Features : Revisiting Nafta - Global Finance Magazine

Regional report

Calls to renegotiate Nafta are growing louder, and as the three member countries’ economic travails deepen, the arguments for a revision are gaining ground.

The economic crisis that began in the United States has had a dramatic effect on economies around the world, but none so much as the impact on its two closest trade allies and Nafta partners, Canada and Mexico. The serious consequences of such a close alliance have led some to call for a thorough reexamination of the Nafta agreement.

However, for those who think it is a good idea to revisit Nafta, the rationales differ. One the one hand, the clear effect of being so closely allied to the United States is that when the US stumbles, its allies stumble, too. From this standpoint, some argue that both Canada and Mexico should build stronger trade relationships with other trade partners outside Nafta.

On the other hand, there are many who argue that a tighter economic partnership among Canada, the United States and Mexico—more along the lines of the European Union model—would be of benefit to all. In particular, for the US a tighter alliance with Mexico—and agreements requiring judicial, labor and environmental reform within Mexico to address corruption and build a stronger Mexican economic base—would not only stem the tide of illegal immigration but also help strengthen US national security.

However, there are plenty of policymakers and economists across the three nations who feel that Nafta is sufficient as it stands and does not need to be revised on any sort of grand scale. Peter Bethlenfalvy, co-president at ratings and analysis firm DBRS, feels that Nafta has had a positive influence as actual volumes of exports and imports have grown significantly for all countries involved. “In the 10 years after Nafta was put in place, total trade among the three Nafta partners expanded from $289 billion to $623 billion,” he points out.

Canadian prime minister Stephen Harper: Optimistic about economic fundamentals.

Tight Bonds, Tough Times

Jeff Faux at Washington think-tank the Economic Policy Institute says that the implosion of the US financial system hit both Canada and Mexico harder than it would have before Nafta. This is particularly the case for Mexico, he says. “When the crisis began, the conventional wisdom was that Mexico’s macroeconomic situation was in good shape, and therefore it would only be marginally affected. Over the last three or four months the assessment has become more and more dour. Dependence on the US made it more exaggerated,” he adds.

At a recent Mexican housing conference, Mexican finance minister Agustín Carstens said that the Mexican government would work to support the economy by continuing to loosen monetary policy and by increasing public expenditures. In January the central bank cut interest rates by 50 basis points. The finance minister predicted that more cuts were to come.

In Canada, although there has been a clear impact and the country is now in a recession, according to some economists fundamentals are still strong. “We are the only government to have gone into this downturn in a budgetary surplus,” points out one economist, “and I think that from a financial and economic point of view we are in the best position going into this, but we are not going to be immune from these global forces because we live in a connected world. The supply chain is interwoven, and the US is our largest trading partner, and vice versa.”

Whether the impact of the crisis causes policymakers to take another look at Nafta and other trade agreements may become moot, however, should the economic downturn deepen. “For both Mexico and Canada the economic assumptions of Nafta are now very much in doubt,” notes Faux. “After Nafta both Canada and Mexico ran surpluses with the US, and a lot of their growth figures assumed that they could continue selling to this huge and growing consumer market.”

During the years since the advent of Nafta, the share of consumption in the US grew substantially, but whether those economic conditions will return is unclear, says Faux. “The US has a huge trade deficit, and the [enthusiasm] of our creditors around the world to keep financing an excessively consuming country is really running thin,” he notes. “So at some point after we get out of the initial hole, the US will have to start paying attention to the trade deficit. It cannot continue to be the consumer market of last resort for everybody.”

Faux says that this is where Nafta comes in. “Either at some point North America means something, and as the US creates a trade strategy aimed at rebalancing its current account, Canada and Mexico are treated as special partners as Nafta would suggest, or else they are just treated the same as every other country, and Nafta becomes obsolete,” he says.

The idea of a North American economy developed alongside the growth of both the Asian and European regional economies. However, in North America the idea was abandoned shortly after Nafta was signed, according to Faux. “Then, when the US opened up to China at the end of that decade, the idea that Mexico would be in a partnership with the US got blown out of the water. A big part of Mexico’s problem is that it is now in competition with China,” he adds.

Avoiding Past Mistakes

As all three countries continue to look at ways to deal with their own economic difficulties, the big fear for those that are pro-free trade is that the solutions selected by federal policymakers go against the tenets of free trade and against the specific agreements of Nafta. The common reaction to any downturn is to focus internally and ensure that domestic business and commerce are supported. While this is naturally a laudable goal, sustaining domestic commerce does not necessarily mean taking a protectionist stance by supporting domestic goods and services to the detriment of current trading partners or contrary to existing trade agreements.

Indeed, if history is any judge, moving to a protectionist stance—either by putting up tariffs on imports to make internal products and manufacturing more appealing or by requiring that products and services be procured domestically for certain contracts or projects—can have negative consequences. One clear example of this is the Smoot-Hawley Tariff Act of 1930. The tariff act was aimed at stimulating the US economy as the recession of the late 1920s looked set to turn into a depression. The act raised tariffs on more than 20,000 goods being imported into the United States. As a consequence, numerous trading partners of the US reacted with tariffs of their own on US exports. At the time, more than a thousand economists signed a petition against the act, and many felt it was a big contributor to the depression that followed, as US trade dropped by more than half by 1932.

Bethlenfalvy says that the result of a protectionist policy, such as the Smoot-Hawley Act, is shrinking global trade. “The Smoot-Hawley Tariff Act saw world trade drop dramatically within two years of its being signed into existence,” he explains. “Virtually every economist would point out that Smoot-Hawley was a bad thing.”

Both the United States and Canada have included what some consider protectionist clauses within their recent stimulus packages—the now-infamous “Buy American” clauses in the US package that have been so hotly debated over the past few weeks, and in Canada the requirement for materials to be sourced locally for certain infrastructure projects related to the stimulus package. However, such policies are contrary to Chapter 11 of the Nafta agreement, which says that each party must treat no less favorably the investments of investors of another party than it accords, in like circumstances, to investments of its own investors.

Although US president Barack Obama during his campaign did discuss revisiting Nafta, many economists believe this was more a political tactic than a likely scenario. Revising Nafta does not necessarily mean demolishing it altogether, though, as Robert Paterson at the University of British Columbia notes. “Nafta has never been significantly amended since its inception despite many threats to do so. It is probably better for our … governments to focus on ways to jointly solve these new problems than obsess about how we did or didn’t solve the problems of the past,” he says.

Carlos Pinéra, a spokesperson at the Nafta Office of Mexico in Canada, notes that the current international scenario differs considerably from the one prevailing in the early 1990s when Nafta was negotiated. “Security, originally not considered in Nafta’s agenda, has modified trade processes and patterns and has become a key issue in the agenda of North America. We need secure borders without involving barriers that raise the costs of our companies,” he explains.
“In that regard,” adds Pinéra, “we believe that it is now time for Mexico, the United States and Canada to conceive a new competitiveness understanding that builds upon Nafta and that aims to extend the trade benefits to get sectors of our societies wider. There are other issues that are important in the agenda of North America, such as the climate change, a concern that the three parties strongly share, and energy, with the idea to secure regional access to sufficient and affordable resources.”

Mexico is against the idea of renegotiating Nafta, according to Pinéra. “Nafta has fulfilled its commitment to create a free trade area,” he says. “Now we must focus our efforts to strengthen Nafta and provide the tools to increase its efficiency. A Nafta upgrade is very different from conducting a renegotiation.”

Concludes Pinéra: “Maintaining open markets and respecting the existing international commitments is the best way to tackle the recession.”

Denise Bedell