FACILITATING TRADE: NAFTA TODAY AND TOMORROW

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1 WHITE PAPER FACILITATING TRADE: NAFTA TODAY AND TOMORROW Looking back at North America s most important free trade agreement.

2 White paper Facilitating trade: NAFTA today and tomorrow Looking back at North America s most important free trade agreement. The North American Free Trade Agreement (NAFTA) is finishing its 21st year, and as governments in Canada and the United States work to finalize new trade agreements such as the Trans-Pacific Partnership (TPP), the Comprehensive Economic and Trade Agreement (CETA) and the Transatlantic Trade and Investment Partnership (TTIP), it s a good time to look back at the impact NAFTA has had on its participating countries and to look ahead at what the future holds for the for the transformative trade agreement. The much-discussed agreement has been both championed and condemned often since its inception, but for more than twenty years, it has provided tax breaks for eligible importers and exports while facilitating trade between Canada, the United States and Mexico. NAFTA officially came into effect on Jan. 1, 1994, meaning it s now officially legal drinking age in the U.S. but just like any 21-year old, NAFTA s gone through a lot of ups and downs as it evolved from infancy to its current state. Going back where it all began NAFTA s beginnings lie several presidents back, even before Bill Clinton, who eventually signed the act into law. Streamlined movement of goods between Mexico, Canada and the U.S. is an idea that has its origins in the Reagan administration. At the time it was signed, Clinton said he hoped NAFTA would guide the world toward a broader global trade pact. The first Democratic presidency in 12 years, the agreement was one of Clinton s first triumphs as president, even though the trade facilitation agreement had emerged from the Republican party. In Canada, free trade within North America had become a hot-button issue by the late 1980s. Conservatives fought hard to portray the agreement as a positive, working to convince people that its advantages would outweigh any potential detriment to Canadian identity and natural resources. Though the Conservative government was eventually able to pass the deal, an extension of the agreement to Mexico was not struck until 1990 s, when Jean Chretien became Prime Minister. NAFTA s impact: Hard to calculate It is difficult to determine the direct impact that NAFTA has had since its implementation. Over the first two decades of the agreement s existence, intracontinental trade has increased significantly. From 1993 to 2012 trade flows grew from $290 billion to more than $1.1 trillion. In fact, the U.S. trades more with Canada and Mexico than with Japan, South Korea, Brazil, Russia, India and China combined. Additionally, travel and investment across borders has also grown notably since the passage of NAFTA. In addition, supply chains have been allowed to develop more freely since the passage of NAFTA. Companies have spread their auto chains across all three member countries which has allowed them to become more globally competitive while reducing costs. This business strategy would have been much more difficult without the tariff reductions introduced by NAFTA. Much of the increase in trade between the three nations has occurred between

3 Mexico and the U.S., and the vast majority of that has been and 2012 merchandise trade between the two nations grew from the automotive sector. nearly seven times to more than $30.9 billion. Additionally, by 2011 services trade between Mexico and Canada had There has been also been a small-scale transference of grown fivefold to $2.9 billion. As recently as two years ago jobs to Mexico, where labor is cheaper. However, Congress Mexico was Canada s third largest trade partner, third largest has examined the effects of NAFTA in the past, and found supplier and fifth biggest market for export trade. that the negative impact of the job movement on the U.S. has been minimal. It concluded that trade with Mexico was already on the rise, and likely would have continued with or Measuring NAFTA in Mexico without NAFTA. However, as a whole the North American trade deal may have placed Mexico at a disadvantage. The Center for Trade between Mexico and Canada has also grown Economic Policy Research has found that Mexico has significantly since the agreement was signed. Between 1993 declined in nearly every relevant metric since the agreement was implemented. The country s unemployment rate has increased, its poverty rate has remained virtually flat and in terms of growth of real GDP per person Mexico ranks 18th Canada, the U.S. and Mexico will have to come to the bargaining table with their own wish lists if they plan to achieve positive change within the realm of NAFTA. out of 20 Latin American countries. The problem with measuring the impact of the deal though, is that despite the CEPR s findings, Mexico has had improvements in both manufacturing productivity and foreign direct investment since the agreement s signing. In fact, despite the trade advantages NAFTA has brought to Mexico, Canada and the U.S., the North American share of the international trade market has actually fallen from 19 percent to 13 percent since the inception of the agreement. Leaders of the three nations will have to discuss ways to

4 Like raking leaves: Gathering your Certificates of Origin As the leaves start to fall and we head towards the end of the year, shippers should make sure their Certificates of Origin are in order. The Certificate of Origin is used by the three NAFTA member countries - Canada, the U.S. and Mexico - to determine where products originated and, based on the originating country, whether imported products are eligible for reduced or eliminated duty. Many factors go into the eligibility decision, including composition, the percentage of components sourced from a NAFTA country, and more. further integrate trade beyond what has been built in the past two decades. For NAFTA to prove successful 40 years after its creation, goods co-produced by the three North American countries will have to become more globally competitive through the next two decades. Looking ahead: NAFTA in the future There have been proposed changes to the trade facilitation deal in the past, and both critics and proponents alike continue to float amendments to the agreements. As recently as the 2008 presidential election, Democrats were calling for changes on a national stage. The frequency with which changes are promoted mean that any amendments should come as no surprise. All three countries will have to come to the bargaining table with their own wish lists if they plan to achieve positive change within the realm of NAFTA. In order to benefit from the preferential tax treatment bestowed by the two-decade-old trade facilitation deal, the certificate must be legibly completed and in the importer s possession when the declaration is made. Additionally, producers can voluntarily fill out the document for use by exporters. As most certificates expire after a year, and typically go by calendar year, fall is the season to start updating. Importers should reach out to their suppliers to ensure they have the most current certificate to continue enjoying reduced duties and smooth border clearance into the new year. The Brookings Institution recommended that several priorities that are necessary if the trade facilitation deal is to be improved. First of which is that congestion at the border remains an obstruction to streamlined trade between the U.S., Mexico and Canada. This issue has to be combated in order to position North America for a more influential future in global trade.

5 Especially when crossing between Mexico and the U.S., delays at the border are brutal. The infrastructure between the two countries is outdated, and unnecessary measures like the U.S. insistence upon guards carrying guns south of the border - against Mexican law - are slowing down operations. International expansion: The next logical step? Also, the three countries need to push for further international involvement. While the U.S., Canada and Mexico have all pushed to liberalize trade with the European Union separately, the countries should do so in together. The three nations can also improve NAFTA by pushing for deals with Latin America and the Caribbean. If the U.S. and its North American trade partners are able to reduce congestion as well as expand intra-continental trade opportunities, the continent will no doubt grow more competitive on a global scale through the next twenty years of NAFTA s existence. Contact Livingston Have questions about free trade agreements? Contact your account executive, write to us at: simplify@livingstonintl.com or give us a call at Sources

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