A Decade Later Economists and policy-makers Economists and policy-makers Efficiency gains spread throughout all three economies Efficiency gains spread throughout all three economies Political scientists, labor leaders Political scientists, labor leaders Reallocation costs in U.S. and CanadaReallocation costs in U.S. and Canada In Mexico, real wages are lower; income inequality is higherIn Mexico, real wages are lower; income inequality is higher Immigration has increasedImmigration has increased
Who is U.S. #1 trading partner? Canada Canada $534 billion (14.7%)$534 billion (14.7%) China China $343 billion (9.4%)$343 billion (9.4%) Mexico Mexico $332 billion (9.1%)$332 billion (9.1%) Japan Japan $208 billion (5.7%)$208 billion (5.7%)
Change in Direction of U.S.Exports Destination Million $ (1993) (2006) Increase X (1993-2006) Canada100,444230,5802.30 Mexico41,581134,1673.23 Rest of the World 456,9431,023,7282.24
Change in Direction of U.S.Imports Source Million $ (1993) (2006) Increase X (1993-2006) Canada111,216303,4162.73 Mexico39,918198,2594.97 Rest of the World 589,3941,859,8043.16
Oh Canada Asymmetrical interdependence Asymmetrical interdependence Canada-US trade is 35% of Canadian GDPCanada-US trade is 35% of Canadian GDP Bilateral trade is 2.5% of US GDPBilateral trade is 2.5% of US GDP Growing US protectionism in 1980s Growing US protectionism in 1980s LumberLumber FisheriesFisheries
U.S.-Canada FTA Negotiated in 1987 Negotiated in 1987 Ratified in 1989 Ratified in 1989 Removed tariffs and quotas between two countries in most sectorsRemoved tariffs and quotas between two countries in most sectors Established international dispute settlement schemeEstablished international dispute settlement scheme Initiated by Canada Initiated by Canada
Oh Mexico An economic colony of U.S.? An economic colony of U.S.? Almost 90% of exports go thereAlmost 90% of exports go there Hunger for foreign investment Hunger for foreign investment Big peso crisis in 1982 (and many smaller BOP crises scared investors awayBig peso crisis in 1982 (and many smaller BOP crises scared investors away 67% of FDI from U.S. MNCs67% of FDI from U.S. MNCs
NAFTA Negotiated in early 1990s Negotiated in early 1990s Ratified, with after new side agreements, in 1993 Ratified, with after new side agreements, in 1993 Expansion of FTA pushed by Mexico Expansion of FTA pushed by Mexico
Small States as Catalysts: A Surprise? Not to liberals (economists) Not to liberals (economists) Smaller economies benefit more from free trade regimeSmaller economies benefit more from free trade regime Canada: 6-10% loss in general welfare from combined U.S.-Canada tariffsCanada: 6-10% loss in general welfare from combined U.S.-Canada tariffs Yes, for realists Yes, for realists Through hard bargaining, powerful states can secure disproportionate benefitsThrough hard bargaining, powerful states can secure disproportionate benefits U.S.: IPR, national treatmentU.S.: IPR, national treatment
Mexico as Catalyst: An Even Greater Surprise? An Illiberal Past An Illiberal Past ISIISI Nationalization of some industriesNationalization of some industries Since mid-1980s, slow but steady liberalization Since mid-1980s, slow but steady liberalization Jose Lopez Portillo (76-82)Jose Lopez Portillo (76-82) tariffication tariffication Miguel de la Madrid (82-88)Miguel de la Madrid (82-88) Tariff reductions Tariff reductions Relaxed export controls Relaxed export controls Joined GATT in 1986 Joined GATT in 1986
Key Features of NAFTA Part One: Market access provisions EnergyA prohibition, except under specified unusual circumstances such as national security reasons, on restrictions on energy trade, forecasting export taxes and other measures used in the past to support nationalist economic policies. AutomobilesTariffs for products that satisfied strict regional content rules were to be eliminated over a period of 10 years. Textiles & ApparelTariffs for products that satisfied strict regional content rules were to be eliminated over a period of 10 years. AgricultureThe immediate elimination of tariffs on 57 per cent of US-Mexican agricultural trade of US-Mexican agricultural trade and the phasing out of other tariffs and quotas over 15 years. Financial ServicesUS and Canadian firms obtained expanded rights to operate within the Mexican market, which at the time was expected to grow because of the lack of basic services such as checking.  These provisions varied by sector and were not applied to certain key sensitive industries such as Mexican oil and railways and Canadian culture.
Key Features of NAFTA Part Two: Special Rules NAFTA investment rulesInvestors from other NAFTA parties must be treated in the same way as domestic investors and at least as well as investors from any other country (the principle of most- favoured-nation). Intellectual property provisionsGovernments are obligated to protect copyrights on computer programs, to prosecute decoding of encrypted satellite transmissions (such as television programs), and to protect new sound recordings for 50 years, new trademarks for 10 years, and new patents for 20 years. Strong dispute resolution procedures Important for smaller partners in trade agreements because they can offset the ability of the stronger partner to use its political power to disregard or interpret the agreement as it pleases. Adopted FTA rules and extended them to Mexico. It was important to prevent US firms from using anti-dumping and countervailing duty measures to gain protection from foreign competition.
Key Features of NAFTA Part Three: Side Agreements Environmental StandardsEstablished a Commission for Environmental Co-operation. It contains a council composed of relevant ministers from the various countries, who meet once a year, and a secretariat, responsible for ongoing administrative and technical support for the commission. The secretariats members are expected to remain independent of governments. It also has a 15-member Joint Public Advisory Committee that can be composed of scientific experts or others active on environmental issues. Labor StandardsEstablished a Commission for Labour Co-operation. It contains a secretariat and a council as in the Environmental Commission, and it also establishes national administrative offices in each country that plays an important role in receiving and initially considering complaints lodged by either NGOs or individuals.