Other Voices

Careful when tinkering with NAFTA’s integrated production economy

Now that the 116th Congress is in session the debate over the United States-Mexico-Canada Agreement (USMCA) – formerly known as the North American Free Trade Agreement (NAFTA) – will begin in earnest.

What lawmakers and President Donald Trump must consider is that, over the nearly 35 years since NAFTA passed, the three countries have made many collaborative strides that have produced success as a “North American economy.”

With regard to the U.S. and Mexico, the countries operate in some sectors as a single, fine-tuned, integrated production process that keeps costs down and makes the products more competitive on world markets. Reversing this, or adding too many tweaks, could be counterproductive.

The new Congress will compare USMCA to NAFTA knowing from the start that Trump will try to end NAFTA if Congress does not accept the modifications he endorses in the USMCA. Failing to find compromise in these negotiations could result in increased tariffs and barriers between the U.S., Canadian and Mexican markets.

Most manufactured goods are produced in a series of stages. For much of the 20th century, production was largely localized and these production stages used to occur in close proximity to each other. One of the most significant changes in international trade over the last 30 years has been what economists call production fragmentation. Changes in communication and computing technology allowed the production stages to be broken up into separable parts. These stages were then free to move to the parts of the world most suited for each step.

The idea that the United States has been losing jobs to Mexico has appeared in popular discourse for more than 30 years — even before NAFTA went into effect in 1994. It is clear some U.S. communities have been strongly and adversely affected by companies shifting production to Mexico. Mexico, also, has experienced adjustment to free trade.

In my research as a senior fellow for the SMU Mission Foods Texas-Mexico Center, I found that, post-NAFTA, both countries have been going through a restructuring of production. This restructuring has been painful at times, but ultimately it has resulted in specialization and very close integration between the two countries.

Ending NAFTA, or not approving USMCA, would certainly impact this contemporary structure of North American production.

NAFTA set up a common set of rules that facilitated the transformation of the three countries into a single production unit that would be difficult to reverse — and in the process would likely raise costs for those sharing production across borders. Increasing these costs would make it harder to export our products to the rest of the world, potentially making our trade deficits worse. For those goods that are not exported, U.S. consumers could expect rising prices.

The changes from NAFTA to USMCA are small, but valuable. Updating the rules for e-commerce and intellectual property are a benefit to trade.

Other changes, such as increasing the domestic content requirements in the automobile sector, may result in more jobs for U.S. workers, but would come with higher prices and a less-competitive industry. These changes will have to be carefully reviewed by Congress.

Congress and the president have to get it right. This can happen if they approach the future in the context of the collaborative ways the countries operate today.

After almost two generations of NAFTA, we now live in a truly integrated North American economy.

Raymond Robertson is a Senior Fellow at the SMU Mission Foods Texas-Mexico Center