Posted: July 17th, 2022

Renegotiating NAFTA Case Essay

9 – 3 1 8 – 1 4 3

R E V : J A N U A R Y 2 1 , 2 0 2 0

Professor Laura Alfaro and Research Associates Haviland Sheldahl-Thomason and Sarah Jeong prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2018, 2019, 2020 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800- 545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

L A U R A A L F A R O

H A V I L A N D S H E L D A H L – T H O M A S O N

S A R A H J E O N G

Renegotiating NAFTA

No nation was ever ruined by trade.

— Benjamin Franklin

On January 16, 2020, the Senate passed a landmark trade deal that would replace the 26-year-old North American Free Trade Agreement (NAFTA). Until the United States-Mexico-Canada Agreement (USMCA) was signed, considerable debate had surrounded it. Trade and trade agreements were a focal point of the 2016 U.S. presidential election. During his campaign, Republican presidential candidate Donald Trump had declared that NAFTA was the “worst trade deal ever made,” citing the trade deficit the U.S. had with Mexico, and vowed to terminate it. He believed that the deal had been beneficial to Mexicans at the cost of US citizens, and referred to the deal as Mexico’s “cash cow.”1

NAFTA came into effect on January 1, 1994, after being backed by the Republican administration of U.S. President George H. W. Bush and the Democratic administration of U.S. President Bill Clinton during its implementation. It created the largest free trade area in the world at the time, with a combined gross domestic product (GDP) of over $8 trillion and a population of nearly 390 million (see Exhibit 3). Since implementation, total trade between NAFTA countries grew from $290 billion in 1993 to $1.1 trillion in 2016, an increase of 280%; in comparison, exports to non-NAFTA partners grew by 195%.2 The total population of the three nations grew to 500 million. By 2018, the U.S. had its lowest unemployment rate since 2000 of 3.9%, Canada’s unemployment rate was at a forty-year low of 5.7%, and Mexico’s unemployment rate of 2.9% was at its lowest levels in over a decade.3

Critics of NAFTA in the United States claimed that it had contributed to a loss of over 800,000 manufacturing jobs to Mexico, lowered U.S. wage levels, increased inequality, and undercut American environmental laws (see Exhibit 7 for employment). Canadian sceptics accused it of causing a “tremendous collapse” in Canada’s social welfare infrastructure, and in Mexico, the increasing inequality in the nation and across regions was denounced.4 Those who supported NAFTA, however, noted that in addition to trade, output, and overall employment, investment amongst the three nations increased, and productivity also grew. Furthermore, the agreement led to lower prices. Others argued that technological advances and automatization, China’s entry into the World Trade Organization (WTO) in 2001, low skills and lack of retraining had a far greater negative impact on U.S. jobs, causing an estimated net loss of 2 to 2.4 million between 1999 and 2011.5 In the case of manufacturing, one

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prominent economist stated that “NAFTA helped the U.S. auto industry survive . . . the U.S. auto industry designed a very efficient production network that spanned the U.S., Mexico and Canada.”6

Donald Trump was elected president in 2016 and, after meeting with Canadian and Mexican leaders, decided to renegotiate NAFTA instead of terminating it to avoid a “pretty big . . . shock to the system.”7 Renegotiations began in the summer of 2017, and Trump’s administration had the primary goal of reducing the U.S. trade deficit with Mexico. The U.S. initially proposed a 50% U.S.-content rule for automobiles made in North America, and later called for minimum wage thresholds for the auto sector and a sunset clause that would lead to the expiration of NAFTA after five years if the countries did not agree to renew it. 8 Trump’s administration also proposed removing the Chapter 19 dispute settlement mechanism, which prohibited NAFTA countries from putting unfair duties on products from other NAFTA countries to protect their industries, as decided by five arbiters.9

In response to Trump’s rhetoric, Canada’s Foreign Affairs Minister, Chrystia Freeland, declared that Canada wouldn’t be pressured by the U.S. Mexican President Enrique Peña Nieto stated that he would work to update NAFTA in a way that would benefit all three countries, but that Mexico “won’t accept anything that goes against our dignity as a nation.” 10 Maurice Obstfeld, the IMF’s chief economist, noted that targeting specific trade deficits would merely shift the problem to trade with other countries, causing the U.S.’ overall trade balance to remain the same as long as savings and investment did not significantly change. 11

Negotiations were to be undertaken in seven rounds, ending in 2017, but it became apparent that more time was needed and talks were extended. On Oct 1, 2018, the three countries agreed to the new trade deal. Substantial changes to the original agreement included higher wage requirements for car manufacturing workers, and easier formation of Mexican unions, while restricting Canada’s dairy exports. The new agreement did not change some issues of contention, maintaining the rights of companies to challenge emergency antidumping and anti-subsidy tariffs and allowing the U.S. to impose emergency tariffs on cars for national security. 12

With changes to NAFTA looming, many questioned whether the accord had brought more benefits than costs to its signatories. Why had the countries signed the original agreement? Could the costs be minimized under a new agreement without reducing the benefits? Did buying local goods help create the most jobs in a country? What was the role of business? Everyone wondered about the potential ramifications of the new NAFTA.

Integration of North American Trade Trade integration in North America had begun in 1965, when the U.S. and Canada, who had both

been founding members of GATT (General Agreement on Tariffs and Trade) in 1948, entered into the Automotive Products Trade Agreement (Auto Pact). The agreement provided for the duty-free, two- way movement of new vehicles and OEM (original equipment manufacturers) parts between the two countries. The Auto Pact resulted in a major rationalization of the auto industry across the two countries, especially by the Big Three U.S. automakers (Chrysler, Ford and General Motors). Research and development, product engineering and the production of high-value parts such as body stampings and drive train components remained heavily concentrated in the U.S., while vehicle assembly was disproportionately based in Canada.13 As a result, by 1976, Canada had a trade surplus of CAD 1.5 billion in motor vehicles with the U.S. and a trade deficit of CAD 2.5 billion in automotive parts. 14

North American trade was further integrated in 1989, when the Canada-U.S. Free Trade Agreement (CUFTA) was implemented. CUFTA initiated a gradual phase-out of all tariffs in 10 years, and

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Canada’s exports to the United States rose from 15% of GDP in 1989 to 30% in 1998, with half of the increase accounted for by manufacturing. 15

In contrast, from the end of World War II to the mid-1980s Mexico’s economic policy environment was shaped by a focus on import substitution. The government targeted key industries while preventing international competition through high trade barriers. Mexico grew by 3–4% annually between 1940 and 1960, with an average inflation rate of 3%, resulting in a large and diversified industrial sector.16 The discovery of vast oil reserves in 1971 and in 1974 helped fuel growth while increasing the government’s dependence on oil revenues. 17 During the 1970s Mexico borrowed large amounts from international sources to finance industrialization. Falling oil prices, higher foreign interest rates, and an increased fiscal deficit led Mexico to default on its debt in 1982, along with most of Latin America. In 1983 GDP fell by more than 4%, while fiscal deficits increased, inflation skyrocketed, investment fell, and unemployment and poverty soared.

