Revisiting NAFTA

By Bedell, Denise | Global Finance, March 2009 | Go to article overview

Revisiting NAFTA


Bedell, Denise, Global Finance


Calls to renegotiate Nafta are growing louder, and as the three member countries economic travails deepen, the arguments for a revision are gaining ground.

The economic crisis that began in the United States has had a dramatic effect on economies around the world, but none so much as the impact on its two closest trade allies and Nafta partners, Canada and Mexico. The serious consequences of such a close alliance have led some to call for a thorough reexamination of the Nafta agreement.

However, for those who think it is a good idea to revisit Nafta, the rationales differ. One the one hand, the clear effect of being so closely allied to the United States is that when the US stumbles, its allies stumble, too. From this standpoint, some argue that both Canada and Mexico should build stronger trade relationships with other trade partners outside Nafta.

On the other hand, there are many who argue that a tighter economic partnership among Canada, the United States and Mexico-more along the lines of the European Union model-would be of benefit to all. In particular, for the US a tighter alliance with Mexico-and agreements requiring judicial, labor and environmental reform within Mexico to address corruption and build a stronger Mexican economic base-would not only stem the tide of illegal immigration but also help strengthen US national security.

However, there are plenty of policy-makers and economists across the three nations who feel that Nafta is sufficient as it stands and does not need to be revised on any sort of grand scale. Peter Bethlenfalvy, co-president at ratings and analysis firm DBRS, feels that Nafta has had a positive influence as actual volumes of exports and imports have grown significantly for all countries involved. "In the 10 years after Nafta was put in place, total trade among the three Nafta partners expanded from $289 billion to $623 billion," he points out.

Tight Bonds, Tough Times

Jeff Faux at Washington think-tank the Economic Policy Institute says that the implosion of the US financial system hit both Canada and Mexico harder than it would have before Nafta. This is particularly the case for Mexico, he says. "When the crisis began, the conventional wisdom was that Mexico's macroeconomic situation was in good shape, and therefore it would only be marginally affected. Over the last three or four months the assessment has become more and more dour. Dependence on the US made it more exaggerated," he adds.

At a recent Mexican housing conference, Mexican finance minister Agustín Carstens said that the Mexican government would work to support the economy by continuing to loosen monetary policy and by increasing public expenditures. In January the central bank cut interest rates by 50 basis points. The finance minister predicted that more cuts were to come.

In Canada, although there has been a clear impact and the country is now in a recession, according to some econo- mists funda- mentals are still strong. "We are the only gov- ernment to have gone into this downturn in a budgetary surplus," points out one econo- mist, "and I think that from a financial and economic point of view we are in the best position going into this, but we are not going to be immune from these global forces because we live in a connected world. The supply chain is interwoven, and the US is our largest trading partner, and vice versa."

Whether the impact of the crisis causes policymakers to take another look at Nafta and other trade agreements may become moot, however, should the economic downturn deepen. "For both Mexico and Canada the economic assumptions of Nafta are now very much in doubt," notes Faux. "After Nafta both Canada and Mexico ran surpluses with the US, and a lot of their growth figures assumed that they could continue selling to this huge and growing consumer market."

During the years since the advent of Nafta, the share of consumption in the US grew substantially, but whether those economic conditions will return is unclear, says Faux. …

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