North American Regional Trade
A Significantly Less Fleshed Out Regional Bloc Compared to the EU
The North American Trinity comprises the high-income nations of America and Canada, and Mexico, the one “upper middle income country” (which is a euphemism for “above average developing economy”).
America has a population of ~340M, Canada has ~40M, and Mexico has ~130M.
In 2022 USD prices, the average American’s gross income (which isn’t just wage income, but also includes includes rent, dividends, capital gains, interest payments on bonds, and earnings from foreign enterprises) is ~$77K, For Canadians it is ~$53K, and for Mexico it is ~$11K.
Since gross income per capita is inherently a positively skewed distribution (mean exceeds median), we can use the World Inequality Database to break down average incomes by cohort from most unequal country to least:
In Mexico, the top 10% make 65% of national income, middle 40% make 30%, and the bottom half make 5%.
In America, the top 10% make 48% of the national income, middle 40% make 42%, and bottom half make 10% of the national income.
In Canada, the top 10% make 35%, the middle 40% make 49%, and the bottom half make 16% of national income.
In summary, Mexico is the most unequal and poorest, America is the richest per capita but more unequal than Canada, and Canada is the most equal but slightly poorer per capita than America. Overall, if you're in the top 50% between America and Canada, you earn more in America, but if you're in the bottom 50%, you earn more in Canada. This is a nicer way of saying its better to be richer or upper-middle class in America, but Canada treats its poor and working class better.
Brief Economic Summary of Each Country
Mexico:
Mexico used to have a significant mix of state owned of industry and private industry, and it was primarily an agricultural & commodity driven economy until the nation defaulted on its debts in 1982. Due to the economic challenges Mexico faced at that time, Mexicans started immigrating to America on masse to the United States. The default occurred due to excessive borrowing in dollars for development projects and reliance on oil exports. When oil prices fell, so did the dollar amount of Mexico’s oil exports. Mexico then had a massive trade imbalance, didn’t have enough reserves to buy imports, and the peso devalued, making Mexico’s dollar denominated debts too expensive to pay off. After defaulting, Mexico took three IMF loans totaling over $7B, and took seriously its neoliberal reforms in the late 80s such as privatizing state owned enterprises, slashing tariff rates, and removing license & technology transfer requirements to make foreign direct investment easier. In 1994, Mexico had another economic crisis called the Tequila crisis, where the Mexican stock market crashed. America was raising interest rates- the 10 year bond went from giving a 5.3% return in 1993 to a 8% return in 1994. Investors pulled out of the Mexican economy choosing to buy safe, yet high yielding American bonds instead, crushing the Mexican stock market and causing capital flight. In addition, the Mexican banking sector crashed due to corruption and significant dollar denominated debt ballooned as the peso devalued from capital fight. Bill Clinton had to rescue the Mexican economy with a $50B bailout package. Since then Mexico has been in NAFTA, and Mexico had decent growth until 2008 Financial Crisis. Between the NAFTA to 2008 Financial Crisis era, more Mexicans in America migrated back to Mexico than Mexicans migrating to the U.S. Then Mexico was slammed again from COVID. As a result, adjusted for inflation, Mexico has stagnated for two decades hovering around $10K-$13K average income per capita. Despite the stagnation, Mexico has transitioned from a commodity & agricultural exporter to a manufacturing exporting economy, assembling and making computers, cars, delivery trucks, refrigerators, tractors, pharmaceutical drugs, and also selling crude oil.
Canada:
Canada, has always been a more market oriented country compared to Mexico. Most of Canada’s industry is private enterprise, but it has significantly more price regulations than America does (i.e. healthcare and pharmaceuticals). In the 1970s, the oil crises caused by the Arab oil embargo caused by assisting Israel in the Yom Kippur War and the 1979 Iranian Revolution, caused inflation to skyrocket. However, the Canadian fossil fuel & mining industries thrived on high prices, allowing the economy to grow sharply until the 1980s commodity bust. Subsequently, in terms of inflation adjusted growth, Canada stagnated for nearly 2 decades, due to the commodity slump and the 1980s banking crisis. Recovery in the 2000s was driven by resource booms, yet post 2014, falling commodity prices contributed to renewed stagnation, exacerbated by the COVID pandemic. Canada like most developed economies have transitioned from a manufacturing economy to a service economy (real estate, tech, finance, insurance, construction, healthcare, business services, transportation) that still has significant mining & oil extraction.
