THE FUTURE OF NAFTA
Jaime Serra
November 2008
NORTH AMERICAN REGIONAL
MEETING OF THE TRILATERAL
COMMISSION
Premise 1
• Since Nafta's inception, intraregional trade and investment,
macroeconomic convergence and economic cycle synchronization have
increased.
INTRA NAFTA TRADE & INVESTMENT INDEX*
(1988=100)
800
NAFTA
China into WTO
9/11
700
549.1
600
500
400
300
200
100
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0
144.2
92.2
*Integration Index: Average of trade index and FDI index, where Trade Index is the index of the weighted average of trade (exports+imports) between Canada , Mexico and
the U.S., and FDI Index is the index of the weighted average of FDI in Mexico, Canada and the U.S., from a NAFTA country.
Source: SAI Consultores with data from INEGI, Banco de México, Secretaría de Economía, US Census Bureau, US BEA and Statistics Canada.
2
Premise 1
MACROECONOMIC CONVERGENCE
π
55%
Johansen* cointegration
as of Jan-99
50%
45%
40%
35%
EXCHANGE RATE
VOLATILITY VS USD
σ
45%
Johansen* cointegration
as of Jan-97
i
90%
35%
Canadian dollar
70%
Mexico
60%
30%
U.S.
30%
Mexican peso
25%
50%
20%
40%
25%
20%
Johansen* cointegration
as of Dec-1995
80%
40%
Canada
SHORT-TERM
INTEREST RATES
Oct-08
15%
15%
10%
10%
20%
5%
10%
0%
0%
INDUSTRIAL PRODUCTION
(ANNUAL CHANGE, 3M M.A.)
g
15%
10%
Canada
5%
U.S.
Mexico
0%
-5%
30%
-10%
Mexico
U.S.
-15%
Jan-93
Nov-93
Sep-94
Jul-95
May-96
Mar-97
Jan-98
Nov-98
Sep-99
Jul-00
May-01
Mar-02
Jan-03
Nov-03
Sep-04
Jul-05
May-06
Mar-07
Jan-08
Aug-93
Jun-94
Apr-95
Feb-96
Dec-96
Oct-97
Aug-98
Jun-99
Apr-00
Feb-01
Dec-01
Oct-02
Aug-03
Jun-04
Apr-05
Feb-06
Dec-06
Oct-07
Aug-08
-5%
Jan-94
Sep-94
Jun-95
Mar-96
Dec-96
Aug-97
May-98
Feb-99
Oct-99
Jul-00
Apr-01
Jan-02
Sep-02
Jun-03
Mar-04
Dec-04
Aug-05
May-06
Feb-07
Nov-07
Jul-08
5%
0%
Johansen* cointegration
as of Jan-94
Mar-91
Feb-92
Jan-93
Dec-93
Nov-94
Oct-95
Sep-96
Aug-97
Jul-98
Jun-99
May-00
Apr-01
Mar-02
Feb-03
Jan-04
Dec-04
Nov-05
Oct-06
Sep-07
ANNUAL INFLATION
RATE
ECONOMIC CYCLE
SYNCHRONIZATION
*Johansen test for cointegration determines the existence of one or more stable linear combinations among different time series. This existence means a long-run relationship
between series.
Sources: INEGI, Federal Reserve System, Bank of Canada, oanda.com, OECD.
3
Premise 2
• The proliferation of Regional Trade Agreements, the increase in
transportation cost, the introduction of export restrictions and the failure
of the Doha Round are giving raise to a regional autarky, favoring regional
trade flows over global ones.
WORLD TRADE
IMPACT OF TRANSPORTATION COSTS
A ROUGH ESTIMATE OF WORLD TRADE WITHIN
REGIONAL TRADE AGREEMENTS (RTAS*)
COST OF SHIPPING A 40' CONTAINER TO US EAST
COAST ($)
16,000
EQUIVALENT TARIFF RATE (%)
25
14,000
20
12,000
47%
RTAs
53%
10,000
12.3
15
8,000
10
6,000
4,000
5
2,000
0
0
WTI @ WTI @ WTI @ WTI @ WTI @ WTI @
$0
$5
$70
$100 $150 $200
*As of today, 88 RTAs have been notified to the WTO.
From China
From Mexico
WTI @ WTI @ WTI @ WTI @ WTI @ WTI @
$0
$5
$70
$100
$150
$200
Equivalent Tariff
Sources: SAI Consultores based on Rubin and Tal, Will Soaring Transport Costs Reverse Globalization?, CIBC World Markets Inc., May 27, 2008
Equivalent Tariff + US MFN
4
Premise 2
EXPORT RESTRICTIONS
(SELECTED EXAMPLES)
Country
Restriction imposed
Imposed new tariffs on soy bean exports and wheat and set
a quota on meat exports (2008).
