We Can Fix the Mess NAFTA Created for US/Mexico Trade

The Canada and USA Bi-lateral Free Trade Agreement was implemented in 1990.

At that time I was the Program Manager for a global logistics re-engineering effort at Unisys. This was a first-of-its kind Logistics System (people, process and enabling technology) seamlessly integrating manufacturing plants and distribution centers located in five countries – including the United States and Canada – on three continents.

The system tied every component (by “country of origin”) plus all labor added at every level of the manufacturing process directly to the unique (serial numbered) computer peripheral finished product.

The granular ability to track parts and tie them, across the global supply chain, to the individual worker who had handled them led to an agreement with the US Customs Service to provide entry documents electronically to the US Customs Service for pre- approval.

The team quickly created electronic entry documents to satisfy the new Canadian customs requirements – making Unisys an early beneficiary of the agreement.

After some initial hesitance by the Canadian people – who feared becoming a defacto 51st state – free trade between the USA and Canada has worked very well — accelerating negotiations for a tri-lateral North American Free Trade Agreement (NAFTA) — signed into law by Bill Clinton in 1993.

Why the Assumptions of NAFTA Failed at our Southern Border

NAFTA has not worked as well with Mexico. During negotiations, many acknowledged the challenges of integrating two “developed” economies with a third that was still “developing”. But negotiators underestimated those challenges.

The US government expected that free trade would expand economic opportunity in Mexico. Expanded opportunity, they argued, would reduce the flow of illegal immigrants seeking employment in the United States.

The hopes for a broader improvement in the economic lives of “average” Mexicans have not been realized.

NAFTA and US Jobs

Trade between the United States and Mexico grew exponentially under NAFTA. But as more raw materials moved south to be returned as manufactured goods — the historic USA trade surplus became a persistent 25% trade deficit. https://www.census.gov/foreign-trade/statistics/highlights/topcurmon.html

The deficit will continue to grow as Mexico aggressively imports American manufacturing jobs. http://www.reimagineamerica.org/saving-us-economy-starts-now-keep-oreo-cookies-in-chicago/

But not all job-shifting by US manufacturers to Mexico is negative for American workers.

The “cross border supply chain” has the potential to strengthen employment across North America.

The Ford Solution

Made-in-America is central to Ford Motor’s brand strategy.

When they announced the development of a 2018 manufacturing line in Mexico to build low margin Ford Focus hybrids – they simultaneously announced the existing Michigan plant will be upgraded to produce high priced SUVs and trucks.

The $8/hr jobs go to Mexico to preserve and increase $60/hr jobs in Michigan.

Bombardier – the Canadian airplane manufacturer makes a similar argument — its Mexican fuselage plant results in increased employment in the United States and Canada. http://www.economist.com/news/briefing/21592631-two-decades-ago-north-american-free-trade-agreement-got-flying-start-then-it

US/Canadian Free Trade Suggests a Template

Auto manufacturing on both sides of our northern border increased as a result of liberalized Direct Foreign Investment (FDI) regulations in Canada.

It created a flourishing cross border consumer economy with Canadian “day trippers” flocking to US shopping centers to buy attractively priced merchandise.

The US market for Canadian energy products and precious metals increased as a result of lower costs and ease of transport.

Hollywood studios have taken advantage of the lower production costs in Canada to develop significant satellite operations without fear of intellectual piracy.

USA/Canadian imports and exports tend to balance each other out – resulting in real GDP growth in both countries.

Canada is, also, our most reliable ally. https://www.washingtonpost.com/news/checkpoint/wp/2015/03/11/canadas-highway-of-heroes-the-patriotic-tradition-lives-on-after-afghanistan/

Building a Beneficial US/Mexico Relationship

A mutually beneficial trade relationship with Mexico is entirely possible – a relationship that looks more like our Canadian trading relationship.

More manufacturing jobs are an opportunity to expand the Mexican middle class but not all of those jobs have to come at the expense of American workers.

Rising factory wages in China create an opportunity for Mexico to compete globally to manufacture products destined for North American consumers.

To capitalize on this opportunity, Mexico must rapidly improve public education. The US can help through the Peace Corps, Teach America and other non-governmental organizations.

Build a more Efficient Cross Border Supply Chain

Further, strengthening the North American supply chain so that raw materials, sub-assemblies, and finished goods can move smoothly, safely, rapidly and legally across our southern border will require better highway and rail transport from the Mexican interior.

Joint investment in developing infrastructure – through the Inter-American Development Bank and cross border investment (http://www.marketwatch.com/story/warren-buffett-and-bill-gates-like-railroads-and-you-should-too-2015-09-17) — will create skilled and unskilled labor jobs in Mexico – drawing more economic migrants back to Mexico from the US while growing GDP on both sides of the border.

Renegotiate NAFTA

Growing trilateral GDP was the impetus behind NAFTA. It remains the objective, but the agreement has to be renegotiated with assumptions based on reality.

What is important is to grow the middle class throughout North America. This is not a zero sum game!

