PHARR, RGV – When he signed North American Free Trade Agreement in late 1993, President Bill Clinton said globalization had reshaped the world economy.
“North America is a powerful global competitor, although our relative position is slipping, as deficits pile up in the United States, and our shared efforts to strengthen Mexico’s institutions are only beginning to have their impact,” he said.
NAFTA was the first comprehensive free trade agreement (FTA) joining together developed and developing nations. It achieved broader and deeper market openings than any trade agreement had before. NAFTA has fundamentally reshaped North American economic relations in less than a quarter of a century.
Experts in many quarters say there is room for changes in the more than two decade-old agreement. Renegotiation could create a better deal for all three countries. But it will require concessions.
President Trump ordered government officials on January 26, 2017 to begin planning a physical wall on the border with Mexico. A possible means of paying for the border wall was also floated by Trump’s staff: a 20 percent tax on imports from countries with which the United States runs a trade deficit, “like Mexico.”
According to the Census Bureau, NAFTA partners accounted for just 10 percent of the U.S. trade deficit in 2015. China accounted for 48 percent; the European Union, 20 percent; Japan, 9 percent; Mexico, 8 percent, and Canada accounted for 2 percent.
President Trump zeroed in on his concern about the trade imbalances of NAFTA in a tweet. “The U.S. has a $60 billion-dollar trade deficit with Mexico. It has been a one-sided deal from the beginning…with massive numbers of jobs and companies lost.”
His comments created a diplomatic upheaval, and the previously scheduled meeting between President Trump and President Peña Nieto was cancelled by mutual agreement. However, Presidents Peña Nieto and Trump did hold a ”warm and productive” conversation on Saturday, January 28, according to news reports. During that conversation, they acknowledged their “clear and very public differences” over Mr. Trump’s insistence that Mexico pay for the wall. Both sides agreed not to speak publicly about the controversial subject.
Canada has stayed out of the current spotlight, believing it will receive preferential treatment because of its trade balance with the United States. Should NAFTA be cancelled, U.S.-Canada trade would likely revert to terms of the 1987 U.S.-Canada FTA. Formal treaty renegotiations are on hold, as all sides weigh their priorities.
What is NAFTA?
In the 23years since it was brought into being, the North American Free Trade Agreement has been both praised and attacked. Scholars and policy makers often disagree about the impact that NAFTA has had on economic growth and job generation in the United States. That impact, they say, is not always easy to disentangle from other economic, social and political factors that have influenced U.S. growth. There is lots of debate about the effects of NAFTA; it was a controversial theme in the Trump presidential campaign, and now in his Presidential infancy it rises close to the top of the to-do list.
For all the hub-bub, many economists say the impact of NAFTA has not been significant in the U.S. economic scheme of things. According to a blog of Harvard economist Dani Rodrik, “NAFTA produced large changes in trade volumes, tiny efficiency gains overall, and some very significant impacts on adversely affected communities.” He said, as have many, that President Trump had “exaggerated” the pact’s cost on manufacturing jobs, but “was able to capitalize on the very real losses…in certain parts of the country in a way that Democrats were unable to…” All sides agree NAFTA has coincided with a significant increase in economic activity across the U.S.-Mexico border: more trade, more foreign direct investment (FDI), and a more-integrated manufacturing system, particularly for the auto industry. But, as the WSJ has reported, “They differ on which numbers matter most.”
To properly evaluate NAFTA, it is important to be clear about what it was designed to do and what it has actually accomplished.
NAFTA is a three-nation accord negotiated by the governments of Canada, Mexico, and the United States. It entered into force in January 1994. NAFTA’s terms, which were implemented gradually through January 2008, have provided for the elimination of most tariffs on products traded among the three countries. Liberalization of trade in agriculture, textiles, and automobile-manufacturing was a major focus. The deal also sought to protect intellectual property, establish dispute-resolution mechanisms, and, through side agreements, implement labor and environmental safeguards.
When negotiations for NAFTA began in 1991, the goal for all three countries was the integration of Mexico with the highly developed, high-wage economies of the United States and Canada. The hope was that freer trade would bring stronger and steadier economic growth to Mexico, providing new jobs and opportunities for its growing workforce and discouraging illegal migration from Mexico. For the United States and Canada, Mexico was seen both as a promising new market for exports and as a lower cost investment location that could enhance the competitiveness of U.S. and Canadian companies.
