The North American Free Trade Agreement (NAFTA) that recently completed two decades of existence, was a trendsetter in many ways. However, over the years, the trade agreement that was to build export and growth for all member countries - Mexico, the US and Canada - has lost its sheen with countries such as China and other trade agreements displacing the expected gains from NAFTA.
The Global Economic Governance Initiative has discussed the impact of China's growing presence in global markets and its impact on NAFTA in a recent study. The authors of the study, Enrique Dussel Peters and Kevin P Gallagher, have argued that the entry of China into the World Trade Organisation and its subsequent access to global markets has displaced the earlier strongholds of Mexico, the US and Canada in each other's markets.
The study shows that "China is becoming an important trading partner for both Mexico and the United States. By 2009, China had become the second largest trading partner for both countries, whereas in 1995, China had not been among the top five trading partners for either one." Interestingly, the China factor has been felt across 50 sectors where Mexico and the US have had comparative advantage over other countries for accessing each other's markets due to NAFTA.
The study shows that 96 per cent of the US' manufacturing exports to Mexico, which represent 62 per cent of the total US exports to Mexico, are under threat from China. It is interesting to note in this case that none of the exports are experiencing a partial threat, rather all are considered to be under direct threat.
For Mexico, 81 per cent of Mexican manufactures' exports and 56 per cent of total Mexican exports to the US are under threat from China. In the case of Mexican manufactures, 52 per cent of Mexican exports to the US are under direct threat, and 29 per cent are under partial threat.
The only sector in which Mexico is not under threat from China or is gaining market share with respect to China is in relation to cars, trucks and related parts and accessories. This is because such items are physically heavy to transport from China, and because the North American auto sector enjoys protection under NAFTA.
In terms of total Mexican exports, 36 per cent are under direct threat and 20 per cent are under partial threat from China. Unlike Mexico, China does not export petroleum or other commodities to the US, which explains why its total export share is not as significant, the study said.
This study provides great insight for all bilateral and regional trade agreements that are mushrooming as of now. The NAFTA example shows that trade partners need to keep the agreement dynamic if they have to remain ahead of other countries, which are looking to capture global markets.
There are, therefore, some insights that countries including India can gain by studying the Chinese assault in the North American market that has disturbed the original calculations of NAFTA.
First, trade partners need to have a serious review process for trade agreements. The current review process does not always take into account the dynamic situation around the globe that can impact the agreement. The review process has to be made much more relevant to the global situation and in each other's markets.
Second, countries may want to consider the fact that a comprehensive agreement covering all aspects of economic activity - goods, services and investment - does not in itself make partners competitive in each other's market. NAFTA goes well beyond trade, and there are enough bilateral investments between the US and Mexico. However, China has managed to get to the top. Trade partners, therefore, need to continuously review the competitiveness quotient in the agreement to keep it relevant.
Finally, it must be understood that trade agreements cannot exist for an eternity. There would be an expiry date for all agreements. What could be important is to renegotiate an agreement that takes into account the prevailing global market conditions to keep the agreement relevant for industry.
Industry also needs to keep a close watch on the benefits accruing from agreements and realise when a bilateral or regional deal turns redundant. It must regularly bring the negotiators up-to-date on the benefits of the agreement, so that the gains from a deal can remain pertinent.
The author is Principal Adviser at APJ-SLG Law Offices
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