The United States and Canada can help accelerate Mexico’s economic development but Mexico must take the first step by cleansing itself of rampant internal corruption.

In addition to demands for better schools, the emerging middle Mexican middle class will demand effective public safety and better social services. NAFTA negotiators must support these demands.

Further, they must link renegotiation to forceful actions by the Mexican government to deal with international drug smuggling and human trafficking.

Nothing undermines NAFTA more than the volatile southern border that has existed since General Pershing chased Poncho Villa back across Rio Grande in 1916!

China versus USA: Piracy on the High Seas of International Trade

While Thomas Jefferson was negotiating with France over the Louisiana Purchase, pirates operating out of Tripoli (now Libya) were menacing American mercantile ships in the Mediterranean – imprisoning and ransoming crews — and impeding the expansion of American trading relationships with Southern Europe.

Expanding global trade was imperative to the survival of the Republic.

In their book Thomas Jefferson and The Tripoli Pirates, authors Brian Kilmeade and Don Yaeger offer an engaging account of America’s first response to piracy on the high seas.

President Jefferson sent the US Navy and Marines.

Supported by Congress, Jefferson took major risks — ranging from the bombardment of Tripoli to the Trade Embargo of 1807 — to establish the RIGHT of American merchants to trade anywhere at any time without fear of assault by pirates or the British Navy. https://www.monticello.org/site/research-and-collections/embargo-1807

USA Founded on Principle of Trading Freely

Profitable trade has driven American economic development since the first European settlements.

For the next +/- 150 years, the colonies traded abundant natural resources (animal furs, lumber and fish) and commercial agricultural products (cotton, tobacco, molasses, sugar) for manufactured products and luxury goods (silk, tea).

More than 20 percent of North American trade was carried by ships built and owned by colonial merchants by 1773 — when the Boston Tea Party previewed the coming rebellion.

The British government should have taken note.

The seeds of the American Revolution were spread in reaction to British trading policies these merchants considered oppressive and confiscatory.

The British East India Company imported tea from China and sold it in the colonies — forbidding colonial merchants to engage in direct trade with China.

Not long after the Revolution the Stars and Stripes flew over the Canton, China harbor.

Our early trade with China was lopsided, corrupt, and tightly constrained by the Chinese Emperor — not very different from our trade with China today.

How China Plays by Different Rules

Since World War II, American trade policy’s been built on the assumption that strong trading relationships lead to strong friendships, a “level playing field” for expanding trade, and a strengthening global middle class.

A middle class opposed to war and eager to buy American manufactured and agricultural products.

China and the United States resumed trading after a thawing of relations during the 1970s.

Rather than level the playing field – American concessions as acts of “friendship” — tariff reductions — cost jobs.

But there’s no reciprocity from China. America imports 91 percent more from China than it exports to China.

China’s emerging middle class has shown a willingness to pay for quality American made goods but their government continues to protect Chinese businesses from foreign competition.

China’s global power house factory system was built on what the World Trade Organization often finds to be unfair trading practices: erecting barriers to some products  and “dumping” others.

Apple Inc. Suffers Chinese Trade Piracy

For example, CEO Tim Cook argues Apple cannot manufacture iPhones in the United States because wages for Tool and Die Makers would add 40% to the cost of iPhone.

The facts are different. The manufacturing cost difference would be about $2.50 for every $700 retail phone

The real reason – China requires products sold in China to be made in China.

China is Apple’s largest iPhone market.

But acquiescence has not protected Apple from Chinese trade piracy.

Just last week, Chinese Courts ruled that a Chinese (defendant) firm can manufacture and sell worldwide goods stamped with the iPHONE logo and the internationally recognized registered trademark symbol (“R”) without a license from (compensating) Apple. http://www.bbc.com/news/business-36200481

Counterfeiting goods is big business in China.

It is government sanctioned 21st century piracy!!

The Real Reason Behind our Murky Relations

With such an abysmal record on trade, why is China is still a “most favored nation”?

Why are China’s military provocations in South China Sea, cyber assaults on our government agencies and overt military spying met with pronouncements of concern rather than actions of real consequence?

Easy: China holds nearly $2 Trillion – 1/3 of the total US Debt in foreign hands.

We Must Retool Our Assumptions about China

President Obama and his successor – whoever she or he may be – must make clear to China bilateral trading relationships and genuine friendships are not necessarily the same thing.

We trade with nations we do not consider friends – for example Vietnam or Russia.

BUT – we do favors – eliminate tariff barriers – only for our friends.

The United States economy – troubled as it is – is still the largest economy in the world. (http://www.investopedia.com/articles/investing/022415/worlds-top-10-economies.asp)

If China doesn’t sell their goods to the United States who will buy them?

If China does not buy US Treasuries where will they safely invest their dollars?

We have economic leverage. Chinese outrages have stirred the administration but quick, bold trade renegotiation is required.

China should have no doubt we remain committed to eliminating any and all piracy.