NAFTA and the Real ‘Sucking Sound’

Michael Haverty saw the potential early on. It was 1995, and Haverty had just joined Kansas City Southern Railway as CEO, a mere year after the North American Free Trade Agreement took effect. At the time, NAFTA was a rare entity, a marriage of the world’s two largest trading partners to one firmly entrenched in the developing world.

“We were working north-south in an east-west world,” Haverty told the Kansas City Business Journal last fall before retiring as executive chairman of KCS. “We believed that NAFTA would work and that manufacturing would shift down there. A lot of people, if you go back to 1995, didn’t believe that.”

Fast-forward almost 20 years and the “giant sucking sound” of jobs moving south that Ross Perot so famously forecast would be NAFTA’s calling card isn’t the case at all. Today, that “giant sucking sound” is coming from the wind created by the vacuum of KCS trains and cross-border trucks hauling U.S.-Mexico trade that, when final 2013 numbers are in, will have exceeded $600 billion in a single year for the first time, according to U.S. Commerce Department data.

What was that trade worth in 1993, the year before NAFTA took effect? $81 billion. The growth, to say the least, has been phenomenal. Instead of creating the joblessness and poverty that Perot and other opponents predicted, NAFTA has “created wealth and opportunity and made the continent more globally competitive,” The Wall Street Journal’s Mary Anastasia O’Grady wrote this month.

But as Walter Kemmsies, chief economist of infrastructure consulting firm Moffatt & Nichol, says in this week’s Cover Story, Mexico’s jaunt to manufacturing powerhouse is merely in “start-up stage.”

Progressing beyond that — to even be discussed in the same breath as a true global manufacturing giant such as China — will require going to the next level by capitalizing on a nascent energy revolution that already is lowering prices and helping to drive the near-shoring trend that is bringing production closer to destination markets.

There are, of course, other barriers, especially in Mexico, that must fall before NAFTA’s true potential can be realized: curtailing the drug cartel violence that has garnered the lion’s share of Mexican story lines and most recently led to the military taking control of the Pacific port of Lazaro Cardenas; improving a customs regime that has impeded the efficient flow of cross-border trade; and new taxes that threaten to scare off foreign investors.

Mexico, in short, is showing all the growing pains of a developing country fighting to emerge from the instability that comes when a population is entrenched in centuries of poverty, with seemingly no way out.

NAFTA, for all its controversy and complexity, is paving that path by creating a trade giant. The NAFTA story is far from complete — indeed, there’s another whole chapter in Canada that we’ll dive into next month — but to this point, 20 years in, it has all the makings of a blockbuster.

Michael Haverty was right.

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