NAFTA corridor has given way to Chinese goods corridor

NAFTA “Superhighway” Spells the End of NAFTA Countries Manufacturing Alliance
William R. Hawkins
American Economic Alert
Tuesday, July 18, 2006

“HIGHWAY OF DEATH” FOR NAFTA

There has been a flurry of media reports about what has been dubbed the “NAFTA Highway,” a corridor of both highways and railroads running through Mexico and into the American Midwest. Interstate Highways 35, 29 and 94 are central to this transportation network and the key terminal is an “inland port” in Kansas City, Missouri.

Many of the reports have sought to reopen the debate over the North American Free Trade Agreement, which allowed many U.S. factories to relocate to Mexico, laying off thousands of American workers and replacing them with much cheaper labor south of the border. Some reports have taken an alarmist tack, claiming that further economic integration of the United States and Mexico would lead to a political union that would open America to mass migration and political corruption on a scale that would destroy U.S. institutions, culture and sovereignty.

In actuality, the new energy being put into expanding the transportation network from Mexico into the United States heralds the collapse of NAFTA, and further discredits the trade strategy followed by the administrations of George H. W. Bush, Bill Clinton and George W. Bush.

NAFTA was enacted in 1993. The main public arguments put forward by its proponents were that it would open Mexico to more U.S.-made exports and that Mexico, with the addition of new, American-owned factories, would become an export platform permitting American firms to compete in markets throughout the world. (It was also supposed to halt illegal immigration and illegal drug transhipment – but that’s a subject for another column.)

Since the Mexican economy was only five percent the size of the American economy, our export opportunities were limited by the lack of purchasing power to the south. The real interest of the business groups that pushed NAFTA through Congress was to combine cheap Mexican labor with American capital and technology to improve competition with overseas rivals – for shares of the American market. At the time, Japanese firms, which had located factories in other Asian countries with cheap labor, were thought to be the main rivals. Yet China was already looming, unrecognized, over the horizon.

Two of the most vocal proponents of NAFTA testified to this effect before the House Ways and Means Subcommittee on Trade on September 11, 1997. C. Fred Bergsten and Jeffrey Schott, of the Institute for International Economics, stated, “The United States sought to increase its imports from Mexico as a result of NAFTA. In particular, we wanted to shift imports from other countries to Mexico – since our imports from Mexico include more U.S. content and because Mexico spends much more of its export earnings on imports from the United States than do, say, the East Asian countries.” The higher U.S. content in imports from Mexico was the result of sending components from American factories to Mexican factories for assembly into products that are then exported back to the United States.

Such imports from Mexico grew rapidly (while Mexico never emerged as the “export platform to the rest of the world”), and there was congestion in the US-Mexican transportation system as a result. But that is not what is driving the NAFTA superhighway activity now, over a dozen years later. The North America’s SuperCorridor Coalition (NASCO) was formed in 1994 to lobby for government funding for improvements in the multi-modal U.S.-Mexican transportation system. But over half the money it claims to have raised has come since 2003. In 2005, the Kansas City “SmartPort” received $4 million for highway corridor projects, plus another $500,000 earmark from Sen. Jim Talent (R-MO) to further develop the capabilities of the inland port to process a greater volume of international trade. Additionally, the first steps to establish a Mexican customs office at the Kansas Smartport were taken last year. And it wasn’t until last December that the Texas Transportation Commission opened negotiations with a the Spanish-led Cintra consortium to start the first phase of a $7.5 billion, 800-mile corridor from Oklahoma to Mexico that would parallel Interstate 35.

Upon closer examination, something other than the “success” of the NAFTA model, as sold to the American voter, is propelling all this transportation and Smart Port activity – and that is the massive wave of imports from the previously unrecognized export superstar, China. U.S. west coast ports are swamped with container ships filled with Chinese goods, and a scramble is on to find new Pacific ports to bring even more Chinese products into the United States. Container ship traffic from China is growing at a rate of 15 percent a year. Between 2003 and 2005, annual imports from China increased by $92.2 billion, and from other parts of Asia by $41.0 billion. (So much for NAFTA allowing American firms to compete more effectively with the Japanese.)

The Hong Kong-based shipping company Hutchison Whampoa and retail giant Wal-Mart are partners in a new $300 million expansion of Mexico’s Pacific port of Lazaro Cardeñas to increase its annual handling capacity from 100,000 containers to 700,000 containers initially, with possible expansion to two million containers by the end of the decade. Hutchison Whampoa is run by billionaire Li Ka-shing, whose business empire is closely aligned with the Beijing regime.

