In January, 1994, when the North American Free Trade Agreement went into effect, the economy was stuck in the "jobless recovery." The unemployment rate was 6.7%, with about 13% of black workers jobless. It was not the best time to open up borders.
Or so it seemed. From that moment until fairly recently, the U.S. economy boomed. Unemployment fell sharply for every group and wages rose, making NAFTA a nonissue. Attempts by politicians such as Pat Buchanan to play on trade fears came to naught.
But now, as the economy stalls and unemployment starts to rise, trade is again showing up on the political agenda. Americans are worried about their jobs, especially in manufacturing, moving overseas. President George W. Bush is considering moving against steel imports. It's only a matter of time before NAFTA comes under attack.
Nevertheless, the scorecard for NAFTA so far seems positive. On its major objective--promoting trade between the U.S. and Mexico--it has been a huge success. It's far harder to track NAFTA's precise impact on jobs and wages. While some U.S. workers have lost their jobs because of it, the number has been far fewer than opponents predicted. And the best available studies show that on balance NAFTA has boosted jobs and cut inflation without hurting wages.
On the Mexican side, NAFTA looks like an even bigger success. Exports to the U.S. account for about 25% of Mexico's economy, up from 13% in 1993. Maquiladoras--assembly factories that enjoy special duty-free status--have created almost 800,000 jobs since 1993. Moreover, the export boom NAFTA caused accounts for more than half the 3.5 million jobs created in Mexico since August, 1995. And Mexican real wages have risen quite strongly in recent years.
In trade flow terms, NAFTA has far exceeded expectations. U.S. merchandise exports to Mexico in 2000 are up almost 170% from 1993, far above the 68% gain for overall U.S. exports (chart, page 56). Mexican exports to the U.S. grew even more--241%. "Trade has expanded at the high end of anyone's projections," says Gary C. Hufbauer, senior fellow at the Institute for International Economics, a Washington think tank.
U.S. trade with Mexico is far better balanced than with other partners. In 2000, the U.S. ran a $25 billion merchandise trade deficit with Mexico, compared with $84 billion with China and $81 billion with Japan. And the U.S. deficit with Mexico is only 10% of total trade with that country (exports plus imports). By contrast, the U.S. deficit with the European Community equals 14% of trade; with Japan, 38%; and with China, 72%.
SUCKING SOUND? Economic theory suggests that the large increase in trade with Mexico should benefit both countries. Nevertheless, finding direct evidence of its effects in the U.S. is not easy. Despite the explosion in trade, U.S. imports from Mexico in 2000 amount to less than 1.5% of U.S. gross domestic product.
That means, for example, that the direct effect on U.S. jobs--either negative or positive--has been relatively small. There's been no sign of a "giant sucking sound" caused by millions of jobs moving across the border, in the words of NAFTA opponent H. Ross Perot. Since the treaty went into effect in 1994, the U.S. Labor Dept. has certified about 316,000 jobs as threatened or lost due to trade with Mexico and Canada. That number--which economists such as Hufbauer see as a good measure of the job impact of this trade--is quite small, since the U.S. economy has added about 20 million jobs over that time period.
But the claims by some NAFTA proponents that the treaty would create enormous numbers of new jobs in the U.S. turned out to be far from the truth as well. About 100,000 net new jobs have been added to date, according to Raul Hinojosa-Ojeda, research director of the North American Integration & Development Center at University of California at Los Angeles, which has published the most detailed studies of the agreement's employment impact.
Similarly, low-priced Mexican imports have held down inflation, but only modestly. NAFTA has shaved about 0.1 percentage points off the annual inflation rate, says David A. Wyss, chief economist at Standard & Poor's Corp.
