The Reality of NAFTA, International Trade and the United States President

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Senior Vice President of NAPS, Scott Stanley, sheds light on election and trade

The outcome of the 2016 United States Presidential race has, among many other things, caused tremendous speculation on the future of international trade with the United States. President-elect Mr. Donald Trump used the topic as a key point throughout his campaign, clearly striking a chord with the American public. At the heart of Mr. Trump’s message was that previous administrations had entered into trade agreements that were unfavorable for the United States, causing the loss of millions of jobs to other countries. The trade agreement that received the most attention was the North American Free Trade Agreement, more commonly referred to as NAFTA.

While formally signed by former President Bill Clinton on December 08, 1993, NAFTA was originally spearheaded by former republican President George H.W. Bush, who ceremonially signed the agreement on December 17, 1992, along with Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas. NAFTA did not officially take affect until January 01, 1994.

The elimination of tariffs between the United States, Mexico and Canada to promote free trade in all of North America was NAFTA’s primary goal. The biggest impact was certainly between Mexico and the United States, as most trade between Canada and the U.S. was already duty-free under the former Canada-United States Free Trade Agreement. U.S. companies, mostly manufacturers, were attracted to Mexico’s low-wage labor and (Mexican) government programs to promote foreign investment in Mexico. As a result, the “maquiladora” industry exploded in Mexico.

“Maquiladoras,” factories in Mexico owned by foreign companies, many of which from the U.S., mostly operated along the border cities of Tijuana, Nogales, Ciudad Juarez, Nuevo Laredo and Monterrey to take advantage of low-cost labor and the close proximity to the United States. The Mexican government promoted the maquiladora program by offering foreign companies tax, fiscal and other incentives for establishing factories in Mexico to create jobs. Under the maquiladora program, foreign companies were able to import raw materials and components from around the world, mostly duty-free, and convert them into finished products before exporting them back out of Mexico (mostly to the United States). While the maquiladora program initially attracted operations for light manufacturing and basic assembly, it has evolved to include sophisticated manufacturing of aerospace, medical device, automotive and electronic products.

There are currently over 6,000 maquiladoras in Mexico, most of which rely on U.S. manufacturers for at least part of their supply chain (raw materials and components) needs. Under NAFTA, U.S. manufacturers are able to export most raw materials to Mexico duty free to supply the maquiladora industry, which would likely change if NAFTA were repealed. Factories in Mexico may turn to other countries, such as China, for more of their supply chain requirements if duties on U.S. goods were imposed. This would likely create a loss of revenue (and jobs) in U.S. factories that currently supply the maquiladora industry.

International trade agreements and treaties between countries, NAFTA or otherwise, enable manufacturers global access to the most efficient manner in which to build their products. While free trade may benefit countries differently at any given time, it is a fluid concept under continuous change. For example, China’s manufacturing industry has been the beneficiary of free trade over the past 20 years due to extremely low-cost labor compared to other developed countries. Many of the world economies, however, have also benefited from China’s low-cost labor by enabling consumers to purchase products at far lower prices than otherwise possible. This is significant being that consumer spending accounts for the majority of many developed countries’ economies.

China’s success, however, has pushed labor rates to levels greater than many other countries, such as Mexico, which has caused another major shift in international trade. Many manufacturing companies, including Chinese nationals, are exiting China and establishing manufacturing in countries like Mexico, especially for finished products destined for the United States. While Mexico’s job and real estate markets are one of the beneficiaries of this free trade evolution, U.S. manufacturers throughout the supply chain of various industries are once again being called upon to supply Mexico’s growing manufacturing base.

While countries around the world benefit differently from free trade, 95% of leading U.S. economists agree that free trade, especially programs such as NAFTA, have had a net positive effect on U.S. citizens (March, 2012, Poll Result / IGM Forum). Many also agree that, in the case of NAFTA, free trade has helped create more U.S. jobs than the estimated 695,000 that were lost to Mexico over the past twenty years. While no one can predict when the next trade evolution will occur, it is difficult to ignore the benefits of free trade on companies, consumers and free-market economies around the world.

About NAPS
North American Production Sharing, Inc. (NAPS) was founded in 1991 by William Lew and Richard Jaime. NAPS offers administrative and compliance management services to ensure a seamless operation while manufacturing in Mexico. The company has helped over 150 organizations transition to manufacturing in Mexico with a full-service management program, allowing clients to focus on training, production, and quality control, while NAPS handles virtually all other operations. For more information on NAPS, visit their website http://www.napsintl.com, Twitter and Facebook.

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Kate Lobel
@PwrDigMarketing
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