Mexico began to liberalize its trade policy in 1984, initially by lowering import quotas and progressing to joining GATT in 1986.18 President Carlos Salinas de Gortari’s administration (1988– 1994) removed further limitations on foreign investment in all sectors except energy and banking, and led the nation in joining the Organization for Economic Cooperation and Development (OECD) in 1994.19

Negotiating NAFTA

The administrations of Mexican President Carlos Salinas de Gortari and U.S. President George H.W. Bush began meeting in 1991 to negotiate a free trade agreement, and Canada under Prime Minister Brian Mulroney joined soon after.20 The three countries’ leaders hoped that freeing trade between them would lead to stronger and more sustainable growth in Mexico, for Mexico was seen as a low-cost investment location and a promising new market for exports. 21

After more than 200,000 meetings and 2 million phone calls between delegates of the three nations, a 1,400-page agreement was drafted with wide-ranging provisions governing almost all aspects of trade between the United States, Canada and Mexico.22 Carla Hills, the primary U.S. negotiator for NAFTA, called it “the most comprehensive trade agreement ever concluded.” 23 Supporters of the agreement believed that trade liberalization would create economic gains due to comparative advantage.a Economists since Adam Smith and David Ricardo had noted that countries traded because there were gains to specialization, scale, and exchange.

Quantitative analyses led to a mainstream consensus that the effects of the agreement would be positive but small for the U.S., positive and large for Mexico, and little to no effect on Canada, since Canada already had a FTA with the U.S. and had relatively little trade with Mexico.24 Not all observers were optimistic—Ross Perot, a U.S. presidential candidate in 1992, warned that the agreement would create a “giant sucking sound” of U.S. jobs fleeing to Mexico. Critics voiced the concern that foreign competition with low wage countries was unfair. Skepticism remained about the benefits of trading for goods that a country could produce itself or with countries with different wages or productivity levels. Other experts worried about a race to the bottom. On the other hand, in Mexico, many worried that opening their economy to trade would be disastrous as local firms would not able to compete against the more advanced firms from the north. Supporters of protectionism mentioned the existence of externalities, spillovers and other market failures. 25

a Comparative advantage refers to the ability of a country to produce certain goods and services at a lower opportunity cost than another. Trade expands a nation’s consumption possibilities even if it has an absolute advantage in producing every good.

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Bill Clinton was elected U.S. President in 1993, and while he supported the trade pact, he called for more provisions related to labor and the environment. Several more months of negotiations ensued, eventually resulting in two side agreements concerning the environment and labor. The Mexican, Canadian and U.S. governments approved NAFTA, and on January 1, 1994, the pact officially came into effect. NAFTA provided for immediate elimination of tariffs on several goods and the phased elimination of all tariffs on regional trade within 15 years and superseded CUFTA. The agreement included comprehensive provisions related to trade in services such as banking between the three nations, and a major focus was to liberalize trade of agriculture, textiles, and automobile manufacturing. NAFTA also presented dispute-resolution mechanisms and intellectual property protections, and was accompanied by the two side agreements that sought to implement labor and environmental protections (see Appendix A).

Mexico was given a slower start in tariff reduction: almost 80% of Mexican exports to the United States were to be tariff free from day one, while only 41.1% of U.S. exports to Mexico were to be free on the same date.26 NAFTA immediately cut in half the 20% tariff on imports of automobiles into Mexico and phased it out completely over 10 years for automobiles and 5 years for light trucks. The United States and Canada eliminated auto tariffs immediately and reduced the tariff on light trucks from 25% to 10% (this was phased out completely over 5 years). However, rules of origin requirements were tightened—NAFTA required that automobiles have 62.5% North American content, and auto parts 60%. CUFTA had specified that automobiles have only a 50% content requirement. In the textiles and apparel sector, all tariffs were to be eliminated in ten years and most quotas were to be phased out by 2000. But the deal mandated that all finished textile products had to be cut and sewn from fabric spun from North American fibers.

The three nations agreed to establish free trade in agricultural products within 15 years, although negotiations concerning the sector proved to be contentious. A large portion of the Mexican labor market were agriculture workers, and industries such as sugar and citrus had considerable political power in the U.S. government. NAFTA contained two different agreements on agriculture, one between the U.S. and Mexico and the other between Canada and Mexico. While some tariffs were immediately abolished, such as the tariffs on Mexican imports of U.S. cattle, beef, fruits and vegetables and U.S. imports of livestock and eggs, while others were phased out gradually. The longest transition period of 15 years was imposed on Mexican imports of corn, beans, powdered milk and dried onions and U.S. imports of sugar, orange juice and peanuts (see Exhibit 2). However, some worried that the expected increase in U.S. grain exports to Mexico would harm Mexico’s agricultural labor force, and lead to increased migration of Mexican farmers to the U.S.27

Concerning services, NAFTA allowed U.S. and Canadian banks to own up to 15% of Mexico’s total banking market by 1999, though individual banks could only own up to 1.5% of the total market. These restrictions were lifted by 2000. Mexico’s energy sector was another contentious issue: Mexico’s energy industry was state-controlled, and Mexico wanted no obligation to guarantee petroleum to Canada or the U.S. in emergencies. Mexico also did not want to allow foreign investment into its oil exploration and development sectors, and did not want foreign gasoline stations to enter the market. The nations compromised, and U.S. and Canadian companies were allowed to compete for service contracts offered by Mexico’s oil company, Pemex, and Mexico’s electricity company, CFE, but foreign investment was not allowed in these sectors, or in the retail gasoline market.

NAFTA also addressed foreign direct investment, and many Mexican sectors, such as international cargo services, commercial air services, coal mines and petrochemicals, were opened to foreign ownership. Most importantly, Chapter 11 of NAFTA required each country to provide “national treatment” to NAFTA investors, which meant that investors from the three nations would be treated

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as well as domestic investors. Furthermore, it required each country to “accord to investments of investors of another Party treatment in accordance with international law” and “non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife.”28 This allowed investors to use international law to appeal directly against violation of their rights by governments.

The agreement extended patent and copyright laws to include computer programs, satellite transmissions, trademarks, trade secrets and set a minimum patent term of 20 years. NAFTA also allowed limited labor mobility within the free trade area, but Mexican professionals were still required to obtain a visa to enter the U.S., and the number of visas was restricted to 5,500 each year. While President Bush worried even this limited free labor movement would sink the agreement in Congress, Janet Reno, Attorney General from 1993–2001, declared that “NAFTA will create jobs in Mexico—jobs for Mexican workers who might otherwise cross illegally into America. . . . If NAFTA passes, my job guarding the border will be easier.”29

NAFTA established a safeguard mechanism during the transition period: countries could raise tariffs back to the pre-NAFTA levels in cases where imports from a NAFTA partner threatened serious injury to the domestic sector. Such tariff “snapbacks” could last for three to four years. Countries were also free to maintain their own food standards, which might be higher than international standards.30

