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NAFTA and Logistics

By Elmore Alexander | 10/21/2016 | 6:43 AM | Categories: Current Affairs, Weblogs

Interestingly, the NAFTA debate of the current election cycle has focused primarily on US–Mexico trade generally ignoring the US–Canadian relationship.  Sometimes we forget how significant this latter relationship is[i]:

  1. The largest bilateral trading relationship in the world—approaching three-quarters of a trillion dollars and supporting almost 2 million jobs;
  2. The longest international border in the world—crossed by 400,000 people each day;
  3. The largest integrated electrical power system in the world—and, lest we forget, Canada is the largest supplier of foreign oil to the US; and finally,
  4. The largest system of Foreign Direct Investment in the world with the US being the largest source of FDI in Canada and Canada being the 3rd largest source of FDI in the US.

There can be no question that the United States and Canada are uniquely joined.  Even pre-Brexit, our interdependencies were much more significant than those of the European Union—we share a common language and a common level of economic development and it has now been over two centuries since we raised arms against each other.  

NAFTA created a $19 trillion dollar common market of 470 million customers.  Importantly, it was the first trade agreement that combined developed nations (the US and Canada) with a developing one (Mexico).[ii]  This is a remarkable achievement and represents an element that is critical to the future resiliency of the partnership. 

Despite Ross Perot’s warning of a “gigantic sucking sound” and Donald Trump’s recent declaration that NAFTA is a total failure, most economists argue that the agreement has had a net positive impact on all three countries.[iii]  Unfortunately, the effects have been uneven; and the post-election period will probably focus on worker adjustment programs to ease transitions from old into new jobs or to financially compensate displaced workers.  I do not, however, see a renegotiation of NAFTA on the horizon.  As a matter of fact, I think that a post-election Congress is more likely to support TPP albeit in a form that provides more worker retraining and displaced worker provisions.

The reason I expect this outcome relates to one of the most important, but frequently ignored, statistics surrounding the NAFTA relationships.  Today, approximately 40 percent of the average US import from Mexico is attributable to US value-add.  The comparable statistic for Canadian imports is approximately 25 percent.[iv]  The success story of NAFTA is not free trade but integrated economies.  For example, consider the construction of a Bombardier Learjet.  With the exception of Irish wings, the Learjet 85 is a North American product—fuselage constructed in Mexico and engines built in Canada but designed by Pratt & Whitney in the US. Automobiles are similarly North American with the parts and labor of the majority of cars spread across the US, Canada and Mexico.  When Ford recently decided to shift production of compact cars to a plant in Mexico, it retooled the plant to produce high end trucks and SUV’s at no loss of US jobs.  Actually, auto-making jobs in the US have grown by 200,000 since the end of the Great Recession.

Importantly, since the NAFTA partnership is not homogeneous, it creates opportunities for Canada and the US to utilize lower wage rates in Mexico strategically (as in the case of low margin compact cars) to compete with products from low wage Asian nations.   The development of cluster industries exploiting our heterogeneous North American comparative advantages is likely to grow in future years.  In particular, both demographics (a young Mexican workforce) and energy (huge US and Canadian reserves of low cost natural gas and clean Canadian hydroelectric power) as important hedges against Asian Tigers.  

The unevenness of the impact of trade agreements, however, is real.  Trade boosts overall GDP while redistributing the portions to capital and highly educated workers at the expense of low skilled workers.  Thus, the trade discussion needs to move forward considering funding for increased worker training and displaced worker compensation as a condition for lowered trade barriers. Economist Jeffrey Sacks goes so far as to argue that companies benefiting from free trade should be taxed to provide the funds to compensate displaced workers. 

This strategy should be very familiar to people within the logistics industry. Mark Levinson's landmark book, The Box, provides a great description of our experience with the introduction of standardized shipping containers.  To allow the introduction of standardized containers over the objections of longshoremen in the 1960’s, shipping companies agreed to share the efficiency gains through guaranteed but unnecessary jobs.  Surprisingly (or not), the efficiency gains were so great that the introduction of the new technology resulted in labor shortages not surpluses in the very first year of the agreement.

The world economy is not perfect, but it is hard to make a rational case for isolationism.  I, for one, think that rational analysis will lead us back to a discussion of how to make trade work to the betterment of our economies in the upcoming months.  For logistics, this means an increasingly important role in making the transportation system an increasingly efficient part of the world economy.

 

[i] https://www.whitehouse.gov/the-press-office/2016/03/10/fact-sheet-united-states-%E2%80%93-canada-relationship

[ii] https://www.foreignaffairs.com/videos/2014-06-06/foreign-affairs-focus-carla-hills-nafta-20

[iii] http://knowledge.wharton.upenn.edu/article/nafta-20-years-later-benefits-outweigh-costs/

[iv] https://www.foreignaffairs.com/videos/2014-06-06/foreign-affairs-focus-carla-hills-nafta-20

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About Elmore Alexander

Elmore Alexander

Elmore Alexander is Dean and Professor of Management in the Louis Ricciardi College of Business at Bridgewater State University in Bridgewater, Massachusetts. Prior to joining Bridgewater State, he served as Dean and Professor in the School of Management at Marist College. Previously, Dr. Alexander was Dean of the School of Business Administration at Philadelphia University, Director of the Division of Business and Management at Johns Hopkins University, Associate Dean and Chair of the Management Department within the Kogod School of Business at American University in Washington, D.C. and Professor of Management and Director of the Fogelman Executive Center at the University of Memphis.



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