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What's Next for NAFTA?

As the North American Free Trade Agreement celebrates 20 years, what are the directions and priorities for the three-country pact?

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2014-03-01

The North American Free Trade Agreement, NAFTA, celebrated 20 years this January. It came into effect in 1994 creating one of the world’s largest free trade zones comprising Canada, the US and Mexico.

In the 20 years since, trade between these three nations has tripled and overall job growth has been strong in all three partner countries with total employment increasing by almost 40 million jobs.

As Canadian Shipper was going to press, the current leaders of Canada, the US and Mexico, Stephen Harper, Barack Obama and Enrique Peña Nieto, respectively, were having their annual meeting in Mexico, the “Three Amigos Summit”, to discuss the direction of the pact. Many stakeholders are questioning whether NAFTA is at a crossroads.

In 1994, a pact encouraging North American economic integration was an obvious and logical solution.

In 2014, factors like emerging global economies and their participation in other free trade agreements are changing relationships, leading the NAFTA players to try and figure out where to place their bets.

In their presentation to the Center for North American Studies (CNAS) at Washington University, Frank Graves, Robert Pastor and Miguel Basáñez, authors of a survey called “The NAFTA Promise and the North American Reality” found that with regard to attitudes about borders and security, security is still important in the United States, but “it has declined over the last decade.”

“Mexico is now much more concerned about freedom of movement. This has vaulted to top border concern. Canada no longer focuses on security, while the US supports common border policies to both Canada and Mexico. And all three countries now support a common security perimeter, particularly Mexico,” the survey found.

Discussing the US perspective on the direction NAFTA could take, Leslie Blakey, executive director at the Coalition for America’s Gateways and Trade Corridors, applauded President Obama’s January State of the Union address as supportive of trade and infrastructure.

“Obama is the first president since probably Eisenhower to talk about transportation, noting that first class jobs go where there is first class infrastructure,” said Blakey at the Cargo Logistics Conference in Vancouver this January.

Obama’s address also seemed to mark a positive development for the president, who has not always been seen as supportive of the NAFTA deal throughout his presidency.

“We need to do a better job of focusing on gateways,” said Blakey, who is organizing a summit on transportation and energy policies in Chicago this April called NAFTA NEXT.

The summit will focus on freight mobility, energy and the environment.

“Looking at supply chain network capacity, how has it expanded? 25% of US imports from Canada and Mexico have US content. The US gets more balance of trade between Canada and Mexico than it does of any of its other trade partners. For every dollar of trade, Mexico imports 42% from the US,” said Blakey.

The top trade lanes have important corridor implications.

“Our mutual interest in terms of working together is to create more advanced products, which make up 47% of trade. Energy is the North American game-changer. We cannot let things like truck size and weight get in the way of freight mobility,” she added.

“Mexico is the first or second export destination for 21 US states. Canada is Mexico’s fifth largest source of foreign direct investment mining and there are 3,000 Canadian companies operating in Mexico,” said Luis Brasdefer, commercial counselor with ProMexico, a trade organization based in Canada that coordinates actions to attract foreign direct investment, as well as export opportunities.

For Mexico, NAFTA has gleaned significant benefits. Some 66% of Mexican trade is with North America, and the country now boasts solid macroeconomics, specialized and high skilled manufacturing, added Brasdefer.

Its automotive industry and supply chain has become highly integrated with that of the US.

Jim Phillips, president and CEO of the Canadian American Border Trade Alliance, called Mexico “NAFTA’s clear winner.”

He noted that North American auto production numbers for the NAFTA nations has revealed a flipped switch of sorts: in 2013, 24% of vehicles were produced in Mexico, vs. 11% in Canada, and 65% in the US.

US numbers has stayed the same while Canada and Mexico have reversed roles.

Mexico’s labour force, which graduates 115,000 engineers each year,is a result of demand driven education, noted Brasdefer.

“NAFTA is at a crossroads for a variety of reasons. But anything we do in the future, if you don’t have three winners, you’re in serious trouble. You can’t have one country being the consumer. And if you don’t have a population that can afford to buy things, or that is working, you’re not as big a consumer in future,” said Phillips.

“The logic of closer integration of these three countries is impeccable. As Mexico modernizes we increasingly have convergence of rule of law and domestic institutions, etc. But obstacles at the border cost us,” Phillips noted.

A US pilot program for Mexican truckers, which was introduced 17 years after the NAFTA signing as a three year pilot up for renewal this year, did not get the anticipated sign-up response from Mexican trucking companies.

“Not as many applied as they thought would happen. One of the reasons is drayage is a costly issue on the Mexican border. As a result the rail business of moving product from Mexico to the US is going through the roof,” said Phillips.

“The hue and cry (over Mexican truckers entering the US) was typically coming from independent owner operators. A limited pilot has evolved and a lot of the drama has been laid to rest. It didn’t materialize as a huge usurpation of trucking jobs. Part of that is related to the driver shortage all over,” said Blakey.

Key issues from the Canadian perspective include a stymied approval of the Keystone pipeline between Canada and the US, and rules of origin.

“In 2012, 950,000 autos arrived at the Port Of Baltimore, 100% manufactured offshore, and in one day 1900 cars are on their way to dealers at less than $30 the cost of inspection. So why are we charging ourselves $600 per car to cross the border between the US and Canada? Foreign suppliers do not face this tax,” said Phillips.

Meanwhile, the Trans-Pacific Partnership, the TPP, is being negotiated as world’s largest free trade zone. The US, Canada and Mexico are negotiating separately to join the partnership.

TPP would give Canada preferential trade and investment access to dynamic new markets, a coveted “door” of opportunity that may accelerate the currently sluggish economic recovery.

Assuming Canada, the US and Mexico join the TPP, “any provisions will apply not only to us but to them. This does not play to a robust North America. Trade facilitation measures are critical to the long-term success of the TPP. While the cross-border flow of goods, investments, people and technology has transformed the world, there has been little reform to the supply chain trade since the 1990’s”, said Phillips.

“Post 9/11, public security at the US/Canada border has taken over and become a priority over the facilitation of low-risk trade, threatening our economic security and in fact creating more harm than good. Other bottlenecks like border delays, inadequate infrastructure and burdensome regulations are barriers that weigh as heavily on trade as tariffs and are inhibiting our industry’s potential business future. Ministers must work to ensure these issues are the framework for immediate action once the agreement is signed. We support efforts to move a Competitiveness and Business Facilitation chapter into the agreement,” said Phillips.

“The TPP is dealing with a specific and effective area of the globe. As TPP becomes reality, NAFTA NEXT better become reality, and better get some real traction. To make the three of us begin to compete globally, we have to do something about connectivity and infrastructure development,” he said.

“The collective drive to make the best kind of outcomes is missing and we need to revive it,” said Blakey of NAFTA.

Added Brasdefer: “NAFTA’s legal document doesn’t need to change in itself, but we need to promote it. The three countries, the private sector and government must realize the benefits of NAFTA, which seem to have been forgotten,” he said.

“Ultimately, we are three countries, we are one continent, and we must be in this together. If done right, ten years from now the North American economic power of Canada, US and Mexico can be the leading global economic force. We have to take it forward, retool it and move it,” said Phillips.



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