America:
America boasts the least government control on prices and fewest government owned enterprises out of all of North America, fostering dynamism but also pronounced inequality compared to Canada. Post 1960, America’s growth persisted until the aforementioned oil crises skyrocketed inflation, leading to stagnation until Federal Reserve Chairman, Paul Volker caused two recessions to smash inflation, including the 1987 Savings and Loans Crisis. Since then, America has generally experienced growth with low inflation, despite setbacks such as 2007-2008 financial crisis and COVID-19. America, like Canada, has transitioned from a manufacturing economy to a service economy. Companies like Nvidia do semiconductor design in America, but the assembly is done by Taiwanese firm TSMC.
A summary of these nations’ economic performance can be seen on the graph below:
Trade Summary
On July 7th 2020, Mexican President Andrews Manuel Lopez Obrador (AMLO), Donald Trump and Canadian President Justin Trudeau signed the US Mexico Canada Agreement or USMCA. The USMCA renegotiated the previous trade deal NAFTA.
In terms of trade, trade matters significantly more to Mexico & Canada than America. America has a huge consumer market and its is very internal facing, its trade volume is equivalent to 25% of its economic output. For Canada, trade makes up 67% and for Mexico it is 88%. (Note because America’s economy is so huge 25% of America’s output is over $6T). Nevertheless, trade is very important for productivity gains, economic growth, and wage growth. Competition through exports to boost productivity is called “export discipline”.
North American trade ranks as the third largest regional trade bloc globally, trailing significantly behind East Asia and Europe.
Idea of NAFTA
Pre-NAFTA
Before NAFTA, the three North American countries still traded and invested in each other but they weren’t nearly as integrated.
American firms have always purchased Mexican oil from Pemex and steel from Altos Hornos de Mexico, as well as Canadian Suncor’s oil & gas, and Canadian Magna’s car component parts.
Both Canadians and Mexicans still bought American agricultural products from Cargill like wheat & soybeans, and tractors from John Deere or Caterpillar.
Companies like Ford, Procter & Gamble and Pepsi sold their products in Mexico and Canada, including cars, oral care products, and soda.
However, tariff rates were high across the board pre-NAFTA, especially in Mexico, which had a 14.3% tariff rate in 1991.
Mexico was a very protectionist country with high tariffs (taxes on foreign goods), import quotas (a limit on how much Mexican consumers or firms can import from abroad), and licenses & technological transfer requirements (if a firm wanted to invest in Mexico they would have to give the government access to certain technologies that the Mexican government could give to their domestic firms).
In the 1960s, Mexico had a sniff a neoliberalism with the “maquiladora program” a special economic zone (SEZ) where foreign owned, assembly plants from Ford, General Electric, IBM, 3M, & GM in Mexico could import component parts, tariff-free to be assembled, welded, or forged together into parts that would export finished goods to stores back in America.
Canada was also relatively protectionist, but with much better investment laws than Mexico. America and Canada started making trade deals as early as the 1960s. President LBJ and Prime Minister Pearson signed the Automotive Products Agreement in 1965. They signed this to end trade wars which could have hurt the car industry. This deal helped integrate Windsor, Ontario with Detroit, Michigan.
America-Canada Free Trade Deal
Later, the Liberal Canadian Prime Minister, John Turner signed a free trade deal with Reagan in the late 80s - the Canada-US Free Trade agreement.
Also in the 1980s, Mexico had a sovereign default and needed an IMF loan. As a result, Mexico needed to institute neoliberal reforms to obtain the loan - Mexico slashed tariffs, reduced importation quotas, and sold hundreds of former state owned monopolies such as Mexicana Airlines, Aeromexico, and Telmex to investors, creating billionaires like Carlos Slim. Also, Mexico finally joined the General Agreement on Tariffs and Trade in 1986. In the early 1990s, Mexico lowered many agricultural trade barriers.