CHEAP LABOR. But the relatively small direct impact of NAFTA conceals its pervasive but subtle beneficial effects. Outsourcing of low-skill jobs to low-wage countries is an unstoppable trend. But it turns out that the NAFTA free-trade zone has given U.S. companies a way of taking advantage of cheap labor while still keeping close links to U.S. suppliers. Mexican assembly plants get 82% of their components from U.S. suppliers, according to the U.S. International Trade Commission. By contrast, factories in Asia use far fewer U.S. parts. If General Motors Corp. relies on a plant in Matamoros, Mexico, to build wire harnesses for car audio systems, that's far better for the U.S. economy than if the carmaker buys its harnesses from, say, Taiwan. Without NAFTA, "entire industries might be lost, rather than just the labor-intensive portions," says economist Gordon H. Hanson of the University of California at San Diego.
That helps U.S. border cities such as San Diego and El Paso. For example, plants specializing in plastic injection molding, used to make outer shells and knobs for electronics equipment, have seen explosive growth in El Paso, according to Hanson. The operations prosper by making parts that are shipped over the border for others to assemble.
The shift toward higher-skill jobs induced by NAFTA fits well with the American workforce's rising skills. In 1993, 20% of people in the U.S. over 25 had less than a high school education. By 2000, that fraction had fallen to 16%.
This decline has been driven by the increased education of native-born Americans. At the same time, however, less educated Hispanic immigrants, many of them Mexican, have become more important in the U.S. labor force. From 1999 to 2000, for example, the number of native-born Americans with less than a high school education fell 5%. Meanwhile, the number of Hispanic immigrants without a high school diploma rose by 5%. In the critical 25-to-44 age category, foreign-born Hispanics now account for a full 33% of the U.S. population without a high school degree.
As a result, NAFTA has meant the U.S. low-skilled workforce is effectively integrated with the Mexican economy. The inflow of Mexican workers is "pretty much set by labor-market demand in the U.S.," says Hinojosa-Ojeda. Still, wage growth between 1994 and 2000 has been somewhat faster for those in the bottom 10% of the earnings spectrum than for those among the top 10%.
To be sure, that's no consolation to Americans who find their jobs leaving for Mexico. According to new research by economist Lori G. Kletzer of the Institute for International Economics, displaced manufacturing workers who had to take jobs in the retail sector saw their wages fall by an average of 34%.
Nevertheless, notes Kletzer, a sizable number of factory workers displaced by trade find other manufacturing jobs, and those workers see their earnings fall by an average of only about 5%. In fact, about one-third of the reemployed suffer no earnings loss at all.
For Mexico, NAFTA looks to be a net plus for wages, especially in recent years. The peso devaluation sent real wages there tumbling in 1995 and 1996, but since then manufacturing wages have regained almost all their ground. Moving from a rural village to one of the maquiladoras often doubles a worker's income, notes Hufbauer. "It's a good step up for most Mexican workers," he says. Indeed, real manufacturing wages in Mexico rose almost 6% in 2000.
SPEEDY RECOVERY. Since NAFTA began, $85 billion in foreign investment has gone into the Mexican economy. International investors "simply weren't willing to commit any money in Mexico" without NAFTA's legal framework, says Luis Rubio, a trade expert at the Center of Research for Development, a Mexico City think tank.
NAFTA is often cited as a key reason Mexico recovered rapidly after the December, 1994, peso devaluation. International banks were willing to lend to Mexican businesses within seven months--in part because those companies would have access to U.S. markets. "The quick recovery had everything to do with NAFTA and the closer integration with the U.S. economy," says economist Joseph E. Stiglitz of Stanford University.
Of course, the new U.S.-Mexico economic ties have not yet been tested by a U.S. recession. NAFTA means Mexico is being hit hard by the U.S. slowdown. Industrial production in Mexico in April is down about 3% over a year earlier, and maquiladoras have already trimmed workforces by about 60,000 since October, 2000, according to the Mexican government. At the same time, U.S. workers fear the tough times will send more work across the border to cut costs.
These fears are only natural. Free trade is never easy, especially in a slowing economy. But so far, NAFTA's record is a good one.
By Charles J. Whalen in New York, with Paul Magnusson in Washington and Geri Smith in Mexico City