Benefits of FTAs: NAFTA an example

By Robert Blake Jr. United States Ambassador to Sri Lanka and the Maldives

The proposed India-Sri Lanka Comprehensive Partnership Agreement (CEPA) has received some recent criticism in Sri Lanka that suggests that the benefits of free trade may not be sufficiently well understood.

The North American Free Trade Agreement (NAFTA) received similar criticism before the United States, Mexico and Canada approved the agreement.

The benefits all three countries have derived from NAFTA supports the increasingly strong consensus that, as a general principle, international trade is a good thing, and the freer it is, the better.

The United States is party to several bilateral and multilateral agreements that encourage free trade. Perhaps the most prominent of these is NAFTA.

NAFTA is an especially illuminating example since it involves economies of dramatically different levels of gross domestic product (GDP) and GDP per capita. It has also been in operation far longer than many other US trade agreements, allowing for a clearer understanding of its effects.

When NAFTA came into force, the US economy was 12 times larger than Canada's and more than 16 times larger than that of Mexico.

On a per-capita basis, the US economy generated nearly 25 per cent more GDP per person than Canada's, and nearly six times more than Mexico. By the end of 2007, all these disparities had narrowed. Canada's per-capita GDP is now roughly equivalent with the United States; Mexico is about one-fifth that of the United States.

From NAFTA's implementation in 1994 to 2006, trade among these three countries tripled, and NAFTA partners now conduct nearly $ 2.5 billion in trade per day.

All three of these diverse countries have benefited enormously from this agreement. The United States increased its exports to Canada and Mexico by 157 per cent during that time. The other two NAFTA members benefited even more. Canada's exports increased in value 173 per cent.

Mexico, the poorest of the three NAFTA members, has benefited the most. Its exports to the United States during NAFTA's first 12 years grew by a whopping 392 per cent to more than $ 212 billion. Its exports to Canada also ballooned during this time, from USD 1.5 billion to USD 5.2 billion, a rise of nearly 237 per cent.

The benefits have extended beyond trade. Investors, whether businesses or individuals, crave transparency and stability.

Tangible benefits

One of NAFTA's most important contributions has been to help establish a strong and transparent framework for long-term investments. As a result, foreign direct investment (FDI) by NAFTA members in each other has tripled, to $ 533 billion. These investments have helped industries in all three countries become more productive and better able to compete in the global marketplace.

In the first ten years of NAFTA, for example, Mexico's productivity improved 55 per cent.

What matters most to any responsive government, of course, is how these kind of agreements create tangible benefits for its citizens. On this score, NAFTA has been an unqualified success.

Canada's GDP has grown by 150 per cent in the NAFTA era, and its per capita GDP by 120 per cent. The United States has more than doubled its GDP while per capita GDP has increased more than 70 per cent.

The benefits to Mexico's economy go far beyond macroeconomic statistics, and are impressive. Mexico's economy, measured by the size of its GDP, has more than doubled since NAFTA's founding. Its per-person increase in GDP has been just as striking, growing by 85 per cent, even though Mexico's population increased by nearly 20 per cent over the same time.

Most important for Mexican workers, wages in export-related industries (those most helped by trade agreements) are 37 percent higher than in the rest of the economy. Wages are also higher in sectors with greater exposure to exports or imports. There are also other, often less tangible, benefits. NAFTA, for example, included provisions for cooperation on environmental issues and in ensuring that international-standard labour practices are observed in all NAFTA countries. The environmental provisions have greatly facilitated the transfer of energy-saving and other green technologies and encouraged companies operating in all three countries to share best practices.

Characteristics

Just as all nations are unique, all trade agreements have their own particular characteristics. But the benefits of freer trade are clear everywhere. Sri Lanka's FTA with India, for example, has enabled Sri Lanka's exports to India to increase ten-fold since the agreement came into effect, and India is now Sri Lanka's third-largest export destination.

Increasing access to one of the world's largest and fastest growing markets is increasingly desirable in today's highly competitive and global market.

American companies are pouring into India and are hoping for ever-greater access to that market. Indeed, one of the main goals of the United States in the WTO negotiations is to increase access for American goods and services into the Indian market.

In short, international trade continues to grow by leaps and bounds, and governments and businesses around the world are working hard to take advantage of this opportunity.

Agreements that encourage freer trade by lowering tariffs, creating uniform standards, and establishing common platforms for both cooperation and competition can and do provide tremendous benefits for the citizens of participating nations.