Post-NAFTA

On the day NAFTA came into effect, a group of guerrilla fighters took over half a dozen towns in the southern Mexican state of Chiapas; their leader denounced NAFTA as a “death sentence” on Mexico’s Indians.31 Though government forces managed to regain control and later began talks with the rebels, political instability in Mexico continued. On March 23, Luis Donaldo Colosio, the man chosen by President Salinas as the presidential candidate of the ruling PRI party, was assassinated. The increased levels of violence in Mexico caused foreign investors to flee, testing the credibility of the peg of the peso. Ernesto Zedillo, of the PRI party, became president in 1994, and his government devalued the peso 15% in response to this renewed pressure. After only a few days the government discarded the new peg, and the peso plunged.32 The U.S. administration at the time arranged a $40 billion standby loan in January 1995, and the economy recovered (see Exhibits 3 and 5).33

In Mexico, economic growth and investor confidence in the nation suffered a setback due to the 1995 peso crisis. Some believed that this led many Mexicans to move to the U.S., as the immigration rate increased by nearly 80% following the Tequila Crisis. 34 During the following years (until 1998) the nation experienced growth rates of 5–6%. By the second half of the 90s, North America boomed. With the backdrop of openness and “new economy” defined by accelerated gains in productivity growth through effective use of information and communication technology, 35 the U.S. economy grew, and the stock market surged. Business investment rose dramatically, from 5.5% of GDP in 1992 to 8.6% in 2000. Low unemployment rates, growing wealth, and optimistic assessments of future income led to increased consumer spending. Canada’s economy, which lagged from 1980 until the mid-1990s, turned the corner and began sustaining high growth. Unemployment in Canada fell from 11.4% to nearly 8%.

However, the bursting of the dotcom bubble in the U.S. in 2001 and the resulting recession spilled over into Mexico, whose economic growth fell from 4.9% in 2000 to -0.4% in 2001.36 The next election marked the end of the PRI’s 71-year dominance, as the nation voted for Vicente Fox, a member of the

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National Action Party (PAN),b as president (2000–2006).37 During this period, Mexico experienced some of its slowest growth since 1940.38 Growth in the U.S. averaged 2.8% from 2001 until 2006. In 2002, the Bush administration slapped import tariffs on steel and lumber and passed a bill that increased government subsidies to agriculture by $190 billion over the next ten years.39 Canada and Mexico were exempt from the steel tariff, but the U.S. imposed a tariff of an average of 29% on imported Canadian lumber, accusing Canada of subsidizing its lumber industry. The 2002 farm bill guaranteed a minimum price to growers of wheat, corn, cotton, rice and soybeans and introduced new subsidies for peanuts, lentils, chickpeas, and dairy farms.40 The bill was criticized by several U.S. trading partners, including the E.U., Canada, Australia and Brazil.41 The E.U. retaliated by increasing import tariffs of their own on steel, and the WTO declared that the steel tariff was a violation of U.S. WTO commitments. In 2004 Bush withdrew the steel tariff to avoid a trade war. And in 2006, the U.S. and Canada came to an agreement on the lumber dispute, and after several panel rulings the lumber tariff had fallen to an average of 11%.

Canada’s growth during the early 2000s was spurred by increased demand and higher prices for commodities, averaging 3.0% from 2000-2006.42 Unemployment during this time period was an average of 7.1% in Canada as well. Unemployment in Canada had persistently been higher than that of the U.S. since the 1980s.43

Felipe Calderón (2006–2012, PAN) succeeded Fox as president. Mexico joined the Pacific Alliance, an agreement integrating the major Latin American economies and opening up new trade links in the Asia-Pacific region. 44 Collaboration with the state governments was a problem for Calderón, who remarked that the “federal system does not have the incentives correctly aligned for an effective collaboration” for joint efforts.45 Calderón’s term would eventually be remembered for his use of the army against the drug lords, labeled the “Cartel Wars,” and for coping with the Global Financial Crisis.

The Great Recession The Great Recession, triggered by the collapse of the U.S. subprime industry in 2007, plunged the United States into the worst crisis since the Great Depression. More than five million jobs had been axed since the recession, coupled with a massive loss of wealth and depressed consumer confidence. The Bush administration attempted to breathe life back into the economy by pushing for a stimulus package and creating various lending programs for debt-ridden banks. The Fed dropped interest rates to near zero percent and expanded the type of assets it would buy from financial institutions in an effort to ease credit and restore confidence.

Yet as the economy showed few signs of turning around anytime soon, now, the responsibility fell on the newly elected President Barack Obama of the Democrat Party. One of his first agenda items was to push for a massive $787 billion bailout package within a month of taking over the oval office. After several compromises were made to get approval, relating to the size of the overall package and tax cuts for the middle class, the package included a “Buy American” provision, requiring the use of America- made steel and iron in certain stimulus-funded public projects.46 Although President Obama had watered down the original provision, adding that it must comply with WTO rules, the clause evoked memories of the Smoot-Hawley Tariff Act. Adopted in 1930, Smoot-Hawley raised U.S. tariffs on some 20,000 imports to record levels.

Canada, then led by Prime Minister Stephen Harper (Conservative Party, 2006–2015), was also impacted by the recession. Canada’s growth averaged -1.0% between 2008 and 2009. In 2015, the Liberal Party of Canada defeated the Conservative party, and Justin Trudeau was sworn in as prime minister

b At the time he was a member of the Alliance for Change Party, which was a political coalition formed by the PAN and the Green Ecological Party of Mexico (PVEM), though the PVEM withdrew support after Fox’s first year in office.

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https://en.wikipedia.org/wiki/Green_Ecological_Party_of_Mexico
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on November 4, 2015. Trudeau promised to boost spending, increase taxes on the wealthy, take in more refugees, and to reform the voting system.47

The crisis hit Mexico particularly hard, as NAFTA had strengthened Mexico’s economic linkages with the U.S. Mexico’s real growth rate was -6% between 2008 Q2 and 2009 Q2—the lowest in Latin America at this time—and the U.S.’ was -1.5%.48 Of Mexican exports, which were primarily manufactured goods such as cars, vehicle parts, and computers, as well as oil and oil products, silver, fruits, vegetables, coffee, and cotton, 81.0% went to the U.S., and 46.5% of Mexico’s imports came from the U.S. in 2016 (see Exhibit 8). Concerning the movement of labor between the nations, migration from Mexico to the U.S. had been at high levels between 1990 and the early 2000s. However, a report by the Pew Foundation found that net migration to the U.S. had been negative since 2009.49

The Pacto por México Enrique Peña Nieto (2012–2018) succeeded Calderon after receiving 38% of the vote, reinstating the PRI as the leadership party and promising to bring peace to the nation. 50 Peña Nieto had previously been Governor of the State of Mexico, the region surrounding Mexico City. Described as “young, telegenic and impeccably smooth,” and married to a popular soap opera star, the new president entered office with the expectation that he would rebrand the party.51 The day after Nieto was sworn into office the reform package Pacto por México, a host of long-overdue institutional reforms, was signed.52 The Pacto was the product of a cross-party meeting that obtained Congress’s approval for many structural reforms that included opening up the telecommunications and energy sectors to private investment, as well as policy changes in taxes, financial services, fiscal policy, anti- trust, poverty reduction, education, and labor markets. 53

