Nafta 20 Years After: Neither Miracle nor Disaster

Cargo trucks entering the United States from Mexico in 2011 Photograph by David Maung/Bloomberg

Bill Clinton made the North American Free Trade Agreement a cornerstone of his 1992 presidential campaign, saying it would help level the playing field for U.S. businesses trying to sell their products abroad. Candidate Ross Perot predicted Nafta would result in “a giant sucking sound going south”—the sound of American manufacturing jobs and factories being funneled into Mexico.

Nafta went into effect on Jan. 1, 1994, which now gives us 20 years’ worth of data on economic growth, trade volume, and employment to figure out who was right. The bottom line? Nafta has been neither as good as Clinton promised nor as bad as Perot warned.
Let’s start with the most basic measure of economic growth: gross domestic product. Since 1993, the year before Nafta was enacted, U.S. GDP has grown about 63 percent, while Canadian and Mexican GDP have grown 66 percent and 65 percent, respectively, according to data compiled by the Organization for Economic Cooperation and Development. Those tightly clustered growth rates are significantly better than the industrialized nations of the Organization for Economic Cooperation and Development as a whole; their composite GDP has grown about 53 percent since Nafta.

Of course, plenty of factors have contributed to North American economic growth, and Nafta’s direct impact on GDP is difficult to measure. However, the Congressional Budget Office estimated (PDF) in 2003 that the impact had probably been positive, if slight, and that it had grown consistently since the agreement was enacted.

Let’s move on to what Nafta was specifically designed to do: encourage trade. In the early ’90s, the Clintonites promised that free trade would create a more favorable environment for the U.S. to sell its goods and services. Since 1993, U.S. exports to Canada and Mexico have climbed 201 percent and 370 percent, respectively.

Exports are only half of the trade equation. Nafta’s supporters said it would also trigger a rise in imports, leading to lower-priced goods and services for consumers and more competitive companies. Since 1993, the value of imports into the U.S. from Canada and Mexico has jumped by 194 percent and 621 percent, respectively.

Protectionists argued that the disparity between imports and exports was cause for concern because it could put pressure on U.S. companies to lower prices in order to compete in an oversaturated market.

The U.S. trade deficit with Mexico has grown dramatically since Nafta—from a trade surplus of $4 billion in 1993 to a deficit of $54 billion in 2012. Yet in most industries, corporate profit margins have risen over that period. Recently, the U.S.’s deficits with Mexico and Canada have contracted as export growth has accelerated.

As with economic growth, it’s difficult to say with certainty how much of the rise in trade between the U.S. and the other nations is directly attributable to Nafta. Trade liberalization among the U.S., Canada, and Mexico was already underway, and economists say the economic cycle plays a significantly larger role in determining trade volume than Nafta does. In its 2003 report, the CBO found Nafta’s effect on trade had been positive and that had grown in each year since the agreement was enacted. The CBO also concluded that Nafta had wielded a larger effect on U.S. exports than imports.

So what about Perot’s big fear, the labor market? Estimates of Nafta’s effect on U.S. payrolls vary wildly and depend on methodology. Here’s an unfavorable statistic: Today, there are 12 million manufacturing jobs in the U.S., down from about 17 million when Nafta was enacted.

Of course, to lay all the blame on Nafta would be to ignore a fundamental shift in the makeup of the global labor force. Relatively lax labor laws and lower wage requirements have moved a significant portion of the world’s factories to China and India since Nafta.

The Economic Policy Institute, a left-leaning think tank based in Washington, estimates that Nafta was responsible for the loss or displacement of more than half a million American jobs, mainly in manufacturing. Some Nafta supporters say certain job losses were inevitable but that the agreement was so broadly stimulative that the net effect on employment was either negligible or positive. (For what it’s worth, total U.S. employment is up about 22 percent since Nafta was enacted.)

What do you think? Was Nafta good or bad for the U.S.? Share your thoughts in the comments below.

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