NAFTA 2002: A cost/benefit analysis for the United States, Canada, and Mexico.

• Author: Fry, Earl H.
• Position: North American Free Trade Area - Statistical Data Included

1. INTRODUCTION

   With the establishment or the North American Free Trade Area (NAFTA) in 1994, the United States, Canada, and Mexico have created the world's largest free trade zone involving over 400 million people and 11 trillion dollars in annual production. In addition, three-way trade in goods and services reached 660 billion dollars in 2000, more than double the three-way trade of 300 billion dollars in 1993. January 1, 2002 marked the beginning of the ninth full year of the implementation of this historic continental agreement, an accord which will be fully in place in 2008. This monograph will assess some of the benefits and costs of NAFTA for its three member states, with the first part looking at macro- economic and political issues, and the latter part focusing on two controversial areas-labor and the environment.

2. THE GLOBALIZATION PHENOMENA

   Globalization may be defined as a growing interdependence and interconnectedness among nations and people, whether on a global or regional scale. In terms of the economic dimension of globalization, the international movement of goods, services, capital, technology, and people stands at record levels. World trade in goods and services now adds up to seven trillion dollars annually. The volume of world trade is up 16-fold since 1947 and, in recent years, international trade has been growing at a rate almost three times faster than the aggregate growth in national economies. In the year 2000, global trade flows grew by a robust 13 per cent, although recessionary conditions and the aftermath of the September 11th tragedy cut this growth rate to little more than one per cent in 2001.

   Trans-border merger and acquisition activity approached a record 800 billion dollars in 1999, up almost 50 percent from the previous record levels of 1998, and both short-term and long-term investment flows doubled between 1995 and 1999. The half million affiliates of multinational corporations also produce sales of 11 trillion dollars per year, far outpacing the total cross-border trade in goods and services. The international movement of people for business, tourism, and immigration purposes has never been higher, with almost three million people crossing national borders daily, triple the level of 1980. (1) Roughly 698 million tourists traveled internationally in 2000 and spent 476 billion dollars, up dramatically from the 457 million travelers and 264 billion dollars in expenditures recorded in 1990. (2) In the realm of currency transactions, foreign-exchange markets have literally exploded with daily activity topping 1.5 trillion dollars. In cyberspace, more than 250 million people now go on-line using t he Internet, and this number is mushrooming. Telephonic communications are also at record levels with traffic on international switchboards topping 100 billion minutes for the first time in 2000. (3) As former Citicorp Chairman Walter Wriston has observed, the world is now "tied together in a single electronic market moving at the speed of light." (4)

   1. The United States and Globalization

      Over 18 million U.S. jobs are now directly linked to the international economy, with exports of goods and services by American-based companies exceeding one trillion dollars for the first time ever in 2000. More than 12 million jobs are tied to these exports, including 1 in 5 in the manufacturing sector. (5) In rural areas, crops grown on one of every three acres planted by U.S. farmers are also destined for overseas markets. Additionally, almost 7 million Americans work for foreign-owned companies on U.S. soil, and these corporations account for about 30 percent of U.S. merchandise imports and 22 percent of merchandise exports. (6)

      Cumulative foreign direct investment (FDI) in the United States, a type of investment providing foreign investors with a controlling interest in U.S.-based firms, stood at one and one-quarter trillion dollars in 2000, with overseas investors holding over eight trillion dollars in total U.S. assets. (7) Foreign portfolio investment in the U.S. is also at record levels, with investors from abroad possessing 36 percent of the federal government's publicly held debt and hundreds of billions of dollars in corporate debt and equities. Even the U.S. dollar is more popular abroad than at home, with two-thirds of U.S. currency in circulation held overseas.

