Wilbur Ross Wants to Strip NAFTA of What Makes It Great
Commerce Secretary Wilbur Ross’ recent proposal to make NAFTA subject to a five-year sunset clause would be like turning home ownership into a leasing arrangement. That would undercut one of the biggest advantages of ownership – the long-term incentive for investing in improvements. Imposing an automatic five-year termination clause on NAFTA would have the same impact on cross-border investment – discouraging it, cutting off supply chains, and foregoing the efficiencies that are gained from buying and selling in a bigger market.
The best argument for NAFTA is that it helps make access to neighboring markets more secure, not less. Imposing an automatic termination clause that any of the three partner countries could trigger after five years would only create investment chill. Companies seeking to obtain the advantages of market access must be able to look at significant investments through a window wide enough to view the long-term horizon. Companies that set up new plants and extend supply chains have to think about not just the next quarter, but the next quarter-century. Why invest based on something that could expire in five years, when companies making substantial investments are looking for a payback over 25?
But while businesses engage in the equivalent of 3-D chess, the Administration seems to be looking for rules to govern checkers, focusing on imports vs exports rather than how efficiently value is being added by cross-border production.
Increased investment based on secure access has made it possible for North American producers to source production across the continent, obtaining the efficiencies that come with widened supply lines. Intermediate components have become predominant in manufacturing. Industrial production has become tightly linked and vertically integrated to ensure that workers across borders complement each other. One of the clearest and most beneficial aspects of NAFTA is the integration of supply chains across the three participating countries, achieving economies of scale and efficiencies that would otherwise be unattainable. Intermediate goods pass back and forth across the borders of the three NAFTA countries several times on the way to becoming part of a finished product.
Some complain that jobs are “sucked out into Mexico” given that on average Mexican workers are paid only about one-seventh as much as Americans. But in fact, Mexican workers generally occupy lower-skilled parts of production processes, while Americans focus on higher-value added segments. Rather than cost the United States jobs, this division of labor has no doubt helped retain many higher-value U.S. manufacturing jobs that would otherwise have gone to other lower-cost economies such as China.
The advantages of integration of production are especially clear in the auto industry. By contributing to the development of cross-border supply chains, NAFTA has actually helped the U.S auto industry compete with Asian counterparts and maintain its global position, by decreasing costs and increasing productivity. Some components cross borders within NAFTA 6-8 times before a vehicle is finished and sold. In fact, the Detroit area exports more goods to Mexico than any other city in the United States. Extending production lines across North America has meant shedding some jobs in the United States. But far more would have been lost without the cost efficiencies made possible by lower Mexican wage rates. The result: North American vehicle exports to the rest of the world have increased by an annual average of 10 percent over the past decade. North America now accounts for roughly 22 percent of global auto industry exports, up from less than 19 percent a decade ago.
A five-year sunset clause would put the benefits of supply chain integration in danger by creating uncertainty about the value of long-term investments, scaring businesses away from making them. Ross argues that a sunset clause would compel countries to regularly take a fresh look at the deal, and provide a forum for resolving issues. But that forum exists now. NAFTA has been modified and amended several times since it was adopted by all three countries in 1994. Any of the three countries could terminate the agreement on six months notice, which is why they are in the midst of re-negotiations now.
Sunset clauses are usually associated with things you intend to end – not with something like a trade agreement whose inherent point is to project long-term predictability. If companies have to worry that their supply chain will become redundant, they will not add new links. The goal of NAFTA, or any trade agreement, is to create an environment within which businesses can make investments, secure in the knowledge that the rules of the game are clear and will not be completely upended every five years.
