Twenty years after the signing of the North American Free Trade Agreement, NAFTA is more relevant than ever.
The shift in developing global economies, combined with recent improvements to NAFTA, has created a renaissance for North America with abundant opportunities for a variety of industries. This is illustrated by the revival of manufacturing activity in Mexico and the U.S. Here are 10 reasons for U.S.-based business owners and CEOs to consider staying closer to home:
Following the 1993 signing of NAFTA, the economic block formed by the U.S., Mexico and Canada has grown to become one of the most significant economic regions in the world—currently accounting for 30 percent of the world's GDP. According to the World Bank, NAFTA real GDP has increased by 66 percent, growing from $9.9 trillion in 1993 to $16.3 trillion by the end of 2013. Without tariff expenses, trade between NAFTA nations has more than tripled since the agreement took effect, reaching more than $1 trillion in 2011—a figure that continues to grow.
Cost of Labor
As China's hourly manufacturing wages continue to rise—surpassing the average wage in Mexico at $2.50 per hour in 2012, according to Flextronics International, Ltd.—U.S. companies are looking for profitable alternatives. However, in December 2012, Mexico's minimum wage commission agreed to a 3.9 percent increase in the minimum wage beginning in 2013. Still, Mexico and Canada's close proximity allows for easy access to U.S. markets and easier hiring of executive talent and experienced local workers, both of which have proved a persistent challenge for offshore manufacturers in various industries.
Cost of Transportation
With rising fuel prices, manufacturers worldwide are seeking opportunities to manage shipping costs by producing goods close to their market. So it should come as no surprise that Mexico was the United States' second-largest goods export market at $216.3 billion, up 9.1 percent ($18.0 billion) from 2011, and up 121.9 percent from 2002, as cited by the Office of the United States Trade Representative.
In 2010, the U.S. and Mexico made significant strides in standardizing testing procedures for electronics, as well as accepting results from testing facilities in NAFTA countries for use in assessing telecommunications equipment. This will allow manufacturers to test a product only once, and then have the test results accepted in other NAFTA countries—which could eliminate red tape and save costs for many U.S. manufacturers, as electrical goods are a principal U.S. export from mid-sized businesses to Canada and Mexico.
In 2012, the U.S. exported nearly $32 billion of advanced technology products to Mexico, $10 billion more than to China, according to a Migration Policy Institute report. NAFTA protects U.S. businesses and intellectual properties, stipulating that participating countries provide a very high level of protection for intellectual property rights. This is especially helpful in fields such as computer software and chemical production (including patents, trademarks, copyrights and industrial designs).
Exporting Jobs, a Myth?
Critics often claim that NAFTA is responsible for sending jobs across the border, but trade with Canada and Mexico supports nearly 14 million U.S. jobs. Nearly 5 million of these jobs are supported by the increase in trade generated by NAFTA, according to a comprehensive economic study commissioned by the U.S. Chamber of Commerce.
Canada-U.S. bilateral trade is more than two and a half times greater than it was prior to signing NAFTA. According to the U.S. Department of State, Canada is America's most important trading partner, exceeding $689 billion (USD) of trade in 2011 with nearly $1.9 billion crossing the border daily. In 2013, Canada edged the EU as the top market for U.S. goods exports.
Growth in Agribusiness
NAFTA has increased profitability for American farmers and food markets, while helping to keep food prices down. According to the Office of United States Trade Representative, agricultural exports to Canada and Mexico grew from 22 percent of total U.S. farm exports in 1993 to 30 percent in 2007.
Foreign Direct Investment
As U.S. businesses experience steady growth in Mexico and Canada, the United States' foreign direct investment (FDI) in stock in both countries continues to enjoy equal gains. According to the Parliament of Canada, U.S. FDI in Canada stock was $326 billion in 2012, a 12 percent increase from 2010. The U.S. FDI in Mexico stock was $91.4 billion in 2011 (latest data available), an 8.4 percent increase from 2010. Such rich growth provides additional financial security and opportunities for U.S. businesses.
Another principal component of NAFTA for business owners and CEOs is the establishment of clear rules for dealing with the settlement of disputes. With increased North American and international trade, dispute settlement provisions for countervailing duties and anti-dumping matters are covered under Chapter Nineteen, providing an option of panel review from both nations in place of a domestic judicial review.
With Canada now serving as the largest source of U.S. petroleum imports, and Mexico's labor force gaining competitive ground against China, it's hard to see how U.S. companies could ignore North America as a premier region for business growth.