For months, a media juggernaut has rolled over anyone who challenged the North American Free Trade Agreement (NAFTA). That's because economists have won the day by repeating their graduate school lessons like a mantra: History shows that free trade is good, so NAFTA will benefit the U.S. economy. Those who say otherwise are dismissed as ignorant or irresponsible.
But the argument overlooks the treaty's biggest impact, which won't be on trade but on investment, mainly by U.S. companies in Mexico. Most studies rely on the 19th century theory of free trade, which assumes capital doesn't cross borders. Result: The studies miss the drain of U.S. investment dollars--which began several years ago in anticipation of the pact's becoming law.
Some quick arithmetic suggests that investment lost under NAFTA could outweigh potential gains from increased trade. "Most economic models of NAFTA don't look at capital movements," says Edward E. Leamer, a trade economist at the University of California at Los Angeles. "And it might give a different answer as to whether NAFTA is good or bad for the U.S. work force if they did."
"NO ONE HAS LOOKED." Indeed, of 19 NAFTA forecasts reviewed by the Congressional Budget Office (CBO), just five looked at the issue. Four of these assumed--bizarrely--that any investment surge in Mexico would come from somewhere other than the U.S. The only study delving into the issue, by Robert K. McCleery, an American economist at Kobe University in Japan, predicted that NAFTA would displace about $2.5 billion of investment from the U.S. to Mexico annually.
What does that mean for U.S. jobs? McCleery doesn't ask, because he assumes the U.S. economy will fill in lost jobs with new ones. But Georgia State University economist Donald Ratajczak figures that $1 billion of U.S. investment generates about 30,000 jobs. Assuming a $2.5 billion annual capital outflow, that would mean 375,000 potential new jobs lost over five years--more than wiping out the 170,000 gain that Gary Clyde Hufbauer and Jeffrey J. Schott of the Institute for International Economics in Washington predict will occur in five years if NAFTA passes. Bruce G. Arnold, the economist who wrote the CBO paper, acknowledges that investment outflows could wipe out potential job gains from NAFTA, but he admits that "no one has looked at it much."
The pro-NAFTA argument rests on some shaky assumptions about exports, too. Hufbauer and Schott, like most others, assume that higher exports are a net increase for the U.S economy. But the recent export surge to Mexico wasn't fueled by Mexicans on a spending spree. Some 37% of it went to maquiladoras, which ship most of their output right back to the U.S., according to a recent General Accounting Office study. That's not a net boost to U.S. gross domestic product--it's production lost to another country.
Moreover, the CBO found that a further third of U.S. exports to Mexico consisted of capital goods. If much of this money comes from U.S. companies closing plants at home and setting up new ones in Mexico, these exports aren't a net gain for the U.S. either.
Lets take an example: Say General Motors Corp. shuts an Ohio plant that had cost $1 billion to build and that employs 30,000 people. Then, it builds a factory in Mexico, buying $1 billion of equipment from U.S. makers. Hufbauer and Schott figure the economy will be swelled by $1 billion in new exports--enough, they estimate, to create 19,600 new jobs for American workers. But the investment and 30,000 jobs lost in Ohio are left out of the equation.
Trade theory is convincing--about the benefits of increased trade. But it doesn't address what's happening between the U.S. and Mexico, which are merging their economies. If the effects of integration overwhelm the trade gains, the U.S. could be the loser. And economists simply don't pay enough attention to that possibility.