May 12, 2008 – NAFTA: Time for a change?

By Steve Bauer
Managing Editor
As the race for the White House charges on, the North American Free Trade Agreement (NAFTA) is becoming the center of controversy between the three remaining presidential candidates, and their stances on whether to renegotiate the policy have caught the attention of the powersports and automobile industries.
The agreement, which passed in 1993 under former President Bill Clinton’s administration, has been under attack in recent weeks by Democratic presidential candidates Hillary Clinton and Barack Obama. Both have expressed their eagerness to renegotiate the treaty to prevent what they say has been an unacceptable loss of U.S. jobs to Mexico and Canada. John McCain, the front-running Republican candidate, says NAFTA has allowed the United States, Canada and Mexico to be more competitive in the global market, and says the agreement’s benefits far outweigh its negatives.
The debate is of particular interest to the powersports and automobile industries, which argue NAFTA has allowed them to compete with the influx of Asian products and has been a boost financially for each industry.
“It’s been crucial for both industries to have the ability to build plants and use cheaper labor and raw materials in Canada and Mexico,” said Ryan Bellvue, an analyst with McLain-Kennedy LLC. “On the powersports side, some of the things you’re seeing today like Harley-Davidson in Mexico and BRP’s increased presence in the U.S. market wouldn’t have been possible before 1993.”
Critics of the treaty include labor unions, particularly the United Autoworkers of America (UAW), which says NAFTA has bled U.S. manufacturing jobs, contributed to soaring trade deficits and become a model for other bad trade deals the U.S. government has made.
“As one would expect due to the diminished cost of Mexican labor, U.S. imports from Mexico grew to $210 billion in 2007, while America’s exports to Mexico during that time reached $130 billion,” said Sam Jannsen, spokesman for the UAW. “That deficit will keep growing as long as industrial jobs continue to be funneled out of the country.”
Manufacturers argue that NAFTA’s tremendous financial impact on local economies is too quickly dismissed by labor advocates, and that money coming into the U.S. economy as a result of the treaty allows new jobs to be created.
“Roughly $380 billion worth of goods are shipped across each country’s borders on an annual basis,” said Chris Moore, a spokesman for General Motors. “What that means is there’s a lot of businesses, large and small, that are benefiting from NAFTA. And what a lot of people gloss over is the fact that while jobs might have been lost in traditional manufacturing states like Ohio or Pennsylvania, job growth in border states has more than made up for what was lost.”
Moore says tremendous growth of exports to Canada and Mexico would be seriously hampered by any limitations placed on current free trade agreements.
“U.S. domestic exports to its NAFTA partners have increased dramatically with real growth of 114 percent to Mexico and 60 percent to Canada,” he said. “By changing the parameters of the current NAFTA terms, we fear those numbers would drop drastically, leaving the U.S. economy in worse shape than it currently is.”

