Renegotiating NAFTA without favoritism supports prosperity

Renegotiating NAFTA without favoritism supports prosperity
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Though not perfect, NAFTA has increased prosperity and improved the lives of millions of Americans through greater competition, affordable products, and wealth and job creation. Potential renegotiations of NAFTA could deter these gains if the deal doesn’t include reducing both trade barriers and government favoritism for certain industries.

Consider that Mexico has long maintained state control of natural resources, including natural gas, coal, and oil, resulting in only one petroleum company — the 75-year-old state-run Pemex. As with most government-created monopolies, Pemex has been plagued by corruption and inefficiency, ultimately forfeiting its incentive to take risk and prospect for sub-surface resources.

These developments led to a surprisingly beneficial move in 2013 by Mexican President Enrique Peña Nieto to gradually privatize the energy sector. While initially unpopular, the constitutional changes were in place a year later, opening the gates for foreign investment in Mexico’s energy sector.

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Steve Hanson, the CEO of International Frontier Resources Corp., stated, “In short, it is the largest energy opportunity in the world today — and the door has just been opened.” His optimism is largely due to the unprecedented amounts of Mexico’s untouched natural resources.

 

Texas energy companies are poised to capitalize on this new open market, especially because Texas is the leader of the North American energy industry. When this industry grows, Texas, and America, prosper. With only nine percent of the U.S. population, Texas created 25 percent of all new American jobs since the last U.S. recession began in December 2007, which is around the time the shale revolution began.

Thanks to NAFTA, proximity and profit motives, Texas refineries are intertwined with Mexico’s energy sector. Increased production of Mexico’s crude oil and natural gas often results in more business for Texas refineries, contributing to greater wealth and job creation here at home.

However, there’s no guarantee these economic benefits will continue.

An outright exit from NAFTA might nullify these opportunities and economic gains. In addition, there are regulatory barriers that bar full realization of energy business with Mexico, the majority of which were erected in the wake of the denationalization process.

An amendment to the energy chapter of NAFTA currently allows for these regulatory barriers by granting Mexico unilateral regulatory power in the energy sector. While this specific concession is not typical for free trade agreements, favoritism far too often plagues international trade and should be eliminated. 

The Trump administration’s pressure on NAFTA has recently picked up momentum is in accordance with a wider shift from free trade to so-called fair trade with stated goals of shrinking U.S. trade deficits and preventing job losses.

While these goals sound good in theory, U.S. exports and imports contribute to a growing economic pie and job creation with mixed effects on specific industries.

For example, the U.S. International Trade Administration notes that 11.5 million jobs were supported by U.S. exports in 2015, with 10 percent of those in the Lone Star State. Unfortunately, these data account for only part of the job creation supported by foreign trade.

While imports get a bad rap, individuals voluntarily trading in those exchanges benefit or they wouldn’t agree to the transaction. Imports often result in lower prices, higher productivity, and more business investment such that people have more money in their pocket, higher wages, and more job opportunities.

In short, the focus shouldn’t be on reducing trade deficits and risk increased poverty, but rather how to make the U.S. more economically competitive.

Renegotiating NAFTA could serve as a valuable opportunity to promote prosperity, but only by reducing trade barriers and government privilege so individuals in different countries can mutually benefit. In addition, the U.S. can help keep businesses from fleeing and support more job creation at home by cutting excessive government spending, passing pro-growth tax reform, and rolling back onerous regulations.

This is a proven path to human flourishing.

Vance Ginn, Ph.D. (@VanceGinn) is director of the Center for Economic Prosperity and senior economist and Dayal Rajagopalan is a research associate both at the Texas Public Policy Foundation, a nonprofit, free-market research institute based in Austin.