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Trump's Wrong. Nafta Was Good for the U.S. and Mexico

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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The North American Free Trade Agreement, Donald Trump said on Wednesday, "has been a far greater benefit to Mexico" than the U.S. Just minutes before, Mexican President Enrique Pena Nieto, standing by Trump's side in Mexico City, said Nafta had done both countries "a lot of good."

Trump disagrees over which country benefited the most, but he didn't disavow Nafta altogether. He even called for keeping industry "in our hemisphere" rather than letting it move to China. Both agreed the 22-year-old trade deal is long in the tooth and could be modernized, with Trump calling for improved pay and working conditions "to create better results for both countries." And he said a "strong, prosperous and vibrant Mexico" is in the best interest of the U.S.

This was progress. Unlike the 10-point immigration plan that the Republican presidential nominee outlined later in Phoenix, his words on Nafta came intriguingly close to a softening of his views on trade.

Trump still got it wrong, though, when he said Nafta helped Mexico more than the U.S. He ignores the less quantifiable, hidden aspects of free trade that have helped the U.S. economy, such as an increase in higher-paying, export-related U.S. jobs, more competitive (and profitable) U.S. companies, and lower consumer prices at home.

Trump's is an old-fashioned mercantilist approach to trade that has populist appeal but that most economists long ago rejected. It says countries that export more than they import are winners, while countries that import more than they export are losers. In 2015, Mexico exported $316 billion worth of goods and services to the U.S., which sent back $267 billion worth. By Trump's arithmetic, the U.S. is the loser by $49 billion.

Mercantilism shades Trump's entire approach to trade. He loves to lambaste companies like Nabisco, Carrier and Ford Motor for moving production south of the border and cutting jobs in the U.S.  But while it's certainly true that Nafta resulted in job losses to Mexico, the number, about 600,000 over 20 years, is quite small when viewed against the U.S.'s monthly job churn.

Out of a workforce of 135 million people, about 4 million to 6 million leave their jobs voluntarily or forcibly every month. The jobs lost to Mexico over a 20-year period amount to less than 0.1 percent of that turnover. Some of those jobs would have been lost anyway, as manufacturers shift to automation whenever possible to cut costs and increase profits.  

By looking only at the trade deficit with Mexico, Trump also ignores other economic gains from Nafta. Exports to Mexico have risen tremendously -- they were only $42 billion in 1993. That increase has come in part from Mexicans' higher standard of living (because of Nafta). Today, exports to Mexico support six million U.S. jobs, many of which pay more than the blue-collar ones that were lost. Economist Gary Hufbauer of the pro-free-trade Peterson Institute says workers in export-related jobs are paid 10 percent to 15 percent more than workers in non-export jobs requiring the same skills. 

Nafta has also helped make companies more competitive. When U.S. companies must compete against rivals from other countries, they have to find less expensive, more innovative ways to make quality goods, or else lose market share. American-made cars are a lot better now than before the Japanese invaded the U.S. auto market, for example.

When American-made goods contain components that were made less expensively in Mexico, the U.S. also can compete more aggressively on price with European and Asian rivals. The supply chains that move intermediate goods across the Mexican, Canadian and U.S. borders would never have happened were it not for Nafta. They are probably its biggest, if unheralded, success story.

If Trump revoked Nafta, chances are the goods U.S. companies rely on still wouldn't be made in the U.S. "He can't just put his finger in the Mexican dike," says Hufbauer. "He has to put his finger in a lot of dikes."

The good news is that Trump's language seems to indicate he's starting to understand that trade agreements aren't just about lowering U.S. trade deficits. Many goods sold domestically are made of components that began in the U.S., went to Mexico to be combined with another product, then shipped back to the U.S. for final assembly, sometimes with Canadian-made parts. This is the three-country trek nearly all U.S.-sold autos make today. Are they a U.S., Mexican or Canadian product? Who knows?

If Trump wants to improve Nafta, the key is to bring Mexican environmental and labor regulations into line with those of the U.S. By requiring Mexican employers to follow tougher anti-pollution rules, the cost of doing business there would rise. If Mexico's employers must allow unions that bargain collectively over pay, hours and conditions, workers' wages would rise. In both cases, the added costs would make Mexico less appealing to U.S. producers.

There's already a plan in the works that would do all of that, and it's called the Trans-Pacific Partnership. Mexico and Canada have agreed to sign it, as has the U.S. But in demonizing free trade, Trump probably closed off chances for U.S. ratification anytime soon. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Paula Dwyer at pdwyer11@bloomberg.net

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net