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NAFTA & Supply Chain

It has probably been some time since you’ve read an article about NAFTA, and for the most part it makes sense. It has been 21 years since the implementation of the free trade agreement, we are all aware of what it entails and its results, right? Aside from economic prosperity, we did realize also it would also alter the social and political relationship between the U.S. and Mexico. Below we will take a different view of NAFTA in regards to Mexico, the U.S., and supply chain, and perhaps reacquaint ourselves with the powerful trade agreement.

What is NAFTA?

North Atlantic Free Trade Agreement, liberalized trade between the U.S., Canada, and Mexico. Implemented on January 1, 1994, the agreement abolished a number of tariffs the countries paid to import and export goods. It was gradually implemented from 1994 until 2008. The agreement has changed industries from agriculture to manufacturing in both Mexico and the U.S.

Why is it important to Mexico?

Initially NAFTA did one good thing and one bad thing for Mexico. For one, evidently, it didn’t resolve all the social issues that it was said to resolve. It was predicted that NAFTA would bring Mexico out of poverty, and while it made some significant impact, by no means did it vastly increase the buying power of Mexicans. Annually on average per capita income in Mexico went up 1.2% in the past 20 years, in comparison much slower than other Latin American countries. Additionally, while most believed that emigration would decrease, the number of Mexican-born folks from 1994 to 2013 doubled to 12 million in the U.S.

One good thing that came from NAFTA for Mexico: foreign direct investment. FDI came flowing into Mexico as industries began seeing the cost efficiency of setting up shop in Mexico. Industries such as car manufacturing and aeronautics. The below images display the grow and demise of exporting industries in Mexico from 1995, 2000, and 2012 from the Observatory of Economic Complexity. The car parts manufacturing increased over the years while color tvs decreased.

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Foreign direct investment and a more liberal economy. Costs of clothing, food, and some technology dropped dramatically, making them more affordable for Mexicans. Above all the Mexican entities began practicing a more orthodox business management practices opposed to their traditional overspending budgets and underachieving.

Why is it important to supply chain within the US?

It’s simple, FTAs have everything to do with supply chains. FTA’s provide U.S. companies the ability to build competitiveness through its many advantages including streamlining processes, eliminating or reducing tariffs, eliminating custom charges, more liberal regulation of land transportation, and limiting the restriction of imports and exports from non-NAFTA agreements.

U.S. auto manufacturers took full advantage of NAFTA and used it to move operations abroad and cheaper labor costs. By 2014, almost $138 billion worth of auto parts had been imported. In terms of total imports of auto parts, Mexico accounted for 34% in 2014 compared to China’s 18%, 86% up since 2008, which just goes to show growing popularity with moving operations to a destination closer to the U.S.


Trends indicate a general consensus that U.S. manufacturers and retailers are looking for ways to cut costs and take advantage of NAFTA’s offerings. In order to do so, importers, exporters, and compliance specialists need to take a closer look at NAFTA in detail to fully maximize their saving potential and sourcing strategy. The Supply Chain Management Review does an excellent job in assembling Best Practices for Managing NAFTA. Check it out here.

-Riti Patel, Assistant, Supply & Value Chain Center

 

Sources:

Burnson, Patrick. “2015 Customs/Trade Update: Success Is in the Details.”– Supply Chain 24/7. N.p., 01 Jan. 2015. Web. 09 Sept. 2015.

Sergie, Mohammed Aly. “NAFTA’s Economic Impact.” Council on Foreign Relations. Council on Foreign Relations, 14 Feb. 2014. Web. 04 Sept. 2015.
“U.S. Import and Export Compliance Considerations.” – Supply Chain 24/7 Paper. Purolator, 15 Aug. 2015. Web. 09 Sept. 2015.

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