NAFTA emerges as a political lightning rod in this year's presidential campaign

By Joseph P. Quinlan

NAFTA: Beyond trade: The race for the White House hasn't even made it past the primaries, but the North American Free Trade Agreement has already emerged as a political lightning rod. The closer we get to November, the more heated the debate about America's trade linkages with the rest of the world -- notably our NAFTA neighbors Mexico and Canada -- will likely become. China, the poster child for whatever ails U.S. industry, will also be in the spotlight.

While a great deal of goods from Mexico and Canada cross the U.S. border each day, one of America's most important NAFTA imports is energy -- specifically, crude oil. "Black gold" literally and figuratively drives the U.S. economy. The United States accounted for roughly one-quarter of global oil consumption last year, earning the dubious title of "World's No. 1 Oil Dependent."

The United States has been a net oil importer since the 1950s, but last year, the total oil import bill came in at a whopping $328 billion, up 175 percent from 2000. Clearly, weaning ourselves off foreign oil is not as simple a matter as some in Washington would have us believe.

Look past the headlines to find the pipelines: Anyone who thinks of U.S. oil imports typically thinks of the Middle East as the primary supplier. That's understandable, since the Middle East sits atop two-thirds of the world's proven oil reserves. Yet, the United States imported more crude oil from sub-Saharan Africa last year than it did from the Middle East -- hardly an encouraging situation, given ongoing political problems in Nigeria and Algeria, two of Africa's largest oil producers. The broader perception of America's oil dependence doesn't quite match reality, especially in terms of who's holding the pump.

Few people are aware of America's energy dependence on Africa, but we suspect that fewer still could correctly guess that our NAFTA partners, Canada and Mexico, are America's No. 1 and No. 3 suppliers of foreign oil.

The chart (below) highlights America's top sources of foreign oil last year. Combined, America's NAFTA partners accounted for nearly one-third of total U.S. oil imports -- a healthy level of dependence that should not be lost in the debate about NAFTA's virtues and vices.

With the geopolitical situation in the Middle East always in flux, parts of Africa's oil infrastructure under siege, and Venezuela threatening to cut off supplies to the United States, it's sheer luck -- and a happy coincidence -- that America's neighbors have excess oil to sell. A great deal of our oil needs can be addressed right in our own backyard, an advantage that China and Japan -- the world's two other major importers of crude oil -- don't enjoy. Moreover, our energy supplies from Mexico and Canada are rather dependable. That is a favorable scenario compared to Poland, Ukraine and Europe at large, which must deal with the unpredictability of a Russian energy complex that has a habit of turning its gas pipeline on and off.

Black gold and greenbacks: Mexico and Canada, like other oil producers, have reaped a rich bounty from soaring world oil prices. Combined, the current account surplus of our NAFTA neighbors totaled roughly $19 billion in 2007, up nearly $18 billion from 2000. A fair share of this capital has been invested not only at home but in the United States.

While much has been made of U.S. capital inflows from China and the rising presence of sovereign wealth funds in the United States, too little attention has been paid to capital inflows from NAFTA. Unbeknown to many, our NAFTA neighbors have emerged as key suppliers to our capital-deficient nation. Our neighbors are not just filling our tanks with their excess energy, they are fueling our economy with their excess dollars.

To this point, U.S. capital inflows from NAFTA have averaged $38.5 billion this decade versus an annual average of $6.3 billion over the 1990s. Totally $308 billion on a cumulative basis since 2000, our NAFTA neighbors have sunk nearly as much capital into the United States as Germany, France and Ireland put together. As a share of the global total, NAFTA inflows have accounted for 4.9 percent of the cumulative total this decade.

The bottom line: America's neighbors may be economically small relative to the United States, but their presence in the U.S. energy and credit markets has never been larger. With that in mind, we believe that tinkering or toying with NAFTA could result in some negative, unintended consequences for the U.S. economy and financial markets.

Joseph P. Quinlan is managing director and chief market strategist for Banc of America Capital Management. This column was written for the Bank of America newsletter.