Friday, January 9, 2009

NAFTA: A Red Herring

NAFTA turned 15 this month.   

What it is: The North American Free Trade Agreement between Canada, Mexico and the U.S. was finalized on 1/1/94 by Presidents Bill Clinton and Carlos Salinas and eased the movement of goods between the countries principally through the reduction of duties.  

The Pros: Despite controversy, NAFTA has done a measurable amount of good.  Trade among the 3 nations has tripled to $893B in 2007.  U.S. - Mexico trade has quadrupled from $81.5B in 1993 to $347B in 2007.  

The Cons: On the other hand, NAFTA still has a number of gaps. It does not include harmonized labor or environmental standards for goods made in Mexico which would create a more level playing field.  The agreement doesn't suspend protection for corn growers in the U.S. nor protection for U.S. labor that (anti) migration policies may afford.  Despite these shortcomings, agricullture trade between the U.S. and Mexico has increased from $7.3B in 1994 to $20B in 2006.

What are we missing?: Regardless, the debate about NAFTA diverts attention from something more important, "the giant sucking sound" of jobs going elsewhere, wherever. Despite the fact that Mexico's average wage is 13% that of the U.S., jobs have been for some time going to China, India, Malaysia, and anywhere that has a lower cost structure.

In fact, if jobs are going to go to lower cost countries, its better that the jobs go to a trading partner than to a nation who is not. Case in point: Mexico buys 2x the U.S. goods that China does ($129B vs. $61B). 

Where have we used this strategy?: From the State.gov website "The U.S. has agreements in force with 14 countries: Australia, Bahrain, Canada, Chile, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco,  Nicaragua, and Singapore. Agreements with three countries--Costa Rica, Oman, and Peru--are pending implementation."

And what has the result been?: From the same website "In 2007, trade with countries that the U.S. has free trade agreements was significantly greater than their relative share of the global economy: although comprising 7.5% of global GDP (not including the U.S.), those countries accounted for over 42% of U.S. exports."

While a worthy cause, re-negotiating NAFTA should be the second priority. Negotiating free trade with the low cost countries to which the jobs are going should be first.

What do you think?

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