To Update NAFTA, Why Not Start at the Border?

This op-ed originally appeared in the San Diego Business Journal on August 24, 2017.

To Update NAFTA, Why Not Start at the Border?

By Erik Lee and Flavio Olivieri*

Now that the NAFTA renegotiations have begun, a lot of us that look at the U.S.-Mexico border economy are wondering how this will play out for the border region. Interestingly enough, so is U.S. Trade Representative Robert Lighthizer, who made reference to border communities’ “particular equity in the agreement” in his opening statement. Indeed, there is much at stake for border communities, whose economies are based to a significant degree on the idea of a broader North American economy and free trade.

Yet, at first glance, the U.S. Trade Representative’s 17-page document, “Summary of Objectives for the NAFTA Renegotiation,” does not appear to have much of a connection with the U.S-Mexico border…or any region or community in the United States or Mexico, for that matter. The word “border” only shows up as part of the phrase “cross-border data flows.” This is strange, as President Trump’s 2016 campaign was really all about the U.S.-Mexico border, and it would be reasonable to expect the document to connect the NAFTA renegotiation effort to at least some type of border management policy. Perhaps this is because the U.S.-Mexico border has facilitated trillions of dollars in North American trade over the last two decades, which makes it look like an economic success story that this administration simply does not want to admit.

But once you start looking at the document long enough, some interesting ideas begin to emerge. In fact, the document contains a number of elements that, if they come to fruition, have the potential to positively impact economic development along the U.S.-Mexico border region. And this really should be an important objective of these negotiations, as NAFTA 1.0 laid some of the groundwork for a more prosperous border region but left a number of areas wholly undeveloped, including urban planning, transportation planning and the development of cross-border industry clusters, among others. NAFTA 2.0 should help transform border communities from their current status as “pass-through” economies into far more connected, economically sustainable and technologically oriented local economies.

Though not specifically mentioned in the document, the future of the North American Development Bank may be the key piece of the NAFTA 2.0 puzzle for border communities. The NAD Bank—once derisively called the “NADA Bank” by an exasperated George W. Bush for its (then) inability to get key funding to border communities—has evolved into a key player in what continues to be an investment-poor region. Though recapitalization for the NAD Bank has been held up in Congress, the hope is that the NAFTA renegotiations might provide the impetus to re-fund the bank. If the two governments decided to expand the Bank’s mandate, funds might be used to fund basic improvements to border communities beyond wastewater treatment, storm water management and the like and expand into other areas that would boost economic development such as ports of entry funding, transportation systems, expanding local telecom networks, education, research or even health care.

The document also has some long-overdue language on boosting small- and medium-sized enterprises, an emphasis that is borrowed from the Trans-Pacific Partnership that President Trump pulled the United States out of upon entering office. While NAFTA worked well for major multinational corporations, one of the major criticisms of global trade agreements is that small- and medium-sized enterprises have largely been left out of global supply chains. This emphasis on SMEs is important to the border region because a number of the border states are very much small-business states. Arizona is a prime example of this, with its dearth of corporate headquarters.

Yet another area of opportunity that could emerge from the negotiations is services trade. While goods trade has—with some exceptions—continued to grow, services trade lags far behind in volume. This is an area with tremendous room to grow in North America and which could be extremely helpful from an economic development standpoint in border communities. As Erik Lee and Chris Wilson pointed out in Competitive Border Communities, what stands out for many sister city pairs is the lack of cross-border economic connectivity (advanced manufacturing in Mexican border communities which often does not have a local supplier or services base on either the U.S. or Mexican side, for example).

A final point on the importance of place. We mentioned the lack of a focus on the border region itself. All of the above points—financing, SMEs and services—might make more sense as a package if they were brought together at a specific place. Why not the border itself? Specifically, as we have argued elsewhere, a focus on border commercial areas—which could be upgraded through policy, infrastructure and other investments to border economic micro- or even nano-zones—could bring all of this together in one place. The current border commercial areas are responsible for much of the crossborder commerce yet also the negative image of the border itself (lots of congestion, chaotic transportation networks, a lack of public attractions and amenities, and public safety challenges). More cross border interaction between small- and medium-sized companies can be facilitated through a cross-border smart growth urban development program in commercial areas adjacent to land points of entry that in turn will help integrate complementary capabilities, as the large manufacturing companies do.   Sectors such as medical services, software development, video games, film, arts and culture in general could thrive in a more integrated, efficient and pedestrian-focused border environment.

The upcoming NAFTA renegotiation, then, is an opportunity to grow North America if the negotiators can ground the conversation at the community level, and in this case, the cross-border community level. The pieces are there in USTR’s document, but they need further integration.

Erik Lee is executive director of the North American Research Partnership. 

*Flavio Olivieri is executive director of Cali-Baja Bi-National Mega Region, Inc.