Business  |  See all articles tagged doing-business finance-economics

The North American Free Trade Agreement: Nafta at five

Olaf Carrera

Critics said it would never work. Supporters augured prosperity for all. Today, five years after the North American Free Trade Agreement took effect, perhaps neither forecast was entirely on the mark, but numbers and personal experiences clearly tilt the scale in favor of the Nafta backers.

Indeed, trade statistics speak of overwhelming success. Since 1993, the year before the trade agreement among Mexico, the United States and Canada went into effect, commerce among the three countries has surged by more than 70 percent, from around US$300 billion to US$515 billion. Two-way trade between Mexico and its largest trading partner, the United States, has risen 71 percent in the same period, and trade between Mexico and Canada has grown by 80 percent.

A survey sponsored by leading banks in the three Nafta countries, Bancomer, Harris Bank in the United States, and the Bank of Montreal, showed that since implementation of Nafta, sales have increased for 68 percent of Mexican companies, and for 40 percent and 43 percent of U.S. and Canadian companies, respectively. In contrast, only 3 percent of Mexican companies, 5 percent of U.S. companies, and 1 percent of Canadian companies said they could directly link a drop in sales to Nafta.

Data for the maquiladora sector, one of the most benefited, speak for themselves. All told, maquiladora exports shot up almost 135 percent between 1993 and 1998, from US$21.09 billion to an estimated US$51.44 billion. Employment rose an equally impressive 82 percent, from 541,000 jobs to just over 960,000. The fact that employment did not rise as quickly as exports did merely points to another of Nafta's benefits: the gains achieved in productivity over the past five years.

Officials from all three countries agree that the accord has been beneficial. "Nafta has surpassed expectations in terms of growth, investment and employment in Mexico," according to Luis de la Calle, the new commerce undersecretary for international trade negotiations and the former head of the Commerce Secretariat's Nafta office in Washington, D.C.

From the U.S. perspective, "We think (Nafta's) been a very successful enterprise," Commerce Undersecretary for International Trade David Aaron said recently. And Katharine Funtek, head of the Trade and Economic Monitoring Unit at the Canadian Embassy in Mexico, says that Nafta has been "an unqualified success for Canada," on everything from exports to new jobs. Perhaps summarizing the three positions was Jay Ziegler, a spokesperson for the U.S. Trade Representative's office, who said, "Look at the whole spectrum of issues-trade, the environment, labor conditions, cooperation with Mexico in law enforcement. There is not one area where we would be better off today if Nafta were not in place."

While the principal beneficiaries of the Nafta accord have undoubtedly been companies in the three signatory countries, firms from farther latitudes have also wanted to take advantage of the opportunities created since 1994.

"Nafta attracted (Japanese) companies that wanted to export to the U.S.," says Teppei Kuroda, director of the Japan External Trade Organization (JETRO) in Mexico. Some 20 to 30 companies from the Land of the Rising Sun established or expanded operations in Mexico over the past five years. Many new Japanese-owned maquiladoras set up shop along the border to produce a wide range of electronics primarily for the U.S. market, but also for the domestic market as Mexican investment laws loosened up in tandem with the government's embracing of the free trade concept. Maquiladoras now produce 13 million television sets in Mexico every year, most of which are exported. But again, thanks to Nafta, many U.S. companies have directly benefited from Mexican television production since most of the tubes used in these sets are imported from the U.S.-the result of reduced tariffs set under Nafta rules.

Beyond sales

The positive impact of Nafta has not only been seen in increased sales and jobs, but in the creation of larger, longer-term endeavors like multinational business alliances and a new business mentality.

A case in point is ICA-Reichmann, a joint venture between a major Mexican construction firm and the renowned Canadian developer that was made possible thanks to "the conditions created by Nafta," according to the company's marketing director, Henry McDonald. "Because Nafta allowed U.S. service companies to come into Mexico and compete with local firms, demand was created for high-quality, efficient, productive work space."

The big multinational companies insisted on putting their employees in better spaces, since as McDonald says, one of the keys to being competitive is having "a productive, motivated work force." Furthermore, both companies took advantage of each other's expertise: ICA, Mexico's largest construction firm, had unsurpassed knowledge of the local market, while Reichmann, a leader in the development of state-of-the-art multi-purpose complexes, brought innovative design and marketing concepts to Mexico.

