Study on the Operation and Effect of the North American Free Trade Agreement

The U.S. household appliance 53 industry is a strong global competitor in large appliances, such as refrigerators and clothes washers, with global exports of $2.9 billion in 1996. In the 1970s and 1980s, the U.S. appliance industry went through a period of consolidation as the U.S. market became saturated and increasingly price competitive. The major U.S. companies are now rapidly expanding globally through both trade and investment. The NAFTA is particularly significant for this industry because Canada and Mexico are the two leading trade partners for the U.S. household appliance industry.

Developments since NAFTA

Highlights of NAFTA Implementation: Tariff Cuts

Before NAFTA, Mexican tariffs on U.S. home appliances ranged from 5 to 20 percent, with the majority at 20 percent. By contrast, most Mexican appliances entered the United States duty free under GSP.

In 1994, when NAFTA was implemented, Mexico immediately eliminated tariffs on about 17 percent of appliances imported from the United States. Mexico will phase out tariffs on another 17 percent of appliances imported from the United States by January 1, 1998 and all remaining tariffs by January 1, 2003. The NAFTA tariff preference gives U.S. appliances a substantial price advantage over non-NAFTA appliances, which will generally still face tariffs of 20 percent.

Highlights of NAFTA Implementation: Elimination of Non-Tariff Barriers

As of January 1, 1997, Mexico implemented NAFTA provisions enabling companies to obtain certifications from accredited, local testing laboratories that their goods satisfy governmental product standards in all three NAFTA countries. This change is possible because laboratories in the United States can apply for accreditation in Mexico on the same basis as Mexican laboratories. Once accredited, a U.S. laboratory is able to test and certify a product for sale in the United States, Canada, and Mexico, significantly reducing certification costs and time to market for U.S. producers.

The NAFTA improves protection for intellectual property rights in Mexico's market. The U.S. household appliance industry relies on patent, trademark, and trade secret protection to protect key technologies and safeguard commercial reputations.

In addition, NAFTA phases out most trade-distorting Mexican performance requirements as a condition for government approval of foreign investments, including domestic sales restrictions, local content rules, technology transfer requirements, product mandating rules, and trade balancing requirements. The elimination of Mexican domestic sales restrictions has been particularly beneficial to U.S. appliance manufacturers that operate maquiladora plants, which formerly were required to sell most of their production outside Mexico and now are able to sell directly to Mexican consumers.

Trade Flows: U.S. Exports to Mexico

After reaching record levels in 1993 ($472 million), U.S. exports of appliances to Mexico fell to $330 million in 1995 due to the severe recession that followed Mexico's 1994 peso devaluation. A steep drop in real income in Mexico during the recession prompted Mexican consumers to cut back severely on major purchases such as large appliances. Recovery in Mexican consumer demand for appliances began in 1996, and U.S. appliance exports increased to $375.8 million -- up by 14 percent from 1995.

Trade Flows: U.S. Imports from Mexico

Mexican imports of household appliances as a share of U.S. imports have increased by 2 percentage points to 20 percent of total imports since NAFTA. Imported appliances from Mexico are produced primarily in U.S.-Mexican joint venture plants or in plants controlled entirely by U.S. or third country manufacturers. The appliance categories with the largest increases of shipments to the United States over the past three years were stoves, refrigerators, and vacuum cleaners. Since these categories of imports from Mexico were entering the United States duty-free in 1993, NAFTA was not a factor in the increased imports. Increased imports were due primarily to overall strength of consumer demand in the United States during the period and the peso devaluation.

Investment

U.S. capital expenditures in the domestic appliance industry increased from $450 million in 1989 to $632 million in 1995, an increase of 40 percent. This increase reflects strong growth in the U.S. economy in recent years with U.S. appliance production at record levels. U.S. investments in the Mexican appliance industry increased 40 percent between 1989 and 1990, but have remained realtively flat since then. In 1995, U.S. investments totaled $267million, an increase pf just 2 percent from 1990 levels.

Employment, Earnings, and Productivity

In 1993, the U.S. appliance industry employed 104,600 workers. Employment has grown moderately in recent years, totaling 110,300 employees in 1996. From 1993 to 1995 (the latest year for which data is available), hourly earnings for production workers in the U.S. appliance industry rose by 3.4 percent while productivity was up 3.1 percent.

Canada and Mexico have long been leading destinations for U.S. furniture exports. 54 In 1996, total U.S. exports of household and office furniture were $1.8 billion, of which 46 percent -- or $829 million -- were directed to Canada and Mexico.

