NAFTA Series Part I: What Is It And Why Should We Care?
It would take a heavy dictionary to assemble all the acronyms used by the plastics industry – ABS, PE, PP, SAN, REACH, RoHS…. Until the last U.S. national election, NAFTA was not among them. Now it’s a source of daily discussion as well as headlines in the trade and national press. This is the first in a series of posts on NAFTA, the world’s most significant trade agreement – its history, the current negotiations, and the significant stakes for the plastics industry on the outcome of those negotiations.
HISTORY
Ronald Reagan was the first to campaign for a North American common market. Two presidents and years of negotiations later, the North American Free Trade Agreement (NAFTA) was ratified in late 1993 by Bill Clinton. It went into effect on Jan. 1, 1994, superseding a free trade deal the U.S. had signed with Canada in the 1980s.
NAFTA is a trilateral deal among the U.S., Canada and Mexico. It unites three of the world’s top 15 economies to form one of the largest trading blocs, comprising almost 30 percent of the world’s GDP and seven percent of the world’s population. Its primary goals were to eliminate trade barriers, increase business investment, and help North America become more competitive in the global marketplace.
How has it done?
Eliminating Trade Barriers
Before NAFTA, the U.S. and Canada already had a free trade agreement, the Canada-United States Free Trade Agreement (CUSFTA), signed in 1987, which eliminated prior tariffs between the countries. However, tariffs existed between the U.S. and Mexico, with Mexican tariffs on U.S. imports 250 percent higher than U.S. tariffs on Mexican imports. Since the removal of these tariffs, U.S. trade with Mexico has increased eightfold, with a staggering 80 percent of Mexican exports now going to the U.S.
Increasing Investment
Before NAFTA, Mexico had already seen a big increase in foreign investment. The U.S. was the largest of these investors and contributed more than $11.6 billion to Mexican industrial projects in the late 80s and early 90s.
At the time, however, Mexico’s political situation was unstable, and it needed a way to protect existing foreign investors and encourage future investments. NAFTA provided this security by creating fair treatment rules and dispute resolution mechanisms. Now, more than 50 percent of Mexico’s foreign investment comes from the U.S..
Global Competition
NAFTA was a way to keep North America competitive in the global market. On passage, it was the world’s largest trade deal. Today, it competes with other large markets, such as the European Union, the recently signed Trans-Pacific Partnership (TPP), which the U.S. opted out of, and the economy of China.
RESULTS
More than 14 million jobs depend on the [NAFTA] deal, with nearly 200,000 jobs created annually because of it.
NAFTA has been successful in each of its objectives. Trade among the U.S., Canada and Mexico has quadrupled since 1994. Some research indicates that more than 14 million jobs depend on the deal, with nearly 200,000 jobs created annually because of it. And North American supply chains have become deeply integrated since the deal’s Inception – including the plastics industry.
PLASTICS
NAFTA has been particularly impactive in the U.S. plastics industry. In 2016, the industry registered a trade surplus of almost $750 million dollars with Canada and more than $10 billion with Mexico, the U.S.’s largest merchandise trade surplus with any country. As the Plastics Industry Association [PIA] writes, “it’s not a stretch to say that these surpluses are the direct result of the market access provided by NAFTA.”
U.S. plastics trade with Mexico largely consists of supplying technology-intensive components, materials and equipment to labor-intensive Mexican factories for assembly. The resins category of plastics leads in this regard, with a U.S.-Mexico surplus of more than $6 billion. Current trends predict even greater Mexican demand for high-tech equipment – packaging, recycling, molding, and 3D printing equipment, for example – in the coming years.
In contrast, 93 percent of Canadian plastics exports go to the U.S. The Canadian Plastics Industry Association attributes this to the “extremely high level of integration between supply chain members in the North American plastics market,” which “relies extensively on NAFTA.”
CONCLUSION
Research suggests that the U.S. alone would see more than $15 billion of plastics export growth to Canada and Mexico by 2025 if NAFTA remains in effect…
Through supply chain integration, increased market access, and rules for the treatment of investors and trade, NAFTA has been critical for the growth of the North American plastics industry. Research suggests that the U.S. alone would see more than $15 billion of plastics export growth to Canada and Mexico by 2025 if NAFTA remains in effect, and less than half that growth if NAFTA were repealed.
But that is a topic for our next installment (NAFTA Series Part II: The Current Debate), which will focus on the current debate surrounding NAFTA. As American, Canadian and Mexican trade representatives continue their talks to renegotiate the deal, we’ll take a look at what these changes might be and how they might affect the North American plastics industry.
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