Increased productivity and total quality management are just some of the buzzwords that entered the business world's lexicon in the late 1980s and early 1990s. Companies have taken advantage of the synergies created by free trade (read Nafta) to achieve these goals, as in the ICA-Reichmann case and others such as CIFRA-Wal-Mart, Cuauhtémoc-Moctezuma brewery and Canada's John Labatt, and tobacco giants Philip Morris and Cigatam. Auto maker Nissan transferred the entire production of its low-end Sentra models for the North American market to its plant in Aguascalientes, and freed up facilities in the United States to produce higher-cost models specifically for the U.S. market.

The financial services sector is another that was opened up as a result of the Nafta framework. And just last year Mexico's Congress approved legislation allowing greater foreign participation in the country's hitherto untouchable "Big Three" banks: Banamex, Bancomer and Banca Serfin.

In addition to fostering the entry of banks and brokerage firms from the U.S., Nafta rules on the financial sector made it possible for financial institutions from other countries to play a bigger role in the domestic scene as well. Such was the case for Europe's largest bank, Deutsche Bank. "Nafta allowed for complete ownership of foreign financial institutions in Mexico ... and we took advantage of those rules to come to Mexico," says Giselher Foeth, representative for Deutsche Bank in Mexico. Although Deutsche has had a representative office in the country for more than 40 years, the banking group decided to expand its presence after 1994 by establishing Deutsche Bank Securities as a subsidiary of the bank's U.S.operations.

The bank's strategy, Foeth said, "is to be present in every important market." Though Mexico was already considered important for Deutsche, it has become more important since Nafta, Foeth says, thanks to the business generated by increased trade.

The little guy

Shortly after arriving in Mexico in mid-1998, U.S. Ambassador Jeffrey Davidow spoke at an American Chamber/Mexico forum where he cited a comment by a Democratic Party leader in the U.S. House of Representatives as a prime example of prevalent attitudes in Washington. The congressman had said, "After five years of Nafta, the results are in. It is bad for everyone, except for big business." While it is true that most multinationals, whether U.S., Mexican, Canadian, European or Japanese, have come out ahead as a result of Nafta, it is also true that many smaller companies have reaped the benefits of increased trade.

Pioneer Products, a mid-sized supplier of parts for manual transmissions based in Racine, Wisconsin, offers a story that defies the critics. When one of its biggest clients in the United States, Borg-Warner, decided to sell its manual transmission division to Querétaro-based Tremec, Pioneer was sure that a portion of its business would simply vanish. "We thought we'd be left out of the loop," says Pioneer's executive vice president, Jim Beere, fearing the company would not be able to compete with Tremec's local suppliers. But the turnout could not have been more favorable. Tremec decided to place some initial orders with Pioneer and the rest is history. Pioneer was recently named a "preferred supplier" to Tremec, the world's largest manufacturer of manual transmissions.

The case of a Mexican logistics company called Logística Inmex is another one for the books. At around the time Nafta kicked off, the company was trying to develop a commercial alliance with U.S. firms to create a seamless link for clients' cross-border transportation needs, according to the company's managing director, José Antonio Cordero Pérez. The first contacts did not provide smooth riding, Cordero admits, since the company only had a couple years of experience under its belt and Mexico was not seen as much of a market for many companies dedicated solely to the U.S. market. But that changed with the passing of Nafta.

Cordero believes that "without Nafta there wouldn't have been any interest on the part of a U.S. company" to seek an alliance with a small Mexican firm such as his. Login, as the company is also known, finally signed a deal with Watkins, a leading U.S. transportation and logistics operation that sought a partner south of the border after seeing the potential offered by the cross-border trade business. Given the success of the venture thus far, Cordero is sure the future holds even more good news for his company.

The benefits of Nafta go beyond the obvious. "The fact of the matter is that over the last five years ... we have developed, along with growing trade, along with growing investment, ways of dealing with trade and investment problems that have benefited both countries," said Ambassador Jeffrey Davidow at the AmCham event. "What is really important to focus on is that (the U.S., Mexico and Canada) have created structures and mechanisms to resolve our differences so that when we do have these problems we confront them in a fairly transparent fashion."

Pioneer's Beere agrees. "There's a difference in doing business in the United States and in Mexico," but the company "had to understand those differences, and vice-versa," he says. In the final analysis, "none of our differences was insurmountable."

