How do Free Trade Agreements (FTA’s) work in reality? Are FTA’s truly effective in facilitating, promoting and growing trade between countries?
Thomson Reuters Labs have looked at the data behind one of the world’s most notable FTAs – NAFTA – to reveal the layers of complexity that determine how a successful Free Trade Agreement operates.
“Free trade agreements have drastically altered the flow of commodities around the world.”
Daniel Redo, Head of Agriculture Research at Thomson Reuters
What does a successful Free Trade Agreement look like?
The North American Free Trade Agreement, or NAFTA, between Canada, Mexico, and the United States, came into force in 1994. The deal focused on eliminating trade tariffs between the countries, particularly in the agriculture, textiles, and automobile manufacturing industries. It also sought to protect intellectual property, establish dispute-resolution mechanisms, and, through side agreements, implement labor and environmental safeguards.
According to Eduardo Vitor, Head of Market Development and Product Management, Global Trade Management at Thomson Reuters, there is no single metric that defines a successful FTA, but NAFTA is notable for two main reasons:
- Creating a US$20 trillion market with 460+ million consumers
- Increasing trade between its three member countries by 400%+
NAFTA Trade flows over time
By examining annual commodities trade data for the United States, Canada and Mexico through the lenses of commodity type and time, we can detect trends and patterns supported by the data.
Which commodities have experienced the greatest increase in trade within NAFTA? Which NAFTA countries have the strongest import-export bonds between each other, and at what point in time? How much intra-NAFTA trade occurs compared to extra-NAFTA trade for a given commodity?
NAFTA success stories
Daniel Redo, Head of Agriculture Research at Thomson Reuters, says NAFTA opened up market opportunities for all three countries. Previously, tariffs, quotas and trade restrictions had prevented certain commodities being traded cost-effectively:
“From an agricultural standpoint, the real significance is that prior to the 1990s, Mexico wasn’t a big market for U.S. agriculture imports, but is now one of the largest destinations for U.S. livestock and crops, particularly corn. In turn, North American markets opened up to highly specialized commodities, particularly fresh produce like avocados and other fresh or frozen high-value fruits and vegetables.”
Would you like avocado with that?
Avocado with your poached eggs? Guacamole on that burrito? Americans can thank NAFTA for being able to enjoy reasonably priced avocados all year. Prior to this, the fruit was largely a specialty or niche item in the U.S., and usually available only in the summertime when California harvested their crop.
Meanwhile, just across the border, in western Mexico, the avocado is grown year-round, however Mexican avocados had been banned from the U.S. decades earlier for fear of contamination from fruit flies. But with NAFTA, Mexican avocados were first allowed into the northeastern U.S. (with the thought that the colder climate would stave off the flies) and with the elimination of tariffs and new quota establishment, they became relatively more affordable.
The case of the avocado is in a sense, unique, but the same general principle holds true for other specialized fruits and vegetables like broccoli, lettuce, melons and asparagus. When the U.S. is locked in winter and California and Florida can’t grow these crops, Mexico’s climate and geographic proximity are primed, and facilitated by NAFTA, to meet that demand.
Mexico’s automotive industry – La joya de la corona!
From the first automobile plant in Mexico in 1925, through the crisis in 1983 in which Mexico changed policy to boost exports, the implementation NAFTA in 1994, the “boom” in production in this century – Mexico has become prime territory for the automotive industry.
In 2015, the sector represented more than 3% of the Gross Domestic Product (GDP) of the country. Mexico ended 2015 with a surplus trade balance by about US$50,000 million and domestic sales above 1.3 million vehicles, and production of 3.4 million vehicles. Mexico employed 1.7 million people, including direct and indirect jobs in that country for this sector.
Mexico is almost reaching Japan to become the number 2 supplier of vehicles to the U.S. market.
Currently, Mexico has eight automotive producers in Mexico: Ford, Chrysler, GM, VW, Toyota, Nissan, Mazda and Honda.
According to the Mexican Automobile Industry Association, vehicle destinations of Mexico’s exports in the first quarter 2015 were 70% to the United States, 1.8% to Canada, 2.6% Germany, 2.4% Brazil, 2.1% Colombia, 2% to China, 1.3% Saudi Arabia, 0.9% Argentina and 0.5% to Italy.
Marcos Piacitelli, Free Trade Agreement Specialist at Thomson Reuters, says Mexico stands out for its geographic location as a close door to the U.S. car market with very cheap labor in comparison to other countries, a good reputation for producing with excellent quality, great production efficiencies and several public and tax incentives to promote growth and development.
“A key to Mexico’s stand out automotive success is an extensive network of Free Trade Agreements (FTAs), which provides the sector with access to 45 countries.”
NAFTA automotive trade in 1994
NAFTA automotive trade 2015
Canada’s oil woes
Joshua Starnes, Director of Oil Research, Americas, Thomson Reuters, argues that the recent struggles of Canadian oil exports are not the problem of U.S. fracking so much as the combination of fracking and U.S. oil exports.
“When U.S. oil exports were banned, U.S. fracking was a boon to Canadian exporters as Canadian heavy crude was the perfect complement for U.S. light shale crude to create the medium grades U.S. refineries need. The lifting of the U.S. ban has allowed desirable light crude to flow out of the U.S., decreasing the need for Canadian heavy crude in the U.S. refining complex.
“Canada now has to face increased competition on the world market for its heavy crude.”
NAFTA fuel oil trade 1994
NAFTA fuel oil trade 2015
Determining the true impact of NAFTA
It takes years to understand the true impact of Free Trade Agreements – and many of the effects of NAFTA are still being determined even to this day. Different commodities are affected in different ways, and not always positively, as Daniel Redo explains:
“Some have argued that NAFTA has been largely negative for Mexican corn farmers. The argument goes that with increased U.S. corn imports (which are padded by subsidies), local prices in Mexico dropped, and small-scale farmers in Mexico have been unable to acquire positive returns.
On the other hand, there also reports showing that NAFTA has been overall beneficial to Mexico’s small-scale fruit and vegetable farmers and overall good for the Mexican economy.”
NAFTA all commodities trade 1994
NAFTA all commodities trade 2015
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