulation of origin in future agreements.

·         Encourage greater coordination among industries of the region with high levels of integration in their production chains.

·         Create new strategies to promote the development of SMEs in order to incorporate them to the supply chains of the three countries or for them to export directly.

·         Effectively protect intellectual property.

·         Promote greater exchange of professional services. A priority area is medical services.

·         Ensure the highest levels of protection to natural resources and ecosystems in the region without limiting the benefits of economic integration.

·         Obtain more benefits from the North American Development Bank.

·         Improve the understanding of government procurement systems of the three countries.

·         Promote closer ties between the private sectors of the three countries in order to establish an advisory council representative of the industries.

Certain  proposals are being negotiated under the Transpacific Partnership Agreement. This ambitious agreement can serve as a framework for Mexico, United States and Canada to rethink their trade relation building on the experience that NAFTA has provided them.

Pastor:  In my book The North American Idea: A Vision of a Continental Future, I develop a vision and a blueprint for what the three governments need to do to build upon the foundation of NAFTA and create the most formidable, competitive, and secure economic partnership in the world.   We should begin by forging a common external tariff, which would eliminate the heavy tax of "rules of origin" procedures and create a fund that could invest in a continental plan for transportation and infrastructure that would improve commerce and reduce the income gap between Mexico and its northern neighbors.   With a common external tariff, border officials would focus on drug-trafficking, migration, and illicit trade and leave the legitimate commerce, including trucks, to transit expeditiously.   The three leaders should instruct their Ministers of Transportation to work together to develop a single continental transportation plan for the next 50 years.   We should invest in scholarships for students to study in their neighbors and research institutes on North American studies.   In my book, I develop dozens of proposals, but these require imagination and political will to implement.   One hopes that President Enrique Pena Nieto of Mexico, who understands and has spoken about the power of the idea will be able to persuade President Obama and Prime Minister Harper.

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