The 2013 telecommunications reform was intended to increase competition and improve access to services throughout Mexico. It established the Instituto Federal de Telecomunicaciones (IFETEL) as a regulatory agency with the power to impose asymmetric regulations on institutions in sectors that displayed high levels of market power. Mexico’s notoriously uncompetitive telecommunications market had made Carlos Slim, owner of América Móvil, the richest man in the country and, in some years, the world.54 In March 2014, IFT named América Móvil, Televisa, and non-telecom firms Grupo Carso and Grupo Financiero Inbursa “preponderant economic agents.” IFT imposed regulations that ended Movil’s ability to charge interconnection fees to its competitors and eliminated long distance phone charges. In response to the decision, Slim promptly declared that América Móvil would divest itself of assets in an attempt to lower its market share below 50% and avoid repercussions. 55

In 2014, Mexico liberalized the energy sector, which opened the sector to investment by international oil companies and private firms in an attempt to reverse the decline in oil production by the state-owned oil firm, Pemex, and to lower the price of electricity. 56 Pemex had enjoyed a 75-year- long monopoly and accounted for one-third of Mexico’s tax revenue. 57 Pemex and the state-owned electricity company CFE lost monopoly privileges as a result of the reform but remained state-owned players in a competitive market.58 In early 2018, after a series of auctions to private and international investors and the discovery of enormous offshore oil reserves in July, 2017, Mexico’s Energy Minister announced that investment in the energy sector following the reform had reached $175 billion. 59

As the price of oil fell in the international markets in 2014 (see Exhibit 6), the government implemented a tax reform that increased the top rate from 30% to 35%, introduced a capital gains tax of 10%, and made other changes to raise tax revenues. 60 Plans to reduce public spending were carried out, and the Mexican government expected its first primary surplus in a decade in 2018.61 Standard & Poor’s and Fitch Ratings removed a negative watch on Mexico’s sovereign credit in 2017 following the recent spending cuts, the slight recovery of oil prices and an improved growth outlook. The economy grew by 3.3% in 2015, 2.9% in 2016 and was estimated to have grown at 2.1% in 2017 (see Exhibit 5).

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http://www.americamovil.com/home-page
http://www.bnamericas.com/company-profile/en/Grupo_Carso_S,A,_de_C,V,-GCarso
http://www.bnamericas.com/company-profile/en/Grupo_Carso_S,A,_de_C,V,-GCarso
http://www.bnamericas.com/company-profile/en/Grupo_Financiero_Inbursa,_S,A,_de_C,V,-Inbursa
http://www.americamovil.com/home-page
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A Quarter Century of NAFTA If trade between Canada and the U.S. is a bad idea, then there are no good ideas.

— Justin Trudeau, Prime Minister of Canada62

I think a lot of scapegoating has been done on NAFTA. The reality is, a lot of the jobs have been lost mostly to technology. And that is something that happens well beyond the reach of NAFTA or any other trade agreement.

— Luis Videgaray, Mexico’s Secretary of Foreign Affairs63

I think it’s possible [to] take a little bit of the sugar away and have them still say we’re doing pretty well

— Robert Lighthizer, U.S. Trade Representative64

In the twenty-six years since NAFTA took effect, regional trade more than tripled between the three nations, and investment between the countries increased dramatically. The agreement also facilitated integration between the three nations’ supply chains: one estimate found that 25% of Canadian goods imported to the U.S. was actually U.S. content, as was 40% of goods imported into the U.S. from Mexico.65 In comparison, U.S. imports from China were estimated to have only 4% U.S. content. 66 Autos manufactured in North America and sold in the U.S. were found to have U.S. content of between 47% and 85%.67

While many economists noted that the gains from NAFTA were spread throughout the economy and were therefore hard to measure, the costs tended to be concentrated in certain industries, and were therefore easier to pinpoint and publicize. One estimate of the accord’s impact on the three nations found that it increased Mexico’s welfare by 1.31%, decreased Canada’s welfare by .06%, and increased the U.S.’ welfare by 0.08%.68 However, the overall economic impact of the agreement is difficult to disentangle from other factors, such as inflation, changes to the exchange rate, Mexico’s other trade liberalization policies, and domestic and international shocks (see Exhibit 9 for social indicators).

Mexico

The period after NAFTA saw a fivefold increase in trade between Mexico and the U.S., and an eightfold increase in trade between Mexico and Canada (though from a much lower initial level). 69 NAFTA reduced the risk of Mexico’s trade liberalization being reversed, and thereby led firms to be more willing to invest in the nation. 70 Mexico became the U.S.’ second largest trade partner in 2001, though China would soon surpass both Mexico and Canada as the U.S.’ top trade partner. Mexico was highly reliant on exports following its liberalization, and by 2017 Mexico’s exports were nearly 39% of GDP. Furthermore, 81% of Mexico’s exports went to the U.S. Hundreds of thousands of car manufacturing jobs were created in Mexico, and one study found the heightened trade integration led to an increase in Mexican plant productivity. 71

Mexico’s GDP per person, however, grew slower than that of other Latin American countries while the nation’s poverty and unemployment rates rose and real wages stagnated.72 Certain regions in Mexico, such as the border-state of Nuevo Leon and Mexico City, experienced high growth and investment rates post-NAFTA, leading some to believe that the agreement led to a two-speed economy within Mexico. The four areas with the highest levels of GDP (Mexico City, Mexico State, Nuevo León, and Jalisco) accounted for 40% of the national GDP and 33% of the population. 73 The northern states tended to be more prosperous and had better infrastructure; the richest neighborhood in Mexico was San Pedro Garza Garcia in Monterrey.74 A 2008 study found that 12% of people in the rural north were extremely poor, compared to 47% in the rural south. 75 GDP per capita had increased by 39% since

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NAFTA was initiated in the central and northern states, but it had remained almost unchanged in the southern regions.76 In terms of attracting FDI, the cities of Mexico City, Monterrey, Querétaro, Guadalajara, and Tijuana were the most successful in 2014 (see Exhibit 10a for regional FDI). 77

Industrial specialization patterns varied across the country. The manufacture of cars, airplanes, electric goods, and electrical equipment (categories that together accounted for two-thirds of Mexico’s manufacturing exports) largely occurred in the northern and central states (See Appendix B for a description of the automotive cluster in Nuevo León).78 Commercial agricultural products mostly came from the tropical regions of the Gulf Coast and Chiapas Highlands, the irrigated lands of the Northwest, and the Bajío region in the central area.79 Maquiladoras blossomed in the border states, while oil production was prevalent in the southern part of the country. Mexico’s agricultural exports to the U.S. more than tripled following the agreement, but approximately 2 million small farms went out of business. 80 But the nation had implemented unilateral agricultural reforms in the early 1990s, such as eliminating state enterprises related to agriculture and removing staple price supports and subsidies, which may have facilitated these developments as well.81

