NAFTA at 20

Nevertheless, NAFTA—which eliminated most tariffs and other trade restrictions among the United States, Canada and Mexico—has been epic in its own way, ushering in a new era of economic strength and vibrant business relationships across the continent. NAFTA was designed to promote trade and investment among the three signatories, increase North American economic integration, and bring political and economic modernity to Mexico.

“On all three metrics, NAFTA has succeeded,” says Eric Farnsworth, vice president of the Council of the Americas, a Washington, D.C.-based business group that promotes open markets.

One of those metrics offers striking testament to the flood of goods and the ripples of energy that NAFTA has helped to send flowing across North American borders. Trade among the three countries has more than tripled since 1993, from $307 billion to more than $1 trillion in 2012—attributable, at least in part, to NAFTA. Canada, long a stalwart trading partner for the United States, remains No. 1 on that score, and Mexico is now No. 3, after China.

The metals industries have been among the prime beneficiaries of this back-and-forth flow. Steel trading between the United States and Canada almost doubled between 1993 and 2012, while U.S.-Mexico steel trade has increased 281%, according to the American Iron and Steel Institute. Aluminum has experienced similar increases, the Aluminum Association reports, with U.S. exports to its two primary trading partners increasing 88% between 1995 and 2012 (figures for 1993 and 1994 are not available) and imports increasing by 47%.

Of perhaps more lasting significance, NAFTA’s three signatories have established a new international manufacturing model: “Factory North America,” as The Economist recently dubbed it, to rival “Factory Asia,” with cross-border supply chains coming together to produce cars and airplanes with inputs from all three countries. Successes like those have prompted a global wave of trade liberalism, inspiring more international pacts, such as the proposed Trans-Pacific Partnership, based loosely on the NAFTA paradigm.

NAFTA has “strengthened North American supply chains and enhanced cooperation between the industries and governments on key trade issues,” says Lisa Harrison, senior vice president of communications at the American Iron and Steel Institute.

But Also Collateral Damage

Still, not everything has come up roses since Jan. 1, 1994, when NAFTA took effect. There has been collateral damage along the way, the apparent victims huddled bitterly along the road to North American integration. Among those who have been harmed are Mexican farmers and truckers, and American factory workers (particularly in the auto industry). Those merely discomfited include all the prognosticators who predicted either disaster or Valhalla when President Bill Clinton signed the agreement into law.

Though many polls show generally strong support in the United States for free trade, NAFTA continues to get little backing from key members of Congress, including some now from the Democratic Party base and anti-Obama conservatives. The balking Democrats are mainly from labor strongholds; the Republicans, in an election year, are loath to agree with anything the president favors. The result is little hope for substantive action to smooth NAFTA’s obvious kinks, or to approve the Obama administration’s request for quick action on the Trans-Pacific Partnership, a trade agreement involving a dozen countries along the Pacific Rim.

“With trade liberalization in general, there are winners and losers,” concedes Christopher Wilson, an associate with the Wilson Center’s Mexico Institute and a frequent commentator on U.S.-Latin America trade issues. “One of the challenges of NAFTA is to figure out how to make sure that the losers are taken care of.”

It’s easy to forget now that the prospect of the trade agreement was greeted in the early 1990s with both imprecations and hosannas. “It was either the apocalypse or the second coming,” Farnsworth says of the welter of commentary that preceded the pact. Most famously, 1992 presidential candidate Ross Perot predicted a “giant sucking sound” as American jobs departed for Mexico, while rival Vice President Al Gore foresaw a surge in new jobs as demand for American exports increased.

Neither turned out to be entirely accurate, though the controversy continues. In fact, all three countries saw job growth in the late 1990s, but that was due mostly to general economic prosperity. While the United States did lose
3 million manufacturing jobs after 2001, the problem was not with NAFTA but with the sudden arrival of China as a member of the World Trade Organization, concluded economists Robert A. Blecker and Gerardo Esquivel in their essay in CESifo Forum, which analyzed Bureau of Labor Statistics data.

The new behemoth in the room behaved like a movie millionaire flashing a wad of bills. To lure American manufacturers, Chinese industrial reps offered them buildings, roads, railroad linkages and, above all, cheap labor, and hundreds succumbed to these enticements. Thirteen years later, an estimated 30,000 American companies now either have their own plants in China or contract with those that do. That was the sucking sound that Perot had predicted, but it was not, as he had insisted, the result of NAFTA.

