Representatives from the United States, Mexico and Canada are scheduled to begin talks next week to renegotiate the North American Free Trade Agreement, or NAFTA. Arizona has directly benefited from the treaty, with exports from the state increasing 332 percent since it was implemented in 1994.
As negotiations begin, the U.S. should follow through on a good faith effort to update the 23-year-old treaty, which could lead to more open markets, stronger economies for all trading partners and improved benefits for Arizonans.
When Donald Trump — who as a candidate called the agreement “the single worst trade deal ever approved” and threatened to withdraw — was elected president, it sent pulses racing in Arizona, which annually does about $16 billion in trade with Mexico and close to $4 billion with Canada.
More than 257,000 jobs in Arizona depend on trade and investment with Canada and Mexico, according to the Arizona Export District Council. Tourism from those countries is vital to the state’s economy.
When the U.S. trade representative called for public comments on NAFTA, it received feedback from lawmakers, business interests and more than 12,000 responses in support of the trade deal. Fortunately, the administration backed away from scrapping the pact.
“It is an agreement that has worked extremely well, and has been extremely successful in promoting trade and investment flows between our countries,” Kenneth Smith Ramos, Mexico’s chief negotiator for the NAFTA renegotiation, said in an interview. He was in Tubac recently to speak to the Nogales-Santa Cruz County Chamber of Commerce.
Still, Smith Ramos and other trade experts concur the agreement needs updating and the list of objectives for the NAFTA renegotiation put out by the Trump administration lists some needed improvements.
Digital trade (which didn’t even exist in the early ’90s), intellectual property protection, level of involvement of state-owned enterprises, anti-corruption provisions, and labor and environmental standards are all worthwhile issues that need to be addressed.
However, some points in the blueprint for renegotiation are ill-conceived. They run from the pointless — such as the manipulation of exchange rates, something that is not really an issue in North America — to the troubling, including the issue of trade deficits and rules of origin.
The U.S. seeks to reduce the trade deficit with NAFTA countries, but the reason these deficits exist does not rest on trade agreements, and in the case of North America it’s even more muddled.
A deficit occurs when a country imports more from another country than what it exports there, but take the $63 billion trade deficit between the U.S. and Mexico. The way a lot of goods are produced in an ever more integrated supply chain means that about 40 percent of the value of imports from Mexico is created in the United States.
For example, a Ford car assembled across the border in Hermosillo includes several parts built by American workers. In Arizona alone, automotive manufacturing product exports to Mexico increased from $153.3 million in 2008 to $571.9 million in 2015, according to a report by the University of Arizona.
On rules of origin, this matters to manufacturers in particular because to benefit from NAFTA’s provisions for low or no tariffs, their products must be mostly composed of North American goods — which must be certified in a costly and complicated process.
This makes sense, but trade experts, including Melissa Proctor, a Phoenix-based lawyer with the Polsinelli law firm, said determining rules of origin is a very complicated and technical process and she worries any change would hit hard for small businesses.
“Some companies could be required to re-qualify their products — which could number in the thousands — as well as change their supply chains in order to continue using the NAFTA,” she said. “It would be burdensome to the automotive sector. It would be impossible for smaller companies.” But even with those concerns, most trade experts and government officials we spoke with are cautiously optimistic about the results of renegotiation.
It is ironic that an improved agreement that may end up further eliminating tariffs and continuing to liberalize trade comes from an initially protectionist impulse. It is heartening that stakeholders and legislators, including Sens. John McCain and Jeff Flake, have been very vocal about the importance of NAFTA to our economy.
It is imperative that Arizonans keep reminding the country that Mexico and Canada should be seen as partners, not rivals.
