Mexican trade secretary Jaime Serra Puche, U.S. Trade Representative Carla Hills and Canadian trade minister Michael Wilson sign NAFTA. Presidents Carlos Salinas and George W. Bush and Prime Minister Brian Mulroney look on. (Photo: George Bush Presidential Library)
As the U.S. and Mexican economies suffer from recession, it makes sense to leave NAFTA alone.
BY CHRONICLE EDITORS
As Americans and Mexicans celebrated the start of a new year yesterday, they had reason to celebrate another milestone as well: The North American Free Trade Agreement (NAFTA) turned 15.
Despite the slowdown in both the U.S. and Mexican economies, trade between the two nations was expected to set a new record last year. In the first half of 2008, U.S.-Mexico trade grew by 9.6 percent to $183.7 billion. That follows a record $347 billion in trade in 2007. Compare that to the $81.5 billion in total two-way trade in 1993, the last year before NAFTA was implemented.
PRIMARY REASON
NAFTA has without a doubt been the primary reason for that success. It ramatically opened up Mexico's economy to U.S. goods and investments, helping boost revenues for many U.S. companies. At the same time, Mexican companies were able to get duty-free access to the world's largest market, resulting in more sales and more jobs there. The trade growth has meant benefits for both consumers and companies on each side of the border.
While China clearly dominates many of the products we buy in U.S. stores these days, Mexico also plays an important role. Mexico ranks third behind Canada and China among the top exporters to the U.S. market. But Mexico beats China when it comes to buying U.S. goods. During the first ten months last year, Mexico imported U.S. products worth $129.4 billion - or more than twice the $61.0 billion China (with a much larger economy) bought from us.
As Frances B. Smith, an adjunct fellow of trade and consumers at the Competitive Enterprise Institute, points out, NAFTA has benefited consumers in the U.S. through greater choice of products, in terms of selection, quality, and price, including many that are less expensive than pre-NAFTA.
ECONOMIES OF SCALE
NAFTA has allowed U.S. manufacturing giants from General Motors to General Electric to use economies of scale for their production lines. Prior to NAFTA, GM's assembly plants in Mexico assembled small volumes of many products, which resulted in high costs and somewhat inferior quality, says Mustafa Mohatarem, GM's chief economist. Now its plants in Mexico specialize in few high-volume products, resulting in low cost and high quality, he points out. The result benefits both U.S. and Mexican consumers.
Coupled with export growth among U.S. agricultural producers, the United States has seen the creation of more jobs and income gains thanks to NAFTA, as Smith says.
Apart from its trade impact, NAFTA has also clearly helped boost foreign direct investment in Mexico. It provided a guarantee that the country would not revert to its protectionist past even during down times. n the absence of NAFTA, it is not impossible that the open trading regime would have been abandoned in 1995, the year the country saw a severe economic crisis, argues Luis Rubio, president of the Center of Research for Development (CIDAC), an independent research institution in Mexico. It also brought Mexico closer than ever to its Northern neighbor, replacing its historically antagonistic views of the United States.
To this day, it is seen as the most comprehensive free trade agreement the United States has signed with a Latin American country and its intellectual property protections are seen as a model for other FTA's.
NOT PERFECT
To be sure, NAFTA is not perfect. For one, it didn't even touch on Mexico's sensitive oil sector, which should have been part of a comprehensive free trade agreement. Neither did it offer any teeth when it came to violations. For example, the shameful U.S. disregard for the NAFTA regulations on allowing Mexican trucks to enter the United States. Only in September last year, as part of a pilot program by the Bush Administration, did the first Mexican trucks enter the United States - after a delay of eight years according to NAFTA stipulations thanks to opposition from U.S. unions and lawmakers.
NAFTA clearly needs stronger institutions, modeled on the European Union, as Robert Pastor, the author of Toward a North American Community, has pointed out. Many economists also are critical of NAFTA's labor and environmental side agreements, which President Bill Clinton negotiated in order to support the treaty.
However, all in all NAFTA has been of major benefit for both the United States and Mexico. Any renegotiation of NAFTA, as president-elect Barack Obama pledged during last year's campaign, would negatively harm both economies just as they now suffer from economic recession. It would also harm our relations with Mexico, our top trading partner in Latin America.
Hopefully, pragmatism will win the day in Washington, D.C. this year, as our new president aims to find a way to get the U.S. economy back on track. Leaving NAFTA alone would be a good start.
In the meantime, we congratulate NAFTA on its 15 years. Feliz Cumpleaños!
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