NAFTA

NAFTA is as much an investment as a trade treaty, providing guarantees of international courts, regulatory coordination, and intellectual property protections. This has helped bring over $500 billion in foreign direct investment (FDI) to Mexico over the last twenty-three years. This investment has mostly come from the United States, going into manufacturing, financial services, and mining. Trump’s rhetoric—and perhaps soon his actions—are putting this underpinning legal structure in doubt. Throughout the campaign he repeatedly bashed the agreement, and his transition team has promised to rework NAFTA early on. In Congress, Republicans are pushing for a 20 percent border adjustment tax as part of their larger fiscal reform, a measure that would undercut NAFTA-inspired cross border trade. International companies are already wary. While in 2016 overall FDI declined only slightly, new investment (as opposed to reinvested profits) fell by nearly a third. And U.S. investors—traditionally the majority—declined as well, from just over half of all 2015 FDI to a third of 2016 intakes. In the opening weeks of 2017 delays and cancellations have continued, with Ford, Chrysler, and General Motors all pulling back from previous commitments for factories. Source: Centro de Estudios de la las Finanzas Públicas, Cámara de Diputados  Yet investment in Mexico is not going to end, even if Trump takes a hard line. Despite continuing crime and corruption problems, Mexico has succeeded in making it easier to be in business, to register property, obtain credit, pay taxes, and go bankrupt. In the World Bank Ease of Doing Business rankings, Mexico now surpasses its Latin America peers and far outpaces emerging market heavyweights China and India. In fact, much of the money coming in recently is not just betting on NAFTA access to the United States. Instead it is taking advantage of Mexico’s free trade agreements with another forty-four nations, including the European Union, China, and Japan (the United States by contrast, has agreements with just twenty countries). General Motors, when called out by Trump for making the Chevrolet Cruze in Mexico, responded that very few of these cars are headed to the United States—most head from Ramos Arizpe, Coahuila, to Europe. Other companies are coming to take advantage of Mexico’s large internal market. Despite huge inequalities, over 14 million families earn between $15,000 and $45,000 a year, creating thousands in disposable income. Walmart is banking on rising consumption—investing $1.3 billion over the next three years. Israeli owned Teva Pharmaceutical Industries just bought leading Mexican pharmaceutical company RIMSA for $2 billion (though the deal faces legal challenges). And for Mexico’s overall growth, internal decisions may matter more than those of multinational corporations. While vital in developing Mexico’s advanced manufacturing sectors—autos, aerospace, electronics, medical equipment, and the like—in the end FDI is a small part of the overall economy. Averaging roughly $25 billion, it comprises less than 3 percent of the nation’s trillion plus dollar economy. In a way, Trump’s inauguration will help Mexico, as it moves closer to ending the current economic uncertainty. Then the NAFTA “renegotiation” can begin in earnest. This could include new side agreements on rules of origin, procurement, labor, the environment, ecommerce, intellectual property, and sanitation issues for agricultural products among other issues. If the new U.S. president ends the storied agreement, Mexico would return to Most Favored Nation status, raising tariffs on imports into the United States an average 3.5 percent (U.S. exports to Mexico, now some $236 billion a year, would face an average 7.5 percent rate). A 20 percent border adjustment tax on imports would be a bigger threat to cross-border commerce, though the peso’s 20 percent fall over the last year—and the expected further dollar appreciation in the tax’s wake—would help limit the immediate costs borne by Mexico’s exporters. Though not calamitous, NAFTA provides Mexico something special in its investment guarantees. If it ends, these will be harder to replace. But most important for Mexico’s economic future is that the government addresses its own internal challenges—specifically crime and corruption. This, more than anything else, will shape the investment decisions of domestic and foreign companies, creating jobs and growth.