While the United States had completed a free trade agreement with Canada in 1988, the addition of Mexico was unprecedented. Opponents of NAFTA seized on the wage differentials with Mexico, which had a per capita income just 30 percent that of the United States. In 1992, U.S. presidential candidate Ross Perot argued that trade liberalization “would lead to a giant sucking sound” of U.S. jobs fleeing across the border. Supporters like Presidents George H.W. Bush and Bill Clinton countered that the agreement would create hundreds of thousands of new jobs a year. Mexican President Carlos Salinas de Gortari saw it as an opportunity to modernize the Mexican economy in order to “export goods, not people.”
The goal in 1991 was the integration of Mexico with the highly developed, high-wage economies of the United States and Canada. Standing with the president of Mexico and the prime minister of Canada, in San Antonio on October 7, 1992, President George H. W. Bush proclaimed: “This marks a turning point in the history of our three countries. We are creating the largest, richest, and most productive market in the entire world.” His successor, Bill Clinton, was the one to push NAFTA through a divided Congress.
By 1994, the three economies were shaped into a deeply intertwined economy stretching from the Arctic to Central America, bound together by 22 chapters of 309 pages. It would encourage a more than tripling of regional trade, and cross-border investment between the three countries also grew significantly. Yet, NAFTA has remained a constant target in the broader debate over free trade.
Since the Treaty
NAFTA eliminated most tariffs on goods traded between the nations, and set in place processes to get rid of regulatory and other barriers. The idea was that over time there would be no barriers; doing business in all three countries would be similarly easy.
In the years since NAFTA, U.S. trade with its North American partners has more than tripled, growing more rapidly than U.S. trade with the rest of the world. Canada and Mexico are the two largest destinations for U.S. exports, accounting for more than a third of the total. Most estimates conclude that the deal had a modest but positive impact on U.S. GDP of less than 0.5 percent, or a total addition of up to $80 billion dollars to the U.S. economy upon full implementation, or several billion dollars of added growth per year.
NAFTA did that by eliminating tariffs on all industrial goods, guaranteeing unrestricted agricultural trade between the United States and Mexico, opening up a broad range of service sectors, and instituting national treatment for cross-border service providers. It also set high standards of protection, for patents, trademarks, copyrights, and trade secrets. To preserve the rights of investors, it prohibited barriers such as local-content and import-substitution rules, which require producers to ensure that specified inputs are produced domestically.
NAFTA ushered in a new era of regional and bilateral free trade agreements (FTAs) which have proliferated as the World Trade Organization’s (WTO) global trade talks have stagnated. The United States now has FTAs with twenty countries, and is pushing for major new regional deals with Asia and Europe. NAFTA also pioneered the incorporation of labor and environmental provisions in U.S. trade agreements—provisions which have become progressively more comprehensive in subsequent FTAs.
While there are arguments about its success, Neil Irwin in the New York Times says that “the North American economy really does work as an integrated whole.” He reports that U.S. exports to Mexico, for example, are now 3.5 times their 1993 level when adjusted for inflation. They have risen more than twice as fast as the overall economy. Trade between the United States and Canada has pretty well been balanced over time, but the United States has had about a $60 billion per year trade deficit with Mexico, importing more than it exports.
Some NAFTA Arguments
“We are ready to compete and we can win,” said President William J. Clinton upon signing the NAFTA agreement 12/8/98. In 2017, President Donald J. Trump has been saying that NAFTA has shifted U.S. manufacturing production and jobs to Mexico and vows to renegotiate it or withdraw from it. During his confirmation hearing, Wilbur Ross, President Trump’s nominee for Secretary of Commerce, said that “NAFTA is logically the first thing for us to deal with. It will be,” he said, “a very, very early topic in the administration.” And, so it is.
In the years since NAFTA, United States trade with its North American neighbors has more than tripled, growing more rapidly than U.S. trade with the rest of the world. Canada and Mexico are the two largest destinations for U.S. exports, accounting for more than a third of the total. Most estimates conclude that NAFTA has had a modest but positive impact on U.S. GDP of less than 0.5 percent, or a total addition of up to $80 billion dollars to the U.S. economy upon full implementation, or several billion dollars of added growth per year. Such upsides of trade often escape notice, because while the costs are highly concentrated in specific industries like auto manufacturing, the benefits of a deal like NAFTA are distributed widely across society.
