So far, there have been seven rounds of negotiations among the United States, Mexico and Canada trying to agree on an update to NAFTA (the North American Free Trade Agreement), which was originally passed and signed into law in late 1993.
Many things have changed since that time, most notably the emergence of the digital economy and all that it entails and the energy policies of the three nations, and there are good reasons to revisit the structure of the more-than-25-year-old agreement.
Let’s hope the eighth round of NAFTA negotiations is the one where major breakthroughs occur, because the economic stakes are high. I have been active in this process for more than a quarter of a century, and there are few economic issues with more at stake for Texas.
As I have noted before, basic economic trade theory, which is supported by centuries of observation and practice, posits that countries can improve their overall wellbeing through engaging in trade. The theory at its most simplistic assumes that there are two countries with varying skill sets and resources and two goods which are to be produced and consumed.
While it can be feasible for a country to produce all that it needs of both goods on its own, it is likely that the other country can produce one of the goods more easily, cheaply and/or efficiently due to its specific skill and resource mixture. In fact, even if one country can produce both goods more efficiently than the other, there will be a difference in the degree of relative benefit, giving rise to a comparative advantage even for a country with no absolute advantage.
Trade agreements can enhance prosperity by decreasing costs of importing and exporting and, thus, encouraging additional trade. For example, a number of studies have found that NAFTA has had a significant and positive impact on the economies of the countries involved. This result is consistent with expectations, as the widely varying characteristics of the three nations give rise to numerous opportunities to further optimize various comparative advantages in production and distribution.
In 2016, U.S. merchandise exports totaled nearly $1.5 trillion in 2016, while imports were valued at over $2.2 trillion according to the U.S. Bureau of Economic Analysis (BEA). The primary destinations for U.S. exports are Canada and Mexico, followed by China, Japan and the United Kingdom. China is the primary origin for U.S. imports, followed by Mexico, Canada, Japan and Germany. China, Mexico and Canada combined account for 42.2 percent of exports and 47.4 percent of imports, making these nations by far the most important trading partners for the United States.
While trade with Mexico and Canada comprises a significant portion of the merchandise exports from and imports into the United States, Mexico has an even larger dependence on the United States as a trading partner. According to the Secretaría de Economía in Mexico, Mexican exports totaled $373.9 billion and imports were $387.1 billion in 2016. Of that amount, 80.9 percent of Mexico’s exports go to the United States, while the remaining largest trading partners (Canada, China, Germany and Japan) have comparatively small totals. Similarly, 46.4 percent of Mexico’s imports originate in the United States, though China is another significant source for imports with 18.0 percent, followed by Japan, Germany and Korea. Around 11.0 percent of imports come from the European Union, with Germany being the largest single trading partner from that area with 3.6 percent of imports.
We recently studied the trade relationships among United States and Mexico border states as part of a comprehensive study of the potential benefits of enhancing economic integration (more on that study and its results at a later date). Trade between the United States and Mexico has grown substantially during the past decades, more than doubling since 1999 and increasing by 15.7 percent since 2011, according to BEA data. Trade in goods and services between the United States and Mexico totaled $586.9 billion in 2016. The bulk of that amount was merchandise trade ($530.2 billion or 90.4 percent), while trade in services equaled $56.6 billion (9.6 percent).
U.S. exports to Mexico were $261.9 billion in 2016 and were primarily capital goods (with the exception of automotive parts) and industrial supplies and materials. Imports from Mexico into the United States were valued at $325.0 billion in 2016; the largest categories were automotive vehicles, parts, engines and other capital goods.
The border-region economy is large and growing. The 10 U.S. and Mexican states along the border generate trillions in economic activity each year. In fact, we estimated that annual business activity in the 10-state area includes nearly $9.1 trillion in expenditures, $4.4 trillion in gross product and $2.7 trillion in personal income. (Note that expenditures in this context measure the total volume of economic exchange that occurs in a given period, while gross product is parallel to the widely reported gross domestic product (value-added) series. Personal income is income which flows to individuals, and includes wages and salaries as well as rents, interest and other sources of income.)
We also looked at the potential to increase trade among the states in the region. Our analysis indicates estimated total export potential from the 10-state area of nearly $2.3 trillion, while net import requirements for the region total more than $1.4 trillion. In other words, in spite of the deep ties (both social and economic) between the two nations and among the states, there is more than room for further interaction. To the extent that NAFTA’s new update can improve the integration of these economies, both nations will realize economic gains.
The social and economic ties across the U.S.-Mexico border are strong, with large numbers of people and volumes of products crossing back and forth between the nations on a daily basis. The notable differences in costs and other characteristics between the two nations create a situation where international trade can flourish, with benefits for both countries. As we look ahead to NAFTA negotiation round eight, it is hoped that it will bring a deal that works for all of North America. There has been some progress in prior rounds, but maybe the eighth time will be the charm.
