NAFTA Background
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I want to thank the U.S.-Mexico Chamber of Commerce for inviting me to speak on the North American Free Trade
Agreement; the most innovative and important trade agreements in the history of the United States.
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Being here with Enrique brings back many fond memories – not just learning to appreciate good Tequila and the fine dining of
Mexico City (as well as Ottawa and Montreal), but of intense negotiations and the sense of accomplishment. We had difficult days in the negotiations, but we looked at Mexico as a partner, not a competitor, and we never had a doubt we would successfully conclude negotiations.
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As Chief Textiles Negotiator for President George H.W. Bush, I was honored to be part of the consultations with Mexico which preceded the launch of the negotiations as textiles was one of the key sectors for all three countries. Thus, I thought I talk about the process leading up to NAFTA, and some of the issues considered at the time, and then turn to some of the results we have seen from the agreement.
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Today free trade between the United States and Mexico is taken for granted; obviously a “no-brainer” between friendly neighbors.
But 20 years ago it was not so obvious; it took dedication by visionaries on both sides of the border to launch the negotiations.
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Prior to NAFTA, the U.S. had negotiated only two free trade agreements, with Israel and Canada – two developed countries.
We knew NAFTA would be a substantial undertaking given the disparity of incomes and differences in our economies, which has narrowed since then in part to the success of NAFTA.
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While launched by President Bush, President Reagan had called for a North American common market (like the EU) in the 1980 elections.
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There was substantial concern about economic and political stability in the region, and Soviet intrustion in the region. The
Caribbean Basin Initiative (CBI) was created in the mid 1980’s to bolster the economies in Jamaica and Central America.
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In the Reagan Administration we started talking about broadening
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The discussion began as a possible bilateral FTA with Mexico.
Canada, with which we concluded an FTA in 1988, quickly asked for trilateral talks in 1991, and the NAFTA negotiations commenced. the conversation to Mexico. At the same time, Mexico was concerned that Central America was gaining advantages over them in the U.S. market.
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Big proponents of NAFTA in the Bush Administration were
Secretary of State Jim Baker, Under Secretary of State Bob
Zoellick, Secretary of Commerce Rob Mosbacker, who was from
Texas, as well as Agriculture Secretary Clayton Yeutter who was a
USTR in the Reagan Administration, and former CEO of the
Chicago Mercantile Exchange.
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There was a belief that economic integration and reform would spur investment and job creation in Mexico, leading to a more stable country south of the border and reduce illegal immigration.
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We knew the political risk of launching NAFTA given the strong protectionist sentiment in the US at the time, mostly focused on
Japan, China was just emerging as a major U.S. trading partner.
But we firmly believed the economic and national security risks were greater if we failed to engage with Mexico.
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We met with the Mexican economic team during the 1990 World
Economic Forum in Davos. President Salinas was there along with his team, including Trade Minister Jaime Serra Puche. This was a pivotal, go, no go meeting. The Mexican delegation consisted of graduates from our best Universities -- many from
University of Chicago and Yale, such as Enrique. The Mexican team was sold on concept of free markets and economic liberalization. But they too had to assess the political challenges and risks from opening the Mexican market to the United States and Canada.
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So while the Mexican team was committed, they were not sure of the political situation in Mexico would enable them to enact
NAFTA. Oil and the petrochemical industry built around it was big issue. The oil industry is state-owned and controlled under the Mexican constitution and they did not want to change it.
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President Salinas’ initially wanted a sectorial agreement, covering autos and textiles. But as the President sought foreign investment in Mexico, he continuously herd from Europeans and others that they wanted Mexico to also be an export platform to the United
States.
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This discussion was taking place in the midst of a major geopolitical shift with the fall of the Berlin Wall. Mexico was not competing with Poland and other Eastern European countries for
FDI. Thus, at Davos President Salinas decided that Mexico would liberalize their economy and sectors such as banking, which was nationalized in 1982 – thus the decision was made to pursue a fullfledged FTA.
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Mexico had much higher trade barriers than did the US – their average tariff was 20%, while ours was less than 2%, although much higher on sectors such textiles and footwear. Despite these barriers, the U.S. maintained a trade surplus with Mexico at the time. Thus, we expected that the U.S. trade surplus would grow as a result of NAFTA. But the devaluation of the peso, which I know Enrique will talk about, altered that equation.
