When I saw the headline on a new article co-authored by David Petraeus, former U.S. military commander in Iraq, my first reaction was “Finally! Someone from the American national security establishment who gets it on international trade!” When I finished, I realized that Petraeus had simply joined the rapidly swelling ranks of bigwigs who believe that they can become instant experts on the subject.
His ForeignPolicy.com piece, “North America: the Next Great Emerging Market?” looked like it would recognize that the United States lately has been outperforming the rest of the world economically – and would therefore challenge the flood of blather that’s accompanied Congress’ just-concluded fast track trade debate about America’s desperate need for foreign markets. But the article makes embarrassingly clear that Petraeus and his colleague don’t come close to understanding even this hemisphere’s economic and trade dynamics, much less the rest of the world’s.
According to Petraeus and management consultant Paras D. Bhayani, the success of the North American Free Trade Agreement (NAFTA) should convince skeptical Americans how well the nation (and Canada and Mexico) will be able to compete in the new world economy being created by new trade agreements like President Obama’s Trans-Pacific Partnership (TPP). The “unrivaled market integration” created by NAFTA, they argue, has created a “record of shared prosperity” that “should be a compelling reminder of the benefits of improved economic ties.”
With all due respect for Petraeus’ service to his country, this is so ignorant it may not even qualify as fakeonomics.
Let’s start the lesson with the most important reality about the highly integrated North American economy that has so impressed the authors. When NAFTA went into effect, in 1994, the United States represented 86 percent of all the continent’s output adjusted for inflation. Through 2013, the last year that apples-to-apples World Bank data is available, this predominance was virtually changed, with the United States accounting for 85.93 percent of North American real gross product. And the 2014 growth estimates so far on record for the three NAFTA countries make clear that the so-called North American economy remains little more than the U.S. economy, and that the foreseeable future will feature more of the same.
The stable relationship between the gross domestic products (GDPs) of the three North American economies is also sending another message that trade enthusiasts keep ignoring: Throughout NAFTA’s lifespan, Canada and Mexico have not grown appreciably faster than the United States. So the notion that selling to customers there deserves some outsized degree of importance in American eyes is completely unjustified from a macro-economic standpoint.
When the trade flow details are examined, the idea that its closest neighbors are important growth engines for the U.S. economy appears even sillier. Under NAFTA, the $25.11 billion goods trade deficit America ran with Canada in 1994 has nearly quadrupled as of 2014, and a small $531 million surplus with Mexico has turned into a shortfall just shy of $100 billion. And not even stripping out oil changes the overall NAFTA trade situation significantly.
Properly counted (i.e., omitting goods made abroad but shipped through the United States), the NAFTA years have indeed seen an improvement in the American ing trade balance with Canada in manufacturing – the sector that dominates U.S. global and regional trade. From 1994 to 2014, a $402 million surplus soared to $2.71 billion. But this development has been absolutely swamped by the transformation of an $8.44 billion American manufacturing trade surplus with Mexico into a $75.53 billion deficit.
NAFTA could still rightly be viewed as a success despite America’s deteriorating regional trade performance had these developments somehow significantly brightened the nation’s economic fortunes with the rest of the world economy. And indeed, some of NAFTA’s more sophisticated champions promised that the agreement’s most important benefits would be structural, and concentrated in manufacturing. Check out my book The Race to the Bottom for numerous predictions that the agreement would boost U.S. industrial competitiveness by (a) freeing American-based manufacturers and their workers to concentrate on high-value and more lucrative activity while (b) encouraging less advanced, mainly labor-intensive production of parts and components to be handled by less developed Mexico.
For these predictions to have panned out, America’s global manufacturing trade balance would need to have shown improvement under NAFTA, or at least some evidence would have needed to emerge of U.S.-based producers’ greater ability to sell to the rest of the world through either Mexico or Canada. Yet the U.S. global manufacturing trade deficit keeps hitting annual new records despite subpar national economic growth since the Great Recession ended. Even worse, although its only possible to calculate figures through 2011, American manufacturers have steadily lost share of their home market to foreign rivals even in high-value sectors during the NAFTA years. Meanwhile, both Mexico and Canada have become only slightly less dependent on selling to the U.S. market than they were in 1994. In fact, each still sends more than 70 percent of its goods exports annually across their main land borders.
Further debunking NAFTA optimists’ predictions, Canadian and Mexican exports to the United States are not overshadowed by overall economic structures that qualify them as promising final markets for U.S.-origin goods and services. Both economies are export heavy – and about three times more than America’s. Since NAFTA’s implementation, Canada’s export dependence has declined, with overseas sales’ shares of its GDP falling from 36.10 percent to 30.20 percent. But the comparable Mexico figure is up from 25.20 percent to 31.70 percent – and let’s not forget that it was Mexico’s addition to an already existing U.S.-Canada free trade agreement that made NAFTA NAFTA. (The American economy has become more export-heavy, too, but the figure has risen only from 10.60 percent to 13.50 percent over the two NAFTA decades.)
Even with U.S. preponderance, greater integration of North America’s economies could have benefited the United States on net, along with Mexico in particular, had NAFTA been structured more intelligently, and had it not been followed by a long string of even bigger trade policy mistakes – chiefly, the reckless expansion of America’s trade with China. Even greater hemispheric energy integration would be great, too – and it’s one area where both Canada and Mexico actually do bring a great deal to the table.
As for North American integration more broadly, however, since Petraeus is new to the subjects of trade and globalization, he can arguably be forgiven for viewing NAFTA through rose-colored lenses. But his study also strongly indicates that until he gets up to speed on his international economics, he should stick to his national security knitting.