Supporters of NAFTA estimate about 14 million jobs rely on trade with Canada and Mexico, while nearly 200,000 export-related jobs created annually by the pact pay 15 to 20 percent more on average than the jobs that were lost.
Critics of the deal, however, argue NAFTA is to blame for job losses and wage stagnation in the United States–driven by low-wage competition, companies moving production to Mexico to lower costs, and a widening trade deficit. The U.S.-Mexico trade balance swung from a $1.7 billion U.S. surplus in 1993, to a $54 billion deficit by 2014. Economists like the Center for Economic and Policy Research’s (CEPR) Dean Baker and the Economic Policy Institute argue that this surge of imports caused the loss of up to 600,000 jobs over two decades. They do admit, however, that some of this import growth would likely have happened even without NAFTA.
Many workers and labor leaders point to these numbers to blame trade, including NAFTA, for the decline in U.S. manufacturing jobs. The U.S. auto sector has lost about 350,000 jobs—a third of the industry, while Mexican auto employment spiked from 120,000 to 550,000 workers. CEPR’s Baker argues that econometric research shows that trade also puts downward pressure on wages for non-college educated workers who are more likely to face direct competition from low-wage workers in Mexico.
Other economists like Gary Clyde Hufbrauer and Cathleen Cimino-Isaacs of the Peterson Institute for International Economics (PIIE) emphasize that increased trade produces gains for the overall U.S. economy. Some jobs are lost due to imports, but others are created, and they say that consumers benefit significantly from falling prices and often improved quality of goods created by import competition. A 2014 PIIE study of NAFTA’s effects found that “about 15,000 jobs on net are lost each year due to the pact, but that for each of those jobs lost, the economy gains roughly $450,000 in the form of higher productivity and lower consumer prices.”
Many economists also maintain that the recent troubles of U.S. manufacturing have little to do with NAFTA, arguing that manufacturing in the United States was under stress decades before the treaty. Research by David Autor, David Dorn, and Gordon Hanson published in January 2016 found that competition with China “had a much bigger negative impact” on U.S. jobs since 2001, when China joined the WTO. Gordon Hanson, an economist and trade expert at the University of California-San Diego, says that “the steepest decline in manufacturing jobs”, which fell from seventeen million to eleven million between 2000 and 2010, “is mostly attributable to trade with China and underlying technological changes. China is at the top of the list in terms of employment impacts that we found since 2000, with technology second, and NAFTA far less important.”
“In fact,” says Hanson, “NAFTA helped the U.S. auto sector compete with China. By contributing to the development of cross-border supply chains, NAFTA lowered costs, increased productivity, and improved U.S. competitiveness.” This meant shedding some jobs in the United States and moving some positions to Mexico, but, he argues, that without the pact, even more would have been lost.
“Because Mexico is so close, you can have a regional industry cluster where goods can go back and forth. The manufacturing industries in these three countries can be very integrated,” he says. “These sorts of linkages, which have given U.S. automakers an advantage in relation to China, would be much more difficult without NAFTA’s tariff reductions and protections for intellectual property.”
Anxiety over trade deals has grown because wages haven’t kept pace with labor productivity, while income inequality has risen. Trade deals have hastened the pace of the changes in that they have reinforced the globalization of the American economy, according to Edward Alden, a senior fellow at the Council on Foreign Relations (CFR).
NAFTA is as much an investment as a trade treaty, providing guarantees of international courts, regulatory coordination, and intellectual property protections. This has helped bring over $500 billion in FDI to Mexico over the past twenty-three years. This investment has mostly come from the United States, going into manufacturing, financial services and mining. In the World Bank Ease of Doing Business rankings, Mexico now surpasses its Latin American peers and far outpaces emerging China and India. Much of the money coming in recently has been taking advantage of Mexico’s free trade agreements with another forty-four nations, including the European Union, China, and Japan. The U.S., by contrast, has agreements with just twenty countries.
