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NAFTA Partners Consider Agreement’s Future Amid Broader Initiatives

Thursday, February 06, 2014
Sandler, Travis & Rosenberg Trade Report

A Feb. 19 summit among the leaders of the United States, Canada and Mexico is expected to signal if and how the NAFTA partners will work to upgrade a pact that marks its 20th anniversary this year. Panelists at a recent congressional hearing identified a number of improvements that should be made to help North America remain economically competitive in the face of rising challenges, including regional agreements being pursued by NAFTA members themselves, but government officials have offered few details on how they might choose to proceed.

At a Jan. 15 hearing held by the House Foreign Affairs Committee’s Subcommittee on the Western Hemisphere, panelists said NAFTA has been a success. Former U.S. Trade Representative Carla Hills said NAFTA “achieved broader and deeper market openings than any prior trade agreement anywhere in the world” that have yielded “a highly efficient and integrated supply chain” in which the three economies “not only sell things to one another, we make things together.” She pointed out that for every dollar of goods that Canada and Mexico export to the U.S. there is 25 cents worth of U.S. inputs in the Canadian goods and 40 cents in the Mexican goods, compared to four cents with respect to China and two cents with respect to Japan. NAFTA has also turned Mexico into a huge export market for the U.S., now accounting for a higher share of total U.S. exports than Brazil, Russia, India and China put together, or all of Latin America, or Germany, France, Great Britain and the Netherlands combined.

More specifically, the panelists asserted, NAFTA has been good for U.S. employment. Hills said the increase in U.S. exports under NAFTA has translated into more domestic jobs, which pay on average 15-20% more than “jobs that are purely domestically focused.” Duncan Wood, director of the Mexico Institute, asserted that the decline in U.S. manufacturing employment in recent decades is due more to factors such as “the rise of a number of other new exporting powers” than to NAFTA, which he said allowed U.S. manufacturers “to keep skilled jobs in the United States by importing parts and components from other countries.”

Eric Farnsworth, vice president of the Council of the Americas, agreed that “on the basis of economic growth, jobs created, and other common indicators, NAFTA has been a success.” It “has not perhaps been the panacea for all ills that proponents of the agreement sometimes seemed to be suggesting that it would be in order to pass and implement the agreement,” he said, but “neither has [it] been responsible for all the ills that are frequently attributed to it by opponents.” In addition, NAFTA’s benefits have not been purely economic, as the agreement “institutionalized a vision for North America that would have been impossible absent significant political and economic reforms in Mexico, both catalyzing such reforms and also benefitting from them.”

However, the panelists also agreed that NAFTA needs to be updated to reflect today’s global economy. “The rest of the world has not stood still” over the past 20 years, Hills noted, and “increasingly bilateral and regional trade agreements where the United States is not a party are giving entrepreneurs from other countries preferential access to important markets that our entrepreneurs do not have.” Farnsworth added that while North America has become “a true 21st century economic space,” it is undergirded by a “20th century trade platform” (NAFTA) and utilizes “19th century infrastructure.” The panelists therefore recommended that the following steps be taken.

- Use the Trans-Pacific Partnership negotiations, which include all three NAFTA partners as well as nine other nations from around the Pacific Rim, to “address issues that were not relevant when NAFTA was negotiated” or strengthen existing provisions. Areas that could be addressed include energy, services, labor mobility, border procedures, the rule of law, intellectual property rights, and regulations and standards. Former Congressman David Dreier said “all of our efforts to meet TPP’s requirements will effectively update, upgrade and strengthen NAFTA,” and officials from all three countries have indicated that the way to strengthen NAFTA is not by reopening it but by concluding the TPP. Wood cautioned that this initiative should include a discussion of how to compensate individuals and businesses that may be harmed by further trade liberalization in order to “maintain political support for free markets, trade and investment.”

- Have all three NAFTA members join the Pacific Alliance, which seeks to create free trade among its members based on existing bilateral trade accords. This group currently encompasses Mexico, Peru, Colombia and Chile, but Costa Rica has gained approval to join and seven other countries, including the U.S. and Canada, have been granted observer status. On a related notes, Secretary of State John Kerry reportedly said last month that he had “asked some folks to explore” the idea of expanding NAFTA to Latin America, but a Toronto Star article cited an unnamed source as saying that comment was “totally off the leash” and not vetted by the White House.

- Add Canada and Mexico to the Transatlantic Trade and Investment Partnership negotiations between the U.S. and the European Union. Expanding the TTIP in this way would have a number of benefits, Hills said, including “providing a golden opportunity to improve regulatory coherence with respect to more than half the world’s trading volume.” Further, both Canada and Mexico already have bilateral FTAs with the EU, and failure to consolidate these into a single agreement would not only “create a headache and an unnecessary cost burden for entrepreneurs on both sides of the Atlantic” but would also “erode the unique and hugely beneficial economic integration” achieved among the three NAFTA partners.

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