NAFTA Feasibility Study

Economic
Thursday, July 19, 2018
Shervon St. Brice

NAFTA FEASIBILITY STUDY

By Shervon St. Brice

Introduction


Considering the United Kingdom’s recent decision to leave the European Union, policy makers have been afforded an immense opportunity to reshape the economic landscape, forge new partnerships and reorient its global standing. As such, the interim period before and after the triggering of Article 50 demands definitive action in probing, scoping and establishing potential inroads for sustainable trade agreements. The unique relationship occupied by the United States and the United Kingdom may offer one solution for bridging the chasm of international integration created by Brexit.

As the world’s largest economy, a trade deal with United States would signal a U. K’s strategic pivot towards a more inclusive, pragmatic and committed global agenda. A mandate that seeks to explore all avenues of economic engagement with the U.S. and its partners. One such engagement that has gain traction in would be joining the North American Free-Trade Agreement (NAFTA). Economic data suggests that in 2010 this partnership between Canada, Mexico and the United States amounted to a greater economic output of the 28 member nations of the European Union. It was also responsible for $20.08 trillion of the world's GDP (Amadeo, 2017). The U.K. participation in the trading bloc may indeed unleash an influx of investment capital, reduction in tariffs & red tape, set uniform standards and open a plethora of economic opportunities.

However, a trade negotiation of this magnitude inevitably present technocrats with unforeseen challenges and opportunities that may serve to hinder progress and deepen skepticism. Therefore, consideration of the NAFTA viability must be constructed. This paper will seek to examine the process of the UK joining such a trade deal. Setting this course ensures that the trade winds of economic growth are bolstered by a resurgent pro-business policy.


Overview of NAFTA


The historical implementation of the North American Free-Trade Agreement (NAFTA) on January 1st, 1994 marked the emergence of the world’s largest free trade area and a new era of cooperation- namely between two developed economies in Canada and the Unites States and Mexico an emerging economy. The preceding decade saw an immense upsurge in intra-region (Boundless, 2016) trade negotiations directed at establishing formal ties. In 1986 Canada and the United States begun formal trade talks to iron out a framework for greater trade liberalization. A year later both countries signed the Canada-US Free Trade Agreement (CUSFTA). Unlike its more prosperous neighbors to the north, Mexico’s economy was emerging from what economists deemed the “lost decade”, due to its poor management of a debt crisis and collapse in oil prices (Milhelich, 2014). Stymying investor concerns and capitalizing on the fervor surrounding globalization, Mexican officials commenced bilateral negotiations with the United States and Canada respectively, formulating a framework aimed at fostering closer relations. By the summer of 1991, official NAFTA negotiations were quickly underway with legislation passing by the fall of 1993 (M. Ayhan Kose, 2004).  

The North American Free-Trade Agreement between the United States, Canada and Mexico sought to integrate regional economies by reducing barriers to trade and investment. The agreement forged a framework for resolving disputes, promoting fair competition, elucidating the party’s commitment towards protecting and enforcing intellectual property rights and increasing investment opportunities (Council on Foreign Relations, 1994). Prior to the agreement tariffs on U.S imports into Mexico stood at 12.4 percent compared to 4.3 percent for imports from Mexico (Boundless, 2016). Tariffs on more than half of exports from Mexico and one-third of U.S export to Mexico were immediately eliminated and all other tariffs phased out over the course of 15 years (A.S. Posen, NAFTA, 20 Years Later, 2014). More than twenty years after the commencement of NAFTA the true nature of its impact is manifested in the trove of economic data.

Notwithstanding the fact that Mexico suffered a devaluation of its pesos - due to a debt crisis in the months following the passage of NAFTA - the free market liberalization induced significant gains to its economy. As of 2015, the estimated value of U.S. trade in goods and services with Mexico and Canada stood at more than $1.2 trillion compared to $1.1 trillion in 2014. Ranked as the US’ second and third largest trading partner in goods, Canada and Mexico reaped an estimated $575 billion and $531 billion in two-way good trade respectively. Moreover, Mexico and Canada are the US’ second and third largest goods export market (Office of the United States Trade Representative, 2017). Because of increased integration, net migration from Mexico to the United States has all but vanished, sitting at nearly zero percent as job opportunities have caught up to worker demand. Additionally, the economic reforms of NAFTA facilitated the development of a burgeoning middle class. The legislative and regulatory mandates in the agreement further empowered and stimulated democratic engagement throughout a broad segment of Mexican society (Farnsworth, 2016). Intra continental integration spurred greater interdependence as evidence in Canadian and Mexican imports amounting to 25 and 40 percent of US inputs respectively. Conversely the US currently exports roughly 14 percent of its merchandise to Mexico, which is more than the “total exports to Germany, France and the United Kingdom” combined (A.S. Posen, NAFTA, 20 Years Later, 2014).