The flip side

Not everything is rosy, however. Nafta itself, it could be argued, has been directly responsible for the rise of other problems, such as environmental damage, the widening of the gap between rich and poor, and the multiplication of trade disputes, to name but a few. Those opposed to Nafta-from U.S. congressmen and left-of-center Mexican political leaders to union workers in all three countries, and a variety of non-governmental organizations (NGOs)--have been especially vociferous in getting their point across. The Economic Policy Institute, a progressive U.S.-based think tank, published a report in 1997 titled, "The Failed Experiment: Nafta at Three Years," which condemned the accord.

In December 1998, the Public Citizen Global Trade Watch, an NGO, issued its own report card on the agreement and gave it a resounding "fail" score. According to the group, Nafta has failed in agriculture, public health, wage levels, highway safety, drug enforcement and the environment, and several other areas.

Perhaps one of the areas that has seen less progress than others since the implementation of Nafta is the environment. Edward Hoyt, director general of EIC Consultores de México, an energy and environmental consulting and project development firm, sums up the environmental picture by saying "there were substantial problems (prior to Nafta), and there continue to be substantial problems." Hazardous waste and treatment of industrial waste are of particular concern. "There has not been an adequate handling of hazardous waste," either before Nafta, or since the accord's implementation, says Gustavo Alanís, president of the Mexican Environmental Law Center. The problem, says Alanís, is not one of having the appropriate legislation in place-as Mexico does-but rather one of enforcing that legislation. And in terms of specifics, the Economic Policy Institute claims that some of Nafta's shortcomings on the environment include having generated only 1 percent of the money promised for cleanup activities, higher ozone levels along the border, and even an incidence of Hepatitis-A in the border region that is two to five times higher than the U.S. average.

Despite this less than optimistic scenario, things would almost certainly have been worse without the accord. AmCham's 1997 Nafta survey showed that more than half of the respondents (57.1 percent) have invested in new technology to improve their environmental practices since 1994. The median amount spent per company between 1994 and 1997 was US$200,000-and this in a sample where more than 40 percent of the respondents were small or medium-sized companies. So even on the environmental front, "Nafta has delivered in some respects," Hoyt says, citing "some progress" in the reduction of water and air pollution. But perhaps more importantly, Nafta has made it easier to import the equipment needed for (environmental) projects, and "to the extent Nafta makes environmental goods and services cheaper, the environment is benefited," Hoyt says.

Labor is another area frequently cited as deserving a failing grade, but primarily in areas such as safety standards and working conditions. Though the AmCham Nafta survey by itself can hardly refute this argument, it did show that 62.7 percent of respondents had implemented new industrial hygiene and worker safety measures since Nafta implementation. Once again, without the accord, it is likely the situation would be worse.

And what about the loss of jobs among U.S. companies? The small manual transmission parts supplier in Wisconsin was able not only to retain all its jobs back home, but according to Pioneer's Jim Beere will probably add half a dozen positions in Racine this year thanks to new business from Tremec.

In his recent comments, Undersecretary Aaron said that U.S. trade with Canada and Mexico supports 2.6 million jobs in the United States alone, far outweighing the 200,000 jobs "certified as Nafta casualties" by the Public Citizen group. Moreover, "It's quite clear," Aaron said, "that most of the job dislocation that has taken place in the U.S. is not due to trade, let alone trade with Nafta. Most of it is due to technological change."

Public Citizen Global Trade Watch and the Economic Policy Institute call the Labor and Environment Side Agreements that were signed in tandem with the Nafta agreement "useless" or "utterly inadequate." The Washington-based Institute for International Economics, on the other hand, takes a more reasoned stance saying that "though many environment and labor groups are disappointed with the limited powers given to the (side agreement) commissions, the side agreements have been able to improve tri-national communication and cooperation on regional environment and labor issues."

The best-kept secret

The real problem, perhaps, resides in the way in which those who have benefited from the accord have publicized their success versus the way those who have been negatively affected have done so. As the Public Citizen Global Trade Watch report says, there have been "many documented Nafta victims, few documented Nafta success stories." For Ambassador Davidow "there has been a focus on the negative." And he went a step further in saying, "I don't think we've done our job. I don't think we've conveyed ... the value of free trade." Ambassador Davidow's comment is and will continue to be valid: "We have to do more to inform and educate our people with regards to Nafta's benefits."

As Nafta begins its second quinquennium, much remains to be achieved and much remains to be said. But one thing is sure: The groundwork has been set. As Secofi's Luis de la Calle has said: "Nafta has been instrumental in paving the road for stronger economic growth and employment in the years ahead."


Published or Updated on: February 1, 1992 by Olaf Carrera © 1992
All Tags