May 17, 2017 | by Bob Weidner

Getting NAFTA Right for the Entire North American Industrial Metals Supply Chain

Tossing aside success is not the answer.

Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.Pierre Trudeau

The memorable Canadian Prime Minister Pierre Trudeau first famously equated Canadian and U.S. policy to sleeping beside an elephant back in 1969; today, Pierre would no doubt point with some alarm to the considerable twitching and grunting about free and fair trade currently emanating from Washington. At least for now, President Trump has apparently decided not to just walk away but instead “renegotiate” the North American Free Trade Agreement. At least for now, the business leaders across North America who have grown and thrived with this unusually successful trade pact can perhaps breathe a slight bit easier. Certainly, at MSCI, with our industrial metals supply chain members stretching from Canada, through the American heartland, and into Mexico, we are encouraged.

Both the current Canadian Prime Minister Justin Trudeau—who is in fact Pierre’s son—and the Mexican President Enrique Peña Nieto are already on record endorsing a modernization and refurbishing of this nearly 25-year-old pact that created the world’s largest free trade area. Most everyone knowledgeable on the right and the left in this country knows that NAFTA needs reworking and updating in critical areas, but abandoning it—as earlier comments from Trump seemed to indicate—would be a monumental mistake.

After all, this agreement has contributed mightily to all three economies and certainly to the U.S. industrial metals supply chain. It has quadrupled trade between Canada, Mexico and the United States and reduced prices in the United States on everything from oil and manufactured goods to consumer and farm products. It has boosted U.S. growth by an estimated 0.5% per year, and created nearly 5 million new American jobs, including at least 800,000 in manufacturing in just its first four years. Most notably it has recreated the North American automobile industry into a modern, multi-billion dollar, tripartite, cross-border cooperative dependent on the movements of parts and semi-finished vehicles across all our borders. A typical auto part, for example, crosses the U.S.-Canadian border seven times before it is part of a finished vehicle. NAFTA has also nurtured a broad and vigorous advanced manufacturing supply chain across North America, from companies like Bombardier and Volkswagen to 3-D Robotics.

NAFTA is an old, creaky piece of work as trade agreements go, written and relatively unchanged since before the Internet, the incredible increase in border congestion, and the easing of access to Mexico's oil resources among other things.

The conservative Peterson Institute for International Economics estimates we in the United States are $127 billion richer each year than we would be without NAFTA. The U.S. Chamber of Commerce says that 14 million U.S. jobs are now dependent on the free trade agreement.

Our annual trade with Canada now totals some $663 billion and with Mexico more than $500 billion, according to the most recent available figures. Both countries are essential, integrated players in the North American industrial metals supply chains for energy production and supplies, commercial construction and infrastructure projects, and motor vehicles. The United States trades $6 billion a year in steel alone across its northern border.

Mexico is much the same story, only more so. Every dollar in goods exported from Mexico to the United States includes 40 cents of U.S. content. It has overtaken Canada as our leading auto manufacturing partner and by 2020 will produce an estimated 25% of all North American cars. Mexico is now the top export destination for our beef, soybean meal, corn sweeteners, apples and beans and second largest in the world for our corn, soybeans and oils.

So what’s the problem? Unfortunately, NAFTA is an old, creaky piece of work as trade agreements go, written and relatively unchanged since before the Internet, the incredible increase in border congestion, and the easing of access to Mexico’s oil resources among other things. There are those who have blamed NAFTA for the “hollowing out” and loss of between 500,000 and 800,000 manufacturing jobs in California, New York, Michigan and Texas. Though on reflection it seems that China’s predatory currency manipulation and government subsidized overproduction, and super-low cost manufacturing had as much or more to do with those losses.

In any case, it has been widely reported that President Trump decided to renegotiate rather than withdraw from NAFTA after Commerce Secretary Wilbur Ross rolled out a map showing the potentially large job losses across the manufacturing and farming Midwest if the trade agreement was shut down.

No surprise, there is an extensive list of improvements and reforms that could be incorporated into a modernized NAFTA. These include: recognition of the financial power of the Internet and e-commerce; much stronger measures to ease chronic congestion along both borders; and tighter “rules of origin” standards to prevent parts from other countries being assembled, especially in Mexico, and shipped into the United States. The agreement’s slow and contentious dispute settlement mechanism could be vastly improved. Mexico could further ease access to its oil resources, and stronger currency manipulation rules would help ensure a level trading field.

MSCI represents industrial metals supply chain members and their interests in all three countries. We look forward to working with our colleagues here, in Canada and Mexico, and key Trump trade representatives to modernize this agreement that is so critical to our industries and the U.S. economy. As Henry Ford said: “Coming together is a beginning; keeping together is progress; working together is success.”  

Read more about our efforts to advocate for free and fair trade on behalf of the industrial metals supply chain.