Commentary: Agriculture, automobiles, and railroads. These iconic industries have played a major part in making the U.S. a global, economic superpower. Each of these sectors is carefully following the North American Free Trade Agreement (NAFTA) renegotiations that just completed a sixth round in Toronto, Canada, and each has become more and more vocal about the value of NAFTA to their future welfare. NAFTA was designed to reduce tariffs on products traded among the three North American neighbors, and to enact provisions such as requiring a certain percentage of North American content into products traded in North America in order for them to enjoy lower or zero tariffs.
From a trade standpoint, NAFTA has been successful. Since it was implemented in 1994, NAFTA has helped increase trade between Canada, the U.S., and Mexico from $290 billion to $1.1 trillion in 2016. Agricultural and automotive are two sectors that have been instrumental in driving the increase. In late December, governors from the states of Iowa, Arkansas, Michigan and Tennessee traveled to Washington, D.C. to meet with Vice President Mike Pence, Secretary of Commerce Wilbur Ross and Secretary of Agriculture Sonny Perdue to discuss the importance of NAFTA to their farmers. Governor Kim Reynolds of Iowa stated, " If the U.S. chooses to pull out of NAFTA, we will be one of the first causalities that would happen. We're going to hold them accountable, and we're going to continue to have the conversations that we need to. We could potentially lose all of the opportunities that we would see from the tax bill with the uncertainty that it would bring from the investment community if we withdraw from NAFTA."
The U.S. agricultural sector exported approximately $43 billion to its NAFTA neighbors in 2016 – a 450 percent increase since NAFTA was implemented. It is estimated that exiting NAFTA could cause a loss of 50,000 U.S. jobs and a $13 billion drop in GDP from decreased agricultural revenues. Ironically, each of the states that took the trip to Washington, D.C. to lobby for NAFTA were states that President Donald Trump won in the 2016 presidential election as he bashed NAFTA as the “worst agreement ever.” They are now scrambling to become an influential force in attempting to preserve the agreement.
According to a November op-ed penned by Mitch Bainwol, President and CEO of the Alliance of Automobile Manufacturers, U.S. companies exported more than $30 billion in automotive parts to Canada and more than $29 billion to Mexico in 2015. He states that “U.S. auto manufacturing is an international endeavor, with a supply chain stretching around the globe. The industry’s competitiveness hinges on its integrated NAFTA supply chain, through which vehicle components cross the Mexican and Canadian border duty-free, most often by freight rail, as many as eight times in the vehicle assembly process.” Therefore, NAFTA is a critical factor in this supply chain. According to Bainwol, “The tariff would incentivize automakers to produce goods outside of North America. It would also cause automobiles produced in Mexico and Canada to be more competitive in global markets than cars produced in the United States. Under such scenarios, the U.S. would be less able to compete with Asian and European companies.”
The Alliance is strongly against the Trump administration’s NAFTA renegotiation demands that the amount of NAFTA content in North American autos be increased from 62.5 percent to 85 percent, and a total of 50 percent of total content would have to come from U.S. companies. Bainwol points out that more than 12.2 million automobiles were produced in the U.S. in 2016, more than 1 million more than were produced before NAFTA was enacted. Today, vehicles produced in Mexico and Canada contain much more U.S. content than those produced outside North America. If NAFTA were terminated, the result would be a 2.5 percent tariff on passenger vehicles imported from Mexico and Canada, which would result in an average extra cost of $850 per vehicle passed on to consumers.
From a logistics standpoint, railroads carry billions of dollars of supplies and finished products between the three NAFTA partners, the largest amounts concentrated in the automotive, farm, and food products sectors. According to Edward Hamberger, CEO of the Association of American Railroads, NAFTA trade accounts for a large portion of all rail business. “Industry data shows that at least 42 percent of rail carloads and intermodal units, and roughly 50,000 U.S. jobs are directly associated with international trade. We agree with economists who predict a steep decline of North American trade without NAFTA in place, a major problem for our industry, which customers rely on to traverse the northern and southern borders every day,” Union Pacific Railroad’s CEO Lance Fritz states, “While almost all observers agree that NAFTA must be modernized, it should not be abandoned altogether. The conversation we need to be having is how do we enhance the NAFTA trading bloc’s capability of competing globally, and specifically America’s ability to compete globally.
It is still uncertain when the NAFTA renegotiations will end and whether NAFTA will continue between the North American partners. However, traditional American industries that are so critical to our economy are loudly raising their voices in favor of its preservation.
Jerry Pacheco is President of the Border Industrial Association. His columns appear in The Albuquerque Journal.