NAFTA helped give U.S. and Canadian investors nondiscriminatory treatment of their investments and investor protection in Mexico, and FDI from the US to Mexico increased 587% from a stock of $15.2 billion in 1993 to $104.4 billion in 2012, and then fell to $87.6 billion in 2016 (see Exhibit 11 for Doing Business Indicators).82 Approximately half of FDI investment in Mexico was in the manufacturing industry (see Exhibit 10b). Mexico’s stock of FDI in the US also increased, rising 1,300% from $1.2 billion in 1993 to $16.8 billion in 2016. One observer noted that NAFTA “created a somewhat seamless supply chain — a North American supply chain that allowed North American auto companies to be more profitable and more competitive.” 83

Concerning the environment, Mexico received 47 of the 91 complaints to the Commission for Environmental Cooperation (CEC) by 2018. Canada was the recipient of 31 and the U.S. 13.84 As maquiladora c employment boomed after the agreement, pollution in Mexico, particularly along the U.S. border, worsened. One report found that only 12% of the hazardous waste produced in the maquiladoras was properly treated in 2004.85 In terms of labor, the North American Agreement on Labor Cooperation (NAACL) had issued 23 reports on labor complaints from the three nations. Of these reports, 15 reports concerned complaints by the U.S. and Canada, mostly relating to labor conditions in Mexico. 86 The Sierra Club, an environmental organization, stated that NAFTA had “created a legacy where corporate profits are promoted at the expense of environmental safeguards, health protections, and workers’ rights.”87 But others believed that NAFTA had resulted in increased environmental standards. One report observed that “NAFTA has brought the environment into the mainstream in Mexico . . . to be taken seriously,” and that the agreement spurred Mexico to pass environmental laws similar to those in the U.S. and Canada.88

Mexico also had maintained its trajectory of opening up to trade following NAFTA, and by 2017 the nation was party to 11 free trade agreements involving 46 countries. As one of the most trade- friendly nations in the world, Mexico had agreements with the majority of the countries in the Western Hemisphere, as well as Israel, Japan, and the E.U.89

c Maquiladora’s were factories located near the U.S.-Mexican border that received tax advantages and primarily imported parts, manufactured them in Mexico, and exported the final product. The parent company was usually located in the U.S.

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http://www.britannica.com/place/Gulf-Coast
http://www.britannica.com/place/Chiapas-Highlands
http://www.britannica.com/place/Bajio
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Canada While Canada already had increased trade with the U.S. due to CAFTA, U.S. and Mexican

investments in Canada tripled after 1993. Canadian exports of goods to the U.S. grew from $110 billion to a high of $349 billion in 2014, though they had fallen to $297 billion by 2016. U.S. exports to Canada grew by a similar amount.90 Canada’s agricultural sector was particularly impacted, as Canada became the top importer of U.S. agriculture products and Canada’s total agriculture exports to the U.S. and Mexico more than tripled.91 However, trade with Mexico remained relatively low. Canadian employment in manufacturing remained about the same, but productivity lingered at approximately 72% of U.S. levels.92 One observer remarked that “free trade helped Canada to grow up, to turn its face out to the world, to embrace its future as a trading nation, [and] to get over its chronic sense of inferiority.” 93 However, following the global financial crisis, the auto manufacturing sector in Canada stagnated. No new auto assembly plant in Canada was opened since 2009, and Canada’s share of North American vehicle output fell to 14%.94

The U.S. became the largest investor in Canada, with U.S. FDI into Canada rising from a stock of $70 billion in 1993 to $353 billion in 2015.95 The majority of Canada’s FDI went to the U.S., rising from a stock of approximately $27 billion in 1988 to $269 billion in 2015.96 Most FDI in Canada went to the manufacturing sector and the mining and hydrocarbon sector. 97

A number of disputes arose concerning Canada’s environmental regulations, and Canada became the most-sued developed nation under free trade tribunals. 98 By 2015, Canada had lost or settled 6 claims (of the 35 filed) under the Chapter 11 clause and paid $170 million in damages, while Mexico lost 5 cases and the U.S. won 11 cases. 99 The U.S. had never lost a NAFTA Chapter 11 investor-state case. Yet Canada had won victories through Chapter 19 dispute panels, which had led to a reversal of tariffs repeatedly imposed by the U.S. on lumber imports from Canada. In 2018, Canada filed requests for Chapter 19 panel review after the U.S. imposed a duty of 300% on Canadian Bombardier aircraft imports and average duties of 20% on Canadian lumber, which the U.S. claimed was subsidized. 100 The U.S. also complained about Canadian dairy protections, such as quotas on milk production and regulated pricing, believing that they undercut imports from the U.S. But a Canadian ambassador stated that financial losses for U.S. dairy farmers were “due to U.S. and global overproduction.” 101

The United States

U.S. trade with Canada and Mexico tripled after NAFTA’s implementation, and the two nations accounted for more than a third of U.S. exports. Many estimates found that the deal had a small but positive effect on the U.S. economy, adding several billion dollars of growth per year (to a total of $80 billion on full implementation – a fraction of the U.S.’ GDP).102 U.S. agricultural exports to Mexico increased fivefold after NAFTA’s enactment. 103 U.S. companies moved production to Mexico to lower costs, in particular in sectors such as automobile manufacturing. Some believed that these American workers were not properly retrained, and Nobel Laureate Joseph Stiglitz noted that “two decades on there’s been long-term damage. The workers who should have been retrained 15 years ago are not going to be easily retrained today.”104

Proponents of the agreement argued that 14 million U.S. jobs relied on trade with Canada and Mexico, and that export-related jobs paid 15-20% more, on average, than the jobs that were lost due to the pact. One study found that the U.S. lost a net 15,000 jobs annually due to NAFTA, but that for each job lost the U.S. economy gained about $450,000 from higher productivity and lower prices. 105 And, while jobs were lost in the U.S. auto sector, some argued that NAFTA had increased the global competitiveness of that sector, as the integrated markets and supply chains lowered auto costs and

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increased productivity. 106 Many vehicles in the United States were manufactured in Mexico, like the Ram Heavy Duty pickup truck and Ford Fusion, while Dodge Challengers and Chevrolet Equinoxes were assembled in Canada.107 Experts noted that increased scale and efficiency led to gains from trade in the form of more products and more varieties of products (intermediate and final goods) while fostering value chains. Recent research had found that international trade led to reductions in prices, in particular of imported manufacturing inputs, thus raising the cost-competitiveness of U.S. manufacturing firms. Related research found that because cheaper foreign goods were available as inputs, such imports also helped to increase the number of non-manufacturing jobs. 108

However, as the U.S. trade surplus with Mexico morphed into a rising trade deficit (although the U.S. had a surplus in services with Mexico, and an overall surplus in trade of goods and services with Canada), and as U.S. unemployment rose during the GFC, citizens and politicians began to put increasing blame on the agreement for the woes of the U.S. economy. Previous anti-trade demonstrations such as the 1999 Seattle WTO protest had concerned the environment, labor issues, and the treatment of developing countries. But the U.S. had been at full employment in 1999.

