NS3040 Fall Term 2014

NAFTA

NAFTA

• NAFTA very controversial trade treaty – many axes to grind and much dis-information

• Sidney Weintraub, “Scoring Free Trade: A Critique of the Critics” – U.S conservative view

• Jorge Castaneda, “NAFTA at 10: A Plus or a Minus?” Mexican view – more liberal approach

• Gary Hufbauer and Jeffrey Schott, NAFTA’s Bad Rap – technocratic view – very critical of political disinformation

• Uwe Deichmann and Indermit Gill, The Economic Geography of Regional Integration”

• Not NAFTA specific, -- outlines the favorable view of regional economic integration, The New Economic Geography 2

Weintraub I

• Makes point early on that any critique of NAFTA or other regional grouping must first establish a credible counter-factual – what would be the situation without NAFTA?

• Critical of those who stress job loss from NAFTA• In reality pretty much a wash – jobs gained and lost• Use other methods to create jobs – trade very inefficient in that

regard• Criticizes argument that the balance of payments deficit is a

sign the U.S. “loses” as a result of NAFTA – a new Mercantilist argument

• -- fact is the defect simply reflects comparative advantage and Mexican energy exports to US.

• If we did not import energy from Mexico it would have come from elsewhere

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Weintraub II

• There will always be gainers and losers from regional agreements –

• We don’t stop flying in airplanes just because a few crash• Trick is to compensate the losers• With the counterfactual it is clear that U.S. job loss would have

occurred without NAFTA – would have been lost to China or SE Asia

• To judge NAFTA need to look at its purpose – to increase trade and investment – clearly has done this

• Mexican growth has not been great during the first 10 years of NAFTA

• Argues that is simply result of poor policy making in Mexico – very low taxes, poor education system, lack of reforms in energy, telecoms.

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Weintraub III

• Mexican agriculture hard hit

• Country had fifteen years to undertake reforms and create jobs outside agriculture but failed

• When quotas lifted on U.S. grain imports, many farmers went under – Mexico should have anticipated this.

• Mexican wages did not increase much

• Weintraub feels this is more a demographic effect – high population growth and many new entrants into Mexican work-force

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Castaneda I

• Former Mexican Foreign Minister under Fox

• Was not for NAFTA at the start – now accepts it as a fact of life

• Mexico was a very closed economy until debt crisis of 1982. Economy stagnated under import substitution

• Mexican Presidents wanted to open Mexican economy to find new sources of growth – exports, increased productivity

• Joined GATT in late 1980s and NAFTA in early1990s

• President Salinas wanted the shift to be irreversible so that future Presidents could not reverse the process

• Apparently Mexico felt that they could industrialize fast enough with NAFTA to create jobs for those forced off the land by U.S. agricultural imports. 6

Castaneda II

• Castaneda seems to feel Mexico has not benefitted much from NAFTA and that more could have been done

• Cites EU program to support development in more backward regions

• Argues compensatory financing to help those hurt from NAFTA would be in everyone’s advantage

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NAFTA’s Bad Rap I

• Authors quite critical of U.S. politicians – either very uninformed or very cynical

• The fact is:

• NAFTA has added about $60 billion annually to U.S economy -- $200 per American

• Rewards from economic integration exceed costs by ratio of 10 to one or better

• To politicians who argue we should withdraw from the pact, authors point out – jobs lost, exports lost and our neighbors would no longer trust us.

• Again, counterfactuals are important – what would have happened in the absence of NAFTA?

• If can’t have a credible answer then estimates very suspect.

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NAFTA’s Bad Rap II

• Authors look at critics of NAFTA in four main areas

• NAFTA destroys U.S. manufacturing jobs

• NAFTA suppresses U.S. wages

• NAFTA has worsened the U.S. trade deficit and

• NAFTA abets immigration from Mexico

• Jobs Lost?

• NAFTA has probably had no net effect on U.S. Employment – in early years of NAFTA the U.S. economy was creating all kinds of jobs

• Even if as President Obama contends 100,000 jobs are lost annually due to NAFTA that is only six tenths of one percent of the annual churn of the U.S. labor market

• Most of the jobs lost would have been lost to other developing countries anyway

• Other side of coin – many U.S. jobs depend on trade with Mexico

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NAFTA’s Bad Rap III

• U.S. wages depressed?

• Authors argue blue collar wages in decline long before NAFTA

• Main factor is technology

• Actually, wages in the states with the most trade with Mexico have had wage growth above the national average

• Larger trade deficit?

• As we will see in the second half of the course trade deficits are caused more by macroeconomic imbalances not trade per se.

• Besides a trade deficit may just reflect the fact that the U.S. grew faster than Mexico during most of this time.

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NAFTA’s Bad Rap IV

• Immigration woes?

• NAFTA contains little about immigration

• In contrast to politicians, serious demographers forecast

• Increased inflows of Mexican migration to U.S in 1990s and 2000s

• Followed by declining flows for two or three decades

• Forecasts are based on Mexico’s

• demographic structure

• Rapid growth in working age Mexican population between 1995 and 2015

• Slower growth in later years

• The big flow of migrants to US right after NAFTA due to poor economic conditions in Mexico – major recession following peso collapse

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NAFTA’s Bad Rap V

• Conclude that Mexican economy has under-achieved

• But not because of NAFTA

• Mexican political system did not deliver tax and energy reforms needed to generate new resources for

• Infrastructure

• Education

• Nor has it succeeded in eradicating corruption and narco traffickers

• Areas for the future –

• Labor and Environmental standards important

• Border security cooperation

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NAFTA Update 01-2014 I

• Oxford Analytica, NAFTA Boosted Global Competitiveness, January 7, 2014

• Main observations:

• NAFTA’s success – sets precedent for other trade deals

• NAFTA has facilitated rapid growth in trade, business investment and supply chains across the region

• However NAFTA cannot address many of the current challenges that businesses face in a more tightly integrated market

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NAFTA Update 01-2014 II

Analysis

•Mexican energy reforms could greatly boost the regional economy

•Energy will continue to be one of the major comparative advantages enjoyed by the regional manufacturing sector

•US energy export and Canadian infrastructure development could significantly reshape the regional and global energy industry

•When NAFTA came into effect on January 1, 1994 it was the most ambitious trade deal outside the EU

•Today the U.S., Mexico and Canada form the largest trading bloc in the world with a combined GDP of $19 trillion.

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NAFTA Update 01-2014 III

For the parties to the agreement NAFTA

•Eliminated all tariffs and quotas on goods falling under North American rules of origin

•Opened up the market for services, with the exception of aviation and maritime transport and basic telecommunications

•Opened up federal procurements for goods, services and construction contracts

•Strengthened intellectual property rights

•Guaranteed national treatment of business investment

•Facilitated temporary entry for business travelers

•Established governmental and investor dispute settlement procedures

•Supplementary agreements

• committed each country to effective enforcement of its environmental and labor regulations

• created commissions for environmental and labor cooperation. 15

NAFTA Update 01-2014 IV

Economic Success?

•NAFTA has become a model for many of the regional trade agreements

•Overall legacy is more complex

•Economic impact more difficult to decipher

•Since NAFTA came into effect the North American Economy has more than doubled in size

•Trade among the NAFTA partners has more than tripled since 1993

•Still, fair to say that NAFTA has not been the only or the most significant factor affecting economic or employment trends at either regional, national or continental levels

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NAFTA Update 01-2014 V

• Other factors affecting output and employment trends in North America

• Introduction of competition from China and other emerging economies

• Accelerating pace of technological change

• Public policy decisions

• Financial crises and recession

• Have all had more powerful affects on economic and business performance than NAFTA

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NAFTA Update 01-2014 VI

• Agreement has been very important in reshaping regional business

• NAFTA has enabled US, Canadian and Mexican business to diversify their presence across North America

• Also enabled firms to rationalize and expand or consolidate production activities, distribution systems and supply changes

• As a result firms have become more flexible, competitive and productive

• Today over 60% of all North American merchandise trade flows and 75% of services trade takes place as intra-corporate transactions or within tightly held network of suppliers and distributors

• Means benefits of expansion felt rapidly and widely.18

NAFTA Update 01-2014 VII

• Shortcomings – NAFTA fails to address five critical challenges that now face business operating in a more integrated market:

• More complicated, time-consuming and expensive security and customs procedures have been established at borders

• Recent survey indicates that 48% of Canadian manufacturers are exporting less to US and 32% are importing less from US as result of worsening conditions at border

• More stringent immigration enforcement proceedings have eroded benefits of temporary entry provisions under NAFTA

• Mounting costs of unnecessarily regulatory requirements imposed on goods and services

• Lack of alignment with respect to cross-border infrastructure planning and investment.

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NAFTA Update 01-2014 VIII• NAFTA members are attempting to address these issues

on a bilateral basis:

• Launching initiatives to improve security and efficiency and border infrastructure

• Enhance regulatory cooperation

• Eliminate procurement restrictions and

• Facilitate legitimate travel while strengthening enforcement rules

• To date efforts have done little to remedy the new barriers to continental trade

• NAFTA fallen short of providing the bases for a more concerted North American approach to trade negotiations

• 3 governments continue their independent approaches

• Unwilling to develop a common negotiating strategy tat would take the integrated nature of North American market into account 20

NAFTA Update 01-2014 VIXOutlook

•Standard for international trade agreements is no longer being set by NAFTA but by regional and bilateral Trans-Pacific and Trans-Atlantic negotiations

•These emerging deals may eventually provide other trading partners better access to North American markets than that guaranteed to NAFTA partners themselves

Conclusions

•Twenty years after coming into effect, NAFTA has proved unable to new challenges facing the market such as

•Increased border security

•Greater immigration restrictions

•Misaligned regulatory requirements

•Nevertheless has made US, Canadian and Mexican businesses far more globally competitive

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U.S. Trade With NAFTA Countries

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U.S. Mexico Market Shares

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U.S. Canada Market Shares

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