NAFTA (the North American Free Trade Agreement) is a labor and international trading agreement between three countries–the United States, Canada, and Mexico. NAFTA’s goals were to increase wealth and competitiveness and deliver real benefits to families, farmers, workers, manufacturers, and consumers in North America through a reduction in tariffs and regulation. NAFTA is not the first, the only, or the last trading agreement between the U.S. and other nations or trading blocs.
While the trade agreement, by most metrics, is an economic success, it has impacted certain segments differently. Many criticisms of NAFTA are valid but don’t paint the overall picture.
NAFTA has been blamed for the loss of U.S manufacturing jobs to Mexico. But with globalization, U.S. manufacturing jobs that were “lost” to Mexico could have instead been “lost” to other countries like India or China. While Mexican consumers now have less scarcity of products, wider selections, and lower prices, Mexican indigenous peoples’ farming communities have been impoverished as lower cost American and Canadian farm imports displaced local producers. For Canada and Mexico, the North American Free Trade Agreement has decreased wages in what was called a “race to the bottom,” as the gap in unskilled labor costs narrows.
A major opponent of NAFTA are the trade unions that have criticized the agreement as putting corporate interests ahead of worker rights. In one example, the U.S trucking industry, supported by the Teamsters union, has blocked Mexican trucks from transporting goods into the U.S. The lack of compliance with the trucking agreement costs U.S. consumers $2 billion in annual dispute tariffs. While truck safety is a real concern, the U.S. consumer has subsidized U.S. trucking with protectionism for the past 22 years. Saving American jobs is important, but the issue, in this case, is competition.
The Importance of NAFTA to the United States Total Trade
The U.S., Mexico, and Canada had been trading goods and services with each other for three centuries. But before NAFTA, Mexican tariffs on some U.S. imports were 250% higher than U.S. tariffs on Mexican imports. This meant that some U.S products in Mexico were unaffordable. For U.S businesses wanting to sell in Canada and Mexico, NAFTA opened up markets.
Let us consider the importance of NAFTA to America’s Total Trade, which are imports and exports combined. According to the U.S. Census Bureau, in 2015, by Annual Total Trade, America’s four largest trading partners by rank were:
- China at $598B (Billion)—U.S. exports to China $116B; US trade deficit with China $366B.
- Canada at $575B—U.S. exports to Canada $280B; U.S. trade deficit with Canada $15B.
- Mexico at $531B—U.S. exports to Mexico $236B; U.S trade deficit with Mexico $58B
- Japan at $194B—U.S. exports to Japan $63B; U.S. trade deficit with Japan $69B.
While the U.S. consistently incurs large trade deficits with China, trade with Canada and Mexico is more balanced. America exports to Canada and Mexico almost as much as it imports from them. Anyone versed on international trade, and the impact that trade has on the American standard of living will immediately recognize that a significantly large and balanced trade with Canada and Mexico is a good thing for strong economic growth and prosperity.
Comparison to the European Union (EU)
The EU and NAFTA are both organizations that support increased globalization. Despite being set up for similar purposes, the EU and NAFTA have many differences. In the EU, under the European Monetary Union (EMU) agreement, there is the possibility for free movement of labor between countries, and a single common currency, two options not available in NAFTA.
While the EU and NAFTA had decades of preceding agreements, they both came into effect at about the same time in the early 1990’s. Twenty years later, when we compare the two largest trading zones in the world, the importance of NAFTA becomes self-evident. NAFTA, with a population of 472M and a GDP of $21T, is more prosperous than the combined EU with a population of 508M and a GDP of $19T. There are other regional free trade zones, but NAFTA is the largest free trade zone in the world.
However, what the raw numbers don’t easily disclose is that the EU has now spent more time, and put in significantly more resources, integrating and lifting many of its southern and eastern nation members from under-development. Today the EU has 28 member countries, with some of those countries, like Bulgaria, starting off as very under-developed. The American hemisphere has 55 countries from which to choose, but NAFTA only includes three. In the long term, the EU is bound to be more prosperous having integrated so many more peripheral economies. The U.S can only benefit economically by increasing the standard of living in the countries south of the NAFTA border.
NAFTA and Latin America
NAFTA has done far more than just increase wealth and competitiveness for the three founding North American countries. NAFTA has also put a focus on developing the American hemisphere economically and institutionally. To date, Central America, the Caribbean, and South American countries have made trade agreements with NAFTA. NAFTA has helped Mexico become one of the world’s most globalized countries with trade agreements with the Common Market of the South (Mercosur), Costa Rica (1995), Chile (1999), and the EU (2000), to name just a few.
NAFTA has also become a model for a Latin America hindered by decades of market protectionist policies. What seems counter-intuitive to many, is actually the case—if a country can increase trade, more domestic jobs are created. Of course, jobs are not created equally in all industries, as national competitive advantages come into play.
Today, there are many Latin American trade agreements. Some are regional, some multinational, and some are unilateral. Greater coordination of all the Americas’ trade agreements would strengthen the hemisphere’s global competitive position. Why is this important? Because every region from Asia (ASEAN) to Europe (EU) has created trading blocs to compete globally. The ASEAN countries, with their “One Vision, One Identity, One Community” strategy have achieved impressive and significant coordinated growth as they have embraced a globalization as a path to prosperity.
Expanding NAFTA in the American Hemisphere
NAFTA has changed the political landscape with trade and economic cooperation in North America and has benefited the U.S, Canada, and Mexico. Central American, Caribbean, and South American trade agreements picked up momentum in the early 1990s as countries outside of NAFTA scrambled to ensure their long-term trade relevance, which is really hard to do for small countries without expanded markets. Trade agreements offer countries in the American hemisphere an important path to foreign direct investment, development, economic growth, and higher standards of living. By gaining access to NAFTA as a trading partner, new economic and political institutions are created, and development at the basic infrastructural level is made possible.
For the U.S. to achieve stronger economic growth and rising prosperity, NAFTA needs to be about more than just trading; more than just facilitating the transit of merchandises, products, services, and capital. NAFTA needs to oversee the regional trade agreements and expand into Latin America in a way similar to how the European Union expanded into Eastern Europe. Latin American regional economic development and integration may require NAFTA to invest development funds in a way similar to what the EU provided its poorer southern and eastern European countries, all while receiving the benefits of more jobs and security. For the U.S. to make a dent on illegal immigration from Latin America, the only real long-term solution is to create economic prosperity in the Americas. Building a wall will not be the solution compared to what an expanded NAFTA agreement can provide.
Dr. Alfred Sanders is a professor of finance at the Jack Welch Management Institute, and a Partner, Capital Markets Consulting at Genpact.