Manufacturers counter
Nationwide, response to NAFTA is not unified, but instead tends to reflect the effect of the trade pact on a given state’s economy. NAFTA critics have argued that it has driven high-paying jobs into Mexico and Canada and done little to help the American worker, created economic stagnation among the American middle class and caused an increase in income inequality.
Although NAFTA’s critics argue that more than 1 million U.S. manufacturing jobs have been liquidated since its inception, many economists argue these losses are not necessarily attributable to NAFTA.
“It’s true that there has been a decline in the American manufacturing sector, but you can’t place the blame solely on NAFTA,” said Mark Benson, a professor of economics at the University of Minnesota. “Several studies have been conducted on this subject, and by and large they all come to the conclusion that outsourcing manufacturing jobs to countries overseas is a much bigger culprit for U.S. job loss, not NAFTA.”
Another claim that a growing U.S. income deficit with Mexico and Canada has resulted in lower wages for U.S. employees has been verified in recent studies by both the Wharton School of Business and Stanford University.
“Our 2007 study showed that the high demand for jobs in Mexico at reduced salaries has given American companies the leverage to counter aggressive U.S. labor demands, keeping U.S.-based firms more competitive but shrinking employment,” said Arthur Dassel, a business professor at Stanford.
Manufacturers argue, however, that outsourcing lower paying jobs to other countries has allowed the companies to build up their profit foundations, allowing them to reserve higher paying jobs for U.S. workers, while using lower salary workers in other countries to do jobs that have traditionally been difficult to fill with American workers.
“Unions tend to cry foul on this issue, but the fact is that their workers don’t want the lower-paid jobs we need filled, and NAFTA has allowed us to look to other options that are both cost effective and convenient,” General Motors’ Moore said.
Edward Alden, a trade and immigration expert at the Council on Foreign Relations, says the globalization of today’s economy means companies need agreements like NAFTA in place in order to survive and compete.
“If you analyze the sum total of all trade agreements that the United States has signed during the past decade, they have definitely reinforced the globalization of the American economy,” he said. “This has put a lot of sectors, particularly manufacturing, under intense competition. But only a small fraction of that competition has actually come from the countries that are part of NAFTA. Most of the competition has come from the rest of the world.”
Alden says the recent presidential debate has become removed from the reality of the trade agreement. Neither Democratic political candidate, he notes, has expressed a desire to revoke NAFTA, but instead have called for renegotiation of labor and environmental side agreements with Mexico.
“The considerable pressure on the U.S. manufacturing base is coming from trade with China, Japan and India,” he said. “When push comes to shove, it’s unlikely any of the candidates would seek to renegotiate trade agreements once elected to office.”

An economic boost
Since NAFTA went into effect in 1993, trade among Canada, the U.S. and Mexico has more than tripled, to almost $1 trillion. As a result, U.S. manufacturing has been more efficient than in any time period dating back to the 1940s, according to data provided by the U.S. Census Bureau. Productivity has been growing, too, as American manufacturing output rose 58 percent from 1993 to 2006.
“Much of the production increases are due to improved technology, but the efficiency rate is a direct result of companies being able to outsource some of their workforce,” Minnesota’s Benson said.
With the growing influx of Chinese products into the U.S., Canadian and Mexican markets, NAFTA’s role in ensuring North American companies can compete has only become more prominent.
“The ability for us to make wholesale transfers of production to areas outside of the U.S. only benefits consumers, and it is in the best interest of our financial health that NAFTA remain in its current form,” said Cory Johnson of aftermarket manufacture Sunstar.
“Massive relocations that many predicted would happen in the early 1990s haven’t happened, and it’s because so many companies, including powersports, are balancing their investments both domestically and overseas.”

Impact on dealers
One sector of the powersports industry that has greatly benefited from NAFTA has been U.S. and Canadian dealerships, especially those close to neighboring countries’ borders.
Josh Kamen, owner of Rio Motorsports outside of San Diego, Calif., says the ability to market and sell to consumers in Mexican border towns has been a boon to his business. “Before 1993 there were many more limitations on how we could sell merchandise to the South, and the past decade I’d say 60 percent of my business comes from buyers across the border.”
Kamen says he opposes any changes to the current NAFTA outlines, noting his business would likely go under if harsher restrictions were placed on selling vehicles and merchandise to Mexico.
“This is the first I’ve heard of (NAFTA) possibly being altered, and I’m anxious about it,” he admitted. “I don’t think people who oppose NAFTA have any idea the opportunities it has created for small businesses like mine.”
In the northern U.S., the attitude toward NAFTA takes a slightly different tone. But the criticism is aimed more at the falling value of the U.S. dollar and manufacturers’ policies than the agreement itself.
William McNamee, owner of Northern Lights Powersports outside of International Falls, Minn., says he’s been hurt by Canadians coming across the border to purchase vehicles at his store at largely discounted rates because of the exchange rate of Canadian currency.
“I have daily complaints from my customers from the states who want to know why our government allows Canadians to come across the border and buy vehicles that end up costing them half of what it does for others, not to mention taking profit right out of my pocket,” he said.
McNamee says he understands that U.S. customers had the advantages of buying Canadian goods cheap in the past and concludes that it’s a cyclical process.
“Do I think the current economic conditions are unfair, yeah,” he said. “But that doesn’t mean we need to destroy a system that has allowed us tremendous selling opportunities in the past decade.”

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