How China crashed the Nafta party; The negotiators of the ambitious and contentious 1994 free-trade deal failed to anticipate the rise in cheap imports from Asia

How China crashed the Nafta party

The negotiators of the ambitious and contentious 1994 free-trade deal failed to anticipate the rise in cheap imports from Asia

According to western tradition, the gift for the 20th anniversary of a union is china. But, two decades on from the trade nuptials enshrined in the theNorth American Free Trade Agreement (Nafta), China is the uninvited guest that has walked away with many of the gifts.In 1993, pro-Nafta Washington thinktanks, such as the Peterson Institute for International Economics, went so far as to say that the agreement would lead to a trade surplus with Mexico for the US, while also providing huge benefits for the Mexican economy. The US had a trade surplus with Mexico in 1994, but since 1995 the US has had an annual trade deficitwith Mexico. On the Mexican side, GNI per capita economic growth is nowbarely one percentage point higher than when Nafta came into force. What has happened since then?

Nafta has had at least two phases. In the first (1994-2000) it increased trade, investments, productivity and overall integration, with positive effects in employment and production in several export-oriented sectors in Mexico. In the second phase since 2000, however, Nafta turned sour. Its negotiators in the early 1990s did not anticipate the rise of Asia and particularly of China.

Looking back, our research shows that China has significantly penetrated many of the new markets opened by Nafta. In a paper published by the Economic Commission for Latin America and the Caribbean, we document the extent to which Chinese products have taken away market share in the US, and how China has begun to take Mexican markets from the US as well.

From 1994 to 2001, Mexico had a honeymoon with the US. No other country enjoyed the same proximity and trade preferences. Although trade increased significantly between the two countries, it failed to translate into per capita income growth and rising employment and wages in Mexico.

The honeymoon ended in 2001 when China entered the World Trade Organisation and began to enjoy similar access to the US market. We find that by 2009, 84% of Mexico’s manufacturing exports to the US were under threat from China. By threat we mean sectors where China is gaining market share and Mexico is losing it. We also find that 96% of US exports to Mexico are under threat from China.

In 2000, the US supplied Mexico with 60.8% of its office machine and computer imports and 70% of the peripheral parts for those machines. Ten years later, the US held only 10% of the Mexican import market in each sector. By contrast, China held 13% of the office machine import market and 5% of the parts market in Mexico in 2000, and, nine years later, it had 48% and 58% of those markets respectively.

Simple economics would lead one to think this would be a benefit for Mexico – as the inputs for its electronic industry decreased because imports from China are cheaper than from the US. This should lead to productivity gains and more exports to the States. China and Mexico supplied the US about 5% of the US computer market in 2000; by 2009 China had more than half that market and Mexico did not budge.

We performed in-depth case studies alongside this statistical work that further confirm our findings. The yarn-textile-garment chain – similar to furniture, toys and most of Mexico’s manufacturing sector – is symbolic in losing more than 50% of its employment since 2000. The US has become an additional loser, since it is the major supplier of Mexican exports.

The automobile parts and assembly chain is a big exception in the competition with China, in the US market and in Mexico. Since the beginning of Nafta, Mexico’s exports in the US have strengthened, with levels above 30%, while China’s share has remained relatively low, mainly for domestic reasons: China’s consumption in the auto sector has been dynamic and above its production, in other words the potential for exports has been low. This, however, will change as China’s auto companies follow the lead set by other Chinese global multinationals.

This is the hangover that will be felt long after the 20th anniversary party. The only remedy will be couples’ therapy. From Mexico’s vantage point the “Asia pivot” is seen as cheating on a partner. The region needs to revitalise its relationship: it is time to start a conversation about collective financing mechanisms, exchange-rate co-ordination, and strategic sectors for the Nafta region so it can negotiate and see itself as a larger block. That would give us something to celebrate.

Kevin Gallagher is professor of international relations at Boston University where he co-directs the Global Economic Governance Initiative. Enrique Dussel is professor at the National Autonomous University of Mexico where he directs the Center for China-Mexico Studies