What Did NAFTA Really Do?
Posted on February 2, 2017
NAFTA has been in the hot seat recently, though the controversial trade agreement never really got out of it. At issue is the U.S.’s trade relationship with Mexico, a developing country in comparison to the U.S. and Canada. Viewpoints on the effects of NAFTA over the years vary depending on the source, but what do the non-partisan institutions say about it? We took a look.
The North American Free Trade Agreement (NAFTA) took effect in January 1994, committing the US, Canada and Mexico to a reduction or elimination of tariffs gradually over a period of 15 years. It also reduced non-tariff barriers to trade and investment and set standards for intellectual property rights. This was the US’s first major trade agreement with a developing country. The agreement fulfilled at least one of its purposes – since NAFTA was enacted, trade with Canada and Mexico has more than tripled.
One of the main criticisms of NAFTA is that it took jobs away from American workers when global companies subsequently moved their manufacturing facilities to Mexico. The hardest hit were non-college educated U.S. workers that were more likely to compete with low-wage Mexican workers. It is difficult to gauge the actual number of jobs lost due to NAFTA alone, with the U.S. economy in constant flux for myriad reasons. However, the Peterson Institute for International Economics (PIIE), a non-partisan research institution, estimates that overall 15,000 net jobs are lost each year due to the agreement. Their report surmises that for each job lost, the US economy gains $450,000 worth of higher productivity and lower consumer prices.
Less visible are the jobs created as a result of increased exports. The general consensus is that NAFTA did not create more jobs, but it did create better jobs as the economies adjusted according to the law of comparative advantage. That is, the economies adjusted to produce more of what they could produce most efficiently. These better, export-related jobs pay an average of 16% more than those targeting the domestic market alone.
A 2015 Congressional Research Service paper finds that overall, NAFTA has had a small but positive effect on the U.S. economy. Inputs from Mexico have made U.S. industry more competitive globally. U.S. manufacturing industries have come to rely on Mexican manufacturers to keep their finished products’ costs down. An estimated 40% of the content of Mexican products imported into the U.S. are of U.S. origin. Imports from Canada contain parts that are 25% U.S. origin. The paper does not specify the number of jobs lost, but goes on to acknowledge that there are both winners and losers when it comes to trade liberalization and overall economic growth.
Another intention of NAFTA was to narrow the difference between American and Mexican wages. NAFTA had little effect on Mexican wages. A separate study by the Congressional Research Service concluded that average wages, income per worker and per capita income did not approach U.S. levels due to both a lack of economic reforms and poorly implemented economic reforms within Mexico.
The PIIE report examined the reasons behind the influx of Mexican workers into the U.S. in the years after NAFTA was implemented. The report specifies that the robust U.S. economy, and not NAFTA, was the catalyst for workers to head north. The mid and late 1990’s were a prosperous time for the US, with 17 million jobs added to the economy through the year 2000. Unemployment went from 6.9% to 4.0%. Mexican migration to the US is said to typically occur during boom times, when unemployment is down and there is a better chance of securing a job with higher American wages.
The effects of NAFTA on Mexican agriculture is another controversial topic, especially within the corn market. Job losses in Mexico due to imported U.S. corn were estimated to be over 1 million between 1991 and 2000. These losses were not only due to NAFTA, but also to Mexico’s agricultural reform measures. Mexican ag reform began in the 1980’s and included privatization and removing staple price supports and subsidies. CONASUPO, the government’s agricultural agency that bought commodities at guaranteed prices, was abolished in 1999. These factors contributed to the decrease of cultivated corn from 8.0 million hectares in 1994 to 6.8 million hectares in 2013, a considerable loss when the average farm is 8 hectares.
Interestingly, numerous sources point to our trade with China as causing a bigger disruption to the U.S. job market than NAFTA. The Council on Foreign Relations cites a study by the National Bureau of Economic Research asserting that trade with China is predominately responsible for the reduction of manufacturing jobs from 17 million in 2000 to 11 million in 2010. Technological change is also responsible, and NAFTA is in a distant third as far as job impact.
So what is to be done? The author of this Economist article highlights Germany as an example of a market that has been able to adjust to competition from China and the new EU countries to the east. The Germans did this by using apprenticeships and vocational training to constantly expand its skilled workforce. The U.S. could benefit from emphasizing vocational training and providing educational programs to those that are most susceptible to foreign labor competition.
In addition to the possible renegotiation of NAFTA, it is advisable for the U.S. to elevate the skillset of its workforce to match the domestic job market.