Banned rice exports (2008) for 6 months starting on May
Bangladesh
2008.
Imposed tariffs on several exports:
China
Rice, some grains, coke, steel (2007).
Argentina
Ecuador
Banned rice exports (2008).
Egypt
Banned rice exports (2008).
Banned the export of all agricultural commodities, forestry
and livestock as well as oil and timber (2008).
Banned “non-basmati” rice and corn exports until October
India
15, 2008.
Imposed quantitative restrictions on the export of mediumIndonesia
grade rice (2008).
Kazakhstan Imposed taxes on wheat and on oil exports (2008).
Guinea
Malawi
Banned corn exports (2008).
Russia
Imposed tariffs on wheat exports (2007).
Weak WTO disciplines on
export restrictions
+
Failure of Doha Round
5
Premise 3
• There is a large degree of complementarity in North American factor
endowments (US-Canada capital abundant, Mexico labor abundant)
that favors further economic integration of the region.
NOTE:
Nafta takes care of capital mobility under Chapter 11. It does not have any relevant rules for labor
mobility.
6
Premise 3
LABOR COMPLEMENTARITY
UNITED STATES
CANADA
80+
80+
75 - 79
75 - 79
70 - 74
70 - 74
65 - 69
65 - 69
60 - 64
60 - 64
55 - 59
55 - 59
50 - 54
50 - 54
45 - 49
45 - 49
40 - 44
40 - 44
35 - 39
35 - 39
30 - 34
30 - 34
25 - 29
25 - 29
20 - 24
20 - 24
15 - 19
15 - 19
10 - 14
10 - 14
5- 9
5- 9
0- 4
0- 4
15,000
10,000
5,000
0
5,000
10,000
15,000
1,800
DEPENDENCY RATIO 2007
1,200
600
0
600
Thousand people
1,200
Young*
Elder**
Total
Mexico
47.03
9.26
56.29
USA
30.11
18.70
48.81
Canada
24.14
21.19
45.32
NAFTA
33.64
16.67
50.31
1,800
Thousand people
DEPENDENCY RATIO 2025F/
NAFTA
MEXICO
80+
80+
75 - 79
75 - 79
70 - 74
70 - 74
65 - 69
65 - 69
60 - 64
60 - 64
55 - 59
55 - 59
50 - 54
50 - 54
45 - 49
45 - 49
40 - 44
40 - 44
35 - 39
35 - 39
30 - 34
30 - 34
25 - 29
25 - 29
Elder**
Total
Mexico
35.53
14.74
50.27
USA
32.12
29.33
61.45
Canada
24.70
36.42
61.12
NAFTA
32.50
25.96
58.46
20 - 24
20 - 24
15 - 19
15 - 19
10 - 14
10 - 14
5- 9
5- 9
0- 4
0- 4
7,500
Young*
5,000
2,500
0
2,500
5,000
7,500
Thousand people
-21,000
-14,000
-7,000
0
7,000
14,000
21,000
Thousand people
USA
Canada
Mexico
*People under 15 / people between 15-64 years old / ** People over 64 / people between 15-64 years old
f/ Forecast
Source: U.S. Census Bureau, International Data Base
7
Conjecture
• The momentum in intraregional trade and investment/macroeconomic
convergence/cycle synchronization in Nafta (Premise 1), the
regionalization of global trade (Premise 2), and the factor endowment
complementarity (Premise 3) point towards further integration of the
North American region.
8
Summary
1. Economic integration in North America will naturally continue.
2. The 2008 financial crisis will slow it down but not stop it.
3. The welfare gains of this integration will depend fundamentally on the new US
government policies. There are two opposite scenarios:
Pro-free trade policies
Protectionist policies
Higher welfare gains
Lower welfare gains
• Comprehensive Migration Agreement
vs
• Border walls and watered-down migration
arrangements
• Cooperative labor and environmental
programs
vs
• Protectionist (trade sanctions) labor and
environmental measures
• Common competition regulations (chapter 15)
vs
• Proliferation of dumping cases
• Agricultural complementarity programs
(vegetables vs. grains)
vs
• Protectionist and subsidy driven agricultural
policies
• Free mobility of trucks and integration of
transportation systems
vs
• Violation of Nafta rules on truck mobility
9