Developments since NAFTA

Highlights of NAFTA Implementation

The NAFTA made no change in U.S. import duties on Mexican furniture, as these products entered the United States duty free under GSP prior to 1994. By contrast, prior to NAFTA, Mexican tariffs on U.S. furniture ranged from 10 to 20 percent. When NAFTA went into effect on January 1, 1994, Mexico immediately eliminated duties on 18 percent of U.S. furniture exports and began a five-year phase-out of tariffs for another 8 percent of U.S. exports and a ten-year phase out for the remaining U.S. exports. 55

Trade Flows: U.S. Exports to Mexico

During the first year of NAFTA's implementation, U.S. furniture exports to Mexico grew 33 percent, from $197.1 million to $262.7 million. They then fell 56 percent in 1995 as a result of the Mexican recession. As the Mexican economy began to emerge from the recession, exports grew by 12 percent in 1996.

Even though U.S. furniture exports have declined as a result of the Mexican recession, they fared much better than exports from other countries. Specifically, U.S. exports (down 19.5 percent) fell by far less than did European (down 27.6 percent) and Asian (down 57.7 percent) exports, and U.S. exports increased their share of the Mexican import market by 5 percent from 1993, capturing 79 percent in 1996.

Trade Flows: U.S. Imports from Mexico

U.S. imports of Mexican furniture increased from $241 million in 1993 to $486.4 million in 1996. The increased imports, however, were not attributable to NAFTA, as all U.S. imports of furniture from Mexico entered duty-free prior to 1994. Instead, increased imports from Mexico were the result of the devaluation of the peso in response to Mexico's fiscal crisis, and strong U.S. demand, which also spurred imports from Canada and many non-NAFTA countries.

Investment

No data are available for this sector with respect to investments in the United States or Mexico from 1993 to 1996.

Employment, Earnings, and Productivity

In 1993, the U.S. household and office furniture sector employed approximately 324,500 workers, including 269,000 production workers. By 1995, the number of employees had risen to 341,600, including 285,500 production workers -- an increase of 5.3 percent and 6.1 percent, respectively. Productivity in the U.S. furniture industry sector fell by 0.6 percent between 1993 and 1995 (the latest year for which data is available), but hourly earnings for production workers increased by 2.1 percent.

The U.S. printing and publishing industry, 56 with estimated 1996 total shipments of $200.7 billion, ranks with Germany as the world's largest exporter of printed products. However, exports of printed products accounted for just under 2 percent of the industry's total shipments in 1996. Canada has long been the largest foreign market for U.S. printed products, with 1996 sales of $1.9 billion, accounting for 44 percent of all U.S. exports. Since 1989, Mexico has moved past Germany, Australia, and Japan to become the third largest market for U.S. printed product exports, behind only Canada and the United Kingdom. Exports of U.S. printed products to Canada and Mexico increased from 49 percent in 1993 to 51 percent in 1996.

Developments since NAFTA

Highlights of NAFTA Implementation: Tariff Cuts

Under NAFTA, Mexico immediately eliminated tariffs ranging from 10 to 20 percent on 63 percent of all U.S. printing and publishing exports. Mexico will phase out its tariffs on another 8 percent of U.S. printing and publishing exports by January 1, 1998 and on the remaining 29 percent of U.S. exports in this sector over ten years, with some products becoming duty-free in as early as eight years.

By contrast, 66 percent of U.S. imports from Mexico entered duty free prior to NAFTA. Upon implementation of NAFTA, the United States eliminated tariffs on an additional 24 percent of Mexican imports. For the remaining 10 percent of U.S. imports -- for which tariff rates are no higher than 7 percent -- duties will be eliminated by January 1, 1998.

Highlights of NAFTA Implementation: Elimination of Non-Tariff Barriers

Of particular importance to the printing and publishing industry were improvements in Mexican copyright and trademark protection. Also important were NAFTA-induced changes to Mexican labeling and foreign investment restrictions. As a result of NAFTA, Mexico now permits majority foreign ownership in newspaper enterprises engaged in simultaneous printing and distribution in Mexico of newspapers published outside of Mexico. Also pursuant to NAFTA, Mexico removed its restrictions regarding the editing of Mexican newspapers and periodicals by non-citizens.

