Wise, C (2009). The North American Free Trade Agreement (excerpts)

• NAFTA and the inability of political leaders in North America to renovate and expand

• meant its eclipse by more recent and compelling global forces.

China & US

• Gained a foothold in sectors once considered ‘North American’: electrical machinery, equipment and parts.

• China’s 2001 entry into the World Trade Organization (WTO) - its exports have steadily surpassed those of Mexico and Canada in US markets.

• Overall, Canada and Mexico remain the most important US trading partners, and together represent the largest supply of US energy imports,

China cause of job dislocation and associated economic stress in the USA and larger North American market  All three countries have  avoided debating the full implications of the burgeoning China-NAFTA trade deficit and focused so narrowly on NAFTA as the root cause of today’s economic malaise. 

Regional and Global trends are gradually contributing to NAFTA’s obsolescence

NAFTA’s key innovations:• Protection of IPRs• Liberalisation of investment and trade in services• Creation of mechanisms to resolve investment disputes

based on binding international arbitration

In sum:• Along with the side agreements on labour standards and

environmental protection, the NAFTA accord promoted the free flow of goods, investment and services within the North American bloc over a 15-year timeline which ended in 2009.

• WTO rules: most barriers came down in the first 10 years of the agreement (by 2004). Tariffs and non-tariff barriers were eliminated on 65 per cent of North American goods by the 5-year point;

• Tariff reductions on automobiles occurred over a 10-year period, with the rules-of-origin stipulation that such vehicles must meet a 62.5 per cent local-content requirement in order to qualify.

• In the agricultural sector, sensitive products were allotted a 15-year liberalization schedule that ended in 2009: corn, dry beans and powdered milk on the Mexican side; sugar, peanuts and orange juice concentrate on the US side.

• Negotiating tensions were such that sugar and dairy products were excluded altogether in trade between Canada and Mexico.

NAFTA still fell short of its mandate to liberalize substantially all trade between the three partners:

• First, is the persistence of administered protection: e.g. in the setting of hefty percentages for local content under NAFTA’s rules of origin in such sectors as autos, high-tech products and textiles and apparel.

• Second, little progress was made toward the elimination of antidumping policies and countervailing duties.

• Although special interests tried to gain these protectionist concessions, hindsight suggests that NAFTA has been a liberalizing force overall

Each participant wanted to reduce transaction costs and increase the benefits of cooperation. Canada and Mexico: • opportunity to secure access to the US market• establish clear rules and procedures for resolving trade

and investment disputes.

The USA: promoting and rationalizing economic ties within the North American bloc, sought to bolster the rules and norms that constituted the international trade regime codified within the GATT 

Canada and the USA: NAFTA debate opened up the bitter exchanges over job impacts, economic liberalization ( the downside of USA–Canadian relations) 

If NAFTA signified the free flow of goods, services and capital between all three countries, what was to stop the flow northward of environmental pollution and sub-standard working conditions? Why risk the lowering of labour and environmental standards that workers and consumers had fought to achieve since the 1930s? 

it was this coalition that compelled the administration of George H. Bush to expend political capital on border clean-up and the enforcement of much higher environmental standards  This ante was upped to include the formal negotiation of labour and environmental side agreements to accompany NAFTA as a quid pro quo for the blue–green endorsement of the 1993 NAFTA-implementing legislation

• Started out as an issue-oriented blue–green coalition in 1991• • Grew into a full-blown anti-NAFTA movement that included

graduates to downsized business executives, laid-off factory workers, teachers’ unions, pensioners and welfare mothers.

 • This coalition won the battle in securing the attachment of labour

and environmental side agreements to NAFTA

• Lack of enforcement of those agreements prolonged the trade policy war on the domestic side.

• The fight has centred on correcting the institutional weaknesses in those earlier agreements, namely, the obligation of each country to enforce its own existing national laws

• But no regard for the strengthening and harmonising North American labour and environmental standards  overall 

Result of NAFTA erratic:•  At the macroeconomic level:• Canada and Mexico have converged toward the more

highly developed US standard in terms of aggregate growth, interest rates, exchange rate stability and the lowering of inflation to under 5% annually.

• For Mexico this is a considerable victory, given the explosion of consumer prices in the wake of the 1994 peso crisis.

But the microeconomic level: • Failure of neoliberal policies • Emphasized the need for sound domestic policy

reforms to complement and maximize on the opportunities of a regional integration scheme.  

