Assessing NAFTA's Impact
By Lori Musser
There was no definitive reason to renegotiate the almost 25-year-old North American Free Trade Agreement.
As Reggie Thompson, Latin American analyst for geopolitical consultant Stratfor, succinctly explained: “These issues didn’t have to be addressed during this presidency.”
There have been a few minor updates over the years, but there is no renegotiation schedule or sunset clause. There is, however, consensus that NAFTA needs a tune-up to strengthen North American competitiveness, innovation and growth.
Steve Cernak, chairman of the American Association of Port Authorities, which represents the seaport industry throughout the Americas, said North America’s economies, supply chains, trade and consumption have evolved over 25 years, and it makes sense to address those changes within the parameters of NAFTA.
“We’re in a global economy now. There has been a great deal of change in where we buy and sell, and in how we do it,” Cernak said. Indeed, the level of technological change alone, over the last quarter-century, demands an update.
But that update needs to be sensitive to the existing agreement and what it already offers to U.S., Canadian and Mexican businesses. Glenn Hamer, president and CEO of the Arizona Chamber of Commerce & Industry, said a new NAFTA must be built through a “practical and business-savvy modernization of the pact,” because NAFTA means jobs – more than 230,000 to Arizona alone. Nearly half of Arizona’s exports are destined for customers in Canada and Mexico.
NAFTA may not have been equally beneficial to all regions or industrial sectors, but despite U.S. President Donald Trump dubbing it “the single-worst trade deal ever approved in this country,” statistics confirm positives for the U.S.:
• Increased trade between members.
• Increased economic output.
• Job creation related to stronger growth.
• Increased foreign direct investment, or FDI.
• Lower prices on many items including oil and transportation following the elimination of tariffs.
From the U.S. perspective, the preeminent question is whether these benefits outweigh the migration of U.S. manufacturing jobs to Mexico, and suppressed U.S. wages?
Project cargo supply chains could be sorely affected if NAFTA were to come to an end. Insofar as the North American trading bloc has grown and developed robust internal supply chains, and fostered FDI, North American-based engineering, procurement and construction, or EPC, companies have benefited from the elimination of tariffs and gained a competitive edge over project cargo movements from outside of the NAFTA bloc.
According to international trade specialists M. Angeles Villarreal and Ian F. Fergusson of the U.S. Congressional Research Service, or CRS, NAFTA provisions on foreign investment helped to lock in Mexico’s reforms and increase investor confidence in Mexico, especially in Mexico’s booming manufacturing sector. A May 2017 CRS report said: “The United States is the largest source of FDI in Mexico … increasing from US$15.2 billion in 1993 to US$104.4 billion in 2012,” although other events have thrown off investment in more recent years. Mexican FDI in the U.S. has also increased, from US$1.2 billion in 1993 to US$16.6 billion in 2015.
Similarly, the U.S. is the largest single investor with FDI in Canada reaching US$352.9 billion in 2015, up from US$69.9 billion in 1993. While Canada is not the largest investor in the U.S., the U.S. has become the largest destination for Canadian FDI, according to the report.Counting On NAFTA
Renegotiations on NAFTA have begun, but the process is already proving to be slow and onerous. Thompson said: “Although we are not close to a resolution, and it will be a little while before something emerges, the possibility of a withdrawal from NAFTA is less imminent today than it was a year ago. The talks are now addressing substantive areas.”
The progress made to date gives a leg up to NAFTA over the main alternative; three bilateral treaties would likely take far longer to negotiate.
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In December 2017, the U.S. Business Roundtable published By the Numbers: The Costs of Withdrawing from NAFTA, concluding that, in a world without NAFTA, there would be a US$15.5 billion impact on U.S. exports of US$570 billion in goods to Canada and Mexico (in 2015). That figure was based on Canada and Mexico assessing new tariffs or taxes averaging 3 percent, triggering reductions in U.S. exports.
The food and auto sectors would bear the brunt of the impact, at US$7.4 billion, but industrial sectors would also be gravely impacted – U.S. machinery exports without NAFTA could have faced an additional US$508 million in tariffs, and metal products exports an additional US$590 million. U.S. goods would simply be less competitive in Canada and Mexico relative to those produced in countries that have their own FTAs with Canada and Mexico – like Japan and the European Union.