The United States lost another 2 million manufacturing jobs in 2008, according to the Bureau of Labor Statistics, but again the culprit was not NAFTA but the Great Recession, Blecker and Esquivel say. “None of these events had anything to do with NAFTA,” they write.

Realizing the New Opportunities

Meanwhile, the tariff-free environment in North America was prompting a new kind of integrated manufacturing, especially for big-ticket items like cars and airplanes. The NAFTA manufacturing platform meant automobile makers could now combine Canadian transmissions with Mexican engines in a U.S.-made car, or ship parts south to become part of a Mexican-made car, with elements ping-ponging across borders as many as eight times during the manufacturing process. Car modules or completed cars travel tax-free, as long as 62.5% of the content is added in NAFTA countries.

The virtue of tri-national efforts, carmakers say, is that the industry can take advantage of each nation’s specialized resources—for example, established manufacturing sectors in the United States and Canada and cheap labor in Mexico—and thus operate more efficiently.

The new model has been especially beneficial for Mexico, where Japanese and European auto manufacturers have been pouring money into new factories: a $2 billion Nissan plant in Aguascalientes, an $800 million Honda plant in Celaya (both in Central Mexico), a $1.3 billion Audi plant in San José Chiapa (in Southern Mexico), all in just the past two years. With Mexican autoworkers earning about 20% of what their U.S. counterparts earn, American carmakers in Mexico are also reaping big profits south of the border.

The Mexican Automobile Industry Association predicts the industry will be turning out 4 million cars a year by 2017. When NAFTA went into effect, foreign carmakers operating in Mexico were making about 1 million vehicles a year. Last year, the sector produced almost 3 million.

A similar dynamic has conjoined airplane manufacturers in Canada, the United States and Mexico to produce Montreal-based Bombardier’s new Learjet 85. With an engine built in Canada (though designed by U.S. firm Pratt & Whitney) and a fuselage built in Querétaro, Mexico, the eight-seat business jet is assembled at Learjet headquarters in Wichita, Kan. (along with wings brought in from Belfast, Northern Ireland).

Mexico’s role in the process would have been unthinkable 20 years ago, Farnsworth says.

“The plant in Querétaro is not just a low-cost assembly line,” he says. “A lot of the design and creative work is taking place there, too. It’s something that was never seen a generation ago.”

Creating Jobs in All Three Countries

The torrent of trade unleashed by NAFTA (and other economic forces, including a rising middle class in Mexico) has, of course, helped to generate jobs in all three NAFTA countries. Economist Wilson says that at least 6 million U.S. jobs depend directly or indirectly on trade with Mexico and 8 million on trade with Canada. The job connections go well beyond border states like Texas and California (with 1.1 million jobs between them). For example, South Dakota, New Hampshire and Nebraska send 20% of their exports to Mexico, Wilson says.

Trade-related jobs include some factory jobs to produce goods for export, Wilson says. “But there are also the janitorial workers who are hired to clean the factory, the truck drivers that deliver products, a lot of others—all the people whose jobs would disappear if trade between the United States and Mexico were shut down tomorrow,” Wilson says.

Consequences for Mexican Farmers and Truckers

With government-subsidized corn from the United States suddenly flooding the market, many Mexican farm workers found their employers going broke. Some 2 million of them left the countryside, many joining the trek north to enter the United States illegally, according to Laura Carlsen, director of the Mexico City-based Americas Program of the Center for International Policy.

“We do know that the loss of jobs in the Mexican countryside was directly related to NAFTA,” she says. “It happened just when produce from the United States came in and prices went down.”

Mexican truckers also have a smoldering NAFTA-related complaint. The original pact promised them freedom as they were carrying northbound products to make deliveries in the United States (as is the case with Canadian truckers). But because of resistance by the Teamsters union and independent American owner-operators, the promise was never kept. After Mexico finally retaliated in 2009 with tariffs on U.S. imports, the Obama administration introduced a pilot program allowing certified Mexican truckers into the country.

The issue still irks Mexicans. The pilot program is modestly successful, but only a few Mexican carriers participate due to the cost of bringing their trucks—which are 17 years old on average, according to The Journal of Commerce—into compliance with American standards.