 

• Canada, despite its advantage as a G8 country, has lagged in improving its domestic economy

• Although Canadian income distribution is the most equitable in North America, Canada’s per capita income remains about 20 per cent lower than that of the USA and its productivity and investment ratios are similarly trailing.  

• In Mexico, the pending reform tasks inherited by the administration of Vicente Fox (2000–2006) were waylaid by the unexpected difficulties that arose between the country’s first democratically elected executive, a minority government and the divided Congress which he was handed.

This meant, in Mexico:• Delay of crucial competitiveness measures in energy sector

modernisation, fiscal restructuring, labour market mobility and stronger technical support and credit access for those small and medium-sized firms that provide the bulk of Mexican employment. 

• Although Fox’s successor, Felipe Caldero´n (2006–2012), has proven to be more politically adroit in navigating a divided Congress, the pace of microlevel reforms has been slow and incremental. 

• The inability of all the relevant actors to overcome a longstanding collective action gridlock in reforming Mexico’s energy sector has crippled the ability of this energy-rich nation to cash in fully on the latest oil price boom. 

China, with its lower costs on utility inputs for industrial production, more favourable corporate tax rates and blitzkrieg educational investment in the higher-skilled professions, is now burrowing through the more sophisticated sub-sectors of the US electronics market (computer peripherals, sound and television equipment, telecoms),

This sector, Mexico can no longer claim as its own 

 Public policy debate in Canada still juxtapose nationalist comforts and quality of life issues against the kinds of market-oriented economic measures that would reduce the numerous barriers to higher productivity and competitiveness. 

In Canada , Canadian politicians and policy makers have repeatedly postponed the following  measures, and in so doing have hampered opportunities for stronger growth of per capita GDP and upward mobility on the part of the average Canadian:

• Reduction of inter-provincial trade barriers,• Removal of restrictions on labour mobility• Loosening of controls on the production and distribution of

public goods and services• Lower taxes on capital and income

Because of the minimalist institutional framework that all three members agreed to at the outset, NAFTA has basically been frozen in place and is out of date when it faces structural challenges .

China’s trade relationship with South America is based on more traditional patterns of comparative advantage:China’s export of lower-end industrial goods and its import of primary products from Argentina, Brazil and Chile, in particular

The China–NAFTA relationship is one of export similarity and fierce competition for manufacturing market share, especially with regard to Mexico and the USA.  

The overriding goal on both sides is to establish manufacturing operations in Mexico based on integrated global production chains, with an eye toward exporting to the US market.  

By turning its back on Mexico, the USA could soon be facing the worst-case scenario of all with regard to its mammoth commercial deficit: the displacement of US suppliers by Chinese firms in Mexico’s maquila assembly plants – a trend that is now underway.

China’s ability to offset Mexico’s higher labour and production costs by meeting NAFTA’s regional content requirements and thereby gaining duty-free access to the US market.  

Canada • Used its privileged access to the US market as an

opportunity to restructure the economy despite the hefty political costs and to introduce sweeping changes to its historically mercantilist trade strategy.

• Mexico, in contrast, seized NAFTA membership as a way of locking in a new market-oriented reform model, one for which there has been insufficient preparation or follow-up.

• Fifteen years after the fact, numerous sectors of the Mexican economy (telecoms, finance, petroleum, bread, tortillas) remain under monopolistic control.

• Mexico lags behind Chile and Colombia on the World Bank’s Doing Business competitiveness indicators  

Report by Daniel Lederman et.al. 2005 (World Bank’s Latin America and Caribbean Division) ‘Mexico’s global exports would have been about 50 percent lower and foreign direct Global Monitor  145  investment (FDI) would have been about 40 percent less without NAFTA. Also, the amount of time required for Mexican manufacturers to adopt U.S. technological innovations was cut in half . . . NAFTA made Mexico richer by about 4 per cent of its gross domestic product (GDP) per capita.’ However, although Mexico may arguably have been worse off had it not joined NAFTA, counterfactual analysis (that is, comparisons of Mexico with other Latin American emerging markets that did not join NAFTA) confirm its pattern of under-performance  

A true revival of NAFTA would require that regional leaders agree on a continental strategy that taps labour markets across the three borders, tackles the huge asymmetries that continue to divide Mexico from its partners, and invests more vigorously in infrastructure and technology transfer