For the NAFTA region to compete globally in the 21st century, the US, Mexico and Canada should move forward, not backward, in economic integration.
Mexico has a highly diversified and stable economy and is one of the most open free-trading nations in the world. In 2016, it was the most open economy in the G20, measured at 73.8 percent on the openness trade index (ratio of trade to GDP). It has 12 free trade agreements across North America, the Asia-Pacific region, Europe, the Middle East and Latin America. It belongs to the World Trade Organization (WTO), the Organisation for Economic Co-operation and Development and the Asia-Pacific Economic Cooperation forum, so its trade policy leadership has contributed to growth in every corner of the globe.
Since becoming a member of the General Agreement on Tariffs and Trade (now the WTO) in 1986, Mexico has consolidated its customs duty rights and implemented liberalizing trade policies related to import licences, nontariff barriers and quotas, among other matters, aiming to boost and promote Mexican trade all over the world. According to the Mexican Ministry of the Economy (with data from Banxico), Mexico’s trade-to-GDP ratio has grown from 20 percent in the 1980s to 73 percent currently, reflecting the importance of international trade to its economy. After two decades, sound macroeconomic policies and free trade leadership are paying off.
Mexico has transformed its export structure to become a global manufacturing powerhouse. In 1982, oil accounted for 70 percent of Mexico’s total exports; by 2016, manufactured goods made up 89 percent of total exports. As part of this transformation, the North American Free Trade Agreement has been a valuable tool for Mexico’s trade policy. It has allowed Mexico to move from the simple exchange of goods to the building of a sturdy production platform that is highly integrated with the economies of the United States and Canada.
Mexico’s total trade with its NAFTA partners grew 452 percent from 1993, when the agreement was signed, to 2016; its exports grew 604 percent (figure 1). It is important to underscore that more than 50 percent of the total incoming foreign direct investment from 1999 to 2016 came from the US and Canada. This increased integration lowered costs and increased efficiency in all three countries.
In 2016, total trade in the NAFTA region was worth almost US$1 trillion, representing an average annual growth rate of 5.5 percent from when NAFTA first came into force. The rates for Mexico-Canada and Mexico-US total trade were 9.8 percent and 7.7 percent, respectively.
Mexico’s total trade share with its NAFTA partners was 30.9 percent in 1993; after the deal went into effect, this figure went up significantly, climbing to 51 percent in 2016. This increase reflects the outstanding importance of Mexico as a trading partner of Canada and the US.
President Trump and NAFTA
With Donald Trump now president of the US, Mexico and Canada face an administration that has declared that it promotes trade protectionism to favour its domestic industry and workers. One of the Trump administration’s top trade priorities is the renegotiation of NAFTA, which requires Mexico to develop a new way of engaging with the US government.
From Mexico’s perspective, the Trump administration’s move to reopen NAFTA is an opportunity to update trade relationships to incorporate the new dynamics and realities of the 21st-century global economy.
More than 23 years have passed since NAFTA’s entry into force, and the world has changed dramatically. Therefore, the parties should set a far-reaching scope and broad vision for the renegotiation to create conditions that upgrade and enhance the economic integration of North America. Mexico will enter these talks with an approach that rests on three pillars: 1) NAFTA has brought benefits for all three signatories; 2) there is always room for improvement; and 3) the outcome must be a win-win-win.
NAFTA 2.0: Moving forward, not backward
As a free trader, Mexico believes in open markets and will not accept any steps backward from NAFTA, such as new tariffs and quotas. Mexico will not accept opening a Pandora’s box of new trade restrictions. That would mean a disastrous setback for North America’s competitiveness and create uncertainty for business and workers in all three countries. Disrupting highly integrated supply chains would increase costs, punish consumers and kill jobs throughout North America.
A NAFTA modernization process should include a range of objectives: dealing with new trade-related issues including e-commerce; providing better support for small and medium-sized businesses; updating existing rules; and handling contentious issues such as trade deficits through trade expansion.
Although Mexico has been working to diversify its trade with other nations, its northern neighbour will remain its most attractive and most important market. Therefore, there will always be tension between the goal of continued trade diversification and the need to continue supplying products that feed the valuable mass consumption that defines the US market. In many respects Canada shares this dilemma. Both Canada and Mexico have a major trading partner in the middle, but both are simultaneously looking to move to other markets for their goods and services.
What the three partners must remember is that they are not simply selling things to one another; as NAFTA partners, they are making things together. Therefore, they must enhance and improve these cross-border supply chains. Mexican exports to the US market contain 40 percent US content; Canadian exports to the US contain 25 percent US content. NAFTA provides a basket of options for consumers, industries, agriculture and agribusiness in terms of quality, variety, availability and price. The partners have also entrenched the integration of the three economies in technological development, production processes and standardization. Simply put, rolling back these competitive advantages would not serve anyone.
North America has to be rethought from a new perspective. Revision of NAFTA should focus on making North America more competitive and open to international trade, setting a strong framework to develop and boost the three economies. Furthermore, under NAFTA modernization, Canada and Mexico have a very good opportunity to work together and develop a clear understanding of the importance of their domestic markets for trade, as well as to generate value-added goods and services and attract new investment.
In the current scenario, both countries should be ambitious to reach a good deal for the North American region that will promote common interests — a win-win. But beyond the NAFTA talks, a coordinated and permanent dialogue should be established to move forward on the shared goal of making North America an even more dynamic region for global trade. The design of joint strategies will strengthen cooperation, create new trade and investment arrangements, and enhance the North American production platform.
On July 17, the United States Trade Representative tabled negotiating objectives for the NAFTA talks in August. Like any other negotiation, the process is likely to be a roller coaster, with very good, good, bad and horrible days. It is important to bear in mind that Mexico has presidential elections next year and the US has midterm elections; Canada’s next federal election is in 2019. It is desirable to conclude negotiations before those political events take place.
This is the time to move forward, not backward, in economic integration. After 23 years, NAFTA has made Mexico, Canada and the US more competitive, more efficient and more prosperous. If we want the NAFTA region to become an international trade platform that can compete globally in the 21st century, the three countries should enhance and improve NAFTA in ways that benefit them all.
Note: This article reflects the point of view of the author and not necessarily that of the Mexican government.
This article is part of the Trade Policy for Uncertain Times special feature.
Photo: Large cargo ship in a harbour of Mazatlan, Mexico. Shutterstock, by Yuriy Chertok.
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