Although these markers point to NAFTA’s overall success and contribution upon examining the data further, there are areas of concern that warrant further discussion of the data itself.  NAFTA’s net effect on the US GDP accounts for a small percentage in proportion to the economies size. Canada has also seen productivity lagged initial expectation despite growth in trade. Studies have also shown that Mexico’s economic growth remains subpar at best due to structural reforms, political setbacks and exogenous factors i.e. competition from China, exchange rate policies and cyclical nature of business. Another consequence of NAFTA has been Mexico’s heightened dependence on the US for foreign trade and investment. Subsequently drastic alterations to the US economy has had a disproportionately destabilizing effect on its economy as witnessed in the recession of 2008, when Mexico experienced a 6.6% contraction in its GDP. Some scholars also argued that US agricultural subsidies devastated Mexican farmers affecting an estimated 4.9 million from 1991-2007 (Nguyen, Subpar Performance of the Mexican Economy in the NAFTA Era: Plausible Explanations, 2016). However, Mexico’s of privatization of state own enterprises in the 1980s and earlier 1990s removed subsidies and price supports increasing competition. These reforms continued during the negotiations, as result NAFTA compounded the effects of existing unilateral agricultural policies (Library of Congress, 2014).  

As alluded to earlier most of Mexico’s performance did not come as a result of NAFTA. In his analysis of the Mexico’s poor economic performance during the NAFTA era, Professor Chu Nguyen concludes “...while NAFTA may be the catalyst, exogenous factors such as Mexico’s previous market-opening measures in Mexico, financial crises, oil prices, business cycles, and, most importantly, the China factor contribute to this subpar performance of the Mexico’s economy in the last two decades” (Nguyen, Subpar Performance of the Mexican Economy in the NAFTA Era: Plausible Explanations, 2016).

Critics of NAFTA have long cited massive jobs loss and manufacturing displacement as the agreements Achilles heel. Persistent dissemination of this theory has reaped dividends in its infiltration of the general lexicon of public option. A 2010 study conducted on the public view of the impact of trade on jobs wages, found that 44 percent of respondents thought that trade deals including NAFTA was bad for America. Over half believed that trade agreements lead to job losses (Pew Research Center, 2010). Despite this growing sentiment, research on job churn (the rate at which workers lose and gain jobs over period of time) found that a small percentage of the annual US job churn was linked to NAFTA.  A 2014 study conducted by the Peterson Institute for International Economics found that between 2009-2013 less than 5 percent (203,000) of the estimated 13 million workers displaced during this period was linked to Mexico. However simultaneously 188,000 new US jobs were added to the economy in a variety of sectors, accounting for a 15,000-annual net loss (A.S. Posen, NAFTA, 20 Years Later, 2014).

No free-trade agreement is without perfect, however the burden of proof lays beyond the barometer of hyper partisan opinion or the outliers that skew concrete results. The fact is that rhetoric has eclipsed economic data that supports an overall benefit of free trade in North America. NAFTA translated in integrating the region's infrastructure, promoting efficient production processes, reducing the cost of consumer goods, standardized worker conditions, raised standard of living. Labor, environmental and law enforcement agreements have also strengthened ties between member countries.  NAFTA has influenced US trade policy by initiating next generations FTA’s that adhere to standards and practices that respect intellectual property rights, delineates rules of origins, promotes foreign investment, environmental and labor protections. In this manner, the United States has successfully negotiated and established FTA’s with 20 countries (Library of Congress, 2014). However, United Kingdom may have not stand to reap the benefits of a NAFTA membership.

The United Kingdom and NAFTA


In the early 1970s, prior to the formation of NAFTA and the UK’s membership of the European Economic Community (EEC)-the predecessor to the European Union (EU)-, there were preliminary discussions on both sides of the Atlantic to broker a possible North Atlantic Area agreement. Initially successful, talks were disbanded as it was evident the United States would have had a more pre-eminent role in this new arrangement. This coupled with the push from consecutive Presidential administrations for the UK to join the EEC halted further exploration (Clements, 2014).   

