NAFTA at 20 - Accomplishments,

Challenges, and the Way Forward

NAFTA Has Been a Success both in Economic and Foreign Policy
NAFTA was a true innovation in economic relations. It was first and foremost an
agreement designed to increase trade and investment among its three parties; promote
North American economic integration; and support a vision of open market
democracy for Mexico providing that nation with a clear path toward political and
.economic modernization. On all three metrics, NAFTA has succeeded
Since 1993, U.S. trade in goods and services with Canada and Mexico increased from
$307 billion to over $1 trillion by 2012. Annual trade between the United States and
Canada has more than doubled; with Mexico trade has quadrupled. Canada is the top
trading partner of the United States and Mexico is our second largest export market
and third largest trading partner. More than 40 states count either Canada or Mexico
as their top export destination. Perhaps more importantly, beyond these tangible
commercial benefits, NAFTA institutionalized a vision for North America that would
have been impossible absent significant political and economic reforms in Mexico,
.both catalyzing such reforms and also benefitting from them
This is one reason why we are so pleased that this hearing today is being held by this
Subcommittee. Fundamentally, trade agreements like NAFTA are not just about trade
and investment, they are also critical if often overlooked tools of U.S. foreign policy.
On the basis of economic growth, jobs created, and other common indicators, NAFTA
has been a success, even if it has not perhaps been the panacea for all ills that
proponents of the agreement sometimes seemed to be suggesting that it would be in
order to pass and implement the agreement. Inversely, neither has NAFTA been
.responsible for all the ills that are frequently attributed to it by opponents
Unquestionably, however, NAFTA has directly supported Mexicos democratic
transformation over the past 20 years by requiring legislative and regulatory changes
that might not otherwise have occurred absent an external catalyst. It has also
empowered new economic constituencies and a growing middle class that has
demanded and received an increasingly clear political voice. Arguably, Mexicos
politics are more transparent and democratic today than ever before, and the Mexican
people have made clear their disinterest in returning to the ways of the past. And as
we see Mexicos economy generate and offer new opportunities to its workers,
coupled with the slowdown of the
U.S. economy since 2008, net migration flows from Mexico have become virtually
.zero. A full accounting of NAFTAs impact cannot overlook these issues

From the trade perspective, NAFTA was at the cutting edge when it was passed
originally. Heretofore there had never been an effort to link the worlds largest, most
developed economy with an economically backward, underdeveloped neighbor that
seemed to lurch from economic crisis to crisis. The gulf between Mexico and its two
other North American neighbors was large and perhaps insurmountable. At the same
time, the pre-existing free trade agreement that the United States had already
implemented with Canada was cause for Ottawa to join the talks as a defensive move,
so as not to see their own benefits eroded by a U.S. agreement with Mexico. Along
with certain constitutional and political restrictions in all three countries, this meant
that negotiators could move ahead only so far, excluding certain sectors such as
energy or labor mobility because they were too politically controversial at the time.
What the negotiators created, however, proved to be an effective framework for
ordering the majority of North American trade and investment relations during the
.economic stresses, political transitions, and security crises of the past 20 years
But the World has Changed in the Past 20 Years, and NAFTA has Become Dated
Since then, however, the world has changed dramatically, and NAFTA is now
showing its age. It should therefore be modernized as a means to promote a joint
vision of true North American competitiveness. Otherwise, NAFTA could potentially
become an agreement that actually sets a virtual limit on North American trade
.relations rather than a powerful tool to unlock them to their fullest potential
.Three trends must be highlighted
First, production models have changed. Canada, Mexico, and the United States do not
merely trade products; we now design and make them together. In many industries,
joint production and supply chains have developed to such an extent that, from the
commercial perspective at least, national borders no longer define products. This is to
our benefit: according to the National Bureau of Economic Statistics, every dollar of
U.S. imports from Mexico, for example, includes some 40 percent of U.S. content; for
Canada it is 25 percent. As a result it is no longer accurate to think in terms of U.S. or
Mexican or Canadian products when North America itself has become the production
platform. North America has become a true 21st century economic space, just in time
.to compete more effectively with China, India, and others
Second, consider that in 1994, there was barely an internet, much less Facebook or
Twitter (incidentally, follow me on @ericfarns...). One of the first emails I remember
receiving, in fact, was actually from Carla Hills in 1992 when she was the US Trade
Representative and I was a junior member of the NAFTA negotiation team; email
itself was very new and nobody had a clue how radically and rapidly electronic
communications would fundamentally alter business models around the world. But
its not just email and social media. Consider the incredible advances that technology
has made possible in the auto and manufacturing sectors, energy, financial services,

