Modernizing NAFTA: Strengthening Our Trade Relationship with our North American Neighbors

How do you get along with your neighbors? At WCIT we always believe in keeping good relationships with our neighbors (don’t want to miss out on the summer block parties!), which is one reason we’re so enthusiastic about NAFTA. Thanks to this agreement, the U.S. has a strong relationship with our next-door neighbors, Canada and Mexico.

You’ve probably been hearing a lot about NAFTA recently, but do you know what it does and how it affects Washington?

The North American Free Trade Agreement, or NAFTA, has been part of our modern economy since 1994. The agreement has created a strong, interconnected North American economy, and has been particularly beneficial to trade-focused states like Washington. That said, NAFTA is over 20 years old and could use a refresh. President Trump has repeatedly stated his intention to renegotiate or leave NAFTA, and has been met with equal amounts of joy and anxiety. But modernization could be a terrific opportunity to update the agreement and reaffirm – or even strengthen – our connection to some of our top trading partners.

What is NAFTA?

NAFTA is the largest free trade agreement in the world. Its goal was to bolster economic activity by removing trade barriers, such as tariffs between the North American nations of Canada, the United States, and Mexico.

Here’s a NAFTA fun fact: the U.S. trades as much with Canada and Mexico as it does with the BRICS economies (Brazil, Russia, India, China, and South Africa) and Japan and Korea, combined.[1]  Having a trade deal in place that removes tariffs and other common trade barriers allows North America to compete with other big economic blocks.

NAFTA’s Accomplishments

Thanks to NAFTA, trade between the three member nations has surged. Trilateral trade has increased by an astonishing 243.4%, and by some accounts trade has quadrupled from 1993 to 2016.[2] Even when adjusted for inflation, we are still left with a very impressive 125.2% increase in trade.[3] By connecting the American economy to Canada and Mexico’s, NAFTA has allowed us to compete with major trade and manufacturing centers in China, South East Asia, and the European Union. NAFTA-based exports alone have created over six-million additional jobs, [4] mostly in trade-focused states like Washington, where an estimated 330,000 jobs depend on trade with our NAFTA partners. Thanks to our tightly integrated supply chains, imports also create jobs at our manufactures and retailers, which source components and consumer goods from our NAFTA partners. And even imports contain U.S. exports: 40% of the contents of Mexican imports originate in the U.S.

Meanwhile the lowered tariffs on agriculture and consumer goods have resulted in affordable essentials, like food and clothing. This in turn has given lower and middle-class families across the U.S. more spending power. And without affordable agricultural imports from Mexico, we wouldn’t have year-round access goods like the bananas and strawberries in our smoothies, or the avocados and tomatoes in our salads!

One of the most impactful yet less mentioned tools in NAFTA’s belt comes from the energy sector.  Petroleum imports from Canada and Mexico have reduced the United States’ reliance on certain oil-rich nations, and lessened the political and economic leverage of states like Iran and Venezuela.[5] Additionally, the petroleum imports have also kept gas prices relatively affordable and stable for North American consumers.[6] As a special bonus for Washingtonians, a lot of that Canadian oil enters the U.S. via our ports and highways before heading for other parts of the nation and the world.[7]

Washington state is one of, if not the, most trade-reliant states in the union, so it should be no surprise that NAFTA has particularly benefitted Washington. Washington state alone has exported $134.5 billion to Canada and Mexico in the last 20 years, largely thanks to NAFTA.[8] From 1996-2010 WA exports to Mexico have increased almost 700%, while exports to Canada have increased 200%.[9] Mexico has been particularly eager for more Washington crops, and since 1994 annual agricultural exports have quintupled![10] We now export about $370 million in agriculture annually to our friends south of the border.[11]

Room for Improvement

In the 25 years since NAFTA’s inception, the way we do business has rapidly evolved, but NAFTA has not kept up. Digital trade and e-commerce has changed the way we communicate, work and shop, and Washington state has become a world leader in these fields. Though the United States is no longer a member the Trans-Pacific Partnership (TPP), this trade deal created a framework to govern and support the growth of digital trade, ensuring the free flow of data across borders without localization requirements. Forced data-localization (requiring companies to locate servers in every country they do business), like the kind exhibited by Canada,[12] can be prohibitively expensive for Washington.[13]

Low de minimis thresholds (the price above which a consumer must pay a tax on a good purchased in another country) are also holding back Washington retailers of every size. Customers must pay taxes on goods valued above $20 in Canada and above $50 in Mexico, and raising these values would make it easier for our Canadian and Mexican neighbors to shop online for U.S. goods.

NAFTA 2.0 should also address trade concerns such as lengthy customs procedures. For example, goods only take couple of hours to meet border compliance requirements in the U.S. and Canada, but in Mexico the wait is 22(!) times as long. Our small businesses would especially appreciate express clearance procedures for the smaller shipments.

Though full of potential, the road to a new NAFTA could be a risky one. Failure to retain the massive benefits created by the original NAFTA could lead to equally massive drawbacks for agriculture, retail, manufacturing, service providers, and other Washington industries, especially if Canada and Mexico impose retaliatory tariffs or regulatory barriers. For example, we currently export $120 million to Mexico just in frozen potato products, making it our second largest potato market.[14] If we modernize NAFTA poorly or drop out altogether, our farmers could see the return of staggering 50% tariffs. Good bye potato primacy!

WCIT is so excited by the prospect of a modernized NAFTA that we put together a whole list of recommendations for how we can make it better while retaining the gains we’ve seen under the agreement – you can see that list here.  We want to make sure it will the best it can possibly be for Washington state, while making our relationship with our North American neighbors stronger than ever!

By Jon Okun

[1] https://www.brookings.edu/blog/the-avenue/2017/03/30/how-u-s-states-rely-on-the-nafta-supply-chain/

[2] http://naftamexico.net/can/Can_Jun16.pdf

[3] https://www.thebalance.com/nafta-definition-north-american-free-trade-agreement-3306147x

[4] http://www.heritage.org/trade/report/the-effects-nafta-exports-jobs-and-the-environment-myth-vs-reality

[5] https://waysandmeans.house.gov/the-surprising-true-story-of-nafta/

[6]https://www.thebalance.com/advantages-of-nafta-3306271

[7] http://www.commerce.wa.gov/wp-content/uploads/2016/04/Energy-Petroleum-Whitepaper-7-15-2013.pdf

[8] http://www.bizjournals.com/seattle/news/2016/11/29/trump-nafta-washington-boeing-mexico-canada-amazon.html

[9] WISER trade database

[10] http://www.spokesman.com/stories/2017/jun/04/from-apples-to-wheat-nafta-has-been-a-boon-for-was/

[11] WISER trade database

[12] The Digital Trade Imbalance and Its Implications for Internet Governance, Global Mission of Internet Governance, Chatham House, Aaronson. (https://www.eff.org/files/2016/01/23/gcig_no25_1.pdf)

[13] Breaking the Web, Data Localization vs the Global Internet, UC Davis School of Law, Chander & Le

[14] http://crosscut.com/2017/04/trump-nafta-tpp-washington-potato-farmers/

Ashley Dutta
ashleyd@wcit.org
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