In 1990, Mexican President Carlos Salinas pitched his country as a destination for investment for European firms. Companies like BMW, Airbus, Siemens, and Rolls Royce basically preferred Eastern Europe as destinations of investment and cheap assembly workers instead.
As a result, Salinas pitched to President George H.W. Bush, and then Canadian free trade lover, Brian Mulroney joined as well.
The NAFTA negotiations faced years of opposition, with concerns from Mexicans about local farmers, Canadians fearing loss of sovereignty as a 51st state of America, and Americans worrying about job migration to Mexico due to cheaper wages. Despite detractors, the deal was signed in 1994 and ratified by the U.S. Congress.
At the end of the day, in the 60s-90s, Japan was using Taiwan, Singapore, Hong Kong, and South Korea as cheap labor (Back when they were poor), and then used Thailand, Indonesia, Malaysia, China, and Vietnam as cheap labor. This strategy helped Japan create regional supply chain networks and economies of scale that helped their firms like Nissan, Toyota, and etc. take market share from American car firms, and almost bankrupted them in the 80s.
The rich companies in Western Europe - BMW, Volkswagen, Siemens, Airbus, and etc. also used cheap labor pools. Initially Portugal and Spain were the cheap labor, but by the 90s, Eastern Europe became the assembly plant of Western Europe.
America was already losing market share to Japan and Europe, as these nations were recovering from WW2. So America & Canada needed cheap labor pools as well. Enter Mexico. It was initially seen as match made in heaven, Mexico would upskill by opening up, while American and Canadian firms could use Mexico to compete with Europe & Japan’s regional low labor pools.
The NAFTA era
After NAFTA was signed in 1994, gradually the three nations eliminated/reduced their tariffs on beef, pork, fruits, cotton, wheat, flour, sugar, rice, cars, chicken, corn, car parts and 1000s of other products. Regional trade increased swiftly from $290B in 1993 to $1.1T in 2016. US FDI to Mexico went from $15B to $100B over the same period. The American car industry went from unprofitable to profitable, while Mexico auto employment boomed from 100K to 550K workers. Northern Mexico has basically integrated with Texas’ supply chain. Americans do the high-paying design, research, and engineering work while the Mexicans do component manufacturing & assembly.
IP Protections
Mexico removed many of its most protectionist policies of import/export licenses, domestic manufacturing requirements, and forced technology transfer agreements. (These are all protectionist policies China has to some extent btw, allowing China to catch up in other industries faster. Multinational firms normally hate these policies in smaller countries and avoid them like the plague, but China’s massive consumer market was too enticing to pass by.).
In NAFTA/USMCA, Intellectual Property, patents, trade secrets, and trademarks were protected (American firms really cared about this). If a Mexican, American, or Canadian firm counterfeited, all of their governments would go after that business.
In addition, NAFTA defended each other from nationalization/expropriation. For those who don’t know, Mexico has a history of buying out or expropriating foreign owned assets and companies. In March 18th 1938, the Mexican President Lazaro Cardenas signed an executive order that took all the assets of every single foreign oil firm operating in Mexico, and merged those assets into the government owned monopoly - Petroleos Mexicanos (PEMEX). Mexico literally made a holiday over taking oil assets from the West.
After that, Mexico banned all foreign oil firms from doing business in their country. American firms such as Standard Oil of California & Jersey (modern day Chevron) and British firms like Shell requested compensation for the acquisition of the oil rigs, refineries, and pipelines they invested in Mexico, which the Mexican government took without pay. The Mexican government refused to pay back foreign firms. For not respecting property rights, America and UK embargoed Mexico and banned their firms from importing Mexican oil until Mexico paid back the oil infrastructure investments that Chevron and Shell made. By 1940s, the Mexican government gave in and compensated Chevron and Shell for taking the assets that these companies invested in the nation. U.S. and U.K. then stopped their embargo.
NAFTA established a legal framework prohibiting nationalization of each other's assets among the three member countries. It also allowed foreign investment and prevented discrimination between domestic firms and their NAFTA partners.
If a country wanted to make a special exception for strategic or national security interests, NAFTA made arbitration panels if a country or company felt wronged.
