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NAFTA – More of the Same

Prior to the December 1993 passage of the North American Free Trade Agreement (NAFTA), proponents and adversaries chanted incessantly of grand benefits or great doom.

Proponents projected hundreds of thousands of new U.S. jobs supplying products for the to-be-opened Mexican market. Those against NAFTA often referred to the impending “great sucking sound” of many thousands of component and assembly jobs, particularly in the automotive and consumer electronics fields, heading south of the border where wages are low and environmental laws not a drag on productivity.

Compounding the problem of conflicting claims was the reality that the exact terms hidden in the many pages of the proposed agreement were often not understood, and perhaps not even scanned, by the legislative clerks, trade department researchers and lobbyists who would be responsible for the final rules and their implementation (see AI,February 1993). Overlooked in these hesitancies and confusions is that relative to the automotive sector, NAFTA was to be only one additional short step in a long journey as U.S. automotive technology, jobs and even production equipment had for many years been on the move to Mexico. The flock of small Macquilador border plants had already been joined, in the years prior to NAFTA, by several major automotive components and assembly plants, some that had been near direct transfers from the United States. As for Canada, the 1965 Agreement Concerning Automotive Products Between the Government of Canada and the Government of the United States, generally referred to as the U.S.-Canadian Auto Pact, nurtured and protected the Canadian auto industry from American products at a more than two-to-one Canadian advantage. Later, a 1989 U.S.-Canada trade agreement accepted and continued much of this asymmetrical agreement that gave a greater proportion of the cross border automotive business to Canadians.

The obvious conclusion is that the United States, a wealthy, high-wage entity, governed by free trade advocated and ruled by quarterly financial obligations, had been moving automotive production out of the country prior to NAFTA. NAFTA was to be and is simply more of the same.

Today, a hard-number analysis of jobs lost or gained is not a realistic task as there are too many guesses and maybes involved. But, units and dollars are checked off at the borders and are readily available. As shown in the graph, the U.S. share of North American vehicle production has been on a declining trend since 1994, NAFTA’s first full year, with Mexico gaining relatively more share than Canada.

The dollar details are equally instructive: The U.S. auto-trade deficit with Mexico has moved upward from $3.5 billion in 1993 to $23.5 billion in 2001. U.S.-Canada deficit over the same time moved from $9.6 billion to $40.6 billion.

NAFTA has only been an extension of earlier policies. Considering that the U.S. is a rich, high-wage nation governed by free-traders, that technology and skills are transferable, that many other nations, both high- and low-wage, tend to be protectionists, and that the current U.S. government’s directional thinking is outlined (albeit as a bargaining ploy) in a mindboggling and unattainable proposal to the World Trade Organization for the total elimination of all world tariffs on manufactured goods by 2015, there will be more of the same, if not within NAFTA, certainly within the world.

The question is not, is this good or bad policy? The question is, is the U.S. auto industry preparing for more of the same?

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Sun. March 26th, 2023

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