Positively speaking, overall trade between the three NAFTA partners has increased sharply from inception, from roughly $290, billion in 1993 to more than 1.1 trillion in 2016. Cross-border investment has also surged during those years, as the stock of U.S. FDI in Mexico rose from $15 billion to more than $107.8 in 2014. As for job growth, according to the U.S. Chamber of Commerce, six million U.S. jobs depend on U.S. trade with Mexico, a flow that has been greatly facilitated by NAFTA which has helped eliminate costly tariff and non-tariff barriers. NAFTA has also facilitated a multi-layered integration of the U.S., Mexico, and Canadian supply chain. According to the Wilson Center, twenty-five cents out of every dollar of goods that are imported from Canada to the U.S. is actually “Made in USA” content, as are forty cents out of every dollar for goods imported into the United States from Mexico.
A Brief Look at Canada
Canada has experienced some strong gains in cross-border investment under NAFTA. Since 1993, U.S. and Mexican investments in Canada have tripled. U.S. investment, accounting for more than half of Canada’s FDI stock, grew from $70 billion in 1993, to over $368 billion in 2013. The most impactful aspect for Canada was pre-NAFTA, when the Canada-U.S. Free Trade Agreement went into effect. From that time, overall bi-lateral trade has been increasing rapidly. Post-NAFTA, Canadian exports to the United States grew from $110 billion to $346 billion, while imports from the United States grew by almost the same amount.
It was in agriculture that Canada saw the biggest boost. Canada is the leading importer of U.S. agricultural products. One of NAFTA’s biggest economic effects for Canada has been to increase bilateral U.S.-Canada agricultural flows. Canadian agricultural trade with the United States more than tripled since 1994, as did Canada’s total agricultural exports to NAFTA partners.
Contrary to opposition voices, opening to NAFTA trade did not eviscerate the country’s manufacturing sector, but it also didn’t spark a rapid rise in productivity. Canadian manufacturing employment held steady. The “productivity gap” between the Canadian and U.S. economies wasn’t closed. Canada’s labor productivity remains at 72 percent of U.S. levels.
A Look at Mexico Impacts
Geronimo Gutierrez, managing director of the North American Development Bank (NADB) notes that trade between United States and Mexico “reached over $500 billion in 2015, a five-fold increase since 1992,” when NAFTA negotiations concluded. “Thus,” he explains, “Mexico imports more from the United States these days than do all the so-called BRIC nations combined –Brazil, Russia, India and China. (The NADB acts as a binational catalyst for helping communities along the U.S.-Mexico border develop affordable long-term infrastructure.)
Mr. Gutierrez points out that there are lesser-known benefits of NAFTA. “By promoting the tight integration of North American supply chains, NAFTA is creating partners, and not competitors, among the member countries. As for Mexico’s interest in this bilateral relationship, it can be summarized in two facts: about 80% of Mexico’s exports go to the United States, while 50 percent of the accumulated FDI received between 2000 and 2011 comes from the United States. Moreover, NAFTA has been the fundamental anchor for reforms that make Mexico a more modern economy and open society.” (Geronimo Gutierrez has just been named ambassador to the United States.)
NAFTA gave a major boost to Mexican farm exports to the United States, which have tripled since NAFTA’s implementation. Hundreds of thousands of auto-manufacturing jobs have also been created in the country, and most studies have found that the pact had a positive impact on Mexican productivity and consumer prices. NAFTA was the continuation of a decade of economic liberalization that found Mexico transitioning from one of the world’s most protectionist economies to one of the most open to trade. Mexico had reduced many of its trade barriers upon joining the General Agreement on Tariffs and Trade (GATT), the precursor to the WTO, in 1986, but still had a pre-NAFTA average tariff level of ten percent.
Mexican policymakers considered NAFTA to be an opportunity to both accelerate and “lock in” these hard-won reforms to the Mexican economy. In addition to liberalizing trade, Mexico’s leaders reduced public debt, introduced a balanced budget rule, stabilized inflation, and built up the country’s foreign reserves. While Mexico was hard hit by the 2008 U.S. recession due to its dependence on exports to the U.S. market—in 2009, Mexican exports to the United States fell 17 percent while its economy shrank by over 6 percent—its economy was able to bounce back relatively quickly. Mexico returned to growth in 2010, its GDP expanding over five percent, and subsequently falling to around two percent in 2014 and 2015, according to the Council on Foreign Relations.
