PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Comments to USTR on Modernization of the NAFTA Agreement

By at 12 June, 2017, 9:18 pm

NAFTA NEGOTIATIONS 

Comments on Negotiations with Canada and Mexico Regarding Modernization of the North American Free Trade Agreement (NAFTA)

Submitted to the Office of the United States Trade Representative

Raymond J. Keating

Chief Economist

Small Business & Entrepreneurship Council

 

On behalf of the Small Business & Entrepreneurship Council (SBE Council), I am writing on the matter of the North American Free Trade Agreement (NAFTA) and the decision to commence negotiations with Canada and Mexico regarding modernization of the agreement.  In addition, I am requesting to testify on behalf of SBE Council on June 27, 2017 at the public hearing.

SBE Council is a nonpartisan, nonprofit advocacy, research and education organization that works to protect small business and promote entrepreneurship. For nearly 25 years SBE Council has worked to successfully implement a range of policy and private sector initiatives to strengthen the ecosystem for startups and small business growth. With more than 100,000 members nationwide, SBE Council focuses on advancing policies that are critical to a healthy ecosystem for startups and small businesses, including access to markets. Access to global markets is important to the growth and competitiveness of U.S. entrepreneurs and small businesses. Small businesses that are engaged in international trade grow faster, innovate and invest more, are more competitive and create higher-paying jobs.

With regard to NAFTA renegotiations, it is critical that in order for such negotiations to result in modernizing and strengthening an agreement that went into effect over 23 years ago, all parties stay true to free-trade goals and principles of reducing governmental barriers, obstacles and costs that limit opportunities for entrepreneurs, businesses, workers and consumers.

NAFTA’s Benefits for U.S. Trade

Make no mistake, the U.S. has benefited tremendously from NAFTA. Canada is the U.S. top partner in terms of total trade, including ranking as the top U.S. export market, and Mexico is number three, including being the second largest U.S. export market. For good measure, as estimated in a study for the U.S. Chamber of Commerce, 14 million jobs in the U.S. depend on trade with Canada and Mexico, with 5 million of those net jobs supported by increased trade under NAFTA.

Since free trade accords went into effect with Canada, Mexico and the U.S., export growth from the U.S. to both nations has been strong. The U.S. entered in a free trade agreement with Canada first, taking effect in 1989. From 1988 to 2016, U.S. goods exports to our neighbor to the north increased by 165.7 percent.

But export growth has been particularly strong with Mexico, since NAFTA took effect in 1994. U.S. goods exports to Mexico grew by 452.2 percent from 1993 to 2016. That was more than double the growth in U.S. exports to the world (a 212 percent increase in U.S. global goods exports over the same period).

Also, as reported in the Chamber study, it was noted: “With new market access and clearer rules afforded by NAFTA, U.S. services exports to Canada and Mexico have tripled, rising from $27 billion in 1993 to $82 billion in 2011.”

NAFTA’s Benefits for Small Business

But there’s much more. NAFTA has been good news for small businesses. Consider that, according to U.S. Commerce Department data, in 2015, there were 89,106 firms that were exporters to Canada, as well as 59,428 firms exporting to Mexico. In each case, as noted in Table 1 (based on U.S. Commerce Department data), these overwhelmingly are small and mid-size businesses. For example, 75.4 percent of firms exporting to Canada and 72.7 percent of firms exporting to Mexico have less than 50 employees.

Table 1: U.S. Exporters 2015: Percent of Firms by Number of Employees
# of Employees Canada Mexico
Less than 20 60.1% 58.1%
Less than 50 75.4% 72.7%
Less than 100 83.9% 81.7%
Less than 500 94.6% 93.8%

 

For good measure, the growth in the number of U.S. firms exporting to both Canada and Mexico has been dramatic. From 1992 to 2015, there was an 81.4 percent increase in the number of U.S. exporters to Canada and a dramatic 365.5 percent increase in those exporting to Mexico. Indeed, NAFTA has been a growth engine for small business.

It is important to recognize imports as well. After all, U.S. consumers and businesses benefit from the expanded choices and lower costs that come with low barriers to imports. And it’s important to keep in mind that imports are not negatives to the U.S. economy, but instead, fundamentally, are a reflection of the state of the domestic economy. That is, strong domestic economic growth naturally generates growth in imports. In addition, many U.S. firms obviously are involved in the importation of goods from other nations. In 2015, there were 16,799 U.S. firms that were importers related to Canada, and 15,290 U.S. firms were importers related to Mexico. Again, the vast majority were small and midsize businesses, as noted in Table 2 (again, based on U.S. Commerce Department data). For example, 54.8 percent of Canada importers and 67.5 percent of Mexico importers have less than 50 employees.

Table 2: U.S. Importers 2015: Percent of Firms by Number of Employees
# of Employees Canada Mexico
Less than 20 42.0% 57.4%
Less than 50 54.8% 67.5%
Less than 100 64.4% 74.3%
Less than 500 82.7% 86.7%

Looking Ahead

As negotiations move for modernizing this agreement, it is important that the process be governed by some key principles.

Negotiations must be built on the tremendous success of NAFTA. That is, burdens or costs on individuals and businesses trading among the three nations should not be increased, but instead, this should be treated as an opportunity for further reducing such obstacles. This purpose must be made clear in order to reduce uncertainty for entrepreneurs and businesses. For example, it could focus on a limited agenda of addressing e-commerce and digital economy issues that might be needed given that NAFTA was hammered out before such matters existed, and if updating is needed, strengthening in related areas like intellectual property (IP) rights and protections. Also, it is important to move quickly on this matter, again in order to reduce uncertainty for entrepreneurs and businesses.

International trade – that is, businesses and individuals trading across borders – provides, by definition, mutual benefits. NAFTA’s lowering of trade barriers between the U.S., Canada and Mexico works in each nation’s favor. Further lowering barriers to trade, and thereby, expanding opportunities for U.S. entrepreneurs, businesses and workers, would be a positive for U.S. economic, income and employment growth.

Respectfully submitted,

Raymond J. Keating, Chief Economist

 

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