When the North American Free Trade Agreement (NAFTA) was implemented in 1994, it removed trade barriers between the United States, Mexico and Canada, and encouraged economic activity among the partnering countries. NAFTA created the world’s largest free trade area, and trade between the partners soared after the agreement came into effect.
NAFTA now links 450 million people producing $17 trillion worth of goods and services,1 and U.S. commerce with Canada and Mexico has risen to $1.2 trillion annually, making NAFTA the second-largest trade bloc in the world – second only to the 28-member European Union.2
As we look back on 20 years since the agreement was signed, it is clear that this pursuit of free trade in North America has not only impacted the three partnering nations, but global trade as well.
Economic Growth and Development
The trade and economic opportunities gained from NAFTA have opened up and allowed for significant growth and development in all three countries. U.S. manufactured goods to Mexico and Canada have more than tripled since 1993, increasing approximately $173 billion through 2012 and accounting for more than 18 percent of the total growth in U.S. manufactured exports, according to the U.S. Chamber of Commerce. Additionally, trade with Canada and Mexico supports nearly 14 million U.S. jobs, nearly five million of which are directly backed by the increase in trade generated by NAFTA.
While the economic impact of NAFTA has been felt by all three partnering nations, it is especially evident in Mexico. Beyond the southern U.S. border, the economy is considerably more dynamic and stable today than it was two decades ago, and Mexico continues to become a preferred country for manufacturing and a source for a wide variety of consumer goods available at lower prices.
Much of Mexico’s development has been a result of more and more companies near-sourcing operations to Mexico to decrease time-to-market, reduce inventory warehouse space, speed up cash-to-cash cycles, and reduce transportation costs. But the growth in Mexico is not limited to manufacturing. A growing number of U.S. retailers – including several Big Box companies – have begun opening stores in Mexico to increase their customer base and further drive profits. This is proving exceptionally profitable thanks to Mexico’s growing middle class. Also, for many companies, this is their first venture into international expansion and serves as the initial launching ground before expanding into other regions of the world.
The development and infrastructure improvements as a result of NAFTA have helped stabilize Mexico’s economy and opened up even greater opportunities for businesses and its people. The U.S. has also benefited from a much stronger southern neighbor, which has led to the continued rise in imports and exports along with standardization around security compliance. It’s safe to say that without the improvements that have resulted over the last 20 years, Mexico would not be a preferred country for development – and as a result – the current Mexico investments would instead be flowing into China and other Asian countries.
Where is NAFTA going?
While NAFTA opened the doors for trade in North America, there are still several roadblocks to true free trade. The NAFTA agreement should be a simple, straightforward guide to facilitate open trade between the partnering countries. However, it is a complex, lengthy document full of exceptions, restrictions and limitations. If we really want free trade, we need to move towards having a true free trade agreement. This means deemphasizing special interest groups and creating a true centralistic trading bloc that enables the flow of goods and services across borders. We need to honor all of our commitments, including cross-border trucking, as initially conceptualized when the document was developed. The more efficient the process, the more likely it is that companies will relocate facilities to the NAFTA region.
We need to understand that there are other trading blocs taking a much more aggressive, dynamic approach, such as the European Union (EU), which is structured to surpass the GDP of the NAFTA region and becoming the largest and strongest trading bloc in the world. Their agreements go beyond just free economic trade and have aligned currencies, labor and cross-border transportation in an aggressive strategy to create more trade in their region and increase their competitiveness. Meanwhile, the NAFTA region is still trying to address the first 20 years of trade without developing strategies to drive growth and free trade forward. While NAFTA should not follow the exact strategy of the EU, we need to be aware that it continues to evolve its strategies to promote free trade and economic strength in the region. We can’t simply ignore what the rest of the world is doing to promote true free trade if we want to continue to maintain our leadership position in international politics and economics.
1 Retrieved from: The Office of the United States Trade Representative “North American Free Trade Agreement (NAFTA)”
2 United States Chamber of Commerce “NAFTA Triumphant: Assessing Two Decades of Gains in Trade, Growth, and jobs
Troy Ryley is the Managing Director for Transplace Mexico. Mr. Ryley has been involved in Mexico and Latin America logistics since 1993. Shortly after graduating with his MBA from The American Graduate School of International Business (Thunderbird), he was relocated to Mexico City where he worked and lived for more than 12 years. Mr. Ryley has managed the Mexico operations for Distribution Services Ltd (now Maersk Logistics) and Expeditors International. In addition, he spent several years working throughout Latin America as a Business Development Manager for TNT Express Worldwide. Now located in Laredo, Texas, he has a unique view of the extensive development and changing trade practices of America’s southern neighbor. If you would like to discuss the topic further, please contact email@example.com.