But Mexico’s unemployment also rose, which some economists have blamed on NAFTA for exposing Mexican farmers, especially corn producers, to competition from heavily subsidized U.S. agriculture. A study led by CEPR economist Mark Weisbrot estimates that NAFTA put almost two million small-scale Mexican farmers out of work—in turn driving illegal migration to the United States. Migration to the United States, both legal and illegal, more than doubled after 1994, peaking in 2007. However, the flow did reverse after 2008, as more Mexican-born immigrants began leaving the country than arriving. Experts attribute this to stricter border enforcement, changing demographics in Mexico, and the combination of fewer available jobs in the United States along with more in Mexico.
Analysts explain these divergent outcomes by pointing to the “two-speed” nature of Mexico’s economy, in which NAFTA drove the growth of foreign investment, high-tech manufacturing, and rising wages in the industrial north, while the largely agrarian southern Mexico remains detached from this new economy. Many, like University of Pennsylvania economist Mauro Guillen, argue that Mexico’s rising inequality stems from NAFTA-oriented workers in the north gaining much higher wages from trade-related activity.
Ultimately, many have cautioned, Mexico’s recent economic performance has been affected by several non-NAFTA factors. The 1994 peso devaluation drove Mexican exports, while competition with China’s low-cost manufacturing sector likely depressed growth. Unrelated public policies, such as land reform, made it easier for farmers to sell their land and emigrate. As University of California-San Diego’s Victor Hanson has proposed, Mexico’s struggles have largely domestic causes: poorly developed credit markets, a large and low-productivity informal sector and dysfunctional regulation.
Contrary to the promises of the leaders who promoted it, said Robert Blecker, an American University economist, “NAFTA did not make Mexico converge to the United States in per capita income, nor did it solve Mexico’s employment problems, or stem the flow of migration. However, NAFTA did foster greater U.S.-Mexico integration and helped transform Mexico into a major exporter of manufactured goods.”
President Trump is correct that NAFTA has coincided with a big shift in U.S. trade terms with its southern neighbor, swinging from a trade surplus of $1.7 billion in 1993, the year before NAFTA took effect, to a deficit of $61 billion in 2016, though on a far greater value of bilateral trade overall.
In addition to the impact attributable to tariff cuts under NAFTA, currency swings exacerbated the deficit. The Mexican peso plunged the year after the NAFTA took effect, making Mexican exports much cheaper and pricing many American products out of the Mexican market.
Rapid technological change, expanded trade with other countries such as China, and unrelated domestic developments in each of the countries have affected NAFTA success. Debate persists regarding NAFTA’s legacy on employment and wages, with some workers and industries facing painful disruptions as they lose market share due to increased competition, and others gaining from new market opportunities that were created.
There is a more complex picture. While Mexico is shipping more to the United States, in NAFTA’s first two decades, U.S. exports to Mexico soared from $41.6 billion in 1993 to $240.3 billion in 2014. Imports from Mexico, however, grew even faster in those years, from $39.9 billion to $294.2 billion.
The complex nature of NAFTA is intertwinement—economic and social relationships, sales and supply chains. As a result, NAFTA impact numbers are difficult to sort out, because parts are shipped back and forth within expanded regional production systems. This situation was encapsulated recently by the CEO of Union Pacific Lance Fritz. “When we look at the cross-border trade…when you really dig deep, you see that…a lion’s share has value-added on both sides of the border and is inextricably linked to our economy.”
Looking at the auto industry, for example, supply chains crisscross North American borders, with work of different complexity done in different countries. A car made in Michigan could contain a dashboard made in Mexico and a transmission made in Canada. Such a supply chain has helped make the U.S. auto industry competitive with Asia and Europe.
NAFTA interdependence flows from a high increase in American FDI into Mexico, from $15.2 billion in 1993 to $101.0 billion in 2013. Of concern, this has taken the form of U.S. manufacturers shifting into Mexico. Yet the treaty’s advocates say that shift lifted the efficiency of the factories that stayed in the United States—pre-empting what would have been an even bigger loss of manufacturing.
A critical issue is what effect NAFTA has had on the U.S. workforce–measured by jobs lost and the depressing effect on wages as production has shifted to a lower-paid workforce.
The supporters of NAFTA and its detractors agree on some things. Obvious to both is the reduction of U.S. jobs—but the estimates vary widely, from about 100,000 to about 700,000. Defenders says its critics are looking at the steady drop in the U.S. manufacturing workforce in recent decades and improperly tying all of it to NAFTA—discounting other factors , e.g., persistence of a long-term decline that predated NAFTA, the sharp increase in automation, and a surge in Chinese imports after Beijing entered the WTO.