Trade Flows: U.S. Exports to Mexico

The NAFTA's benefits to U.S. printers and publishers were apparent in its first year of NAFTA operation. Although some products in this sector enjoyed duty-free treatment prior to NAFTA, Mexico was not generally viewed as an attractive market. The negotiation of NAFTA played an important role in changing this view. U.S. exports to Mexico rose to $333.0 million in 1994, up from $258.4 million in 1993 -- a gain of 29 percent. The growth of exports in 1994 was primarily in those items (e.g., trade advertising materials) for which duties were removed under NAFTA.

Mexico's peso crisis in late 1994, which lead to a deep recession in 1995, had an immediate adverse effect on U.S. trade with Mexico in the sector. Exports of U.S. printed products dropped by 23 percent in 1995. Much of the loss was recouped during 1996, with exports of U.S. printed products to Mexico rising to $309.1 million, a gain of 21 percent over 1995. The increase in exports during 1996 paralleled a general recovery of the Mexican economy. Exports in the first quarter of 1997 were 31 percent greater than the first quarter of 1997.

As in other consumer goods sectors, Mexico's preferential reduction of tariffs on U.S. printed products under NAFTA resulted in a significant increase in the U.S. share of Mexico's import market in this sector. U.S. printed products accounted for 78.1 percent of Mexican imports in 1996, up from 62.5 percent in 1993, as Mexican buyers switched from third country imports to more competitively priced U.S. products.

Trade Flows: U.S. Imports from Mexico

While imports of printed matter from Mexico rose to $120.3 million in 1996, these increases appear to have been due to other factors, such as currency changes and the strength of the U.S. economy during the period, given that approximately 66 percent of all U.S. imports from Mexico in the printing and publishing sector entered duty-free prior to NAFTA.

Investment

In response to technological change, U.S. printers and publishers are replacing their analog production systems with more productive digital systems. The industry's capital expenditures in the United States jumped to $5.6 billion in 1994, an increase of 14 percent over 1993 expenditures of $4.8 billion. Data for the most recent year, 1995, show capital expenditures maintaining the 1994 level of $5.6 billion.

Investment by U.S. printers and publishers in Mexico peaked at $107 million in 1993, declining to $93 million in 1994 and $74 million in 1995.

Employment, Earnings, and Productivity

Despite a near doubling in the number of establishments, employment in the U.S. printing and publishing industry has remained stable at approximately 1.5 million since the late 1970s. Capital expenditures for new equipment have increased U.S. output and productivity and reduced requirements for production worker staffing. Between 1993 and 1995 (the latest year for which data is available), productivity declined by 1.8 percent in the printing and publishing industry. Wages for production workers were up 1.7 percent.

The United States is one of the leading exporters of recreational equipment, 57 with exports to the world totaling $4.7 billion in 1996. In 1996, U.S. exports of recreational equipment to Mexico and Canada were $1.1 billion, or 23 percent of total U.S. exports and 5 percent of U.S. product shipments.

U.S. manufacturers of recreational equipment view Mexico as one of the most important emerging markets for their products given a number of developments in Mexico that will spur demand for recreational equipment. Mexican consumers are expected to have more disposable income over time; 57 percent of Mexico's population is under 25 years of age; Mexican developers are building new golf courses, marinas, and other recreational amenities for tourists; and U.S. professional sports leagues are beginning to pursue the Mexican market.

Developments since NAFTA

Highlights of NAFTA Implementation: Tariffs

All imports of recreational equipment from Mexico entered the United States duty free prior to NAFTA. By contrast, Mexican tariffs on imports of U.S.-made recreational equipment ranged from 10-20 percent. Mexico reduced many of these tariffs to zero immediately following NAFTA's implementation. Most of the remaining tariffs are currently less than 10 percent and will be phased out by January 1, 1998, or January 1, 2003.

Highlights of NAFTA Implementation: Elimination of Non-Tariff Barriers

The NAFTA also addressed non-tariff barriers of concern to the recreational equipment industry. The improved intellectual property protection guarantees included in NAFTA are particularly important to this industry, which relies heavily on trademark protection to safeguard internationally known trade names and to ensure product quality.

The NAFTA standards provisions also are of particular interest to the recreational equipment industry because Mexico's mandatory safety regulations and labeling requirements have impeded imports. NAFTA's rules regarding the establishment of product standards ensure that Mexico employs transparent and non-discriminatory procedures that permit U.S. manufacturers to comment on proposed Mexican regulations and require the Government to consider these comments before implementing new regulations.