Specialized Protectionism
However, even though some manufacturing and agriculture were subjected to free trade, each country can still be highly protectionist with certain industries of their choice. For example, Canada protected many of its service based industries like their film industry, media, and banking industry. Mexico protected its oil industry controlling the geologists, petroleum engineers, and logistics industries. Unlike the European Union, NAFTA didn’t have comprehensive cross border licenses and certifications for professionals (engineers, architect, lawyers, and etc.)
Subsidies were hardly affected. America still gave billions of dollars in corn subsidies to corn farmers and Mexico subsidized its bean growers. Canada’s Bombardier & America’s Boeing still received cheap loans and tax credits.
Labor Protections
In NAFTA 2.0 - USMCA, union rights and collective bargaining were protected and labor conditions were protected as well.
Why NAFTA never became as powerful as the EU or East Asian trade
Despite decreased tariffs, North American interregional trade is lower than European or East Asian trade. No common currency, synchronized regulations, or shared passports like Europe. Nor was there strong sustained regional investment like Japan had for East Asia. Additionally, there wasn’t strong a regulatory protection for Mexican farmers, which Europe had.
Furthermore, after China joined the WTO in 2001, American investment in China competed with investment in Mexico… As a result, when we look at interregional trade, after 2008, North America became less integrated than East Asia & Pacific was.
Conclusion
Overall NAFTA and the USMCA are both half-hearted economic integration attempts compared to the EU. Before NAFTA in 1993, Mexicans earned roughly 20% of American/Canadian wages; now, it's closer to 15%. In contrast with the EU, Polish wages were 10% of German wages in the 90s, but are now 35% of German wages. Czech wages used to be 14% Austrian wages, but are now nearly 50%. The North American free trade agreement has so far failed to lift Mexican incomes the way the European Union transformed Estonia, Czechia, Latvia, Lithuania, Poland, Hungary, and etc.
The European Union’s success can be attributed to robust development funds like the European Social Fund, European Regional Development Fund, and Cohesion Fund which plowed capital for job retraining, research, education, transportation, and etc. into the formerly destitute Eastern European countries. In contrast, North America has a small development bank that only distributes a paltry ~$1B in development loans every year over the past five years (2018-2022) for urban development or sustainable energy. The European Social fund alone plows 10x that…
Due to strong patriotism across North America, there's resistance to establish separate continental institutions for the USMCA. Essentially, NAFTA/USMCA is primarily a free trade deal for some products like cars and refrigerators and safeguards American and Canadian firms from Mexican technology transfer and expropriation. Moreover, North Americans conduct slightly less than half of their trade within the continent. There’s also chronic underfunding & lack of relative ministerial capacity for many waterdog, judicial, and common framework governance organizations in USMCA.
Upon closer examination, it becomes apparent that NAFTA/USMCA lacks the governance efficiency seen in European agreements, which has its pluses and minuses. America does not have a free trade with China, yet it took until 2024 for American-Mexican trade to overtake American-Chinese trade.
In short, NAFTA & USMCA remains a sub-par regional trade bloc compared to Europe and East Asia with numerous barriers hindering Mexico’s full potential. Compared to the robust trade volumes & interregional cooperation of European Union or East Asia & Pacific, which only recently had a trade deal in 2022, North American trade is sub-par. However, this weakness is partly intentional, as it protects intellectual property, maintains sovereignty, and defends strategic industries. Regardless, the USMCA is still a stronger regional trade bloc than Russia’s Eurasian Union, Latin America’s MERCOUR, Carribean’s CARICOM, South Asia’s SAFTA, or Africa’s African Union for now. These developing country trade groups compared to the North America, European Union, or East Asia & Pacific are all talk shops which still need to execute more. It will be interesting to see whether these groups remain a talk shop, go more the EU direction, or USMCA route.
We will discuss more about North American regional trade in future articles. Along with discussions on Africa.
Feel free to comment below!
Links are all underlined!
It’s interesting to see the real numbers breakdown without all the “spin” that usually accompanies vague generalizations. Thank you.
I wonder what world trade would look (and feel) like if rich Americans and Europeans never bought things they don't need?