NAFTA Has Benefitted The U.S., Mexico and Canada
In 1992, Independent presidential candidate Ross Perot warned voters that “There will be a giant sucking sound going south,” as a result of the North American Free Trade Agreement (NAFTA) due to huge wage differentials between the U.S., Canada and Mexico. Proponents argued a trade agreement, aimed at liberalizing trade between member countries, would lead to growing trade surpluses with Mexico and that hundreds of thousands of jobs would be created. Who was right?
Well, like Wharton professor of operations and information management Morris Cohen, I believe trade is generally a good thing as it helps to elevate standard of living and raise the level of economic activity of all participants. There’s no doubt a net transfer resulting in winners and losers though. While we can’t find out what would’ve happened had there been no NAFTA or to what extent existing conditions today are a result of it, evidence seems to indicate that it has been more beneficial than detrimental to all three countries involved.
According to a report by the U.S. Chamber of Commerce, since NAFTA’s full enactment in 1994, trade with Canada and Mexico has nearly quadrupled to $1.3 trillion, and the two countries buy more than one-third of U.S. merchandise exports. Trade with Canada and Mexico supports nearly 14 million U.S. jobs, and nearly 5 million of these net jobs are supported by the increase in trade generated by NAFTA.
The expansion of trade unleashed by NAFTA supports tens of thousands of jobs in each of the 50 states and more than 100,000 jobs in each of 17 states. NAFTA has been a boon to the competitiveness of U.S. manufacturers, which added more than 800,000 jobs in the four years after NAFTA entered into force.
Canadians and Mexicans purchased $487 billion of U.S. manufactured goods in 2014, generating nearly $40,000 in export revenue for every American factory worker. NAFTA has helped U.S. agricultural exports to Canada and Mexico increase by 350%.
With new market access and clearer rules afforded by NAFTA, U.S. services exports to Canada and Mexico have tripled, rising from $27 billion in 1993 to $92 billion in 2014. Canada and Mexico are the top two export destinations for U.S. small and medium-size enterprises, more than 126,000 of which sold their goods and services in Canada and Mexico in 2013.
“Perhaps NAFTA accelerated the process, but it did not make a huge difference. At the same time, a lot of jobs were created in the U.S. that wouldn’t be there without the Mexico trade. I’m not just talking about Texas or California or Arizona…. Many of the products made in Mexico are designed in the United States. So there are a lot of jobs created here.”
Wharton management professor Mauro Guillen on the impact of NAFTA on job losses
Close to 40% of what the U.S. imports from Mexico is derived from U.S. sources. Twenty years ago, Moffatt Nichol chief economist Walter Kemmsies estimates, that percentage was less than 5%.
As a result, many jobs were created in Canada and Mexico, and the resulting economic activity created a somewhat seamless North American supply chain that allowed North American auto companies especially to be more profitable and more competitive. Knowledge@Wharton explains:
Before NAFTA went into effect in 1994, the automotive sector throughout North America was insular and regional, and most vehicles were developed for the markets in which they were sold, notes “The rest of the world didn’t want our vehicles” because they lacked the size and mileage demanded by its consumers. South of the U.S. border, Mexican administrations pursued a policy known as “import substitution,” which is antithetical to free trade. Protected by high import duties, import licenses and quotas, Mexican plants were notorious for producing shoddy goods unpopular even in their domestic market.
Michael Robinet, managing director of IHS Automotive, a consultancy based in Michigan
Overall, Mexico’s output of vehicles reached 2.93 million units in 2013. By 2020, almost 25% of all North American vehicle production will take place in Mexico.
Before NAFTA, production in Canada was for sale basically in the smaller domestic market. Afterwards, plants became integrated with components or sub-assemblies sent back to the U.S. operating as if there was only one economic zone with no border. As a result, the quality of Canadian-made vehicles is now on the same world-class, highly competitive level as those made in the U.S. and Mexico.
NAFTA has driven down costs making it possible for an integrated North America, as a single manufacturing platform, to become a major force in global automotive trade. Thanks to NAFTA trade preferences, automotive companies in the U.S., Canada and Mexico can use an engine from Mexico and a transmission from Canada, and then build the car in the U.S. while still enjoying NAFTA preferential treatment as long as 62.5% of the value of that vehicle comes from within those three countries. The “vast majority” of vehicles built in North America have at least 75% (combined) value-added from those three countries, while some have well over 90% of North American value-added.
Meanwhile, Mexico’s emergence as an export-focused automotive manufacturing center is having a growing impact on other sectors of Mexico’s economy as well. Since the beginning of NAFTA, productivity has increased in most of the export-oriented industries in Mexico, especially manufacturing, where it has more than doubled.
Similar to Canada, before NAFTA, automobile plants in Mexico were oriented toward the domestic market. In anticipation and during NAFTA, American, Japanese and South Korean firms invested in world-class factories and equipment for the export market.
Massive recent foreign investments made by Asian and German brands in Mexico include Mazda’s facility, with an estimated annual production of 230,000 vehicles; Nissan’s, also with an annual capacity of 230,000 vehicles, and Audi’s, set to open in 2016, with annual capacity for 150,000 vehicles.
