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September 1, 2008

BORDER LINE

NAFTA took effect some 15 years ago—long enough to know who wins and who loses.

Each minute, products worth about $1 million flow across the U.S.-Canada border, and about half that over the U.S.-Mexico border.

At The Steel Supply Co., a service center in Rolling Meadows, Illinois, the paperwork has been piling up, along with opportunities, since the North American Free Trade Agreement (NAFTA) debuted nearly 15 years ago.

Business is up 25% to 30% since the trade agreement entered into force, fueled by purchases from Canadian companies. “A lot of other service centers are buying from us because we have such an extensive inventory,” says David Sheer, Steel Supply’s vice president and general manager, of the company’s wide variety of metric diameter shafting and tubing.

The only drawbacks are the stacks of certificates of origin and customs invoices that must be filled in for each item, which could total a couple of dozen in every shipment. “Those are costs you can’t recover too well,” Sheer says.

Free-trade agreements, whether multilateral like NAFTA or negotiated with individual countries, are an important issue in this election season. Critics believe the United States undermines its own manufacturing base by making it easier through these agreements for multinational companies to relocate factories to lower-cost nations where labor can be exploited and product quality can be questionable. Free-trade advocates say the agreements benefit all signatories because they open the way for increased bilateral trade. NAFTA, which took effect in 1994, is thus an example of free-trade theory in action and the extent to which such a treaty can benefit or harm Mexico, Canada and the United States.

Since NAFTA was introduced, trade among the United States, Canada and Mexico has more than tripled to $930 billion in 2007 from almost $300 billion in 1993, reports the Office of the United States Trade Representative. However, the United States’ trade deficit with both of its partners has climbed during that time. The U.S. trade deficit with Canada, $10.8 billion in 1993, grew to $78.5 billion in 2005 but declined to $68.2 billion by last year. The U.S. trade surplus with Mexico in 1993 was $1.6 billion; in 2007, with U.S. imports from Mexico a record $211 billion, the U.S. trade deficit with Mexico was $74.6 billion.

In Mexico, employment in maquiladoras—factories that import materials on a duty- and tariff-free basis for manufacturing and then re-export the assembled products, typically to the originating country—has increased since NAFTA’s enactment by some 550,000 jobs, reports the Carnegie Endowment. Jobs in the non-maquiladora sector, however, have dropped by about 100,000, to 1.3 million.

The United States reflects a less encouraging employment scenario. In July 2008, 13.5 million people were employed in U.S. manufacturing, some 20% less than in 1993, reports the U.S. Bureau of Labor Statistics. In Canada, the decline in manufacturing workers for that period was about 18%, to 1.9 million.

However, in conversations with Forward, metals industry executives say the net impact of NAFTA has been either positive or neutral. That’s consistent with a more formal survey, “Made in North America,” undertaken with more than 300 executives of major manufacturing companies in the three nations by financial and consulting firm Deloitte Touche Tohmatsu. Nearly half of those surveyed said NAFTA has positively impacted their businesses, 10% said the treaty’s impact has been negative, and the remainder were neutral.

The North American Steel Trade Committee, a NAFTA advisory and coordination group, reports intra-NAFTA steel trade rose to 1.81 million tons in April 2008 from 1.47 million tons in September 2006.

MAKING THE MOVE

To Bill Jones, president and CEO of O’Neal Steel in Birmingham, Alabama, “North America is inevitably going to be somewhat of an open market, and NAFTA is as good an attempt as possible to lend some rules to an orderly transition.”

Since the agreement took effect, O’Neal has established a welding center in Monterrey, Mexico, that produces large weldment pieces primarily for customers in the United States. O’Neal established the center because of plans by “dozens” of its customers to establish their own individual fabrication facilities in Mexico. Now, O’Neal serves all of them. The move also gave O’Neal “access to a huge labor market” in Mexico for positions such as welders that are often difficult to fill in the United States.

Steel Warehouse Co. of South Bend, Indiana, established a temper pass cut-to-length line in Monterrey about 11/2 years ago to serve customers that had already built plants there. “The reason we’re there is because our customers are there,” says CEO Dave Lerman. While some products are partly made in Mexico, then returned to the United States for finishing, others are sent abroad. “The ease of bringing products back and forth between the U.S. and Mexico has had a role to play for both countries,” Lerman says.

Each minute, the Commerce Department says, goods worth about $1 million flow across the U.S.-Canada border. About half that value of goods crosses over the U.S.-Mexico border, says Walter Bastian, deputy assistant secretary for the Western Hemisphere in the Department of Commerce’s International Trade Administration. When the United States shut down its borders after the attacks of Sept. 11, 2001, the impact on the U.S. economy was felt “in a matter of hours,” he says.

When Canadian steelmaker Dofasco was purchased by ArcelorMittal in 2006, it primarily served the needs of Canadian auto assembly plants. ArcelorMittal’s U.S. plants serviced the U.S. auto industry. To ensure it provided consistent quality and service throughout North America, the company promoted Brian Aranha, vice president-commercial, to vice president-NAFTA automotive sales and marketing. “It was necessary to have one face for the customers,” he says.