Nevertheless, the prospect of the U.K. joining NAFTA has been floated for more than a decade. Conservatives on both sides of the pond have marshalled efforts to tender such an arrangement. While in office former Speaker of the US House of Representatives (1995-1999), Newt Gingrich (a close ally of President Donald Trump), then foreign policy advisor to President George H.W. Bush Condoleezza Rice and Former Prime Minister Margaret Thatcher all expressed interest in the UK joining NAFTA (Bulman, 2016). In the summer of 2000, former Senator Phil Gramm, then Chairman of the Senate Committee on International Trade issued his vocal support saying “the special relationship” between the UK and US qualified the UK to fast track a plausible NAFTA application (McSmith, 2000). Those in favor of this proposition have long cited the relative easy by which an agreement could be struck without having to starting over and unlike the European Union, its favorable proposals would recognize the UK’s sovereignty.  

Proponents argue that since the US and the UK are world’s largest sources and recipients of foreign direct investment (FDI) that it would be logical for these centers of influence to increase cooperation through NAFTA. Per this hypothesis, the economic windfall for British goods being traded with the world's largest economy, along with having similar labor standards, relatively low tax rates and corresponding business cycles offer a multitude of reasons for UK-NAFTA membership (The Telegraph, 2002).  

With keen interest the US Senate Finance Committee under the leadership of Chairman William Roth Jr (R-DW) and Ranking Member Patrick Moynihan (D-NY) sent a letter to the US International Trade Commission requesting a report investigating the economic impact of the UK joining NAFTA. The report released in the fall of 2000 concluded that in lieu of UK's exiting the European Union there would be minimal effect on the all economies if existing tariffs were eliminated. At the time, the report cited a “7 to 12 percent” increase for UK exports to the US and a “11 to 16 percent” US exports to the UK. In its estimation, the UK’s GDP would have declined by 0.02 percent (173 million) and the US GDP would “increase by $86 million (less than 0.001 percent)”. Additionally, manufacturing output would have had a small effect on GDP (U.S. International Trade Commission, 2000). From a shear economic stance, a UK alliance with NAFTA would provide little value as the UK’s tariffs on goods and services from member countries are already low.  

Another factor working against the UK obtaining NAFTA membership is geography. Distance plays a rather crucial role in the economics of international trade and investment. As (Dhingra & Sampson, 2016) put it “doubling the distance between two countries roughly halves the trade between them”. The more than four thousand miles that separate the UK NAFTA members does present a challenge as most models show a “positive correlation for trade between comparable sizes of economies and distances between countries” (Regent University, 2015). This would partly explain why the EU accounted for 44.6 percent of UK exports of goods and services and 53.2 percent of imports of UK imports of goods and services in 2014 (Office for National Statistics, 2015).

If the United Kingdom were to apply for ascension under Article 2204 of NAFTA, its membership would be contingent upon the legal terms and conditions negotiated and agreed to by the Commission headed by representatives of the United States, Canada and Mexico. The outcome of such negotiates are unknown and may be rife with complications that could send the deal back to the drawing board. Failure to reach a consensus on favorable concessions might result in a complete withdrawing from negotiations. Furthermore, NAFTA was not designed to meet the demands of an increasingly dynamic and digitally dependent world. The ubiquity of e-commerce, the rise of technological industries and wholesale internet connectivity have all emerged after its inception. Therefore, it is not best suited to handle the volume and interconnectivity of online trading between the UK and the US. (Williams, 2016)argue that NAFTA presented the UK with few substantive proposals and “offers the few strategic grounds on which to claim” the title of “major world power”.  

In joining NAFTA, the UK would have to comply with the investment state dispute settlement provision which enables US investors to bypass official intergovernmental channels and levying claims directly against the government. Controversial indeed as foreign investors would have considerable rights which may infringe on national sovereignty (Sampson, 2016). According to a study published by the Heritage Foundation evaluating the merits of a US-UK Free Trade Agreement it stated that “In short, the NAFTA option is both harder and less attractive than it appears, and it overlooks the advantages of negotiating a modern, bilateral agreement directly with the United States” (Williams, 2016).