IT, medical products, agriculture, and virtually every other economic sector in the past
two decades. Entire industries that were not even contemplated by NAFTA are now a
significant part of all three economies. Yet, while there is a process to make technical
fixes to NAFTA and that process continues to be utilized, the fact remains that the
.agreement is a 20th century trade platform undergirding our 21st century economies
Third, there is a noticeable change in trade patterns within North America
demarcated by 9/11, at which point the border thickened and commercial activities
understandably took a second seat to security. A resulting lack of attention to
commercial needs at the borders, specifically in cross-border infrastructure but in
other areas too, has created unnecessary bottlenecks and wait times for commercial
traffic that erode the compelling advantages of geographic proximity. As NAFTAfacilitated trade has increased, infrastructure has generally languished. In fact, the last
railway border crossing established between the United States and Mexico was over
100 years ago. That means that our 21st century economies, undergirded by a 20th
.century trade framework, are utilizing 19th century infrastructure
.As trade increases, this picture will continue to get worse
Moving Toward the Future
Our strategic opportunity, therefore, is to capitalize on our increasingly unified North
American economic space and dynamism, particularly as Mexico advances concretely
along its reform agenda. In this 20th year of NAFTA, the moment is ripe to think
bigger and bolder about North America and regional competitiveness. If we do so,
viewing North America as a more unified production platform and our borders as
lines that unite rather than divide our three great nations, the way forward will
.become increasingly clear
And in that regard, a path forward would include several important elements, in some
areas attempting to improve challenges stemming from the original agreement, and in
others taking note of changes in the North American production model and working to
.find ways to facilitate and enhance such activities
As a first step we really do need to find a way to get the greatest efficiencies from the
agreement as it currently exists, from trucking regulations to intellectual property
protections to customs and regulatory harmonization to border infrastructure. These
are not easy issues; some have been with us since the agreement was concluded, some
require additional funding. The meeting of North American leaders next month would
.present a powerful opportunity to recommit all three governments to addressing them
At the same time, were the original agreement to be negotiated today it likely would
not look the same. For example, it would have to incorporate the incredible advances
in energy that are making North America self-sufficient, improving terms of trade

while igniting a manufacturing renaissance with lower cost energy supplies. It would
highlight and promote the rapid growth in services that has occurred in the past
generation, including the information technology revolution and cloud computing. It
might incorporate some categories of labor mobility (and without doubt U.S.
immigration reform independent of any trade agreement would directly contribute to
economic well-being). It would seek ways to minimize the existing sand-in-the-gears
of border commerce, looking for ways to safely increase border throughput as a
strategic economic issue for the entire United States, not just border states. It would
attempt to find effective ways to improve the rule of law, which remains Mexicos
most vexing challenge according to former president Ernesto Zedillo in the
.forthcoming Americas Quarterly
More broadly, the NAFTA bloc should be viewed as the basis for a more strategic
trade policy generally. Mexican and Canadian entry into the Trans-Pacific Partnership
negotiationswhich the Council began to promote immediately after the United
States announced its intent to join the negotiationswas a critical step. Now, to take
full advantage of economies of scale, we should also consider negotiating together
with Mexico and Canada the free trade agreement with the European Union.
Similarly, an early economic association among the NAFTA and Pacific Alliance
nations including Chile, Colombia, and Peru in addition to Mexico would be both
.timely and appropriate
The meeting of North American leaders next month in Mexico will offer a
tremendous opportunity to take stock of the NAFTA agreement to date, and to begin a
process that builds on NAFTA even while updating it further. The leaders should
commit at a minimum to annual trilateral meetings, which will drive the agenda and
keep these issues at the forefront, and allow for greater coordination to the extent
appropriate for the broader trade agenda. They should commit to a process that
includes the private sector whereby the unrealized gains from NAFTA can be
identified and addressed, and lessons learned from the agreement can be directly
applied to the TPP and TTIP negotiations. And they should begin a dialogue with the
leaders of the Pacific Alliance and other nations that will advance discussions on
hemispheric economic integration even as the Summit of the Americas, which was
originally conceived as the primary forum for region wide economic discussions, has
.lost its primary economic focus
No negotiation ever produces a perfect result, especially when the issues under
negotiation are at the vanguard of whats been done before. So it was with NAFTA 20
years ago, but the results have nonetheless proven the test of time. Now, given
changed circumstances both within North America and also outside the region in the
larger emerging markets such as China, India, and others, its time to have another
.look to determine where further progress can be made

Thank you, again, Mr. Chairman, for the opportunity to be with you today, and I look
.forward to your questions