Policy & RESEARCH

Capitol Ideas

CSG Knowledge Center

Research Services

MLC Policy Resolutions

Stateline Midwest

States Perform

policy

NAFTA and the Midwest: Any renegotiation to free-trade deal would focus on issues critical to region's workers

by Ilene Grossman ~ June/July 2017 ~ Stateline Midwest »
When the North American Free Trade Agreement took effect in 1994, it created the largest free trade area in the world at that time. By increasing trade and investment, reducing tariffs and addressing non-tariff barriers, the leaders of Canada, Mexico and the United States hoped to grow their countries’ economies and raise living standards across the continent.
“NAFTA worked, fundamentally shaping North American economic relations, driving integration between Canada and the United States’ developed economies and Mexico’s developing economy,” says Colin Robertson, vice president of the Canadian Global Affairs Institute and a former Canadian diplomat.
More trade with neighbors
In many measurable ways, NAFTA has been a major success. U.S. trade with its two neighbors has grown at a faster rate than its economic activity with the rest of the world. The value of U.S. exports to Mexico reached $231 billion last year, with Michigan ranking third among all U.S. states ($12 billion), and for the Midwest, the cross-border relationship with Canada is especially valuable. Canada serves as the largest export market for nine of the 11 states in this region (Kansas and Nebraska are the lone exceptions).
In states such as Michigan and Ohio, much of this cross-border trade centers on the automotive industry, where cars and their various parts are built via supply chains that send components across the border multiple times on their way to completion.
In fact, intermediate goods (not-yet-completed products) from Canada and Mexico accounted for half of all total imports from these countries. Free trade is essential to preserving these cross-border supply chains. According to the Canadian Embassy, trade with Canada supports close to 9 million jobs in the United States. The Mexico Institute estimates that nearly 5 million jobs in the U.S. depend on trade with Mexico.
But from the start, the three-nation agreement has failed to fully recognize how changes in North American trade would negatively affect certain workers and industries, says Christopher Wilson, deputy director of the Mexico Institute.
“[Policymakers] did not admit the scale of the challenges that would be faced by workers,” he says.
Three years ago, in its “NAFTA at 20” study, the AFL-CIO concluded that the “result of [the agreement] has been stagnant wages, increasing inequality and weakened social protections in all countries.”
As a presidential candidate, Donald Trump called NAFTA the “single worst trade deal ever” and promised to terminate it. In May, U.S. Trade Representative Robert Lighthizer formally notified the U.S. Congress of the Trump administration’s intent to renegotiate NAFTA to “support higher-paying jobs in the United States.”
Critics of free trade between Mexico and the United States say it has led U.S. companies to shift operations south of the border, where labor and production are cheaper.
Soon after his election, Trump talked about his successful effort to keep one Indianapolis firm from moving hundreds of jobs to Mexico. At the same time, though, another Indianapolis plant is about to close and send hundreds of jobs to Mexico.
According to Daniel Ikenson, director of trade policy at the Cato Institute, the number of U.S. manufacturing jobs fell by 2.9 million in the 14 years following NAFTA’s enactment; that is a loss of 200,000 more jobs than in the 14 years prior to the agreement.
NAFTA isn’t necessarily to blame for these numbers, however. Manufacturing jobs were declining before 1994, and most economists point to automation and technological advances as being the primary drivers of reduced jobs in this sector. Another factor is the shifting of production facilities to countries outside of North America.
“The gains from NAFTA were greater than the losses,” Wilson says, echoing the sentiment of many researchers who have studied the agreement’s impact on the U.S. economy. But he adds that “neither Mexico nor the United States did enough to support those workers who did lose their jobs, largely in agriculture in Mexico and in manufacturing in the U.S.”
Some people and communities in the Midwest have been among the hardest-hit by these changes.

