NAFTA Is About More than Trade

E-newsletter Issue #81 | Oct. 27, 2011

The North American Free Trade Agreement is not about trade and the U.S., Canada and Mexico do not constitute a trading bloc.

That’s the one point Brian Lee Crowley, managing director of Macdonald-Laurier Institute in Canada, wanted attendees at The Council of State Governments 2011 National Conference and North American Summit to take away. He spoke at the Saturday, Oct. 22, session, “Beyond NAFTA.”

“When you and I think about trade between countries, we think of each country as its own self-contained economy,” he said. “Japan makes cars, France makes wine and they trade wines for cars. This is most emphatically not what happens in North America.”

The three nations in North America, he said, don’t trade finished products with each other. Instead, they make things together and sell them to each other and the rest of the world.

“We are a production bloc, not a trading bloc,” he said.

The auto industry is a prime example of how this works. Crowley and co-panelist Erik Lee, associate director at North American Center for Transborder studies at Arizona State University, displayed a map of the rear wheel suspension assembly for an automobile marked by flags showing where the parts crossed the border numerous times.

“We cannot say that there is an American or Canadian auto industry,” Crowley said. “There is a North American auto industry. Canadians and America make things together and to hurt one is to hurt the other.”

But the cumbersome border crossing system, he said, does just that by imposing taxes on cross-border produced vehicles that a car imported from Asia doesn’t pay since it will cross the U.S. border only once.

“Our ability to be efficient producers (that are) competitive against other production blocks around the world and our ability to be prosperous is harmed,” said Crowley.

Lee said trade is not just important at the national level; it’s also important at the state level. Texas, for example, does $140 billion a year in trade with Mexico, he said.  Nebraska sends more than 95 percent of its soybeans to Mexico.

“These are relationships that are absolutely critical to state and local economies,” said Lee.

Like Crowley, Lee called the trade in North America “a different kind of trade.” It’s a third of all U.S. commercial interaction with the rest of the world, according to Lee.

Paul Storer, professor and chair of the Economics Department at Western Washington University, said because of this intricate relationship among the three countries in contributing various components for different manufacturing processes, “imports are as important as exports.”

In many cases, he said, those imports are part of the process to finish a product that eventually will be exported, he said. Many people, he said, overlook that fact when complaining about the imbalance of trade among the North American countries.

Storer noted that economists say two things have happened in the last decade with regard to trade: its growth slowed and trade in intermediate goods slowed. Among the reasons given for this change, he said, is the increased waiting time at the border that has increased costs.

Others believe regulatory rules throw up another impediment, he said. To get the NAFTA preferential treatment, companies must prove the goods originated in North America. Still others think the competition with China has hurt North American trade.

Whatever the reason, Storer said, proposals to provide preclearance for goods traveling among the countries away from the border would ease congestion at these crossing points. Also, he said, infrastructure at the border crossings must be improved.

But state officials should keep in mind that they may face some special challenges, Storer said. Much of the goods crossing at the Detroit-Windsor border crossing, he said, are related to auto manufacturing by large multi-national corporations that have huge economies of scale. In some states, the same preclearance option wouldn’t work as well because much of their business involves small and medium-sized businesses.

“At the state level, be looking at how your border is different; advocate for policy that is right for you,” he said. “One size fits all is not an effective solution.”

Crowley echoed the importance of the state voice in trade.

“Decisions that are crucial to (NAFTA’s) success or failure are pushed down to local or regional levels,” he said. “You matter every bit as much as Washington.”

Also in this Issue: