NAFTA vs. MFN

Companies and employees being helped by NAFTA are benefiting primarily via the lower tariff rates charged to their exports to Canada and Mexico. Although many tariffs on goods exported to Canada were already low due to the 1989 Canada-U. S. Free Trade Agreement (CUFTA), NAFTA has had the added benefit of nearly eliminating the once-common trade frictions among North American countries, frictions that often led to tariff battles and other general trade disputes.

In a speech in Detroit in April 1999, Canadian Senior Trade Commissioner Ray Guy said that NAFTA's dispute settlement clauses have "been very effective in eliminating the tit-for-tat, temporary trade escalations that used to occur all the time," especially among Canada-U. S. trading partners. Such escalations distorted the notion of free trade, as the two countries would go back and forth, adding new obstacles to the trade of a certain product in response to another country's new, stricter regulations on that same good. "NAFTA has helped us avoid costly trade wars," said Guy.27

In 1993, 49 percent of Chrysler's American motor vehicle exports went to Canada and Mexico. By 1998, that figure had increased to 66 percent.

 

Lower Tariffs

NAFTA is effectively a tax cut on American products sold in Mexico and Canada. Prior to NAFTA, Mexican tariffs charged on the products of Michigan companies averaged around 20 percent, about the same as those of most non-NAFTA nations who export to Mexico currently. Mexican tariffs on American goods were once over 100 percent, but had been reduced in the years leading up to NAFTA as a sign of good faith by the Salinas administration as it postured itself for future NAFTA negotiations. As noted earlier, the tariff rates to Mexico will be totally eliminated over a 15-year period that started January 1, 1994.

Michigan businesses are already enjoying the benefits of tariff-free trade with Canada thanks to CUFTA. As a result of the lower cost of exports and imports, Ray Guy stated that trade between Michigan and the province of Ontario now exceeds that of Michigan to Japan.28

Table 2, below, is an actual tariff-reduction schedule from a Michigan company, Steelcase International. The schedule delineates tariffs on exports of Steelcase's products—namely, chairs, furniture, and furniture parts. Both Canada and Mexico each have NAFTA rates and most-favored nation (MFN) rates that they apply to certain products. This schedule shows those rates and makes clear the lower-tariff advantage under NAFTA.

The tariff schedule shows that the rates on Steelcase's exports to Canada have zeroed out. These cuts were facilitated by the 1989 CUFTA accord. The rates on Steelcase's exports to Mexico have been cut substantially since NAFTA started in 1994, and are now below MFN rates, after being near equal to the MFN rates when NAFTA first began. The tariff reductions on Steelcase's exports to Mexico have been cut by roughly two percent per year. Note, also, that the MFN rates on the Mexico side of the schedule have not gone down.

 

Trade Rationalization

Canada's Guy also speaks of "trade rationalization" that has occurred since NAFTA went into effect. Prior to the agreement, manufacturers often had to produce the same product in three different factories to meet the requirements of the North American market. He mentions Battle Creek-based Kellogg Company as an example. Prior to NAFTA, Kellogg had to produce Corn Flakes in Mexico, Canada, and the United States so it could export to each of those countries and avoid the high tariffs that the company would otherwise encounter. Now, under NAFTA, Kellogg can consolidate its operations.

It is important to note that companies that benefit from NAFTA are not specifically tracked the way those that claim to be hurt are tracked for purposes of TAA benefits. It is easy to consult NAFTA TAA petitions to get an idea of how many businesses have claimed injury by NAFTA, but there exists no such tabulation for companies that have thrived under the agreement's changes. Therefore, the information on "winners" is more difficult to tabulate.

While companies of all sizes and industries have benefited from NAFTA, an examination of Michigan companies should begin with the auto industry, where the results could not be more apparent—and good—for Michigan. Ford calls NAFTA an "unequivocal success"29 and General Motors says, "NAFTA has definitely lived up to its promise."30

Ford, General Motors, DaimlerChrysler, and their employees are all benefiting from tariff cuts generated by NAFTA. These include the following:31

  • Mexican tariffs on cars and light trucks originating in the United States or Canada were immediately reduced from 20 percent to 10 percent on January 1, 1994.

  • The passenger car tariff was subsequently reduced by 1.2 percent in 1995 and has been and will continue to be reduced by 1.1 percent each year until it is eliminated on January 1, 2003.

  • The Mexican tariff on light trucks was reduced by 2.5 percent per year, beginning in 1995, until it was eliminated on January 1, 1998.

  • Mexican tariffs on heavy trucks (all vehicles weighing over 8,864 kilograms), cab chassis, truck tractors, buses, and specialty vehicles were cut from 20 to 18 percent on January 1, 1994, and are being phased out in increments of 2 percent each year until they are eliminated on January 1, 2003.

These tariff cuts, plus other NAFTA changes, have helped Ford and GM. According to the Ford Motor Company, "[P]rior to NAFTA, not only did automakers have to assemble vehicles in Mexico in order to sell there, but all auto producers were subject to a 'trade balancing' system, which required each company to export substantially more than it imported."32 Ford explains that U. S. automakers were required to purchase a high percentage of parts from Mexican suppliers, which often did not meet quality or price standards. This resulted in "less-than-maximum efficiency," and exports to Mexico. NAFTA has changed all of that. It has "allowed Ford to make its established plants in Mexico more efficient."

