North American Trade Pact: Opportunities for Improvement 20 Years Later

Twenty years after the North American Free Trade Agreement (NAFTA) entered into force, trade among the United States, Canada and Mexico has increased and opportunities for improvement remain, a panel of experts told attendees at a California Chamber of Commerce International Luncheon Forum yesterday cosponsored with the Consulate General of Mexico in Sacramento.

Professor J. Edward Taylor from the Department of Agriculture and Resource Economics at University California, Davis.

Post-NAFTA Mexico, What it Means for California

Professor J. Edward Taylor from the Department of Agriculture and Resource Economics at University California, Davis explained that in NAFTA’s first 20 years (1993-2012), U.S. exports to Mexico rose 420%, while Mexico’s exports to the U.S. jumped 596%

“Trade has exploded between Mexico and the United States,” Professor Taylor said. “NAFTA has played a critical role in increasing trade because it facilitated Mexico-U.S. trade by formatting changes already underway and providing a stable policy environment.”

Affecting California in Profound Ways

Professor Taylor explained that Mexico is changing; specifically, the county is in the transitional phase of being both a farm labor exporter and importer. Rural Mexicans are moving out of farm work and following a similar trend the U.S. saw decades ago. Children don’t dream of being hired farm workers any more.  As a result, Mexico has to produce more with less and this rise in productivity in Mexico means:

  • Higher farm wages in California;
  • Farmers will have to produce more with fewer workers
  • More efficient labor management practices;
  • Changes in crop mixes; and
  • More mechanization in the fields.
Jaana Remes, Ph.D., partner at the McKinsey Global Institute.

Mexico Growth Prospects

Jaana Remes, Ph.D., partner at the McKinsey Global Institute, centered her talk  around the question: Is this finally Mexico’s moment or will they be disappointed again?

Despite NAFTA and reforms, Mexico has not raised its productivity in 30 years, Remes said. To combat this trend, however, Dr. Remes explained there are three key levers to boost productivity growth across Mexico’s economy. The levers are:

  • ​​​Help traditional enterprises evolve into modern, formal small and medium enterprises.
  • Expand access to capital, particularly for midsized companies.
  • Continue to make Mexico a place where world-class companies proposer.
  • California Benefits from Prosperous Mexico

Mexico continues to be California’s No. 1 export market, with California exports to Mexico totaling nearly $24 billion.

Big areas for opportunity, as highlighted by Dr. Remes, are:

  • Export market for goods and services geared to Mexico’s growing consuming class. It is expected that Mexico will have 20 million more, new consumers by 2025.
  • Complementarities in the supply chains, particularly in manufacturing. Dr. Remes said. Many multinational companies are looking to shorten and simplify their supply chains and reduce risks. Combining California’s research and development, early stage manufacturing with the upscale and other assets Mexico can provide, can make the two regions collectively more competitive in the global market than either one could be on its own.
  • New markets and applications for California’s technology and innovation. Mexico is increasingly a new market for California’s technology and innovation. There is a rising pool of modern corporations that look for the equipment, machinery, software solutions that California companies can offer. Also, Mexico is a consumer market with lots of young people who are online and an ideal test-bed for many of the solutions that California companies can offer.

“Clearly California has only to benefit from a prosperous Mexico,” Dr. Remes concluded. “And I hope that this is the last time when we will be asking ‘whether this is Mexico’s moment?’”

Dr. Duncan Wood, director for the Mexico Institute at the Woodrow Wilson Center for Scholars.
Dr. Duncan Wood, director for the Mexico Institute at the Woodrow Wilson Center for Scholars.

Future of NAFTA

Dr. Duncan Wood, director for the Mexico Institute at the Woodrow Wilson Center for Scholars, Washington, D.C., put in perspective for the luncheon attendees just how important, economically, NAFTA has been.

“As Mexico has known for many, many years it matters that you’re next door to the United States and all too often in history that has been seen as a bad thing,” Dr. Wood said. “But whenever Mexicans and Canadians complain about sharing a border with the United States, you know what the Japanese say: ‘We wish we had that problem.’ Living next door to the world’s largest national market is a huge opportunity— and vice versa— living next door to one of the most dynamic, emerging markets is an enormous opportunity for the United States.”

Twenty years after the entry into force of NAFTA, trilateral trade exceeds $1 trillion and together the three countries generate nearly 30% of global production. As a region, the nations compete together in the global market, based on the logistical advantages, complementarities and human capital of 450 million people. This accounts for 13.2% of all global exports. By uniting the economies of Canada, Mexico and the United States, NAFTA created what is today a $19 trillion regional market.

“Having said all this good news about North America, I think we all face four very big challenges today,” Dr. Wood said:

  • Infrastructure. All three of the nations in North America have underinvested in infrastructure and haven’t really gotten together to plan things out either. “We desperately still need highways, bridges, railways, and ports. We need to focus on border infrastructure and make sure there are more crossing points, more lanes, and better technology and better procedures for getting people and goods across the border.”
  • Human capital demographics. There is a huge “bauble of talent” that we have to take advantage of, but we need to focus on it and make sure that they’re educated and trained. None of the three nations have actually solved this.
  • Energy cooperation. Regenerate the North American Energy Working Group, where all three nations gathered their energy experts to work together and plan the infrastructure for the future. Unfortunately, this group died at the beginning of the Obama administration and Dr. Wood highly suggested this group be brought back.
  • Update NAFTA itself. Dr. Wood declared NAFTA “an old lady that is 20 years old, but it is a 20th century agreement, it’s a first generation free trade agreement. NAFTA has had a positive impact, but there are still lots of challenges and it doesn’t deal with all of the economics that we face today, especially services, the Internet economy and intellectual property.”

Dr. Wood said it is up to the business community to pressure policymakers and improve public education about NAFTA with more data.

“One of the extraordinary things about NAFTA is the people who opposed NAFTA did a wonderful job of telling their story. We who support NAFTA have done a lousy job of telling the success stories; we need to focus on that.”

NAFTA History

The historic agreement, after passing through both the U.S. House of Representatives and the U.S. Senate, was signed into law by President Bill Clinton on December 8, 1993, and took effect on January 1, 1994.

The NAFTA was signed on December 17, 1992 by President George H.W. Bush, Mexico President Carlos Salinas, and Canadian Prime Minister Brian Mulroney. The framework agreement proposed to eliminate restrictions on the flow of goods, services, and investment in North America.

CalChamber support for the NAFTA is based upon an assessment that it serves the employment, trading and environmental interests of California and the United States, as well as Canada and Mexico, and will be beneficial to the business community and society as a whole.

The objectives of the NAFTA are to eliminate barriers to trade, promote conditions of fair competition, increase investment opportunities, provide adequate protection of intellectual property rights, establish effective procedures for implementing and applying the agreement, and for resolving disputes, and to further trilateral, regional and multilateral cooperation.

Mexico purchases 16% of all California exports. California’s exports to Mexico are driven by computers and transportation equipment, which account for 43% of all California exports to Mexico.

In 2013, U.S. goods exports to Canada and Mexico topped $526 billion, while goods imports totaled $613 billion. Since 1993, trade among the three NAFTA countries has nearly quadrupled. Currently, Mexico is the United States’ second largest export destination, bringing in $226.2 billion in 2013.

More Information

For more information, please see NAFTACanada and Mexico

Staff Contact: Susanne Stirling