Made in North America: 

For a Future with More Regional Integration 

Gustavo Vega Cánovas and Francisco E. Campos Ortiz

Made in North America: 
One of the most noticeable effects of NAFTA is the development of complex value chains that deal with the economic integration of the region. This agreement, however, has reached its peak, making it necessary to adopt new commercial exchange instruments.

During the integration process of North America there were two important turning points that ensued in 1965. Firstly, the agreement on automotive products signed by the United States and Canada which provided an incentive for the creation of a more comprehensive free trade agreement between the two countries in 1988. Secondly, the establishment of new promotion policies for the textile export industry (maquiladoras), aimed at creating employment, strengthening trade balance, attracting foreign currency and boosting technology imports to our country. On the other hand, the textile industry had the particular effect of encouraging productive integration in the Mexico-United States border region.

The economic crises of the sixties and eighties in Mexico encouraged trade liberalization. Trade openness was devised to promote the export of goods manufactured with greater added value —minimizing primary goods— and attracting foreign investment. This policy, along with the acknowledgement of the United States as a key exporter of goods and an important source of investment, led Mexico to consider the establishment of formal mechanisms to manage the economic exchange between the two countries. This event led to an increase in regional integration proceedings.

The completion of these proceedings took place in the last decade of the 20th century. The Mexican Government observed the growing tendency towards a greater regional integration worldwide and acknowledged the importance of keeping up with this transformation. Its response followed Canada’s example and proposed the creation of an integration project that could position Mexico in North America. In this way, the North American Free Trade Agreement (NAFTA), signed in 1993 by Mexico, the United States and Canada emerged.

NAFTA is one of the most relevant international economic policy measures that Mexico has implemented. From the perspective of the goal that guided its negotiation, trade promotion and regional investment have been successful. Furthermore, it has encouraged the integration of key industries and the reinforcement of value chains in diverse segments. Thus, it has been a key instrument in the integration of North America.

However, regarding other important goals, NAFTA has fallen short of expectations. The per capita income of Mexico and the United States has not converged as required and the contribution of the agreement towards the creation of employment opportunities has not been sufficient. One has to consider, nevertheless, that during NAFTA, Mexico went through three different economic crises —in 1994, 1997 and 2007— that did not have any relation to the agreement that in any event helped the country overcome them.

During the first 20 years of NAFTA (1994-2014), trade among its members tripled, with an average annual growth of 7.2%. However, performance has not been consistent. Trade under NAFTA had an outstanding development between 1994 and 2000, with an average annual growth rate of 12%, compared to the worldwide average of 8% during the same period. In turn, since 2001, annual trade growth under NAFTA has not surpassed international averages. Despite this fact, regional integration has continued. We can observe that after decreasing between 2001 and 2007, during the subsequent period, the average annual trade growth of each NAFTA member with their counterparts surpassed third party trade; this had already been observed during the most dynamic period between 1994 and 2000.

A similar trend can be perceived in the foreign direct investment flows (FDI) in the region. The Mexican FDI assets in the United States and Canada grew, respectively, 701% and 748% in the first year of the agreement. The FDI assets in Mexico that originated in the United States and Canada doubled between 1994 and 2000. Nevertheless, the flow drive has weathered. Whereas between 1994 and 2000 the FDI flows to Mexico under NAFTA on average grew exponentially faster than the rest of the world, this was thwarted in the 21st century.

 

In the last decade of the 20th century, the government focused its attention on regional integration and acknowledged the need to not be left on the outskirts

 

This reveals that the period of time following 2001 has been complex for NAFTA. The first element that helps to understand this halt is the fact that China entered the wto in 2001. This affected the position of Mexican exports to the United States. In 1994, Mexico controlled 7% of the American import market; this figure grew to 13% in 2015. During the same period, China increased its shares in the same market from 6% to 21%, without acting in a context similar to those dictated by NAFTA. Another element that halted the agreement was the economic crisis suffered in 2008, the worst in the United States since The Great Depression. This crisis thwarted economic exchanges in the region and, in turn, the integration process.

Despite the fact that the impact of these events was crucial, the events that had a more negative influence on the integration of North America are the terrorist attacks of September 11, 2001. These occurrences resulted in the alteration of the policies that governed the American border, which severely affected trade in the region. To put it into perspective, 70% of trade between Mexico and the United States goes through its border by land. The changes in border management procedures were considerably detrimental to regional integration.

Each of the three North American partners has made efforts towards strengthening the process of integration. The “intelligent borders” program, which was designed to encourage trade while dealing with the American national security concerns, stands out. Moreover, the Security and Prosperity Partnership of North America (SPP), which included competitive encouragement schemes, is worth mentioning. More recently, a high level economic dialogue (dean) was implemented. It highlighted the importance of boosting productivity, connectivity and economic growth. These undertakings have shown modest but significant results.

Notwithstanding the difficulties afflicting NAFTA, it is important to mention that the agreement has boosted the consolidation of regional value chains and production sharing in North America. The intensification of production sharing procedures implies that diverse products cross the border on multiple occasions during their manufacturing phases. This entails that Mexican imports of “American” products, as an example, often contain Mexican added value. This is probably the most important long term legacy of NAFTA.

In only a few sectors has this procedure reached this level of visibility as in the automotive. This industry has been crucial to the integration of North America, making Mexico the fourth most important exporter and the eighth largest producer of vehicles in the world. From 1994 to 2014, vehicle production in NAFTA countries grew 16%. In 2014, the region contributed 19% of vehicle production worldwide. Thus, the performance of the automotive industry in North America is fundamental to the regional economy, above all because it provides inputs from a wide range of similar local industries.

 

 

Despite its achievements, NAFTA is no longer a useful instrument. Production and trade practices have changed. For this reason, each member opted for a renovation of the integration procedure. This update will be carried out through the Trans-Pacific Partnership (TPP), an agreement —currently under ratification process— among 12 countries, including the three members representing North America. The TPP is a mechanism whose goal is to ‘modernize’ NAFTA and, thus, to restore the integration process in North America.

This does not mean that the TPP will override NAFTA but rather that they will coexist. However, since it’s applicable to the three North American members, TPP guidelines will renovate the trade integration process. This will be achieved through new guidelines in areas such as rules of origin, electronic commerce, telecommunications, intellectual property, competitiveness and investment; key sectors in the 21st century economy.

The integration process in North America gave rise to various difficulties that Mexico, the United States and Canada had to deal with. Despite these circumstances, our countries have achieved the promotion of trade and investment as well as the creation of value chains and shared production in the region. These accounts have brought actual important benefits for the three countries. Nevertheless, it is crucial to recognize that the instruments designed to encourage integration in the 20th century are no longer sufficient. The key schemes in global trade have been modified, thus, the instruments that regulate them should be modified as well.

The challenge is to adopt new mechanisms that encourage regional integration and competitiveness. The best scenario —to create a customs union or a common market— is not so promising due to the political environment of the three members of NAFTA. It is important to search for alternatives. One of them is to modernize trade guidelines in the region. There are several options to take into consideration. At this moment, the most viable —aside from renegotiating NAFTA— would be to rely on the TPP. Its ambitious agenda, though improvable, has the capacity to ignite economic links in the region. Nowadays, it is the best alternative to enhance the integration process of the region. Walking this road means encouraging economic vitality and prosperity in North America.  

 

Translated by Sonia Georgette Alfaro Victoria