Trade Flows: U.S. Exports to Mexico

Despite Mexico's severe recession, U.S. recreational equipment exports to Mexico grew at an annual rate of 6 percent from 1993 to 1996 -- reaching $265.3 million in 1996. U.S. exports to Mexico grew 38 percent in 1994 reaching $311.5 million. Following the peso crisis in late 1994, however, many Mexican consumers could not afford to purchase discretionary products like recreational goods, and U.S. exports declined 37 percent. Hardest hit were boat and motorcycle imports. With improving economic conditions in Mexico, U.S. exports of recreational equipment increased 34 percent, exceeding pre-NAFTA levels. U.S. exports of sports equipment to Mexico grew to a record-level $154 million in 1996, reflecting a 24 percent annual growth rate from 1993 to 1996. U.S. exports to Mexico increased 63 percent in the first quarter of 1997 compared to the first quarter of 1993.

The U.S. share of the Mexican import market for recreational equipment (not including boats) grew from 41 percent in 1993 to 49 percent in 1996. It is estimated that the U.S. share of the Mexican import market for boats was 85 percent or more.

Trade Flows: U.S. Imports from Mexico

U.S. recreational equipment imports from Mexico grew at an annual rate of 26 percent from 1993 to 1996, reaching $743 million in 1996. This increase in imports cannot be attributed to the tariff reductions under NAFTA as all of these products entered the United States duty free prior to 1994. Rather, it reflects the strong economic growth and consumer demand in the United States over the past three years. U.S. imports of toys, sports equipment, and bicycles from Mexico each grew approximately 28 percent while imports of boats, motorcycles, and dolls declined over the same period.

Employment, Earnings, and Productivity

U.S. employment in the recreational equipment industries increased an estimated 2 percent annually from 1993 to 1996, to a total of 173,600 workers. Between 1993 and 1995 (the latest year for which data is available), productivity in the recreational equipment sector was up by 3.9 percent while hourly earnings were up by 5 percent. Estimated employment in Mexico declined 8 percent annually over the same period.

• U.S. electronic component manufacturers 58 exported $5.5 billion to Mexico in 1996, up $3.4 billion since 1993, reflecting an annual growth rate of 36.9 percent over the period.
  • Although the high growth rate cannot be attributed solely to NAFTA, Mexican tariff cuts under NAFTA clearly stimulated U.S. electronic component exports to Mexico.

  • Mexican tariffs on U.S. electronic components averaged 15 percent in 1993. Under NAFTA, Mexico immediately eliminated its tariffs on nearly 50 percent of U.S. imports.

  • Mexico was the largest market for U.S. exports of electronic components in 1996.

• Mexican exports to the United States rose by 41 percent from 1993 to $3.1 billion in 1996, reflecting an annual growth rate of 12.1 percent per year.
  • This increase in imports resulted primarily from the strong growth in the U.S. economy and not NAFTA, as most electronic component imports entered the United States duty-free prior to NAFTA.

• NAFTA has enabled American companies to realize synergies in the North American market, boosting global competitiveness.
  • The United States provides an overwhelming share of the electronic components assembled into computers and other electronic products in Mexico.

  • Mexican tariff reductions under NAFTA reduced the cost of U.S. components finished products, making them more cost competitive against imports from other countries, which do not contain U.S. components.

• U.S. jobs in the electronic components sector began to climb in and reached a total of 613,000 by the end of 1996.

Background

Electronic components are the fundamental building blocks of all the finished electronic products and systems in use today, from automotive ignition systems to radar systems to video games. From 1989 through 1993, U.S. shipments of electronic components recorded an annual growth rate of 7.3 percent. Growth in this sector accelerated from 1993 through 1996, when electronic component shipments achieved an annual growth rate of 19.0 percent. Total U.S. shipments of electronic components were estimated at $120 billion in 1996. U.S. shipments are expected to reach $150 billion in 1998 and to grow by an average of 13 percent annually through 2002. The strong performance of the U.S. economy from 1993 to date has been the primary driver of recent growth in the U.S. electronic components sector, as well as import growth from Mexico and other countries.

Developments since NAFTA

Highlights of NAFTA Implementation: Tariff Cuts

Mexican tariffs on U.S. electronic components averaged 15 percent prior to NAFTA. Mexico eliminated its tariffs on roughly 49 percent of U.S. electronic component exports (including capacitors, switches, piezoelectric crystals, semiconductors, and some resistors and tubes) after NAFTA went into effect in 1994. Mexico will provide duty-free treatment for most of the remaining 51 percent of U.S. electronic component exports by January 1, 1998, with the rest duty-free by January 1, 2003. U.S. tariffs on most electronic components were already at zero prior to NAFTA.