The renegotiation that may lie ahead
Never has the future of the 23-year-old NAFTA been more uncertain. President Trump has not ruled out the idea of ending the agreement, and the process of renegotiation has just begun. Laura Dawson, director of the Canada Institute at the Woodrow Wilson International Center for Scholars, believes the agreement should be updated to reflect changes in today’s economy and “in the spirit of building North American competitiveness.”
But she says “the timing and environment are less than ideal.”
“It is not clear who will be negotiating for the U.S.,” Dawson adds. Will it be internationalist-minded negotiators generally supportive of trade agreements? Will it be negotiators focused on specific trade disputes from the past and trying to right them? Or will it be negotiators (reflecting Trump’s campaign rhetoric) who blame NAFTA for job losses?
It is not clear yet the extent to which the Trump administration will seek to revamp NAFTA, but Dawson says it will be more than a “modernization.”
“This will be a real negotiation,” she says.
With that in mind, here are some of the big issues that negotiators from the three countries would likely have to work out.
Jobs and labor
According to Robertson, the three countries must do more to assist workers who have lost jobs, wages and work hours: “Governments [at all levels] have to do a better job of trade adjustment: providing training and skills enhancement, or new skills, for those affected ... by trade and technology.” His hope is that a revised NAFTA “sets the standard in creating a progressive trade agreement that recognizes the importance of trade gains as well as trade adjustment.”
Wilson also believes more resources need to go to worker retraining and more emphasis needs to be put on labor protections. As part of NAFTA, the three countries signed a “side agreement” in which they pledged to enforce their own labor standards and promote worker rights. But Wilson says enforcement mechanisms have been ineffective.
He suggests strengthening the agreement on labor, making it part of a renegotiated NAFTA (rather than its current status as a side agreement) and taking a tougher stance toward companies that send jobs outside of the United States solely for the purpose of avoiding the country’s protections for workers.
Labor mobility
Right now, workers traveling from one NAFTA country to another need a visa. Christopher Sands, director of the Center for Canadian Studies at Johns Hopkins University’s School of Advanced International Studies, would like to see these rules loosened, especially in light of the growth of cross-border trade in the services sector. He suggests allowing three months of visa-free travel because some sectors need temporary workers.
NAFTA has a list of professions for which travel requirements are lifted, but Robertson says it is painfully out of date. Updating this list, and working toward mutual accreditation of professions, would allow the three countries to “take maximum advantage of the [North American] talent pool,” he says.
Rules of origin
Under NAFTA, a product must have a certain percentage of its materials come from North America to be eligible for tariff-free trade — for example, 62.5 percent of a car’s components. The AFL-CIO has recommended increasing that percentage and providing incentives so that vehicles have more content made in North America. Sands warns, though, that global supply chains could be disrupted with changes to the rules on domestic content. In addition, complying with these rules — especially if parts cross the border several times — can be difficult for small- and medium-sized businesses.
Regulatory reform
For several years now, the U.S. and Canada have been working to harmonize standards and regulations and to mutually recognize compliance with these rules — for example, conducting joint inspections of ships using the Great Lakes and St. Lawrence Seaway. The Canada-U.S. Regulatory Cooperation Council could be made a formal part of NAFTA. Such a move would allow the two governments to work in tandem on new rules involving goods that cross the border.
E-commerce/the digital economy
E-commerce barely existed when NAFTA first took effect, but today, almost all businesses and many consumers are part of the digital economy. “Going forward,” Robertson says, “the three countries should have harmonized standards and regulations.” The Trump administration has said it would like to ensure that customs duties are not imposed on digital products, and that products delivered to customers electronically do not face discriminatory practices.
Intellectual property rights
Intellectual property protections will likely be strengthened. The Trump administration has suggested building on newer international agreements to protect against copyright and patent infringement.
Trade in the services sector
The U.S. services sector (for example, financial and professional services) is a growing source of U.S. exports to Canada and Mexico. The Trump administration has suggested that it will push to further open markets for this sector. The United State has an advantage in this area of the economy, Wilson says, and removing restrictions on services-related trade should help the country.

 

Midwest has seen rise in cross-border supply chains, agriculture exports in North America

Even before the 1994 signing of the North American Free Trade Agreement, Canada and the United States had worked together on a binational pact (the Canada-U.S. Free Trade Agreement in 1989) to eliminate tariffs and limit other protectionist policies such as subsidies and quotas.
Adding Mexico proved to be much more controversial, with then-presidential candidate Ross Perot memorably saying there would be a “giant sucking sound” of jobs moving south of the border. The three-nation agreement gradually removed tariffs and other barriers to cross-border trade in nearly all manufacturing sectors. Barriers also were lifted in areas such as agriculture, the services sector and foreign investment. (Agriculture was addressed differently via separate or existing agreements.)
With NAFTA in place, businesses and investors had rights to nondiscriminatory treatment; federal procurement policies were opened up; and a process for settling disputes among the three countries was created.
Two formal side agreements also were signed by the three countries, a reflection of concerns that NAFTA could diminish standards that protect workers and the environment. The side agreement on labor, for example, includes funds to assist individuals and businesses adversely impacted by freer trade. Critics of NAFTA, though, say these side agreements have not always been effective and can be difficult to enforce.
Prior to the trade agreement, Mexico had a 20 percent tariff on automobiles and light trucks coming from Canada and the United States, as well as tariffs ranging from 10 percent to 20 percent on auto parts. Those tariffs had to be phased out under NAFTA, leading to a more integrated supply chain across North America. (See table for data showing the extent of the Midwest’s cross-border supply chain.)
“The automotive and agriculture sectors are two good examples of how trade and supply chains across the Midwestern states have been developed with Mexico under NAFTA and have successfully increased their global competitiveness,” says Kenneth Smith Ramos, director of the Trade and NAFTA Office at the Embassy of Mexico.
Opponents of NAFTA say any benefits from North American economic integration are outweighed by that “giant sucking sound” of lost manufacturing employment, and the trade agreement has resulted in people losing jobs and businesses relocating operations.
However, this region’s exports to Mexico have risen under NAFTA, Ramos says. Michigan, for example, sent $3.6 billion worth of vehicle components south of the border last year, an increase of 110 percent since 2009. Illinois, Indiana and Ohio annually export about $1 billion each in auto parts.
Most states in the Midwest, in fact, are running positive overall trade balances (more exports than imports) with both countries, U.S. Department of Commerce data show. The lone exceptions are Illinois and Michigan (trade deficits with both countries), Minnesota (deficit with Canada), and Ohio (deficit with Mexico).
For U.S. agriculture and related industries, NAFTA has removed trade barriers for farmers to sell products such as corn, beef and pork, says Christopher Sands, director of the Center for Canadian Studies at Johns Hopkins University’s School of Advanced International Studies. He adds that the agreement helped make agricultural land in Mexico more productive and, as a result, increased sales of U.S.-made farm equipment and supplies.
According to Ramos, Mexico is the largest export market for the agricultural goods of four Midwestern states: Iowa, Kansas, Nebraska and South Dakota. In each of those states, sales to Mexico account for anywhere from 29 percent to 39 percent of total foreign agricultural sales.

 

The Midwest and NAFTA: Export, import data from region’s 11 states (2016)