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Wise, C (2009). The North
American Free Trade
Agreement (excerpts)
• NAFTA and the inability of political
leaders in North America to
renovate and expand
• meant its eclipse by more recent and
compelling global forces.
China & US
• Gained a foothold in sectors once considered
‘North American’: electrical machinery,
equipment and parts.
• China’s 2001 entry into the World Trade
Organization (WTO) - its exports have steadily
surpassed those of Mexico and Canada in US
• Overall, Canada and Mexico remain the most
important US trading partners, and together
represent the largest supply of US energy
China cause of job dislocation and associated
economic stress in the USA and larger North
American market
All three countries have avoided debating the full
implications of the burgeoning China-NAFTA
trade deficit and focused so narrowly on NAFTA as
the root cause of today’s economic malaise.
Regional and Global trends are gradually
contributing to NAFTA’s obsolescence
NAFTA’s key innovations:
• Protection of IPRs
• Liberalisation of investment and trade in services
• Creation of mechanisms to resolve investment disputes
based on binding international arbitration
In sum:
• Along with the side agreements on labour standards and
environmental protection, the NAFTA accord promoted the free flow
of goods, investment and services within the North American bloc
over a 15-year timeline which ended in 2009.
• WTO rules: most barriers came down in the first 10 years of the
agreement (by 2004). Tariffs and non-tariff barriers were eliminated
on 65 per cent of North American goods by the 5-year point;
• Tariff reductions on automobiles occurred over a 10-year period,
with the rules-of-origin stipulation that such vehicles must meet a
62.5 per cent local-content requirement in order to qualify.
• In the agricultural sector, sensitive products were allotted a 15year liberalization schedule that ended in 2009: corn, dry beans and
powdered milk on the Mexican side; sugar, peanuts and orange juice
concentrate on the US side.
• Negotiating tensions were such that sugar and dairy products were
excluded altogether in trade between Canada and Mexico.
NAFTA still fell short of its mandate to liberalize
substantially all trade between the three partners:
• First, is the persistence of administered protection: e.g. in
the setting of hefty percentages for local content under
NAFTA’s rules of origin in such sectors as autos, high-tech
products and textiles and apparel.
• Second, little progress was made toward the elimination of
antidumping policies and countervailing duties.
• Although special interests tried to gain these
protectionist concessions, hindsight suggests that NAFTA
has been a liberalizing force overall
Each participant wanted to reduce transaction costs and
increase the benefits of cooperation.
Canada and Mexico:
• opportunity to secure access to the US market
• establish clear rules and procedures for resolving trade
and investment disputes.
The USA: promoting and rationalizing economic ties
within the North American bloc, sought to bolster the rules
and norms that constituted the international trade regime
codified within the GATT
Canada and the USA: NAFTA debate opened up the bitter
exchanges over job impacts, economic liberalization ( the
downside of USA–Canadian relations)
If NAFTA signified the free flow of goods, services and capital
between all three countries, what was to stop the flow northward of
environmental pollution and sub-standard working conditions?
Why risk the lowering of labour and environmental standards that
workers and consumers had fought to achieve since the 1930s?
it was this coalition that compelled the administration of George H.
Bush to expend political capital on border clean-up and the
enforcement of much higher environmental standards
This ante was upped to include the formal negotiation of labour and
environmental side agreements to accompany NAFTA as a quid pro
quo for the blue–green endorsement of the 1993 NAFTAimplementing legislation
• Started out as an issue-oriented blue–green coalition in 1991
• Grew into a full-blown anti-NAFTA movement that included
graduates to downsized business executives, laid-off factory
workers, teachers’ unions, pensioners and welfare mothers.
• This coalition won the battle in securing the attachment of labour
and environmental side agreements to NAFTA
• Lack of enforcement of those agreements prolonged the trade
policy war on the domestic side.
• The fight has centred on correcting the institutional weaknesses in
those earlier agreements, namely, the obligation of each country to
enforce its own existing national laws
• But no regard for the strengthening and harmonising
North American labour and environmental standards overall
Result of NAFTA erratic:
• At the macroeconomic level:
• Canada and Mexico have converged toward the more
highly developed US standard in terms of aggregate
growth, interest rates, exchange rate stability and the
lowering of inflation to under 5% annually.
• For Mexico this is a considerable victory, given the
explosion of consumer prices in the wake of the 1994
peso crisis.
