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AQ Feature

Policy Advocacy: NAFTA and the New Regionalism

Binational cooperation: Marcos Godoy of Mexico City manufactures car dash mats at a maquiladora. Photo courtesy of Ivan Pierre Aguirre/AP.

The world has changed dramatically since the North American Free Trade Agreement (NAFTA) was signed. Today, 20 years later, we live in an era of mega-regionalism. This new reality calls for a new strategic vision for North America.

“Distant neighbors.” That’s how Alan Riding, then The New York Times bureau chief in Mexico, labeled the relationship between Mexico and the U.S. 30 years ago. We have come a long way since then. While not yet strategic partners, the binational levels of interdependence and cooperation are unprecedented in the history of both countries.

Trade flows within the NAFTA region of Canada, Mexico and the U.S. have grown four times since it came into effect on January 1, 1994. In 2013, Mexico was the United States’ second largest goods export market, totaling $226.2 billion—a 444 percent increase since the pre-NAFTA world of 1993—and accounted for 14.3 percent of overall U.S. exports in 2013. U.S. exports to Mexico are greater than exports to China, Japan and Taiwan combined; greater than exports to the U.K., Germany, the Netherlands, Belgium, and Italy combined; and to the rest of Latin America.

The U.S. imports more from Mexico than from similar groupings, excluding China, totaling $280.5 billion in 2013—a 603 percent increase since 1993—and Mexico accounted for 12.4 percent of overall U.S. imports in 2013. This level of economic activity is happening in a country 13 times smaller in nominal economic terms. Further, the trade deficit with Mexico and Canada has been low and stable for over 20 years, in sharp contrast to the exponential increase and towering levels of America’s deficit with China.

For Mexico, NAFTA has represented much more than a significant change in the region’s internal trade and investment flows. It got Mexico to think “forward and outward, instead of inward and backward,” as Luis Rubio from El Centro de Investigación para el Desarrollo (Center of Research and Development—CIDAC) suggests. Economic interdependence in North America is now embodied by the emergence of shared production processes, clusters and corridors, particularly in sectors like the auto industry. In fact, U.S. imports from Mexico incorporate close to 40 percent U.S. content, with production zigzagging across the border. The equivalent for Canada is 25 percent and 4 percent for China, according to the Woodrow Wilson Center Mexico Institute’s “Is Geography Destiny? A Primer on North American Relations” 2014 report.

A twenty-first century economic architecture for North America needs to be constructed on two levels. The first is within the region, requiring new formulas for market access, energy, logistics, border management, training, and labor mobility. The revolution in the energy sector in the U.S. is a cornerstone, enabling new economic trends and a resurgence of U.S. manufacturing.

The second level is extra-regional, anchored to the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), with the goal of linking the region to a considerable portion of the global economy and bolstering business by lowering transaction costs.

Mexico and Canada should insist on some level of joint negotiation in TPP (an agreement both countries are a part of) and participation in TTIP (a trade agreement that is being negotiated between the U.S. and the European Union), partly as a way to mitigate some of the effects of the unavoidable expansion of preferential access for other countries to the U.S. market. If a common initiative is out of the question, accommodation will be necessary. For example, the terms of each country’s relationship with the EU should eventually match TTIP provisions.

Notwithstanding the difficulties of obtaining Trade Promotion Authority (TPA) in the U.S., as well as the intricacies of the electoral calendars in the U.S. and the EU, the process entailed by both TPP and TTIP represents an opportunity to work on a common agenda for North America’s competitiveness. Luis de la Calle, one of Mexico’s leading economic experts, has suggested that Mexico and Canada unilaterally harmonize their existing internal and external rules and regulations with the EU to conform with TTIP as a last resort, if needed. In parallel, progress within NAFTA can be achieved in regulatory and standards harmonization, external tariff convergence, trade-in-services liberalization, and better standards to protect e-commerce and intellectual property, and improve dispute settlement mechanisms.

Mexico has sustained almost 20 years of superb macroeconomic management, but growth levels have been extremely low. With that in mind, the country is at a watershed moment, trying to complement achievements in stability and an open economy with the critical and long-overdue reforms the current administration is endorsing in the energy, fiscal, labor, education, telecommunications, and political sectors. The energy reform underway, for example, is a historic departure from the dominant nationalistic stance that has been present for many decades.

There is much at stake for the U.S. in Mexico’s reform process. The U.S. can help by welcoming Mexico to a coordinated approach as the new trade and investment framework with other key regions is developed. In fact, it would be an opportunity to rekindle the trilateral nature of NAFTA, which has eroded over the years as dual bilateral and hub-and-spoke approaches have become the norm in regional free-trade relations.

Although border security and anti-narcotics issues have dominated the bilateral agenda since 2001, cooperation between Mexico and the U.S. has continued to mature. To address political opposition on both sides of the border to further economic integration, the exceptional business coalition that was vital during the NAFTA negotiation also needs to be strengthened.

Together, Mexico and the U.S. have preferential access to more than 50 countries around the world. A joint effort to move TPP and TTIP forward as a bloc would take full advantage of the synergies embedded in this relationship. And returning to regional competitiveness as the main focus of the bilateral agenda would be timely as we leave behind the “distant neighbor” mentality and deepen our strategic partnership in North America.

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Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Mexico, NAFTA, Trans-Pacific Partnership