by Merlin Hernandez

A free trade agreement establishes a type of trading bloc where members agree to reduce or eliminate tariffs, quotas, and preferences on most goods and services traded among them. The North American Free trade Agreement (NAFTA) is a treaty between the US, Canada, and Mexico that became effective in 1994. It provided preferential tariffs for certain products. As of January, 2008, all remaining duties and quantitative restrictions were removed. As a result, trade among the three member states has soared with US goods and services traded totaling $1.6 trillion in 2009. Canada and Mexico were the top two purchasers of US exports in 2010. NAFTA countries were the second and third suppliers of goods to the US in 2011.

The basic assumption in considering comparative advantage is that partner countries can maximize output and allocate resources more efficiently. But key variables are specialization and trade in which all partners have some comparative advantage. In the case of NAFTA, while both Canada and Mexico offer expanded markets for US goods, based on proximity and consumer desire, the partnership remains unequal. With an educated workforce, and a business environment that is strong on R&D and IT competitiveness, Canada offers an investment partnership at fairly equitable levels of mutual benefit. Mexico, on the other hand, has a fast growing population and high unemployment. The government needed to create jobs which provided a ready market for US technology and capital equipment manufacturing as well as investment opportunities for US business.

Many analysts have seen NAFTA as a double-edged sword for Mexico. Though 80% of Mexican exports enter the US, cheap US food imports from a subsidized agricultural sector has devastated the Mexican agro economy, increased unemployment, and marginalized rural populations. This, while the immigration debate in the US continues to ignore the connection between the NAFTA fall out and the increasing numbers of Mexicans entering the US, both legally and illegally, in order to earn a living. Furthermore, Mexican comparative advantage for its output within the NAFTA relationship has shifted in relation to China and cheaper Chinese imports into the US. Of additional concern for Mexico is that US outsourcing of jobs to countries like India has negatively impacted job growth. This means that the opportunity costs to being a partner to NAFTA is much higher for Mexico than it is for Canada. This has led Mexico to pursue other trading agreements with China, Japan, and countries in South America.

For the US, however, the shift in jobs for industries like automobiles, textiles, and consumer durables to Mexico to take advantage of lower labor costs, contributed to high unemployment increases at home. The large scale outsourcing of consumer goods to Asian countries further decimated the US labor market. It also reduced the bargaining power of US workers, based on labor supply and demand, and set the trend of lowering wages in order to compete with US-Mexican and US-Asian output. Increased labor and shipping costs for Asian manufacturing this past year has seen some US businesses rethinking the Asian option. Moves by the government to enhance tax collection will also reduce the attractiveness of the Asian outsourcing option. This could be somewhat to Mexico’s advantage with some employment gains. But countries like China and India remain emerging markets that are too large for US industry not to have a presence. Mexico is likely to remain the stepchild under the NAFTA umbrella and should be lauded for pursuing ex-NAFTA partnerships like Mercosur.

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