Mexican Ambassador Francisco J. Barrio Terrazas celebrates the astonishing successes of the North American Free Trade Agreement, now approaching its 20th year. But he finds the world’s most vibrant free-trade agreement has now “fallen short” of meeting the next-generation needs of the Mexican, Canadian and U.S. peoples. Here, Ambassador Barrio Terrazas calls for fundamental reform of NAFTA — ranging from much deeper economic integration to a more profound sense of the three-country North America in which (as he once put it) the common border “crosses the Rio Grande and the Great Lakes and runs from the Usumacinta River to the Arctic.” The Usumacinta River marks Mexico’s southern boundary with Guatemala.
By Francisco Javier Barrio Terrazas
Mexico and Canada have enjoyed an immensely stable and friendly relationship for nearly 70 years, although during the first 50 years, relations were characterized by extremely limited exchanges. It was a cordial relationship, but not a significant one.
That changed in 1992 when Mexico and Canada signed, along with the United States, what would for several years be the world’s largest free trade agreement: NAFTA.
The great incentive to signing the agreement? By gaining preferential access to the markets of the other two countries, we strengthened our own economies.
The results achieved during the lifetime of the treaty speak to its success: more than 40 million jobs created; trade flows tripled (surpassing $1 trillion per year); a combined Gross National Product that has more than doubled; and the development of some of the most competitive production supply chains in the world.
The United States is the top market for Canada and Mexico. Canada and Mexico are the No. 1 and 2 markets for American products. Since NAFTA came into effect, trade between Mexico and Canada has multiplied by nine times, to exceed $35 billion in 2012. In summary, NAFTA continues to be, even today, the most important international trade instrument for each of our three countries.
By eliminating tariffs and multiplying trade exchanges, our political leaders of the time had the vision and courage to place our three nations on a very successful path of integration and growth.
There have been, nevertheless, factors that have impeded a deeper, more complete integration. In Mexico and Canada, there are some who think that agreements aligning the economic policies of the three countries could jeopardize economic and political sovereignty, while fears have arisen in the U.S. and Canada that greater aperture could result in a more marked flow of migrants from Mexico. Thus, in terms of regional integration, NAFTA has seen far more modest advances than the European Union. In fact, NAFTA does not have free movement of the labour force, common external tariffs, a Customs Union or a common market — all attributes of the EU.
But, while trade among our three countries has grown rapidly, other countries did not sit still. Since NAFTA’s launch, 500 other FTAs have been negotiated around the world.
At the same time, some of the most populated countries on the planet, with hundreds of millions of available workers and extremely low wage scales, embarked on aggressive programs to reform their economic systems, bolstering to an astonishing degree their huge competitive advantages and becoming, in the short space of two decades, some of the world’s most thriving economic engines.
These developments took place during an offshore and outsourcing boom. The large corporations of the West, in a frenetic avalanche, leapt to relocate or subcontract manufacturing and service operations in developing countries. Millions of jobs were transferred from the three North American countries to other parts of the world, at the same time, transferring significant portions of our region’s economic activity, competitiveness and growth.
This trend urges us to move faster by adapting our strengths and experiences to the new global conditions and challenges. Unfortunately, our response in the face of this changing scenario has fallen short of meeting the true needs of our industries and citizens; our leadership in the international context has faded.
The emergence of security as a top priority and the new economic global order, in which emerging economies will lead growth, have diverted our focus as a single, integrated block. Canada has evolved. The U.S. has changed. Mexico has transformed. Contrary to the spirit of NAFTA, though, the new dynamic emerging in North America seems to run in the opposite direction.
Those factors, among others, explain how North America’s share of global markets has dropped from 19 percent in 2000 to 12.9 percent in 2010 — while the market share of the Asia-Pacific region (including India) rose from 29.6 percent to 35.4 percent over the same period.
Today, new economic realities are taking shape: the wage gap is closing, shale gas exploitation is decreasing energy costs in North America and high oil prices are increasing the impact of freight charges on the price of certain products. Together, these factors are showing the importance of manufacturing location and proximity to consumer markets over labour costs and availability.
We see, then, that the trend has begun to reverse and that many manufacturing operations are returning to North America. In the last 24 months, more than a dozen American, European and Asian auto assembly companies have invested in new plants in Mexico and some have done so in the U.S., in a clear “inshore” movement. Operations that sought cheap labour in Asia now find that their total costs can be competitive, upon re-assessing proximity to North American markets. In this new trend toward regional hubs, North America has an exceptional opportunity.
Today, the three North American economies complement one another wonderfully. In Mexico, half the population is age 26 or under and wages are highly competitive. Canada and the United States have abundant capital and sophisticated technologies. We are also geographically close, we enjoy good communication and we’re trading partners.
This has led such sectors as the automotive and aerospace industries to integrate in such a way that production chains have become clearly regional. A car assembled in any of our countries comprises thousands of components that, in the production process, have crossed the borders between our countries several times, incorporating further elements of added value at each new crossing.
This allows us to create products that not only compete in North American markets, but can also be successfully exported to other regions of the world. As if that were not enough, advances in shale oil and shale gas exploitation could make the North American region, in a few years, a net energy exporter, paving the way for other promising possibilities.
But, as is often the case in the changing economic dynamics of the 21st Century, the windows of opportunity can be fleeting. Right now, we are fully immersed in negotiations over the Trans Pacific Partnership, the most ambitious free-trade agreement of all time. This alliance, of course, offers huge possibilities, but the obligations we will assume with our new partners will very likely limit our ability to act as a region. Thus, the opportunity to benefit from our status as a vigorous regional hub could find itself reduced, or even eliminated, in just a few years.
If the three NAFTA partners fail to act with the speed and assertiveness the moment requires, it will be other countries, through their companies, that benefit. Japanese, European and even Chinese companies are already investing in new plants in Mexico — to sell to consumers throughout North America.
Twenty years ago, our three countries signed NAFTA to give market access to the entire region. Today, the challenge is to deepen and expand the integration of our economies so we will be able to compete at the global level.
The most renowned economic researchers have recognized Mexico as one of the largest economies in the coming years. We can supply the U.S. and Canadian markets in shorter times and we can jointly produce efficiently under competitive cost conditions. These realities must be recognized by our North American partners. It is imperative that we urgently mobilize to work together in a streamlined approach aimed at recovering our global presence and influence.
The three countries share borders and an entrepreneurial culture that obliges us to co-operate and recoup our joint position. Canada, Mexico and the U.S. must work together, transforming institutions, creating common strategies and renewing trilateral dialogue mechanisms.
In 2013, as two decades ago, the current situation demands that we take the same bold steps, with the same clear vision and the same courage that led us to sign NAFTA. This is a defining moment in which the region’s future could clearly take incredible turns. Our position through the first half of the 21st Century may depend on the skill and resolve with which we act in the very short term.
Francisco Javier Barrio Terrazas is
Mexico’s ambassador to Canada.