Mexico has become the crossroads of automotive trade in the Western Hemisphere while enhancing and augmenting its transportation infrastructure. Mexico is now in an advantageous position avoiding the need to go through the Panama Canal. Before NAFTA, Japanese exporters had to go through the Canal with its costly bottlenecks.
The same affect happened in electronics, especially appliances, automotive parts, furniture” and other sectors such as aerospace and computers. The trend is more visible in the automotive sector because there are less than two dozen vehicle assembly plants in Mexico. That’s why one decision by Nissan or Volkswagen to set up a world-class factory makes a big difference.
Today, Mexican migration to the U.S. has come to a halt. There are Central Americans coming to the U.S. – but virtually no Mexicans.
The increase in productivity is also due to better equipment in new plants also led to better training of the labor force. This conceivably could’ve happened without NAFTA in Mexico as higher educated workers trained on better machinery would breed such results.
Concerning inequality. this kind of growth process with foreign investment coming in will produce it. The relevant question is, are you better or worse off as a country? I think the 30% of Mexicans who got well-paying jobs that otherwise would be elsewhere indicate Mexico is.
In fact, for Mexico, NAFTA has been a total success. Their only problem has been that the export industry is not big enough to employ everybody in the large population of Mexico.
While income inequality certainly exists between those industrial workers who have benefitted from the country’s globalization and those who have been shut out of those benefits, especially the rural poor, that inequality has been produced, because a significant number of workers are now receiving higher wages and not because the wages of low-wage workers got lower.
This is to be contrasted with the U.S., where we are generating inequality because the lower wages are either stagnating or going down because factory workers earning a high wage get laid off and have to go to the service sector and earn a lower wage.
The numbers touting NAFTA’s success counts only jobs gained by exports but ignores jobs lost due to growing imports. Production workers’ wages have suffered in the United States, and workers in Mexico have not seen wage growth.
By 2010, trade deficits with Mexico had eliminated 682,900 U.S. jobs, mostly (60.8 %) in manufacturing. Mexico does have a surplus with the U.S. in trade probably accelerated by NAFTA. the U.S. runs a trade deficit with most of the world including Canada though that is mostly oil and gas.
The jobs lost would probably have gone to China as most did during the time period. The U.S. had a trade deficit with Mexico of $54 billion in 2013, and a deficit five times larger with China at $318 billion. In other words, for every job we have lost in the U.S. to Mexico, five were lost to China. Still, many U.S. high-wage manufacturing jobs were relocated to Mexico, China and other foreign locations as a result of NAFTA.
For both the U.S. and Canada, Mexico’s automotive production numbers represent a considerable decline in their share of North American auto production. U.S. share of all North American automotive jobs dropped from 64.5% in 2000 to 53.4% in 2012. By 2012, 39.1% of all automotive jobs in North America were in Mexico, up from 27.1% of such jobs in 2000.
Why NAFTA Has Been Able To Positively Impact Trade
One reason is a stable peso/dollar exchange rate. Before NAFTA, the dollar-peso exchange rate fluctuated widely, but the Mexican government “kept inflation under control.”
If you build a car in Japan, for example, you have no control over the yen/dollar relationship, Facing that uncertainty, manufacturers have learned that you need to build where you sell, or close to it, as in the case of factories along the U.S.-Mexico border.
Another reason is the growing availability of Mexican suppliers. Again, suppliers are now wanted relatively close to the assembly plant, and they are plentiful in key Mexican clusters of activity.
While China may be cheaper for some components, automotive companies are increasingly sourcing their components as close as possible to final assembly. They aren’t just asking how much a component costs, but how much it will cost to ship.
A third reason is Mexican public policy. Mexico’s governments, whether of the conservative PAN party or the more populist PRI party are interested in developing a global auto industry, unlike that of China, which has focused its long-term strategy on capturing a dominant share of its much larger domestic market.
Thus, Mexico’s government has opened the country to multinationals that have increased their scale of production, driving down prices not just for made-in-Mexico car exports, but also for cars sold to Mexico’s burgeoning middle class. To further facilitate this integration outside of North America, Mexico has forged tariff-free or reduced-tariff agreements with 44 countries around the world.
The United States
American firms will continue to expand not just because of Mexican manufacturing growth, but because of the strong advantage rail has over the trucking industry south of the border, says Patrick Ottensmeyer, chief marketing officer at Kansas City Southern. The railroad has seen high double-digit quarterly intermodal growth inside Mexico, as the U.S. and other manufacturers of automotive, white goods and other products have shifted production to Mexico. Manufacturing in Mexico for export to U.S. consumer markets has become more attractive as a result of the rise in Chinese labor and transportation costs.
Future of NAFTA
NAFTA would be even better if, instead of only 30% of Mexican workers earning those very high wages for Mexico, 70% of the workers did. For that to happen, Mexico will have to overcome its shortage of capital.
NAFTA will continue to be an overall success if Mexico doesn’t impose export taxes on foreign firms doing business there before they are fully convinced of Mexico long term. Given the fragile state of the global economy and the uncertainties surrounding Mexico’s ambitious reform efforts, many foreign companies are still scared and risk averse meaning Mexico still remains in the startup stage.
Overall, NAFTA has been great for Mexico and good for Canada. The only doubts are about whether it has been good for the United States. While it looks like it has been, there is more of a mixed balance between losers and winners here.