NAFTA again became a political issue. Barack Obama declared that “NAFTA’s shortcomings were evident when signed and we must now amend the agreement to fix them,” and detailed revision plans during his campaign. However, after he was elected, the agreement was not revised. The administration instead joined negotiations for the Trans-Pacific Partnership (TPP) trade agreement, which one source described as a sort of “renegotiation of NAFTA.” 109 The TPP would have been the largest regional free trade agreement in history between the United States and 11 other Pacific Rim nations, and it included binding labor and environmental standards, reformed dispute settlement, and included provisions relating to the digital economy and state-owned enterprises.110 The TPP became a hallmark of the Obama administration, and was part of his foreign policy “pivot” to bind Pacific nations together and buttress against China’s growing influence.111 In fact, China, after joining the WTO, had displaced Canada and Mexico as the U.S.’ largest supplier in 2007 (see Exhibit 12).112

The Trump Shock Trump was elected President of the United States in November, 2016, and one of his first actions

was to withdraw the U.S. from the TPP. While Trump reneged on his plan to terminate NAFTA after receiving pressure from U.S. businesses and speaking with the heads of Mexico and Canada, he did initiate a renegotiation of the deal, though he kept his threat alive, declaring that if “I’m unable to make a fair deal for the United States . . . I will terminate NAFTA.”113 However, some thought that Trump’s repeated threats were a negotiating tactic to ensure that the U.S. had the upper hand in the trade talks.

During the 2016 U.S. presidential elections, the nominees of the major parties had expressed their disapproval of both the TPP and NAFTA (see Exhibit 13 for public opinion). Hillary Clinton, the Democratic presidential nominee, declared that NAFTA “had not lived up to its promises” and supported its revision.114 The Republican nominee, Donald Trump, had insulted Mexico throughout his campaign, and promised to build a “great wall” between the two countries—with Mexico receiving the bill. In 2015, 11.6 million Mexican immigrants were living in the U.S., accounting for 27% of all U.S. immigrants.115 However, while the number of Mexicans apprehended along the border was in the millions in the early 2000s, they had fallen to 408,870 in 2016.

Perhaps a more realistic threat was Trump’s intention to undo NAFTA, which he stated he would “end up probably terminating.” 116 While Trump repeatedly proclaimed that the free trade agreement had harmed US workers as Mexicans benefitted, many economists argued that increased competition with China after 2001 and technology advances had a more severe impact on U.S. job losses than

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NAFTA.117 However, if trade with China had cost the U.S. 2.4 million jobs between 1999 and 2001, and if NAFTA had cost 1 million U.S. jobs since implementation, this was a mere fraction of the 21 million workers laid off each year in the U.S.; one study found that the 13-year “China shock” eliminated as many jobs that are cut every 41 days in the U.S., on average.118 Furthermore, the lack of government retraining programs and educational system shortcomings may have also hindered U.S. workers. While U.S. manufacturing employment decreased slightly, overall employment increased by 26% between 1993 and 2017, mostly due to an increase in service jobs (see Exhibit 14).

Negotiations began in August 2017, and the main negotiators were Canada’s Foreign Affairs Minister, Chrystia Freeland, Mexico’s Economy Minister Ildefonso Guajardo, and U.S. Trade Representative Robert Lighthizer. The discussions included updating the agreement by creating new regulations for digital trade and telecommunications, updating the customs process, and aligning regulations between the countries (see Appendix C for US objectives).119 They also included potential revisions to dispute resolution, rules of origin, and an expiration date for the deal. One observer in favor of revising NAFTA stated that “the first NAFTA, it was like the 1974 Corvette” and that the new agreements would be “like the Tesla.”120

The Trade Debate

Evaluating the gains and losses from trade and trade agreements was an increasingly debated topic. Historically, U.S. trade policy had the goal of raising revenues by levying duties on imports and then restricting imports to protect domestic producers, though it evolved to negotiating reciprocal agreements to reduce trade barriers and expand exports.121 As the real wages of less skilled workers in the U.S. declined and income inequality increased many blamed trade. As economists had noted, while nations could gain overall, trade could have strong effects on the distribution of income. In particular, trade could negatively affect workers in industries and firms that compete with imports. However, nations could impose compensatory policies to address adverse consequences. These policies could be implementing safety nets such as income support programs (unemployment benefits) and retraining and relocation programs. Whether these policies were politically feasible was a more complicated story. Christine Lagarde, the head of the IMF in 2018, declared that “trade drives growth, innovation, productivity—but [we] need policies to ensure everyone can benefit.” 122

Technological progress, changes in consumer patterns and preferences, and the discovery of new resources all affected the distribution of income, not just trade. One study found that the U.S. manufacturing sector had become more capital and skills intensive since 2000, and that while the sector had experienced a decline in workers it had not witnessed a real decline in output.123 Further, the mobility of labor in the U.S. across regions had fallen, and Americans were also less likely to move across regions due to changes in labor market conditions. 124 Therefore, trade policy might not have an impact on the manufacturing labor market, particularly for less-skilled workers. A policy of preventing distributional effects, some argued, might limit economic progress.

Others noted that quotas and tariffs were more commonly used than direct policies because they tended to have less visible costs, mostly in the form of higher prices, as opposed to the visibility of government outlays and transfers. Supporters of trade believed that protectionism was driven by interest groups and lobbyists. Some noted that “most deviations from free trade were adopted not because their benefits exceed their costs but because the public fails to understand their true costs.” 125

Trade might have adverse effects on developing countries, if not managed correctly. As trade agreements became increasingly detailed in the 21st century, and included clauses on intellectual property, regulations, and finance, among others, some worried that certain interest groups, such as

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banks, could manipulate them to their advantage. 126 Joseph Stiglitz, a prominent economist, noted that “We could have managed globalization in ways that ordinary citizens would have benefited rather than just the corporations. Trade is beneficial. There are gains to be had from taking advantage of comparative advantage and specialization . . . if you manage globalization right.”127

Trade Negotiations

The first round of negotiations began on August 16, 2017, and while seven rounds of discussions were planned, progress stalled, and the rounds were extended into 2018. Trump hoped to come to an agreement by May 2018, which would give the deal time to be approved by the Republican-led Congress before the November elections, but negotiations were far from finalization by the deadline. Mexico also wanted a quick deal, as presidential elections were to be held in July, 2018. By April, 2018, negotiations on only 7 of the 30 chapters had been finalized.128 Several U.S. demands were unpalatable to the Mexican and Canadian governments. A five-year sunset clause, which would terminate the deal upon expiry, was one of the most problematic suggestions. Canada and Mexico proposed that the deal instead be reviewed every five years. Another controversial idea was to increase the percent of a vehicle that came from NAFTA members to 85% from 62.5%, and that 50% of it be U.S. content. This could lead to car manufacturers bypassing the deal and subjecting themselves to the 2.5% tariff on American car imports, leading to increased prices.129 The U.S. lowered its regional content proposal from 85% to 75% and dropped the 50% U.S. content requirement in April 2018, but floated the idea of requiring 40% of automotive production to pay wages of $16-$19 per hour (see Exhibit 15).130