After months of campaigning on nothing but the most banal of generalities about lost American greatness and crooked opponents, Donald Trump got down in the weeds last week. Way down. In a major speech on trade in what’s left of the steel-making region near Pittsburgh, he promised to use every available presidential power to go after foreign trade cheaters, including “Section 232 of the Trade Expansion Act of 1962.” Don’t feel badly if you have to look this one up. I’ve been following trade closely since before NAFTA, and I had to look it up too. It was passed in the Kennedy administration and allows the government to block imports that threaten to weaken an industry vital to national security. The last case was 15 years ago; it failed. One steel executive who was exploring every option to stop the recent flood of steel imports from China said: “Oh, I forgot I had this. I don’t know if it’s any good.” It probably isn’t. And neither, unfortunately, is most of what Trump offered up in by far his most detailed policy speech of the campaign. Trump has tapped into some real grievances about U.S. trade policy. Growing trade has been great for U.S. companies that can now play almost anywhere in the world; it has been great for American consumers, who spend half as much of their incomes on clothing as they did a generation ago and enjoy bargain prices on all the sophisticated TVs and smart phones made in Asia. But it has been pretty lousy for some American workers, particularly in manufacturing. There were many jobs lost to cheap imports in the 2000s especially, and many of those who found new ones were forced to accept much lower wages. But Trump’s proposals offer nothing new to solve the problems he identifies, and could make them far worse. Consider a couple of his milder plans — bringing new trade complaints against China at the World Trade Organization and declaring China a country that “manipulates” its currency for competitive advantage. The first is a good idea — so good that the Obama administration has already brought a dozen cases against China at the WTO and won every one so far. But the cases take a long time, often several years, to work their way through the WTO courts. Declaring China a currency manipulator is also a pretty good idea, and should have been done a decade ago when China was holding down the yuan’s value to boost its exports. Today, however, China is actually propping up the yuan to discourage Chinese citizens from moving their wealth offshore. And even if a Trump Treasury secretary did label China a manipulator, all this would do under current law is require a negotiation, with no threat of sanctions. Other remedies Trump promises — such as Section 232 — are essentially defunct. Trade has problems, but threats to national security are rarely among them. Trump also applauded Ronald Reagan, who unilaterally slapped big import tariffs on Japanese motorcycles and semiconductors. But the United States gave away most of that power when it helped launch the WTO in 1994, and even Trump is not calling for pulling out of the WTO. That leaves Trump’s two bigger threats — killing the recently negotiated Trans-Pacific Partnership with Japan and 10 other countries, and forcing a renegotiation of the NAFTA with Canada and Mexico under threat of U.S. withdrawal. Both would be, as Trump likes to say, huge mistakes. The TPP is the best way for the United States to stand up to China — which would rather lead its own Asian trading bloc — and it would be really good for American companies like Google, Facebook, IBM and others that create a lot of great jobs in this country. The TPP also offers the best chance so far to open up a closed Japanese market that even the Reagan sanctions did little to pry loose. NAFTA is far from perfect, but two decades along, it is clear that Canada and Mexico are much more partners in making things than they are rivals for investment. Ripping up the treaty would disrupt long-standing continental supply chains and likely prompt more U.S. companies to decamp for Asia or Europe. It was encouraging for a change to hear Trump talk about what he might actually do if he becomes President. But it showed that when the man talks about policies to help renew America, he has very little constructive to offer. This article originally appeared on nydailynews.com.

There’s a striking number in Robert Pastor’s new Renewing America Policy Innovation Memorandum, “Shortcut to U.S. Economic Competitiveness: A Seamless North American Market.” Like many, I had assumed that, whatever one’s assessment of the overall impact of the North American Free Trade Agreement (NAFTA), that it had been largely successful in its primary goal of increasing trade and investment flows among the United States, Mexico, and Canada. But in fact the story comes in two parts. From 1994 when NAFTA was launched up through 2000, trade in North America grew three-fold, and foreign investment increased five-fold. Since 2001, however, that explosive growth of trade and investment has stalled, with the pace of trade growth falling by two-thirds and investment growth by half. While Canada and Mexico are still the first and third largest trading partners for the United States, their relative importance has declined over the past decade. As Pastor lays out in greater detail in his book The North American Idea, U.S. exports to Canada and Mexico as a percentage of total U.S. exports rose from 30 percent when NAFTA was signed to more than 37 percent by 2000. But over the next decade that share dropped back to 32 percent. What went wrong? The list is long. Post-9/11 border security measures, which added long wait times for border crossings with both Mexico and Canada, raised costs, particularly in industries like automobiles where production is closely integrated across the North American borders. China’s entry into the World Trade Organization in 2001 siphoned off U.S. investment, and imports of labor-intensive goods from China displaced imports of labor-intensive goods from Mexico. The continued  controversy over NAFTA -- which was the first big U.S. trade agreement with a developing nation and one that left some deep political wounds -- made all three countries reluctant to deal with new trade problems as they arose. As both cause and consequence of this stagnation over the past decade, political leaders in the United States, Canada, and Mexico have largely stopped thinking about the North American market. The two big U.S. trade initiatives currently are the Trans-Pacific Partnership with Asia and the new Transatlantic Trade and Investment Partnership with the European Union. Canada and Mexico have similarly focused on new trade deals outside North America. The focus overseas is odd. Even in a globalized world, location still matters, and proximity is still an advantage. As Pastor points out, the sheer volume of trade in North America far outweighs the trade involved in any of these initiatives. Small gains in increasing continental trade flows would pay big benefits in terms of economic growth. Many of the measures that would be needed to capture these gains are in reality rather modest initiatives. Pastor proposes a common external tariff for North America, which would have been quite reasonably controversial two or three decades ago in an era of double-digit tariffs that greatly affected business location decisions. But today all three countries maintain mostly low, single-digit tariffs with the rest of the world. The primary result of the current separate tariff schedules is to add billions of dollars in paperwork costs and delays for products crossing borders within North America. Investment in transportation and infrastructure is an obvious need, and an inexpensive one in a time of record low government and private sector borrowing costs. Greater regulatory convergence is currently on the table in negotiations with Europe; North American convergence would in comparison be simpler. The economic gains from creating a more seamless market would be measured in the hundreds of billions of dollars. As Pastor notes, U.S. imports from Canada and Mexico contain a much higher percentage of U.S. content than imports from Asia, offering outsized trade gains. Just as important, deeper ties with Mexico and Canada would strengthen U.S. competitiveness globally with companies based in Europe and Asia. Too often over the past decade U.S. political and business leaders have taken the continent for granted, and failed to see the opportunities that are the closest and easiest to realize. With the United States again pursuing an ambitious trade agenda, it is time to take another look closer to home.