In April, the American Chamber of Commerce in Guangdong, China conducted seminars to promote Lazaro Cardenas as a destination for good shipped from Chinese ports. At the Mexican port, shipping containers are loaded onto the Mexico–U.S. rail line operated by Kansas City Southern Railroad de Mexico. The containers do not clear U.S. Customs until they reach San Antonio. On October 24, 2005, the San Antonio Business Journal reported on a new agreement signed by U.S. and Mexican officials to allow for the movement of air, rail and ground cargo, through Mexico into the United States via KellyUSA – the industrial park created at the former Kelly Air Force Base in San Antonio, Texas. The report noted that the cargo would originate “principally from Asia and South America” – not Mexico.

Another deep water port just north of Lazaro Cardenas is Manzanillo. Situated between Acapulco and Puerto Vallarta, it caters primarily to cruise ships and tourists. But NASCO includes it in its future plans to expand trade shipments.

While American-based manufacturers will continue to suffer under the barrage of Chinese goods,Mexican industry and the hope of economic development south of the border will be smashed flat by what should be called a new Chinese Silk Road rather than a NAFTA highway. The goals of NAFTA for North American economic integration and development are being abandoned. The effect of expanded and modernized Mexican ports linked to the U. S. Midwest by new express routes is to allow China to jump over Mexico, kicking it in the face as it passes by.

Over 600 maquiladora’s, the assembly plants that sprang up along the U.S. -Mexican border to take advantage of NAFTA, have relocated to China, leaving 250,000 unemployed Mexican workers behind. Chinese interests also own factories in Mexico, which assemble imported components, rather than locally sourced parts, into products than are then exported to the United States. The new trade routes will allow these plants to expand at the expense of their competitors. In 2003, China passed Japan as the second largest exporter of goods, primarily components, to Mexico, behind the United States.

Chinese consumer goods also fill Mexican stores. The traffic in Mexican ports are as one-way as in American ports. In 2004, Mexico imported $9.1 billion worth of good from China, but sold China good worth only $1.9 billion in return. This deficit is similar to the U.S. trade ratio with China, which saw only $41.5 billion in exports against $244.6 billion in imports last year.

A fatalism has crept into Mexico, paving the way for acceptance of the new Chinese-focused investment in infrastructure. “Mexico had been the Number Two supplier to the U.S. [after Canada] within the context of the North American Free Trade Agreement” recalls Raul Rodriguez Barocio, manager of the North American Development Bank (NADB) in Mexico. “However, in 2003, Mexico was displaced by China and seems to have lost that position forever,” he laments. For Mexican industrialists, the Chinese invasion has been devastating, particularly for labor intensive industries such as footwear, toys, and garments. There is little chance for Mexican wages to rise if at $1.50 an hour they can be undercut by Chinese labor at 50 cents an hour, with the products rushed from Asia into the North American market.

Mexico has filed over 90 complaints against China at the World Trade Organization and has imposed anti-dumping duties. Mexico was the last country to approve Beijing’s membership in the WTO, fearing what China would do if given a “level playing field” subject only to its own mercantilist devices. But these efforts have been to no avail. Simon Levy-Dabbah, a foreign trade professor at the National Autonomous University of Mexico, epitomizes the defeatest attitude south of the border when he says that Mexican industrialists must get over their hatred and accept that China is “the factory for the world.” He suggests that Mexican firms form joint venture’s with Chinese business, “The Chinese only care about having their goods arrive into the United States. So what is needed now is for products from China and other Asian countries that do not have the required free trade agreements, to be able to use Mexican preferential tariffs to enter these markets.” In other words, if you can’t beat ‘em, join ‘em and hope for some small share of the spoils.

Charlie Banks, president of R. L. Banks & Associates, a transportation consulting company in Washington, told the L. A. Times (June 20) that Mexico is repositioning itself in a world in which its manufacturing base is eroding and its labor is considered relatively expensive by Asian standards. Part of that repositioning, Banks said, is as a logistics and supply chain corridor for goods heading to the United States. But “lift that bale, tote that barge” labor moving Chinese goods to Kansas will not enrich either Mexico or the United States, as real national wealth comes from production, not mere transport.

NAFTA was sold not just on the basis of trade, but as a means to lift Mexico out of poverty and to help establish democracy by creating a more affluent, optimistic polity. Such a development would improve U.S. security by fending off political radicalism and lessening the exodus of illegal immigrants. The same arguments were made last year during the debate over CAFTA, with the added note that an expanded trade bloc could protect regional industry from Chinese competition. As Rep. Bob Inglis (R-SC) said on the House floor during the CAFTA debate, “I stand here convinced that it is the best strategy available to combine with our neighbors to the south to compete with the Chinese.”

The new transport plans make a mockery of these arguments, as they are being constructed purely to help China improve its competitive advantage over all North and Central American commercial rivals. It is well past time to rethink the sophistry of “free trade” with China. Instead of spending billions of private and public funds aiding Chinese traders, a major effort should be launched to rebuild and expand the production base of North America. A key part of that effort would be to renegotiate NAFTA to create a true trade bloc that would drive Chinese goods off the continent, rather than into its heartland.