Introduction
The foundations of the global prosperity that has spread and deepened since the mid-20th century are being questioned, including the role of free trade. This backlash against what used to be considered conventional wisdom has had deep repercussions for our region, bringing down the North American Free Trade Agreement (NAFTA) and replacing it with the U.S.–Mexico–Canada Agreement (USMCA) on July 1, 2020.
The global multilateral trading system, embodied in the World Trade Organization (WTO), was forged in the spirit of a post-World-War-II mindset that international cooperation and global trade and exchange could lift living standards and fortify economies around the world. Preferential trade agreements proliferated, including NAFTA, ratified in 1994, the first such agreement between a developing nation (Mexico) and advanced industrial economies (U.S. and Canada).
Although anti-trade rhetoric has intensified in recent years, such concerns are not new. Opening up to trade was always controversial. Political leaders faced considerable public opposition as they lobbied for their nations to join the WTO or signed them on to regional trade agreements. Even as tariff barriers came down around the world, many countries kept nontariff barriers in place and implemented new protectionist measures to slow the growth of international trade and foreign investment.
NAFTA was a success by most standard measures. After its passage and over the following 25 years, the volume of U.S.–Mexico trade rose fivefold, and foreign direct investment soared. Cross-border manufacturing linkages deepened, and Mexico developed a world-class manufacturing platform approaching that of the U.S. and Canada. In turn, North American consumers enjoyed lower prices on everything from cars to medical devices as well as greater product quality and variety. Despite this apparent progress, NAFTA came under increasing fire.
It was in this time of rising anti-trade sentiment and the imminent demise of NAFTA that the Federal Reserve Bank of Dallas held its two-day conference, “Forging a New Path in North American Trade and Immigration,” to explore what the future would bring—principally the USMCA. Conference speakers reviewed the accomplishments of NAFTA and analyzed the consequences of its removal and its replacement with the USMCA. They also discussed detailed aspects of North American trade and migration including rules of origin, supply chains, trade creation versus trade diversion, services and digital trade, natural gas markets and energy sector investment, and the integration of labor markets.
The insights of this broad group of topic experts boiled down to four main points. One, NAFTA was a success according to standard metrics for evaluating trade agreements. Hence, a strong and consistent commitment to trade and openness remains the best option to bolster economic growth, consumer welfare and the global competitiveness of North American industry. Two, while trade generates net benefits, it also creates winners and losers. Nations need better safety nets and training programs to aid workers who have been displaced by trade. Three, while the USMCA is more restrictive than NAFTA, particularly with regard to the automotive sector, it will continue to provide the necessary legal and institutional framework for North American trade and investment and help expand digital trade. Finally, while North American labor markets are well-integrated along several dimensions, cross-border labor migration is still helpful because it can alleviate worker shortages in certain industries and occupations and support remittance flows, which helped provide a needed boost to economic development in Mexico.
The gathering of trade and migration scholars in September 2019 was much like an earlier Dallas Fed conference held on the occasion of NAFTA’s 20th anniversary in 2014. At that time, the expectation was that NAFTA would be subsumed in the Trans-Pacific Partnership (TPP), a proposed 12-country trade agreement that included Mexico, Canada and the U.S. as well as a number of additional countries around the Pacific Rim. TPP was eventually realized, albeit under a different name and without the U.S.
Looking forward, it’s clear that the proponents of free trade are under scrutiny, and the benefits of trade are being questioned, particularly in the U.S. It’s incumbent on leaders to address the criticisms and allay the fears of workers as well as better communicate trade’s benefits. It’s also important to strengthen the world trading system more generally so it can better enforce the conditions of trade agreements and ensure that countries live up to their obligations. The road ahead leads back to liberalized world trade; the only question is how many detours there will be along the way.