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To counter some of the political pressures that resulted from
NAFTA and the creation of the World Trade Organization,
Mexico decided to take strong action against imports from China, which constrained some US businesses, particularly in retail, from expanding there. President Reagan a few years earlier took the same one step back, to be able tto take 3 steps forward by placing high tariffs on motorcycles from Japan.
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Throughout the NAFTA negotiations, we worked closely with our own private sectors, but I also spent a good deal of time meeting with the private sector in Mexico, as I know Enrique did meeting with U.S. companies and various other interested parties.
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NAFTA was signed by Presidents Bush, Salinas and Canadian PM
Brian Mulroney in 1992 after almost 2 years of non-stop negotiations. I went to the 1992 Republican Convention in
Houston to help sell the concept of NAFTA to Republican delegates. While mostly a friendly audience, it was clear that
Congressional passage of NAFTA would not be clear sailing.
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President Bill Clinton inherited NAFTA and fortunately decided to embrace NAFTA and it, securing Congressional approval in
1993. Ross Perot was villianizing NAFTA, and gaining popularity with his anti-trade message. Bill Daley’s political stewardship and knowledge of the private sector were invaluable to securing U.S. Congressional approval .
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When NAFTA was launched in 1991, we said it was just a first step in the creation of a Free Trade Agreement of the Americas. I remember giving a speech in Cancun during a NAFTA negotiating session, firmly believing that by now we would have economic integration within the Americas. But unfortunately that has not come to fruition.
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While the U.S. has negotiated more free trade agreements with regional trading partners – CAFTA-DR, Chile, Colombia and Peru
– they are separate free standing agreements, not fully allowing for integration of the economies of the region. In my opinion we need to change this – linking these agreements together will create even more economic opportunities and growth.
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The year before NAFTA came into force Mexico exported $50 billion to the US; today they export $277 billion. That is up 600% since 1993, and accounts for 12.2% of overall U.S. imports. Total
NAFTA trade is about $1.6 trillion.
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U.S. goods exports to Mexico are up 420% since 1993, now totaling nearly $220 billion. This accounted for 14% of overall
U.S. exports, making Mexico the 2 nd largest export market for the
U.S. U.S. service exports to Mexico have had similar success, increasing from $10 billion prior to NAFTA to over $25 billion in
2011.
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Investment is also growing – U.S. foreign direct investment (FDI) in Mexico was $91 billion in 2011 (the latest data available);
Mexican FDI in the U.S. was $14.
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The numbers, I believe, confirm the great success of NAFTA.
Sectors such autos has been a bright spot. About 2/3 of cars sold in Mexico are now imported, while 75% of cars made in Mexico are exported. The U.S. imported $53.5 billion in cars, trucks, and parts from Mexico in 2012, making it one of the top five categories of imports. The others were electrical machinery, machinery, mineral fuel and oil, and optic and medical devices.
 When assessing NAFTA’s impact on the U.S. economy, you cannot look at NAFTA in isolation – it was negotiated simultaneously with the Uruguay Round, which created the WTO, opening the door more for China in the U.S. market. That clearly has had a profound effect on both the US and Mexican economies.
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As Enrique will elaborate, NAFTA helped industries in North
America better compete in a rapidly changing and more competitive environment, adjusting to the emergence of China and eventually other countries like Vietnam. IF the co-production arrangements did not exist in key sectors like autos and textiles/apparel, I am confident many more companies would have shifted production to China.
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I am amazed that NAFTA is still being blamed for US economic evils. Even Candidate Obama in the 2008 criticized NAFTA as a bad agreement that destroyed US jobs, and many Congressional candidates still do the same.
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I was in Washington, DC last week meeting with several
Congressmen, Senators and staff. One off from North Carolina said they bitterly remember how NAFTA lead to the destruction of the U.S. footwear industry. The reality is that the U.S. footwear industry went to China, not to Mexico or other countries in the
Hemisphere – yet NAFTA got the blame.
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Rising costs in China, higher costs of transportation in shipping between Asia and the Americas, and the competitiveness of our economies is resulting in industries coming back to the Americas.
Thus, I believe NAFTA will yield even more benefits to the U.S.,
Canadian and Mexican economies in the coming years.
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Now NAFTA countries along with 9 others - Japan (soon to join),
Vietnam, Malaysia, Brunei, Singapore, New Zealand, Australia,
Chile and Peru – are negotiated the Transpacific Partnership
(TPP). But that is probably a topic for another discussion. So what was intended to be a free trade of the Americas may turn into a free trade agreement of the Americas and Asia, if TPP is successful.
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