November 10, 2017
The North American Free Trade Agreement (NAFTA) allows the United States, Canada, and Mexico to trade with each other without paying tariffs, but a growing share of trade does not take advantage of the nontariff preferences available to them. In 1996, 54 percent of imports from Canada and 74 percent of imports from Mexico came into the United States tariff free. In 2016, the percent dropped to 47 percent for Canada and 58 percent for Mexico. About one third of Canadian and Mexican imports are in products with zero tariffs for all World Trade Organization (WTO) members and another 40 percent are in products with tariffs below 3 percent.
Why do Mexico and Canada export goods burdened by tariffs? In many cases, US importers pay the relatively low tariffs and thus avoid NAFTA’s complex rules of origin, which require that manufacturers use a certain percentage of materials from NAFTA countries. By forgoing NAFTA benefits, manufacturers can source more materials from outside North America and do not incur the administrative costs of documenting regional content. With supply chains that are becoming more global, rules of origin make trading through regional agreements increasingly costly.
Authored and published by the contributors at the Peterson Institute: https://piie.com/research/piie-charts/canadian-and-mexican-exporters-have-increasingly-passed-nafta-benefits