Further disagreements arose concerning U.S. proposals for government procurement and dispute resolution. The U.S. wanted to ensure reciprocity in market access opportunities for U.S. contractors in Canada and Mexico, but this could hinder Canadian and Mexican entities’ ability to access U.S. government procurement opportunities. 131 Mexico suggested that reciprocal treatment be based on the percentage of contracts, rather than the dollar amount, held by foreign entities. Additionally, the U.S. proposed revisions that would render the existing dispute resolution mechanisms under Chapter 11 optional or nonbinding. 132 The U.S. also wanted to eliminate Chapter 19 of NAFTA, a move that Canadian Prime Minister Justin Trudeau warned would be a deal breaker in the negotiations.133

The U.S. also linked the negotiation of NAFTA to food labeling and immigration. Both Canada and Mexico were considering putting health food warnings on products that contain high levels of salt, sugar, calories, and saturated fats in an effort to curb obesity. The U.S. proposed that the NAFTA signatories do not adopt front-of-package warnings, saying they might “inappropriately denote that a hazard exists from consumption of the food” and that they were “protectionist.” 134 Additionally, Trump tied the negotiations to immigration to the U.S. through Mexico, tweeting that “Mexico, whose laws on immigration are very tough, must stop people from going through Mexico and into the U.S. We may make this a condition of the new NAFTA Agreement.” 135 Mexico’s Foreign Minister Luis Videgaray responded that Mexico decided its immigration policy in a sovereign manner and that it was “unacceptable” to condition NAFTA’s renegotiation. 136

Continuing with his protectionist policies, Trump announced tariffs of 30% (though they would eventually be lowered to 15%) on solar panels and a 20% tariff on the first 1.2 million imported washing machines, and a 50% tariff on those thereafter, in January, 2018. He announced tariffs of 25% on steel and 10% on aluminum imports in March of 2018, though he temporarily exempted Canada, Mexico and the E.U. pending the outcome of NAFTA negotiations. Following the announcement, Trump tweeted that “trade wars are good, and easy to win” and described the measures as “vital to our national security”—even though most U.S. steel imports came from allies.137 He also declared that further trade policy changes were coming.138 In May, 2018, Trump announced that Mexico and Canada

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(along with the EU) would be no longer be exempt from the steel and aluminum tariffs, due to lack of progress in NAFTA negotiations, and hinted that he might pursue two separate deals. Trudeau responded by imposing tariffs on $12.8 billion worth of US goods and declared that the legal basis of the tariffs was an affront to Canadian soldiers who died alongside Americans in many global battles. 139 Mexico also imposed retaliatory tariffs. Regarding Trump’s increased protectionism, Stiglitz remarked that “we created now efficient global supply chains and destroying those global supply chains is going to be just as disruptive . . . American workers are going to be worse off once again.”140 As trade increasingly involved intermediate goods (intermediate goods accounted for two-thirds of trade), the impact of tariffs was more complex. 141 Some thought tariffs on intermediate goods might only result in higher prices, not increased production, as they would increase firms’ production costs.

In response to the steel and aluminum tariffs, China stated that it would impose tariffs on 154 American products such as wine and pork. On April 3, 2018, Trump announced $60 billion worth of annual tariffs on 1,300 Chinese products, including televisions and aircraft parts, purportedly in retaliation for intellectual property theft and unfair trade practices. The Chinese Embassy in the U.S. released a statement condemning the move, declaring that it “serves neither China’s interest, nor U.S. interest, even less the interest of the global economy,” and that China would resort to “measures of equal scale and strength.”142 As onlookers worried about a pending trade war, China’s Ministry of Commerce retaliated by stating it would impose tariffs of 25% on 106 U.S. products worth $50 billion, including soybeans and automobiles, on April 4th.143 On April 5th, Trump responded by threatening additional tariffs of $100 billion on Chinese goods while stating that China’s retaliation was “unfair.”144

After the U.S. failed to meet its May, 2018 deadline for the negotiations, Trump began threatening to impose tariffs on auto imports, due to national security. As the U.S.’ political rhetoric became increasingly protectionist, Canada and Mexico were strengthening their free trade agreements with other nations. Canada had finalized an extensive free trade agreement with the E.U., the Comprehensive Economic and Trade Agreement, which eliminated 98% of the tariffs between Canada and the E.U. and was implemented in 2017. The E.U. was the second largest market for Canadian exports, though Canada’s exports to the E.U. were a fraction of those to the U.S. Similarly, Mexico chose to pivot its economy away from the U.S. Mexico and the E.U. revised their 1997 trade agreement in 2018, eliminating almost all tariffs between the nations. It allowed companies in the E.U. and Mexico to bid for government contracts abroad and outlined labor and environmental safety standards. The president of the European Commission stated “with this agreement, Mexico joins . . . the growing list of partners willing to work with the E.U. in defending open, fair and rules-based trade.”145

Canada and Mexico both signed a revised TPP, renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in March 2018, following the U.S.’ withdrawal. The agreement created the third largest trade bloc in the world, following the E.U. and NAFTA, but it had not yet been ratified. But, while Mexico was trying to diversify away from the U.S., the nation remained dependent on the U.S. as its top export destination.

As the nations worked to update the agreement, studies found that the majority of citizens in all countries supported NAFTA. According to a Pew Research Center Survey, most Americans (56%) thought NAFTA had been good for the U.S., with 30% believing that Mexico benefitted more than the U.S. (20% thought Canada had benefitted more). 146 Yet when taking into account political orientation, the majority of Republicans (54%) thought NAFTA was a bad deal for the U.S., while 72% of Democrats believed it was a good deal. 60% of Mexicans and 74% of Canadians believed NAFTA had been good for their country. 147

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https://en.wikipedia.org/wiki/Comprehensive_and_Progressive_Agreement_for_Trans-Pacific_Partnership
https://en.wikipedia.org/wiki/Comprehensive_and_Progressive_Agreement_for_Trans-Pacific_Partnership
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The López Obrador Shock Neither Mexico nor its people will be the piñata of any foreign government.

— Andrés Manuel López Obrador148

Public approval of Peña Nieto had fallen to 28% in 2017—the lowest level since his Assessments began in 2011—due to the struggling economy and increase in corruption and drug violence, and support began growing for Andrés Manuel López Obrador of the MORENA Party. 149 As Peña Nieto struggled to defend Mexico’s dignity in the face of Trump’s insults, the economy was suffering from inflation, stagnant growth, and a currency that plummeted after Trump threatened trade between the two nations. Some worried that investment in Mexico would fall due to increased uncertainty.

