Turning Twenty
Yesterday, as the North American Free Trade Act (NAFTA) entered its twenty-first year of implementation, its impact on the three partner countries (Canada, the U.S., and Mexico) is especially salient, given the current free trade talks underway or pending at the negotiating tables of the Trans-Pacific Partnership (involving 12 countries, including NAFTA's three, aimed at opening trade between Asia and the Americas), the U.S.-EU, and the World Trade Organization.
Overall, under NAFTA, trade flows have doubled between Canada and the U.S., and nearly tripled between Mexico and the U.S. The Act can hardly be said to have been responsible for all of this extraordinary expansion, but most analyses indicate that the elimination of tariff and non-tariff barriers to North American trade clearly played a principal role. Mexico, in 1994 a poor, insular, and chronically under-performing economy experiencing frequent currency and balance of payment crises, has been particularly affected: twenty years on, it is considered a robust emerging economy, with exports of about $1 billion a day (10 times what they were in 1994), and with a GDP that places it now as the 13th-largest economy in the world (though on a per capita basis it still ranks much lower, at 57 among 187 countries). Had Mexico not waited the last 20 years to introduce internal growth-enhancing reforms to the economy, NAFTA's impact would have been even greater. Nonetheless, whole industries in Mexico have been transformed. Agriculture is one, with an incessant move to larger, more productive farms whose products show up increasingly in American and Canadian grocery stores. As well, auto manufacturing and assembly has grown hugely, on track to produce 4 million vehicles a year within 5 years; Mexico is now the fourth-largest exporter of vehicles in the world. Nearly every automaker is now making cars in Mexico. With the certainty of NAFTA's tariff-free framework, new auto plant investment continues, with Germany's Audi the latest to announce a $1.5 billion plant construction in Mexico's heartland, the state of Puebla, where it will assemble its luxury Q5 SUV. Auto-industry jobs have jumped 50 per cent since 1994, and although they are very low-paid relative to auto workers in America and Canada, they are highly sought after by Mexicans, and have contributed to a rapidly emerging middle class.
An oft-argued NAFTA negative is that growth in Mexican manufacturing and jobs has been at the expense of those in America and Canada. Two counterpoints apply here: one, trade specialists, like Stephen Blank, an expert on North American integration, notes that advanced nations throughout the world have been losing manufacturing jobs - Free-Trade Agreements or not - in part because with modern processes and robotics, fewer people are needed to produce more goods, cars or otherwise. This is the productivity argument; the loss of jobs in places like Michigan and Ontario has come from technology, not from trade. Secondly, and just as interestingly, Blank notes it may not even be relevant to talk about trade between countries anymore. The NAFTA three don't trade with each other, he says, they make things together. Thus, Canadian exports to America contain 25 per cent inputs from the U.S.; Mexico has 40 per cent U.S. inputs. And, continuing the logic, why did Canada alone just sign a free-trade deal with Europe (and the U.S. will soon follow, then Mexico), instead of a more strategic approach from these three, highly-integrated economies negotiating as one unit?
David Ricardo, the 18th-century political economist who postulated the benefits of free trade and comparative advantage, would have loved this discussion. And he would have been little surprised by NAFTA's contribution to Mexico's rise, and to America's and Canada's post-industrial transition.