The election of Donald Trump to the Presidency of the United States also constitutes an area of concern for the future of NAFTA. During the campaign then candidate Trump referred to NAFTA as “the worst deal ever” and vowed to take major actions to address it. He has blamed the agreement for destroying manufacturing and increasing unemployment throughout the union. Less than a week into his job, President Donald Trump seized the opportunity to make good on his campaign promise by signing an executive order that vowed to start the process of renegotiating NAFTA (Welker, 2017). As with many edicts issued by the current administration, the ramifications of this are unclear however this executive order may prove disastrous for the long-term continuity of the deal itself. President Trump has wielded the threat of imposing a border tax on good coming into the US from Mexico. In response to this Mexico’s President Enrique Pena Nieto in a speech called on the US government to honor its existing commitment to ensuring that “North American trade...remains free of all tariffs and quotas”. Mexico’s Economy Minister Ildefonso Guajardo further elaborated that if concessions did not maintain or exceed existing provisions then Mexico would be forced to leave the trade bloc (Martin, 2017). This could prove disastrous as within the past twenty years the two countries have sinewed a complex supply chain network and integrated its economies to the extent that five million jobs in the US are tied directly to trade with Mexico (Spross, 2017).

The politicization and unpopularity of NAFTA has called into question a future British role with the trading bloc. In the wake of Brexit many supporters called on the government to engage in direct negotiations with member countries to procure a framework for a New NAFTA that includes the UK. Proponents argue that this new NAFTA agreement would not be a substitute for the European Union or its robust trading relationship but instead apart of a larger strategic effort to secure FTA’s with numerous countries and trading blocs. Provisions within this new NAFTA would reflect a more modern trade and investment deal. By integrating existing structures, lowering barriers and creating new rules that facilitate pioneering developments this new agreement would work in concert with a future deal with the EU to bolster the British economy. Also, Mexico which would stand to benefit from an increase in FDI from the UK to its economy. However, the success of this new deal ultimately rests on working out the parameters of the UK’s departure from the EU. Despite the euphoria surrounding Brexit and a possible deal with the NAFTA, the reality is that the future of the deal remains uncertain.

The truth is that joining NAFTA would be fraught with uncertainty and may elicit poultry economic results. The viability of long-term British economic success depends on the government's ability to negotiate and secure modern bilateral and multilateral free-trade agreements. Free trade and free markets economies are essential to the stability of any country. This transition period demands the UK embrace its vaunted acumen that has persisted since the end of WWII. As the fifth largest economy in the world, a global leader in the areas of trade, investment, defense, technology and key member of the EU, the UK stands at a unique juncture to dictate and champion policies that are in its national interest. Albeit a UK-NAFTA accord remains rather popular, this relic of the twentieth century is not in keeping with a UK that is seeking to capitalize on its full potential. Therefore, looking towards the future, the UK must forge ahead in pursuing alternative agreements that engage all aspects of its economy. A possible alternative agreement the government could explore further relations are a much anticipated bilateral free-trade agreement between the UK-US. Although this deal has Securing deal of this magnitude could enable the UK to bridge the divide on demands of a rapidly changing world and bolster its footing on the global stage.


UK-US Free-Trade Agreement


Since the end of WWII, the United States and United Kingdom have forged a staunch partnership underpinned by mutual liberal democratic values, shared political and cultural links, and unwavering commitment towards free market capitalism. In the realm of defense and cybersecurity, the UK and US have seen a substantial uptick in intelligence sharing and cooperation. An unpopular foray into Iraq and Afghanistan by the Blair and Bush administrations serves to accentuate this fidelity. Further military coadunation is but one element in this multiplex relationship that has garnered attention since the referendum. Paramount to the success of a post Brexit is the passage of a bilateral FTA between the United States and Britain.

The interdependence of the US and UK economies is quite pronounced when examining trade relationship. In 2015, the total value US exports of goods and services to the United Kingdom was $123.5 billion while also receiving $111.5 billion worth of imports from the UK. In 2016 the US exported more than $51 billion worth of goods to the UK, while the UK exported more than $49 billion worth of goods to the US. Leaving the UK with a $1.5 billion merchandise trade deficit with the US (Census Bureau, 2016). Overall net productivity resulted in the UK becoming the seventh largest trading partner with the US. As one of the investment capitals of the world the UK has been privy to an influx of capital from the US. In 2015, US Direct investment in the UK was valued at $593 billion while UK direct investment in US was valued at $483.8 billion, an overall increase of 5.3 and 5.5 percent respectively (Analysis, 2016).

