Economics / International Business

NAFTA: Past, Present, Future

Since its inception in 1992, the North American Free-Trade Act (NAFTA) has increased continental trade from $290 million to over $1 trillion in 2011. By eliminating trade barriers between the U.S., Canada, and Mexico, NAFTA created a single market in North America and allowed businesses to operate in Toronto as they would in California. It is the bedrock of North American economic relationships and has dominated political discourse in the past due to the controversies of free trade. Having remained untouched for over twenty years, NAFTA and its participating economies will soon face changes as the Trump administration renegotiates parts of the deal.

Built upon the free-trade agreement that existed between the U.S. and Canada, NAFTA’s controversy came when George H.W. Bush added Mexico, a developing country with wages far lower than the average of its neighbors. Ross Perot, who ran against Bill Clinton for President in 1992, characterized the negative effects of NAFTA as “a giant sucking sound going south”. Perot and many politicians at the time opposed NAFTA for fear that American and Canadian workers would lose their jobs to cheap labor from Mexico. They were partially right – a study by the Economic Policy Institute estimated that around 600,000 jobs have been transferred to Mexico as of 2010 but also stated that “trade both creates and destroys jobs”. For every manufacturing job lost to Mexico, the US economy earned around $900,000 of benefits in terms of cheaper prices, higher productivity, and export-related jobs. American companies gained access to cheaper labor and intermediary components, lowering operating costs and enhancing their competitiveness worldwide.

Image result for ross perot

“A giant sucking sound [of jobs] going south” – Ross Perot

The federal government has long anticipated that trade with lower-wage countries would shift blue-collar jobs to other sectors. The Trade Adjustment Assistance (TAA) Program was established in 1962 to help suffering workers afford reeducation to work in other industries. But original funding for the TAA did not account for the impact of globalization in recent decades as Asia entered the labor market. Without additional funding from Congress, the TAA’s impact was negligible when American workers needed it the most.

Feeling neglected by the government, U.S. manufacturing workers played a significant role in the election of President Trump, who has promised to bring jobs back on American soil. The renegotiation of NAFTA fits that agenda, but may not result in many jobs being brought back to the U.S., as the overwhelming majority of the U.S. trade deficit lies with China. The biggest culprit of job loss may not even be trade itself. A report by Ball State University estimates that “88% of job losses in manufacturing in recent years can be attributable to productivity growth.” As technology advances and companies become more efficient, workers aren’t needed in the same quantities as in prior decades.

Mexican laborers may have more reason to agree with President Trump’s intent to renegotiate NAFTA than their American counterparts. Mexico signed NAFTA believing that the pact would help modernize their economy and provide higher income jobs, but the results have been mixed. Mexico’s per capita GDP growth since the signing of NAFTA has lagged behind that of other Latin American countries dramatically. The Center for Economic and Policy Research (CEPR) attributes this to Mexico’s dependency on the U.S. economy after NAFTA. While the financial crisis of 2008 wrought havoc on the U.S. economy, Mexico suffered far worse. U.S. GDP sunk by 2.4% in 2009 while Mexico’s fell by 6.5%. NAFTA also opened Mexican markets to U.S. competition – 1.9 million Mexican family farmers lost their jobs due to competition with U.S. agricultural conglomerates. The lack of economic opportunity drove rural Mexicans to immigrate to the U.S. to compete for jobs, deepening the rift between beleaguered workers of both countries.

chart us corn exports

President Trump surprised the public when he called NAFTA “the worst trade deal ever signed” during the first presidential debate. While that’s a bold assertion, it is clear that NAFTA, like any other piece of legislation, is far from perfect. Considering NAFTA’s benefits to the U.S. economy, a hardline approach to trade with Mexico will probably end in a lose-lose situation in which we alienate an important regional ally. Through respect and mutual cooperation, we can minimize NAFTA’s harm where it is most concentrated, while still enjoying the benefits of free trade. A strong Mexican economy will reverse the flow of immigration and provide a bigger market for U.S. firms, both of which means more jobs for U.S. workers. If President Trump and American workers believe that our relationship with Mexico is unfair, help instead of punishment can be the ultimate solution to our problems.

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