Highlights of NAFTA Implementation: Elimination of Non-Tariff Barriers

Prior to NAFTA, Mexican regulations prohibited Mexican plants involved in production sharing (maquiladoras) from selling to the Mexican market. The NAFTA requires Mexico to phase out this restriction by January 1, 2001, thereby allowing maquiladoras to sell into Mexico and not just the U.S. As required by NAFTA. Mexico already has raised to 70 percent the amount of product that may be shipped to domestic buyers from maquiladoras.

While a sizable portion of U.S. electronic component exports to Mexico is currently reexported to the United States, the progressive removal of restrictions on maquiladora sales will allow a greater share of maquiladora output to be sold directly to the growing number of electronic product manufacturers in Mexico, thus helping to spur sales of U.S. electronic components included in those products and increasing the competitiveness of both U.S. and Mexican producers.

Trade Flows

The NAFTA tariff reductions, together with those resulting from the Uruguay Round, have helped to spur U.S. and global trade in electronic components. The Information Technology Agreement (ITA), which will eliminate tariffs around the world on a broad range of components, finished products and production equipment by the year 2000, is expected to increase demand further.

Trade Flows: U.S. Exports to Mexico

Mexico was the largest market for U.S. producers of electronic components in 1996. American companies exported $5.5 billion in electronic components to Mexico in 1996, up from $2.1 billion in 1993. Exports surged to $1.5 billion in the first quarter of 1997, up 210 percent from the first quarter of 1993. Since implementation of NAFTA, U.S. electronic component sales to Mexico have outpaced exports to the rest of the world. From 1993 to 1996, U.S. exports to Mexico grew at almost twice the rate of exports outside North America.

The United States remains Mexico's principal supplier of electronic components. According to official Mexican data, in 1996 the U.S. supplied roughly 81 percent of Mexican imports of electronic components.

Trade Flows: U.S. Imports from Mexico

Mexico ranked seventh as a source of U.S. imports in 1996, supplying $3.1 billion in electronic components, up from $2.2 billion in 1993.

Investment

The NAFTA enabled U.S. investors in Mexico to hold 100 percent of the ownership of new electronic production enterprises, without prior government approval. Prior to NAFTA, U.S. investors were limited to a 49 percent equity share unless their plants met government-mandated performance requirements and restrictions.

The U.S. electronic components sector invested $11.4 billion in plant and equipment in the United States during 1995, the latest year for which such data are available. No comparable data are available for U.S. direct investment in Mexico's electronic components sector.

Employment, Earnings, and Productivity

The U.S. electronic component industry benefits from a highly educated labor force and the availability of large numbers of top-quality electrical engineers. U.S. employment in the industry increased from 527,400 in 1992 to nearly 613,000 by the end of 1996. This job growth parallels the growth in electronic component exports to both Canada (to which U.S. exports rose by 62 percent over the period) and Mexico.

Productivity in the U.S. electronic component sector rose by 39.7 percent from 1993 to 1995 (latest year available) while hourly earnings were up by 3.6 percent.

Footnotes:

53. This section examines the entire household appliances sector (SIC 363).

54. This section examines household furniture (SIC 251) and office furniture (SIC 252).

55. In 1996, in response to a U.S. safeguard action on broom corn broom imports, Mexico raised its import tariffs on U.S. exports of several products. As part of this increase, Mexico raised its tariffs on wooden bedroom and office furniture to 14 percent and 12 percent ad valorem, respectively. These products account for 7.2 percent of total U.S. household and office furniture exports to Mexico.

56. This section covers the entire U.S. printing and publishing industry (SIC 27).

57. This section examines sports and athletic equipment (SIC 3949), dolls (SIC 3942), toys and games (SIC 3732), motorcycles and parts (SIC 37512), and bicycles and parts (SIC 37511).

58. This section covers electron tubes (SIC 3671), printed circuit boards (SIC 3672), semiconductors and related devices (SIC 3674), electronic capacitors (SIC 3675), electronic resistors (SIC 3676), electronic coils, transformers, and other inductors (SIC 3677), electronic connectors (SIC 3678), and electronic components not elsewhere classified (SIC 3679).

Continue on to Processed Foods and Beverages