A Drop in Salaries

On the U.S. side of the border, while big job losses can’t always be directly attributed to NAFTA, some analysts find that the pact has contributed to a dramatic drop in wages among unskilled and semi-skilled workers. Says Robert Scott, an economist with the Economic Policy Institute (EPI) in Washington, D.C., “the amount of downward pressure on wages for non-college-educated workers is astounding.”

Some 845,000 American workers have been certified by the Labor Department’s Trade Adjustment Assistance Program as having lost their jobs because of the offshoring of factories to the other NAFTA countries. The EPI estimates that the average non-college-educated U.S. worker has lost an inflation-adjusted $1,800 in annual income—a drop from about $32,800 a year to $31,000—because of competition with workers in developing countries like Mexico.

Wilson and other NAFTA supporters say the obvious need for the growing labor underclass in any of the three NAFTA signatory nations is training. “There are two ways to go,” Wilson says. “Either slide down into low-paying service jobs or move up into higher-paying service jobs. This can mean repairing the machines in the factories or working as health care technicians—jobs that require additional education and training.”

While NAFTA was taking a victory lap on its 20th anniversary, with politicians celebrating the way it has brought three nations together, its shortcomings remain apparent.

Really Two Separate Pacts?

For one thing, the partnership has always been more like two separate partnerships—U.S.-Mexico and U.S.-Canada—than a three-member family. The friendship between Canada and Mexico never really got off the ground, the late Robert Pastor, a professor of international relations at American University in Washington, D.C., said last year. Both countries, like sibling rivals, aspire to be foremost in their powerful neighbor’s consideration.

“NAFTA has not been able to outgrow that de facto situation, to a point where it’s more than bilateral,” says Mireya Solís, a senior fellow at the Brookings Center for East Asia Policy Studies. “Dual bilateralism, driven by U.S. power, continues to govern and irritate.”

In fact, Canada and Mexico are rivals for shares of the U.S. market, particularly in the automobile industry. Despite the cross-border nature of car manufacturing nowadays, America’s two neighbors still vie to be its prime supplier. By 2015, Mexico is expected to replace Canada as the No. 1 auto exporter to the United States.

Perhaps more important than intrafamilial rivalries, NAFTA needs a lot of updating. The original agreement predated China’s spring into global capitalism, e-trading, social networking, heightened security issues and other developments. The agreement also failed to adequately address international intellectual property and environmental issues, trade experts say.

Still, Major Border Delays

NAFTA 2.0 would also have to deal with some huge border problems. Since 9/11, the United States has spent about $186 billion on border security but only a fraction of that on customs. There continue to be frustrating backups, particularly along the Mexican border, where trucks carrying valuable car parts for just-in-time delivery to American plants often wait hours to reach the United States.

“At a fundamental level, every product that crosses the border is losing time and money to these inefficiencies,” says Patrick Kilbride, the U.S. Chamber of Commerce’s senior director for the Americas, adding that every day more than $1 billion cross-border trade flows between the two countries.

All three NAFTA countries are beginning to address the problems. For one thing, they’re starting to put resources into border infrastructure. The United States is building a 13-acre, $224 million expansion project in Nogales, Ariz., adding 14 new traffic lanes and 33 truck inspection docks. In the north, Canada and the state of Michigan are building a $2 billion bridge between Windsor and Detroit to alleviate the pressure on the region’s 85-year-old Ambassador Bridge, which handles more than $100 billion in annual trade.

Border authorities are experimenting with “trusted trader” programs, pre-clearing certified shippers for fast-lane crossings, and customs agencies are fishing for additional agents to man new crossings. But progress is slow and modest in size.

North America still has substantial advantages, with a combined 470 million potential consumers and an average per capita GDP of $41,000, making it the world’s most attractive market. It is also potentially the world’s greatest energy producer, with Canadian tar sands, American natural gas and a revived Mexican oil industry combining to make the region suddenly not only energy self-sufficient but a major global energy supplier.

Working as Partners

But the three NAFTA signatories need to take steps to strengthen the regional economy, Wilson says, adding, “The starting point is a clear realization that the countries of North America are not competitors but rather partners in a highly competitive global economy.”

What about a new NAFTA? An updated version of the agreement could increase efficiency at the borders, offer training for displaced workers, coordinate regulatory agencies and encourage more integrated manufacturing endeavors.

For the moment, though, observers like Wilson, Solís and others say, there’s little chance that the three North American nations will negotiate a new agreement. Like so many other critical government efforts, the North American Free Trade Agreement looks stuck in the mindless paralysis that grips Washington these days.