Now automakers can build vehicles in the most efficient locations because “the artificial tariffs that inhibited the free flow of goods are gone,” Aranha says. The open borders have benefited the metals industry as a whole, he says. “Customers can buy from the most efficient location for the niche products they have.”

CRITICS’ VOICE

Of course, not everyone embraces the free-trade pact or believes it delivers what was promised. Alan Tonelson, research fellow at the U.S. Business and Industry Educational Foundation in Washington, which represents about 1,500 family- or privately owned companies, says NAFTA was supposed to expand U.S. exports. But instead, it “has turned trade policy into promoting outsourcing production and jobs.”

Low wages and underemployment in Mexico translates to a weak market for consumer goods, Tonelson says. Instead, the country’s poor pay and lax worker protection standards mean that “in many respects, it’s an outsourcer’s paradise.”

Tonelson cites the auto industry as an example. Components are sent to Mexico for further processing and assembly, then returned to the United States. As a result, “auto part exports increased, not for cars for Mexicans, but for Americans.”

Economist Robert Scott, director of international programs at the Economic Policy Institute (EPI), a Washington-based think tank, says NAFTA displaced about 1 million U.S. workers between 1993 and 2004, with two-thirds of those losses coming from manufacturing. Michigan was the biggest loser, with 1.4% of its workers displaced, followed by Indiana, with 1.2% of its workers hit.

Those pushed out of their jobs typically found new ones that paid 10% to 15% less than they previously earned, Scott says. Job losses have taken a disproportionate toll on those with a high school education or less. They accounted for more than 50% of job losses, yet represented just 42% of the labor force.

While Mexico is typically the scapegoat for U.S. job losses, the real impact is harder to gauge.

“NAFTA was never going to have a huge impact on U.S. manufacturing or the U.S. economy,” says Daniel Griswold, director of the Center for Trade Policy Studies at the Cato Institute, a public-policy research foundation in Washington. The United States was already open to Mexican imports from maquiladoras dating back to the 1960s.

But thousands more factories sprang up across Mexico in the mid-1990s after the country signed NAFTA, says Roberto Arias, Deloitte’s manufacturing leader in Mexico. More than 17% of Mexico’s gross domestic product (GDP) is generated by manufacturing, with important sectors such as automobiles, machinery and equipment, basic metals, non-metal minerals, chemicals and petroleum derivatives, food and beverages, and textiles and apparel.

Mexico’s Ministry of Economy reports that exports to its North American trading partners jumped to almost $230 billion in 2007 from $44.4 billion in 1993, with the vast majority headed toward the United States.

“[NAFTA] is a powerful reformative document for the Mexican economy,” says Shanker Singham, an international trade expert and partner with the law firm Squire, Sanders & Dempsey LLP, based in Washington.

In contrast, the United States and Canada were closely linked by a trade pact five years before NAFTA entered the scene. Canada’s biggest export market is the United States, with more than 75% percent of exports shipped there.

In 2007, Canadian goods shipped to the United States totaled almost $335 billion, compared to about $325 billion five years earlier, reports Canada’s Office of the Chief Economist. Mexico was Canada’s fifth-largest export market, jumping to about $5 billion in 2007 from $4.4 billion in 2006.

But Edward M. “Bud” Siegel, Jr., president and CEO of Russel Metals in Mississauga, Ontario, a metals distribution and processing company, doesn’t attribute any change in his business to NAFTA. The trade pact has “to the best of my knowledge, not gained any business for Russel Metals,” he says.

As for the United States, Griswold says NAFTA’s impact on U.S. manufacturing varies by industry. While light manufacturing, non-durables and textiles have declined, higher valueadded products like automobiles, aircraft, pharmaceuticals and chemicals have done well.

Of course, when election time draws near, NAFTA becomes “the whipping boy,” says Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington and co-author of NAFTA Revisited: Achievements and Challenges. “Americans often conflate the problems of illegal immigration with the problems of globalization,” he says. When politicians lambaste NAFTA, Americans typically think of Mexico. “It’s a code word, almost, as being tougher on immigration,” Hufbauer contends. Speaking against India or China “might not have the same punch. Workers identify lost jobs with Mexico, not China,” he says.

While job losses from NAFTA attract attention, they are “a mere drop in the bucket compared to what happens with Asia,” says James Hoffman, chief operating officer of EMJ Metals in Lynwood, California. An EPI report released last year said that the United States lost 2.3 million jobs to China in six years.

But without NAFTA, that number would likely have been much higher. “Without the ability to take advantage of the labor they have [in Mexico], a good deal of [manufacturing] business could have ended up much farther away,” says Lerman.

While Michael Siegal, CEO of Olympic Steel in Bedford Heights, Ohio, says it’s impossible to gauge the trade agreement’s impact nearly 15 years after it took effect, “NAFTA is a fait accompli,” and Americans and politicians need to accept it as such. “What is the value of the United States on trade contracts if we say, ‘Let’s review it?’ It ruins our entire credibility.”