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Win-win is the key to nation-specific trade agreements

August 30, 2018

The North American Free Trade Agreement, known as NAFTA, is poised to be superseded by bilateral agreements between its three members — the U.S., Canada and Mexico.

Whether breaking up a regional trade pact that now serves nearly 490 million people into separate agreements will be more beneficial remains to be seen, especially for individual U.S. states. Thirty-two states declare Canada as their largest export market while six others — including Texas and California — count Mexico as theirs.

Over the past 24 years NAFTA has delivered on most of its promises as phased-out tariffs boosted economic output and lowered consumer prices for the entire North American market.

For the U.S., the top criticism was that too many manufacturing jobs moved to Mexico in the automotive, textile, computer and electrical appliance industries. Yet, a recent study by the Congressional Research Service concluded that these so-called losses have been more than offset by significant job gains in the services sector. Ultimately, they say, it is the rise of cross-border supply chains improving American competitiveness for all these industries that is the largest contribution of the trade pact, especially for automobile production that is now a lot less vulnerable.

For Mexico, the biggest payoff unquestionably has been the huge surge in foreign investment that, in addition to creating manufacturing jobs, significantly boosted its tourism industry while accelerating the modernization of its previously protectionist economy. But the trade pact has yet to reduce the levels of poverty: Although the industrialized maquiladora zone has seen wages improve, the national averages still lag those of non-NAFTA countries such as Brazil and Chile.

For Canada, America’s largest trade partner over the past 60 years, the relationship stayed mutually beneficial but not markedly more than before, as the positive impact of the trade pact on its midsize companies was offset by the sharp reduction in auto manufacturing jobs to the benefit of Mexico.

The World Bank estimates that since the inception of NAFTA, Canada’s trade-dependency factor — defined as the average between all global imports and exports as a percentage of GDP — stayed unchanged at 32 percent while Mexico’s jumped from 15 to 38 percent. The American factor moved from 10 to 13 percent, but mostly because of China.

Hence, the recent decision to impose tariffs on Canadian steel and aluminum is baffling. Since the U.S. had an $8.4 billion trade surplus (rather than the mistakenly declared deficit) with Canada last year — mostly due to the services sector — why risk facing retaliatory tariff barriers?

It seems that the Trump administration’s thinking was colored by the real and serious trade deficit problem originating mostly in China, but which only recently started to manifest itself with Mexico as well. But moving away from NAFTA into a country-specific deal will do nothing to address an important cause of that Mexican trade imbalance: exchange-rate instability.

Mexico has seen its peso depreciate by more than half relative to the dollar since the Great Recession of 2008. Such a large move in its currency value made many American imports look a lot more expensive, contributing to the creation of larger trade deficits as a result. The notion that extreme exchange-rate instabilities affect and distort trade imbalances is not a secret. However, our so-called “better deal” approach has not yet explored a mechanism for improved exchange-rate stability with both of America’s neighbors.

With Canada, an area always in need of improvement was labor mobility. As it stands, the trade agreement between Canada and the U.S. does not differentiate itself from any other trans-Atlantic or trans-Pacific deal, as it does not capitalize on the geographic proximity and linguistic commonality for displaced workers to seek employment in either country. Better facilitating the free flow of people — alongside of goods, services and capital — would be useful for the stability and endurance of a future trade agreement, as clearly demonstrated in modern Europe.

Regardless of the choices made to improve or replace the trade agreement, trade pacts must exist and remain mutually satisfactory to survive the test of time. It’s all about a long-term “win-win” vs. extracting temporarily what looks like as a better deal.

Moris Simson is a fellow of the IC² Institute at the University of Texas at Austin and a member of the American College of Corporate Directors.

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