Now that it can act regionally rather than country-by-country, Ford has consolidated all production of Mercury Cougars at a U. S. plant, discontinuing low-volume production at its Cuautitlan, Mexico, plant. Cuautitlan production of the Grand Marquis has also been moved to Canada. Ford's ability to produce all of a car model at a single North American plant is a prime example of how trade rationalization is helping U. S. companies—and Michigan companies in particular. In this case, says Ford, "NAFTA has allowed Ford to improve its competitiveness by planning production to meet the needs of all of North America, rather than having to focus on single-country markets."33

Ford cites numbers to back up its claims of NAFTA's benefits. Before NAFTA, sales of Ford products accounted for less than one percent of the Mexican market. By 1996, sales of Ford products from the United States and Canada already accounted for almost 11 percent of the Mexican market. Ford says that success has not come at the expense of American jobs. Ford vehicles assembled in Mexico maintain a high level of U. S. content. For example, the 1998 Ford Contour was produced in high volume at the Cuautitlan plant, but less than 10 percent of its parts come from Mexico. Furthermore, the company says, "Ford employment levels in each of the NAFTA economies . . . have increased since the signings of the Agreement."34

Prior to NAFTA in 1993, General Motors exports to Mexico were "virtually zero."35 By 1997, they had grown to over 60,000 vehicles,36 making GM "the largest seller of vehicles in Mexico." According to a report on NAFTA issued by the company, "The assessment of NAFTA is very positive." 37

GM further touted NAFTA's success in congressional testimony given by its chief economist, G. Mustafa Mohatarem, before the House Ways and Means Committee on September 11, 1997. Mohatarem provided the following remarks on NAFTA:

GM was an early and strong supporter of NAFTA. We believed that it would promote economic growth, improve living standards and enhance cooperation and goodwill between the U. S., Mexico, and Canada. Although all of NAFTA's provisions will not take effect for another 12 years, NAFTA is living up to its promise three years into its implementation. The U. S. auto industry has long benefited from free trade with Canada, but prior to NAFTA, Mexico's market was effectively closed to exports of autos from the U. S. Now, GM is the largest seller of vehicles in Mexico. What is quite remarkable is that this increase in exports has occurred in the face of one of the deepest recessions in Mexican history. We expect exports to rise even more as Mexico's economy recovers. Indeed, Mexico is rebounding far more quickly and strongly than anyone could have imagined. Clearly, Mexico's decision to honor its NAFTA commitments despite the plunge in demand in its domestic market ultimately served to accelerate recovery.38

Mohatarem also points to a boon in jobs and wages in the U. S. auto industry during the first three years of NAFTA:

Contrary to fears expressed by NAFTA opponents, employment in the auto industry increased by 110,000 between 1993 and 1996 . . . . On average, wages in U. S. companies that export tend to be 10-15 percent higher than wages in non-exporting companies. And, in the motor vehicle and equipment industry, wages have increased an average of $1.74 between 1993 and 1996—74 percent above the average for the U. S. private sector.39

GM is quite happy with NAFTA and its impact on GM, Michigan, and the United States: "All in all," concludes Mohatarem, "we think the assessment of NAFTA is very positive and that the benefits of NAFTA will continue to grow. Thus, not only does General Motors continue to be a strong proponent of NAFTA, but we also support its expansion to other hemispheric countries, beginning with Chile." 40

In 1993, 49 percent of Chrysler's American motor vehicle exports went to Canada and Mexico. By 1998, that figure had increased to 66 percent. From 1993 to 1998 Chrysler (now DaimlerChrysler) motor vehicle exports to Mexico increased from 5,613 to 34,830 motor vehicles. In addition, these increased exports to Mexico were accomplished without eliminating a single U.S.-based job. Indeed, not only has hourly employment at DaimlerChrysler increased by 21 percent since 1993, but profit sharing has increased from $4,300 in 1993 to an average of $7,400 per hourly worker in 1998.41

Midland-based Dow Chemical Company claims NAFTA is benefiting the company in more ways than one. In addition to saving Dow $25 million annually as a result of reduced tariffs, NAFTA has helped Dow increase its exports as well.42 According to Frank Farfone, a company representative in Dow's Washington D. C. office, Dow's plastics business has had the largest increase of any Dow business sector since the inception of NAFTA. It is also noteworthy that this growth has come without the relocation of any Dow plants to Mexico or Canada.

Listed below are companies the Embassy of Mexico considers "NAFTA success stories."43 The embassy compiled this list from various company press releases, newspaper articles, wire services, business journals, and other sources. Like many of the TAA claims of injury, we were not able to fully confirm whether each of these NAFTA successes are in fact successes. Nonetheless, here are Michigan "NAFTA successes":

  • Durakon, truck bedliners, Lapeer.

  • FANUC, robotics, Rochester Hills.

  • Delphi Automotive, automotive components, Troy.

  • Pulte Homes, home construction, Bloomfield Hills.

  • Comshare, management software, Ann Arbor.

  • CMI International, automotive components, Southfield.

  • Hayes Lemmerz International, automotive components, Romulus.

  • TEMIC Automotive, automotive components, Detroit.

  • Budd Company, automotive sheet metal, Troy.

  • Kellogg Company, cereal, Battle Creek.