In June 2017, the Canadian Centre for Policy Alternatives, or CCAP, issued the report, What is the NAFTA Advantage? Putting the Tariff Impacts of a Trump Termination in Perspective. The tariff impacts on Canadian exports without NAFTA (reverting to World Trade Organization rules and tariff rates), would, according to the report, be surprisingly modest. Based on 2016 trade values, the report calculated US$4.2 billion in extra tariff costs – roughly equivalent to 1.5 percent of the value of Canadian exports to the U.S.
And, according to the International Institute for Sustainable Development’s report, Renegotiating NAFTA: Pros and Cons for Canada and Mexico, issued in September 2017, there would, however, be significant employment losses in important industry sectors in all three countries. Increased trade barriers could see the following loss of jobs:
• Energy sector: U.S.: 600,000, Canada: 120,000, Mexico: 260,000.
• Gas sector: U.S.: 100,000, Mexico: 26,000, Canada: 10,000.
• Steel industry: U.S.: 460,000, Mexico: 240,000, Canada: 75,000.
• Cement industry: U.S.: 2 million, Canada: 200,000, Mexico: 200,000.
• Auto industry: Mexico: 800,000, U.S.: 750,000, Canada: 150,000.
“Since cement and steel are important inputs in the shale gas and construction industry, as well as other energy sectors, unemployment in these sectors would affect downstream sectors too,” the report said.Unconventional Proposals
NAFTA mandates that 62 percent of the parts in a car sold in North America must come from Canada, Mexico or the U.S., but the U.S. proposes raising that threshold to 85 percent, and, reserving half of that amount for the U.S. Mexico and Canada have said that just isn’t acceptable.
The automotive industry is chiefly responsible for the U.S. trade deficit with Mexico. Trump is on record as wanting to undermine that deficit.
Another U.S. proposal, initiating a five-year recurring sunset clause for NAFTA, also proved unpalatable. For many businesses investing in Mexico or Canada this clause would introduce an unacceptable level of tariff uncertainty.
David Floyd, in an Investopedia analysis dated January 2018 called NAFTA’s Winners and Losers, confirmed NAFTA’s implementation coincided with a 30 percent drop in U.S. manufacturing employment, from 17.7 million jobs at the end of 1993 to 12.3 million at the end of 2016. “Whether NAFTA is directly responsible for this decline is difficult to say, however.” He cited that although the U.S. vehicle market was immediately opened up to Mexican competition, U.S. employment in that sector grew for years after NAFTA’s introduction, peaking at nearly 1.3 million in October 2000. Jobs began to slip away at that point, and losses grew steeper with the financial crisis, Floyd noted.
NAFTA is complicated: Looking at economic growth can lead to one conclusion, while looking at the balance of trade leads to another, he added.
Stratfor’s Thompson pointed out the impact of China, and the U.S. switching over from a manufacturing-based economy to a service-based one also have to be taken into consideration. “These developments have affected many business sectors in the U.S.,” he said.
CRS has noted that credit may be due to NAFTA for helping U.S. manufacturing industries, especially the U.S. auto industry, become more globally competitive through the development of supply chains. Cars imported to the U.S. from Mexico contain 40 percent U.S. content, 25 percent from Canada and 2 percent from Japan, said the CRS.
Industry Concerns About Enforcement
The U.S. Chamber of Commerce reports that about 14 million American jobs depend on trade with Mexico and Canada. It is particularly troubled by a U.S. proposal to “gut the full array of enforcement tools” in NAFTA.
John G. Murphy, the Chamber’s senior vice president for international policy, said in an opinion article: “While there’s broad support for measures to modernize the 25-year-old agreement, scrapping its enforcement provisions would be a mistake, and it could easily end in lost U.S. exports and lost American jobs.”
Murphy said a voluntary advisory system for disputes would weaken the entire agreement and could lead to a situation where governments are free to ignore their commitments with impunity.
Another concern is the U.S. proposal to opt out of investor-to-state dispute settlement provisions. According to Murphy, that will render the agreement’s investment protections unenforceable.
Project cargo and breakbulk shippers should be wary that, although unlikely, the threat of losing NAFTA is indeed real, and doable with six-months’ notice. However, after seven rounds of talks, and with a softening U.S. stance, it is likely that the agreement will be revamped in some helpful ways. There is more than a trillion dollars in trade between NAFTA signatories at stake.
Based in the U.S., Lori Musser is a veteran shipping industry writer.
Photo credit: Shutterstock, illustration by Catherine Dorrough
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