Last month, the Arizona Daily Star published an editorial I wrote on how Arizona benefits from trade with Mexico. In this article, I offered five ideas for strengthening our existing trade relationship: 1) Change the narrative by encouraging the media to share positive aspects of trade, 2) Build relationships between governmental and business leaders on both sides of the border, 3) Resist the border adjustment tax (BAT), 4) Modernize and strengthen NAFTA, and 5) Invest in border infrastructure to support commerce. Today’s blog focuses on the forth idea – How to modernize and strengthen NAFTA.
The global economy has changed dramatically since NAFTA was enacted in 1994. The economies of Canada, Mexico and the United States have become deeply integrated with supply chains crisscrossing the border numerous times for the manufacture of complex goods such as automobiles. But it’s not just physical products that are zipping across the border. Terabytes of data are moving through cyberspace aided by cloud computing, mobile devises and an array of ever advancing technologies.
While core aspects of NAFTA, such as lower tariffs, have stood the test of time, the need to update other aspects of the agreement has become clear. The following is a list of specific areas where all parties would benefit from modernization. This is not meant to be a comprehensive list of all areas that should be addressed. Rather, it is a starting point for a revised agreement that serves the dual purposes of growing the absolute size of all three national economies and increasing fairness and certainty for business enterprises, workers and future generations.
- Labor standards – The 2016 Presidential campaign highlighted long-simmering concerns over American jobs and the challenges posed by lower-wage workers in other countries, particularly Mexico. Labor standards were negotiated as a side agreement to NAFTA and lack meaningful enforcement mechanisms. The labor provisions agreed to by the parties of the now-defunct Trans-Pacific Partnership (TPP) could serve as a starting point for incorporating an updated set of labor standards directly into NAFTA.
- Environmental sustainability – Similar to the labor provisions, environmental standards were also negotiated as a side agreement to NAFTA. With over two decades of hindsight, we can see the need for these standards to be incorporated into the actual agreement as well. Of particular concern are illegal wildlife trafficking, overfishing, illegal logging and enforcement of conservation laws. Cross-border water contamination is another area needing attention as evidenced by the challenge of waste water contaminating the Santa Cruz River near Nogales.
- E-commerce – I was a freshman at Tulane University in 1994 when NAFTA was enacted. I used a 4 MB Mac lap top with a black and white screen and a dial-up Internet connection. Now, like most Americans, I rely on the Internet for everything from banking to restaurant reservations. For businesses, the effect of e-commerce is even more remarkable. In 2015, Mexican consumers spent $11B on e-commerce sales. International e-commerce purchases are growing, with 87% of those transactions going to products ordered from the United States. We need to adjust NAFTA for the growth in this sector.
- Cross-border data – It’s not only sales transactions that cross the border. Businesses rely on cloud computing and seamless transmission of large volumes of data to conduct their daily operations. Cybersecurity and protection of intellectual property in digital formats is essential for a trade agreement that will function in a world reliant on big data.
- Energy market investment – In 2013, Mexico ended 75 years of a closed, monopolistic model in the energy sector. Over the past 3 ½ years, the Mexican government has executed several rounds of increasingly successful auctions in the energy marketplace. Private companies are now allowed to compete with Pemex in the retail market. Because this development is so recent, NAFTA has no provisions related to private investment in the Mexican energy market. This is an area ripe with opportunity for U.S. and Canadian investors.
- Small business participation – 87% of Arizona exporters are small and medium sized businesses according to The Business Roundtable. However, growth for small businesses exporting to Mexico has been stymied by complex customs paperwork and high dollar requirements for the Mexican de minimis value for cross border shipments. A modernized NAFTA should require Mexico and Canada to match the de minimis requirement of $800 enacted by the United States in 2016. Additionally, adjusting NAFTA’s rules of origin provisions to maximize regional content would spur further exporting activity among smaller businesses.
Despite current political rhetoric, NAFTA remains a remarkably successful trade agreement for all three countries. By focusing on those areas where the economy has changed dramatically since 1994 and by addressing the concerns of those who feel they’ve been left behind, we can update the agreement to facilitate increased prosperity throughout the North American region.