López Obrador had been the mayor of Mexico City between 2000 and 2005, and had enjoyed high levels of popularity during his tenure—by 2005 his approval ratings were at 84%.150 He was a leftist politician, described as a populist, who had run for president twice before. In 2006, López Obrador ran for president as a member of the leftist Coalition for the Good of All, but lost to Calderon of the PAN by less than one percentage point. After losing, López Obrador led protests and even held an inauguration ceremony to declare himself the real leader of Mexico. In 2012, he ran for president again, representing the PRD, but the nation elected Peña Nieto of the PRI with 38% of the vote. López Obrador received 31%. After the major parties in Mexico signed the Pacto Por Mexico, López Obrador left the PRD and created the MORENA party, which was legally established in 2015.151

López Obrador announced his third run for the Mexican presidency in 2017 as the head of the MORENA party, and his campaign included cracking down on corruption, using the money saved to fund massive infrastructure projects and revive Mexico’s agricultural sector, and reforming fiscal policy without raising taxes. His platform also entailed providing free access to telecommunication services and doubling the pension for the elderly, but his proposed increases in social spending led some to worry that investment in productive activities would fall. 152 Additionally, he threatened to undo the energy reform enacted as part of the Pacto, although he later softened his rhetoric and stated that he would only review the over 100 contracts already granted for signs of corruption.153

His reputation as a leftist populist might have harmed his prior attempts at the Mexican presidency, but it appeared to strike a chord with the Mexican public following the U.S. election of Donald Trump. Mexicans’ opinion of the U.S. fell dramatically between 2015 and 2017—in 2015, 66% of Mexicans approved of the U.S., but by October 2017 this had fallen to only 30%.154 An outspoken critic of Trump, López Obrador declared that “without being disrespectful, we’re going to put him in his place,” and that he would turn to the United Nations if Trump built his promised border wall.155 Many believed that his election would increase tensions between Mexico and the U.S.156 The prospect of his presidency caused Mexican companies to delay investment and cut costs to protect against future volatility. 157 On July 1, 2018, Obrador won the presidential election by a landslide.

Concerning NAFTA, López Obrador initially stated that the negotiations should be suspended until after the July 1st election, and that he would renegotiate any deal that harmed Mexico’s interests if he won. 158 His team supported NAFTA, but wanted to make Mexico more self-sufficient in gasoline and agricultural products such as corn. 159 He also wanted the agreement to help increase wages in Mexico, but this was opposed by many Mexican businesses. 160 Graciela Marquez, a Harvard PhD who would be López Obrador’s economy minister, stated in the spring of 2018 that NAFTA was a valuable part of Mexico’s economy and that she would not start over on the work that was done to update it prior to the election. Furthermore, if a deal was reached prior to the elections, she stated that Mexico would not reopen talks to renegotiate or seek to include new items.161

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https://en.wikipedia.org/wiki/Coalition_for_the_Good_of_All
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In 2018, countries proposed the USMCA, of which Obrador appeared to be more supportive than of the old NAFTA. According to Jesús Seade, who represented López Obrador on the Mexican negotiating team, “…the agreement looks to be very good for Mexico.” Obrador’s foreign minister highlighted the stability that the new deal brought to Mexico’s economy, stating that “The culmination of this negotiation process promotes certainty in the financial markets and investment and job creation in our country.” 162 Stability was indeed important for Obrador’s Administration, which had received severe criticism for creating lack of certainty in investments. For example, Obrador incited uproar in October 2018, when he announced a decision to scrap the construction of a $13 billion airport. One third of the airport had already been built, raising concerns that the canceled airport would signal that investments would not be guaranteed by Obrador’s government.

The US-Mexico-Canada Agreement (USMCA): Looking Ahead

On November 30, 2018, the three countries signed an agreement that partially updated the 25- year-old NAFTA. The new agreement was signed as part of the G20 summit, and created stricter requirements for environmental policies and wages, encouraged digital trade, and curbed state-owned enterprises. The following day, López Obrador was inaugurated as Mexico’s new president.

The new agreement made significant changes to the auto and dairy industries, instigating the nickname of “the cows and cars deal”. The deal raised concerns for particularly the auto industry as it pressed additional requirements in the U.S. to qualify for NAFTA’s low tariffs.163 In order for automobiles to qualify for zero tariffs, the percentage of components that must be manufactured in one of the USMCA countries increased from 62.5 to 75. These fears precipitated when General Motors announced intentions to close five automotive plants, partially attributing this decision to expensive tariffs on steel imports under the Trump Administration. The agreement also increased US access to Canada’s dairy market by 3.6%; while the Canadian government promised its farmers compensation for this loss of market share, details were not made public.

Labor provisions and the length of intellectual property rights increased under the new agreement. Compared to NAFTA terms, workers gained greater protections and, in some cases, higher guaranteed minimum pay. A contested issue within intellectual property involved the length of time that pharmaceutical companies could hold patents on biologics. The US and Canada agreed to a 10- year term, which meant cheaper, generic biologics would be delayed by two years in Canada compared to its previous laws. The USMCA also eliminated the investor-state dispute resolution mechanism (ISDS) between Canada and the United States. This meant that private corporations could no longer take legal action against a foreign USMCA government if they believed policies infringed on their rights to engage in commerce under NAFTA terms. This change was considered a win for Canada, which had paid more than $300 million to U.S. corporations through ISDS resolutions under the NAFTA. USMCA would remain in effect for 16 years, with a review and potential extension of the agreement after the first six years.

USMCA faced a lengthy process of ratification. All three countries needed to ratify the deal through legislation, which could take months. Shortly after leaders had agreed on the pact, the midterm elections turned over the U.S. House of Representatives to a Democrat majority, raising questions about the House’s future support of President Trump’s new deal. The private sector worried about the ramifications of heightened uncertainty, especially as the three economies had increasingly intertwined supply chains. Citizens of all nations wondered what the impact would be on price levels, product quality, and overall standards of living. Many worried that increased nationalism and the resulting political pressures could lead to hasty decisions with unforeseen consequences.

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On May 29, 2019, Canada tabled the bill to ratify the USMCA. On June 16, 2019, Mexico fully ratified the agreement with an overwhelmingly positive vote of 114 to 4. House Speaker Nancy Pelosi established a sub-committee to work with the Office of the United States Trade Representative to modify the agreement in a way that would meet Democrats’ demands for stronger labor and environmental rules. The USMCA underwent significant changes, including higher thresholds for the amount of a car that must be made in North America to void tariffs, arbitration for corporations, and provisions to prevent labor violations. 164

In December 2019, Trump was accused of seeking re-election help from Ukraine’s government and, after the White House did not allow staff to testify, was further accused of obstructing Congress. 165 Despite the scheduled impeachment trial in January 2020, the USMCA was approved by the Senate with a 89 to 10 vote on January 16, 2020. The approval came the day after Trump signed a trade deal with China, reflecting two large trade wins for the president despite his impeachment proceedings. The USMCA continued to face criticism, particularly over inadequate considerations for climate change, and it remained up to debate whether the benefits of the new NAFTA or its predecessor outweighed the harms.

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Exhibit 1 Map of Mexico

Source: M. Angeles Villarreal, “NAFTA and the Mexican Economy,” Congressional Research Service, June 3, 2010, page 20.

Exhibit 2 NAFTA Timeline

Source: Adapted from James McBride and Mohammed Aly Sergie, “NAFTA’s Economic Impact,” Council on Foreign Relations backgrounder, October 4, 2017.

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01 8.

For the exclusive use of y. wu, 2021.

This document is authorized for use only by yanxing wu in Intl Business Strategy – Spring 2021 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona from Jan 2021 to May 2021.

31 8-

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