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Analysis

NAFTA’s True Colors

Sat, 09/01/2018 - 10:42

The original NAFTA was negotiated by Mexican President Carlos Salinas de Gortari, US President George W. Bush and Canadian Prime Minister Brian Mulroney and it was later ratified by Salinas de Gortari, US President Bill Clinton and Canadian Prime Minister Kim Campbell. At its roots, the treaty implemented on Jan. 1, 1994 had a goal to strengthen the relationship of all members of the North American region, as well as their respective economies, as stated by Clinton’s speech on Sept. 14, 1993 prior to NAFTA’s implementation. “This debate about NAFTA is a debate about whether we will embrace these changes and create the jobs of tomorrow or try to resist these changes, hoping we can preserve the economic structures of yesterday.”
With NAFTA, trade in agriculture, textiles and manufacturing was liberated in an effort to boost industrial development in all three countries and take advantage of the benefits that each of them could bring to the table to become a strong trade block. Most tariffs on imports and exports were eliminated and foreign investment was encouraged between countries. Furthermore, one of the goals in the implementation of NAFTA was to reduce illegal migration from Mexico to the US. By strengthening the Mexican economy and creating a stronger manufacturing industry, more job opportunities would exist for people to stay in Mexico. According to Salinas de Gortari, NAFTA would allow Mexico “to export goods, not people.”
NAFTA became a stepping stone for Mexico to develop its position as a manufacturing hub, particularly in the automotive industry. That being said, the treaty also had the goal of gradually elevating the Mexican industry to the point where it could be more equal in conditions to those found in the US and Canada. This point in particular has not borne fruit since the wage gap between Mexico and its partners is still considerable. In addition, although foreign investment has led to the establishment of a strong supplier base in the country, Mexico has not yet developed a strong network of national suppliers to support incoming projects.
Still, NAFTA’s benefits cannot be understated, not only for Mexico but for the entire North American region. According to the US Congressional Research Service (CRS), thanks to NAFTA trade in the region rose from US$290 billion in 1993 to US$1.1 trillion in 2016. Canada became the US’ main export market, followed by Mexico and both countries represent a third of total US’ exports. Trade with Mexico alone increased by 455 percent, from US$41.6 billion in 1993 to US$231 billion in 2016.
For the US, CAS estimates NAFTA had a positive impact on the country’s GDP of approximately 0.5 percent, or US$80 billion, after its full implementation with gradual increments year-on-year. Meanwhile, Mexico’s economy grew 1.3 percent year-on-year on average between 1993 and 2013. Estimates from the Peterson Institute for International Economics (PIIE) also show that NAFTA is responsible for approximately 2 million jobs in the US related to trade operations with Mexico. “Between 6 and 10 million jobs in the US depend directly on NAFTA and if President Trump’s goal is to create more jobs, he will have to think very quickly about how to create more than 10 million jobs to offset NAFTA's termination effects in the US,” says Francisco Torres Landa, Partner at Hogan Lovells BSTL. That being said, the open investment policy arising from NAFTA did lead to job migration from the US to Mexico.
According to PIIE, approximately 350,000 jobs were lost in the US automotive industry between 1994 and 2014, with an approximate loss of 15,000 jobs per year, while Mexico’s labor force grew from 120,000 to 550,000 workers. However, that same study shows that for every job lost, the US economy grew US$450,000 due to high-productivity rates and lower prices for the end consumer.
NAFTA’s Main Achievements
Growth of regional trade from US$290 billion in 1993 to US$1.1 trillion in 2016
Increased trade with Mexico from US$21.6 billion in 1993 to US$231 billion in 2016
Foreign Direct Investment growth from the US to Mexico from US$15 billion in 1993 to over US$100 billion in 2017
Total automotive exports from Mexico to the US of US$126.7 billion in 2017
Over 70 percent of the Mexican vehicle production is destined to the US