      Another 1.1 million U.S. jobs are linked to international tourism, with 50 million foreigners visiting the United States in 2000 and spending 95 billion dollars when U.S. passenger fares are included. (8) Over one-half million foreign students also matriculate at U.S. institutions of higher learning every year, spending about 12 billion dollars annually. With 35 percent of all high-tech master's degrees and 50 percent of all high-tech doctorates in U.S. institutions of higher learning being awarded to foreign nationals, it is not surprising that many of the best and brightest of these students remain permanently in the United States and contribute to the build up of brainpower so critical in the new Information Age. (9) They are being joined by the 200,000 highly skilled foreign professionals who enter the U.S. annually under the Hi-B visa program. These visas allow the workers to stay in the United States for up to six years and to apply for green cards during their stay. In addition, the United States expe rienced the largest increase in population in its history during the 1990s, growing by almost 33 million people. Approximately one million immigrants entered the country each year during the past decade and contributed significantly to this unprecedented population rise. By 2005, about 15 percent of the total private-sector work force will consist of foreign-born employees, compared with 7 percent in 1979 and 10 percent in 1998. (10)

      Indirectly, economic globalization is even more significant, because with import penetration at record levels and cyberspace signals permitting overseas businesses to communicate with potential customers in the United States in less than one second, most U.S.-based companies and jobs are now inextricably tied to the international economy. Many Americans also have a stake in the prosperity of other countries, with over 50 percent having stocks, mutual funds, or pension funds with some portion of their portfolios invested abroad. Indeed, the U.S. cross-border flow of bonds and equities was 54 times higher in 2000 than in 1970. (11)

      It is quite possible that globalization is still in its infant stages. McKinsey & Company has estimated that only one-fifth of world output is currently open to global competition in products, services, and ownership. Within the next 30 years, however, McKinsey predicts that four-fifths of world output should be "globally contestable," a scenario which would result in a tremendous expansion in global economic integration. (12)

   2. Regionalism in North America

      Figure I illustrates the significant differences that exist among the three major North American nations, even though all three share the continent and maintain federal systems of government. (13) The United States has almost three times the population base of Mexico, and nine times more people than Canada. The GDP differential is even more extreme, with U.S. GDP 14 times larger than Canada's and 17 times larger than Mexico's. Indeed, California alone has a larger population base than does Canada, and almost the same annual production volume as Canada and Mexico combined.

      In the year 2000, two-way flows in goods and services between Canada and the United States averaged 1.2 billion dollars per day, by far the largest bilateral trading relationship in the world. Similar flows between the United States and Mexico have grown dramatically over the past several years and now average about 720 million dollars daily. In the period since NAFTA began to be implemented, two-way trade between Canada and the United States has almost doubled, and U.S.-Mexican trade has tripled. (14) In comparison, U.S. trade with the rest of the world increased by a much more modest 78 percent between 1993 and 2000. (15)

      U.S. dependence on access to the markets north and south of its borders has also deepened. Although Canada and Mexico represent only 2.2 percent of the global population outside the United States, 37.1 percent of all U.S. exports were destined for these two markets in 2000, up from 30.5 percent in 1993. U.S. exports to Canada and Mexico grew by 105 percent during the 1993-2000 period, double the 52 percent increase in export activity to the rest of the world. The United States also exports twice as much to Mexico as its combined exports to every other member of the proposed Free Trade Area of the Americas (FTAA) except Canada.

      Few Americans are aware that Canada is also their nation's leading export partner and has been for each and every year since 1946. (16) In 2000, the U.S. exported almost three times as much to Canada as to Japan, and actually had more merchandise exports to one Canadian province, Ontario, than to Japan. Even more impressive was the fact that the United States exported more to Canada, with its 31 million people, than to the 15 nations comprising the European Union, a powerful regional entity with over 370 million people. Although Canada has a large merchandise trade surplus with the United States, Canadians purchased per capita 5,821 dollars of U.S. merchandise in 1999, versus 375 dollars of American purchases of Canadian merchandise. (17)

      Mexico surpassed Japan in 1999 to become the second leading trading partner of the United States, and the gap between second-ranked Mexico and third-ranked Japan widened dramatically in 2000 and again in 2001. In proportional terms, U.S. export growth to Mexico has been higher than with any other major trading partner since NAFTA was implemented, and it is growing at about twice the rate of the U.S. export growth with Canada.

      Canada and Mexico are even...