“For the average U.S. worker, there is not much of an impact, but for certain important pockets of workers, the lowered import barriers resulting from NAFTA do seem to have lowered wage growth well below what it would have been,” said John McLaren, a University of Virginia economist in an interview on his school’s website. This is particularly true for blue-collar workers.
John McLaren did a study in which he found that the largest NAFTA impact was “in parts of Georgia, North Carolina, South Carolina, and Indiana, with areas like Washington D.C., Northern Virginia, and Maryland among the least vulnerable locales.” Looking at the textile industry, the collapse of the textile and apparel industry was devastating in central North Carolina. In places like Richmond County, mill towns dried up. That county is poorer, older, and less educated than the state and the country. NAFTA” destroyed” the county and took all the jobs.
NAFTA advocates say the economic debate misses the bigger point of the deal—which has been to palliate long-standing tensions across the border and turn Mexico into a more steadfast ally. It is that immeasurable gain that President Trump seems most skeptical about and most willing to put at risk.
A Special Wall Street Journal report (January 27, 2017) examined the impact of NAFTA and that of potential NAFTA changes from the perspective of Monterrey, Mexico workers and bosses. The author, Robbie Whelan, spent time in that free trade capital. According to the WSJ, if NAFTA were scrapped, the U.S.-Mexico trade relationship would return to WTO rules, which would likely result in average tariffs of only about 5 percent for Mexican goods going north. The impact would be slightly worse for American goods going south, since the old WTO arrangement allowed for some protectionism by Mexico.
But the impact on the investment climate would be hard to predict. NAFTA entrenched legal protections for U.S. firms investing in Mexico, protecting them from punitive Mexican regulation or confiscation. The pact also established a mechanism to adjudicate complaints.
Imposition of a border adjustment tax that would bar American firms from taking a tax exemption on imported goods is being talked about in the White House. Such a tax on Mexican imports could be used to pay for the wall. “The idea of a border tax is a huge problem,” said Enrique Zambrano Benitez, chief executive of Grupo Proeza, a holding company that owns steel producer Metalsa, a large auto supplier in Monterrey who was included in the Wall Street Journal report. If a border tax happens, Mr. Zambrano said his firm would likely shift some of its Mexican production to its five U.S. plants and buy more raw materials from U.S. producers, resulting in Mexican job losses. He also said it would likely force his firm to charge higher prices in the United States.
Another person interviewed in the special Wall Street Journal report was Stabilit SA Chairman Fernando Canales Clariond, a third-generation industrialist who served as Mexico’s secretary of economy and energy. Stabilit SA is a construction materials company. Mr. Canales said that such a tax might force his company to lay off hundreds of Mexican workers, while trying to focus more on selling to customers in Mexico, Europe and Asia. The WSJ said his company spends about $350 million per year on raw materials, including running up large tabs buying plastic resins and fiberglass from U.S. companies like PPG Industries, Inc. Imposing a border tax would mean a lot of lost jobs in U.S. factories, too, he said.
According to the Wall Street Journal report, “few in Mexico now think the country would have been better off without the trade pact. In general, NAFTA and open trade introduced competition to an economy that had been closed off for decades, with protected public and private monopolies making low-quality goods at uncompetitive prices.” Mr. Canales, whose family used to run the conglomerate Industrias de Monterrey SA, says that before NAFTA, ‘galvanized steel produced in Mexico was so flimsy it broke under the pressure of stamping presses.’ Only after the markets opened up to American competition did the quality of his family business’s products improve.”
NAFTA has accomplished much, but could accomplish more with modifications. Economic integration of the United States, Canada, and Mexico has created opportunities across the continent, enabling better competition, and, ultimately, improving the global economy. For the United States, the economic consequences of trade agreements—with attendant social, political and cultural impacts—have been dramatic. If North America is to remain a uniquely competitive region, it will need to build on NAFTA’s success as it opens markets beyond its borders.
“We are led, by events and common sense, to one conclusion,” President George W. Bush has said. “The survival of liberty in our land increasingly depends on the success of liberty in other lands. The best hope for peace in our world is the expansion of freedom in all the world.”