Accompanying a more independent Britain, a UK-US free-trade agreement would inject the economy with investment and trade opportunities, further cementing the “special relationship”.  This trade deal won’t fundamental alter the trajectory of the GDP or remove the geographical challenges, or as mentioned earlier the fact that the US and UK still share low tariffs on goods and services due to trade policies after enacted after the war.  However, a trade deal would eliminate non-tariff barriers (NTBs) which could unleash an estimated $16 billion- given certain assumptions (Ted Bromund and Nile Gardiner, 2014). Removal of these constraints would facilitate a more efficient trading cycle as -the UK trade deficit in sectors that have NTBs would give way to- an increase in the volume of exports and imports on both sides of the Atlantic. Furthermore, a post EU Britain would avoid the inevitable price hikes imposed by the Common Agricultural Policy (CAP) out of Brussels, freeing its agricultural markets to expand trade towards the US.

An increase in productivity buttressed by a market solely focused on the free and efficient exchange of goods will create greater prosperity between the two countries. There is much to gain from a strategic partnership between the world’s leading recipients and sources of FDI. By supporting intellectual property rights, promotion of trade and investment, and expanding agricultural and energy integration a UK-US FTA would reinforce global standing as leaders.

In their assessment Ted Bromund and Nile Gardiner, Ph.D. argue that an Anglo-American trade would be good for the following reason:

“A U.S.–U.K. free trade area would be an opportunity to negotiate a different and better kind of agreement between two advanced industrialized nations with major financial centers. Instead of building up a transnational institution to harmonize regulations—an approach that is fundamentally akin to that adopted by the EU—an Anglo–American agreement would adopt an approach of mutual recognition under which each side would agree to accept the standards of the other. Instead of seeking a comprehensive, big-bang solution—an all-too-common approach for contemporary trade negotiations that promises major results but is slow to pay off—a U.S.–U.K. agreement would focus on sectors in which agreement is likely to be easy (including the promotion of investment) and on the major gains that are to be had (for example, in the agricultural sector). Finally, instead of burdening the agreement with a broader political framework arrangement, as the EU is wont to do, an Anglo–American trade agreement would stick to trade...It means that, having committed themselves to a high-quality agreement that promotes economic freedom and respects national sovereignty in the context of the U.S.–U.K. relationship, they would base future negotiations on the same principles” (Ted Bromund and Nile Gardiner, 2014).


Unlike the uncertainty the surrounding future of NAFTA, President Donald Trump has been rather supportive of a subsequent UK-US trade agreement. In his first official meeting with a Foreign Head of State President Donald Trump reassured Prime Minister Theresa May of his country's commitment towards negotiating the terms of a trade deal. This olive branch signifies the Trump administration's support for the UK’s right for self-determination, reducing regulations, streamlining trade in goods and services and re-establishing national sovereignty.

Despite growing consensus about the importance of striking a FTA with the US after Brexit, it goes without saying that the pursuit of a thoughtful and pragmatic negotiations must take place to ensure safety and fraternity in all sectors. A point of contention that is sure to inevitably come up in talks is the divergence in agricultural and livestock policies. Assimilation into the EU required the UK to adhere to strict food guidelines that ban certain pesticides, chemically washed meets, synthetic growth hormones and antibiotics, as well as limiting the usage of genetically modified foods etc. Unlike the UK the US Food and Drug Administration (FDA) have approved these practices, deeming them safe. Although formal negotiations cannot begin while the UK is still a member of the EU, work should begin in earnest to flesh out these details and allay the trepidation surrounding certain aspects of this accord.  


Conclusion


The fact is that a broader US-UK free trade deal would be a viable option compared to the uncertainty presented in a new NAFTA accord. With strong political backing on both sides of Atlantic, strengthening relations with the world’s largest economy would serve as a model on which the UK could negotiate other trade deals. In the end, free-trade agreements are the lifeblood of any economy, providing a mechanism for greater integration, while enriching the quality of life for all involved. Ensuring that this future trade deal is negotiated with the benchmarks that value sustainability, efficacy and pragmatism over myopic gains, political harangue, ultimately weight the greatest benefit for the everyday citizens is vehemently essential. As the father of economic, Adam Smith once said, “Every man lives by exchanging” (Smith, 1776). Let us remain resolute in this endeavor.



About: Shervon St. Brice is an Intern for the Bow Group











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