But the microeconomic level:
• Failure of neoliberal policies
• Emphasized the need for sound domestic policy reforms
to complement and maximize on the opportunities of a
regional integration scheme.
• Canada, despite its advantage as a G8 country, has lagged in
improving its domestic economy
• Although Canadian income distribution is the most equitable in
North America, Canada’s per capita income remains about 20
per cent lower than that of the USA and its productivity and
investment ratios are similarly trailing.
• In Mexico, the pending reform tasks inherited by the
administration of Vicente Fox (2000–2006) were waylaid by the
unexpected difficulties that arose between the country’s first
democratically elected executive, a minority government
and the divided Congress which he was handed.
This meant, in Mexico:
• Delay of crucial competitiveness measures in energy sector
modernisation, fiscal restructuring, labour market mobility
and stronger technical support and credit access for those
small and medium-sized firms that provide the bulk of
Mexican employment.
Although Fox’s successor, Felipe Caldero´n (2006–2012), has
proven to be more politically adroit in navigating a divided
Congress, the pace of microlevel reforms has been slow and
The inability of all the relevant actors to overcome a
longstanding collective action gridlock in reforming
Mexico’s energy sector has crippled the ability of this energyrich nation to cash in fully on the latest oil price boom.
China, with its lower costs on utility inputs for industrial
production, more favourable corporate tax rates and
blitzkrieg educational investment in the higher-skilled
professions, is now burrowing through the more
sophisticated sub-sectors of the US electronics market
(computer peripherals, sound and television equipment,
This sector, Mexico can no longer claim as its own
Public policy debate in Canada still juxtapose nationalist
comforts and quality of life issues against the kinds of
market-oriented economic measures that would reduce the
numerous barriers to higher productivity and
In Canada , Canadian politicians and policy makers have
repeatedly postponed the following measures, and in so
doing have hampered opportunities for stronger growth of
per capita GDP and upward mobility on the part of the
average Canadian:
• Reduction of inter-provincial trade barriers,
• Removal of restrictions on labour mobility
• Loosening of controls on the production and distribution of
public goods and services
• Lower taxes on capital and income
Because of the minimalist institutional framework that all
three members agreed to at the outset, NAFTA has basically
been frozen in place and is out of date when it faces
structural challenges .
China’s trade relationship with South America is based on more traditional patterns
of comparative advantage:
China’s export of lower-end industrial goods and its import of primary products
from Argentina, Brazil and Chile, in particular
The China–NAFTA relationship is one of export similarity and fierce competition
for manufacturing market share, especially with regard to Mexico and the USA.
The overriding goal on both sides is to establish manufacturing operations in
Mexico based on integrated global production chains, with an eye toward exporting
to the US market.
By turning its back on Mexico, the USA could soon be facing the worst-case
scenario of all with regard to its mammoth commercial deficit: the displacement of
US suppliers by Chinese firms in Mexico’s maquila assembly plants – a trend that
is now underway.
China’s ability to offset Mexico’s higher labour and production costs by meeting
NAFTA’s regional content requirements and thereby gaining duty-free access to the
US market.
• Used its privileged access to the US market as an
opportunity to restructure the economy despite
the hefty political costs and to introduce sweeping
changes to its historically mercantilist trade strategy.
• Mexico, in contrast, seized NAFTA membership as a
way of locking in a new market-oriented reform model,
one for which there has been insufficient preparation or
• Fifteen years after the fact, numerous sectors of the
Mexican economy (telecoms, finance, petroleum,
bread, tortillas) remain under monopolistic control.
• Mexico lags behind Chile and Colombia on the World
Bank’s Doing Business competitiveness indicators
Report by Daniel Lederman 2005 (World Bank’s Latin America
and Caribbean Division) ‘Mexico’s global exports would have been
about 50 percent lower and foreign direct Global
Monitor 145 investment (FDI) would have been about 40 percent less
without NAFTA. Also, the amount of time required for Mexican
manufacturers to adopt U.S. technological innovations was cut in half .
. . NAFTA made Mexico richer by about 4 per cent of its gross
domestic product (GDP) per capita.’
However, although Mexico may arguably have been worse off had it
not joined NAFTA, counterfactual analysis (that is, comparisons of
Mexico with other Latin American emerging markets that did not join
NAFTA) confirm its pattern of under-performance
A true revival of NAFTA would require that regional leaders agree on a
continental strategy that taps labour markets across the three
borders, tackles the huge asymmetries that continue to divide Mexico
from its partners, and invests more vigorously in infrastructure and
technology transfer