You Decide: How will the “New NAFTA” impact North Carolina?

Published 6:11 pm Monday, October 29, 2018

By Dr. Mike Walden

Who knew trade negotiations could play out like a best-selling thriller? The negotiations for a new trade treaty between the U.S., Mexico and Canada had a deadline of September 30, which was a Sunday. I followed the news that day, and it was all gloomy about successful resolutions to several problems between the U.S. and Canada. An agreement on a new trade treaty had already been reached between the U.S. and Mexico, so as I went to bed on Sunday night I thought a three-country NAFTA deal was likely not going to happen.

Arising the next day – Monday, October 1 – at 6 a.m., I turned on one of the financial news programs and saw the day’s forecast for the Dow-Jones stock average was up big – in the three digits. Clearly something good had happened overnight and I wondered what it was.

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I soon got my answer. Literally at the 11th hour (11 p.m. on Sunday night), Canada joined the U.S. and Mexico for a new NAFTA deal. Except it will no longer be called NAFTA (North American Free Trade Agreement). The new three-country trade arrangement will now be known as the USMC (United States, Mexico, Canada) Agreement.

I was here as a faculty member at North Carolina State University for the original NAFTA in 1994 and debate over the treaty was contentious in our state. There was a deep divide between those who worried about lost production and cutbacks in jobs in some sectors of the economy and others who were excited about the possibilities for new selling opportunities in both our northern and southern neighbors.

This time has been different. The dust is settled from the original NAFTA. Yes, there were winners and losers, but the perception seems to be that the majority of people are used to – and indeed expect – international trade. So most of the reports I have seen, and most of the discussions I have had, expressed a hope that NAFTA would be successfully renegotiated.

So how will the new USMC affect North Carolina’s economy? Before I answer this question, let me step back and describe how our state’s international exports have evolved in recent decades.

Current North Carolina exports represent a combination of two major strengths in the state economy. One is a traditional strength – agriculture. North Carolina farmers are very good at growing crops and raising livestock – particularly hogs and poultry. Therefore it should not be surprising to see agricultural products, as well as processed food products, among the state’s top exports to foreign buyers.

North Carolina is also still a manufacturing state. Almost twice as much of the total state economy is devoted to manufacturing as at the national level. Consequently it also makes sense a variety of manufactured products – in health care, transportation, machinery and others – are top exports to other countries.

Canada and Mexico are the number one and number two buyers of North Carolina’s exports, accounting for almost one-third of the value of all the state’s sales to foreign countries. Since 2000, the value of the state’s exports to these two countries has increased 50 percent. But among specific products, the gains have been even more impressive. Sales of agricultural products to Canada and Mexico jumped 550 percent between 2000 and 2017. Between the same two years, our exports of manufactured food products to our NAFTA partners rose 200 percent and export sales to Canada and Mexico of transportation equipment made in North Carolina gained 140 percent.

The preservation of access by North Carolina farmers in the new USMC Agreement to Canadian and Mexican markets is a big win for the state’s companies and workers in agriculture and agribusiness. Many experts see bright prospects for farming and its related businesses as advances are made in animal and crop biology, production technology and resistance to natural and weather-related threats.

Perhaps the biggest impact on North Carolina from the USMC Agreement will be on the state’s very important transportation parts industry. Vehicle manufacturing has been one of the industries most affected by NAFTA. More vehicle assembly shifted to low-wage Mexico while the production of vehicle parts concentrated in tech-heavy Canada and the U.S. Indeed, jobs in vehicle parts production in North Carolina are one-third higher today than prior to NAFTA.

There is reason to think the new USMC Agreement may create additional vehicle manufacturing opportunities in the U.S. and North Carolina. This is because the USMC will require a higher percentage of vehicle parts to come from North America and the trade pact requires an increase in the wage rates of some workers in Mexican auto plants. The latter requirement might even help North Carolina land its first-ever auto assembly plant!

What about North Carolina’s textiles and apparel industries, where employment has fallen 85 percent from pre-NAFTA years to today? Will the USMC Agreement revive it?  Likely not, at least in terms of jobs. The U.S. imports by far the most clothing from China, with Vietnam and India a distant second and third.

Which brings us to China. Although the USMC Agreement will have to be ratified by the legislatures of the three countries, the odds are it will pass. So China is the remaining country where we are in a big trade battle. Will there be an agreement soon? If not, could the dispute eventually plunge the world into a recession? These are multi-trillion questions. You decide on the answers!

Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.