The Impact of NAFTA: The Economics of the Embattled Trade Deal
By Berke GursoyPublished April 2, 2017By Berke Gursoy, 4/2/17
President Trump has consistently attacked the free trade deals that have defined economic policy in this country for decades. The major targets of this rhetoric have been the unpassed and now abandoned TPP (Trans-Pacific Partnership) and NAFTA, the North American Free Trade Agreement.
NAFTA is a three country trade agreement between Canada, Mexico, and the United States that entered into force in January 1994. In the 24 years since, the pact has fundamentally reshaped the economies of the three members by bringing them into an unprecedented state of integration. This integration now defines the US economy, allowing the survival of industries that without it would have perished. (1) Despite this reality, President Trump has consistently railed against the agreement, referring to it as "… the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country." (2) Since taking office, Trump has continued to state his desire to either renegotiate the terms of the agreement, or withdrawal the United States from NAFTA completely.
This potential withdrawal would represent an economic Armageddon, as the economies of the three nations are inseparable. Over the past twenty years, the US, Canada, and Mexico has for practical purposes become a single integrated economy. 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 40 cents out of every dollar for goods imported into the U.S. from Mexico." (3) This quote describes the specializations of labor across borders enabled by NAFTA. In key industries like food production and manufacturing, the production process are divided amongst all three countries allowed the industry of North America to remain competitive on the global stage. Withdrawing from the trade deal would destroy the trans border production infrastructure built in the last twenty years and would seriously undermined U.S. competitiveness. Withdrawing from NAFTA would see the re-emergence of previously eliminated tariffs. NAFTA created a single free trade zone that united the North American continent, the largest such zone in the world. Freed from tariff duties, since NAFTA's inception, trade between the three nations has increased in nominal terms by 258.5%, nearly triple what it once was. (4) Canada and Mexico are the two largest destinations for U.S. exports, accounting for more than a third of the total. Leaving NAFTA would mean the United States would abandon all of these trade benefits. Overall, most economists credit NAFTA with a modest positive impact on the American GDP. (5) To reverse this process would be to cripple US trade globally.
Beyond these numbers, however, is the conversation on jobs. Despite the fact that the US. Chamber of Commerce has estimated that 14 million US. Jobs are dependent on trade with Mexico and Canada, critics of NAFTA always point out the decline in US manufacturing since the agreement was made. (6) The loss of manufacturing workers is an undeniable phenomenon, per the Labor Department there are now are about 12.2 million manufacturing workers, down from 17 million in 1994, but it is patently false to hold NAFTA purely at fault for this trend. (7) Many factors have conspired to the decline of US manufacturing, with the increased integration of China into the world economy and the rise of automation having had the most influence. This is not to say NAFTA has had no impact on employment. A 2014 Peterson Institute for International Economics (PIIE) found that about 15,000 jobs net are lost each year due to the pact, but for each job lost, the US economy gains roughly $450,000 through higher productivity and lower consumer cost. (8) This is the key point. It is a nearly unanimous consensus amongst economists that the jobs lost because of NAFTA would have been lost regardless and that the effects of the agreement have allowed US manufacturing to remain competitive in the world market. A supply chain was created allowing for the specialization of labor across the three countries resulting in lowered costs, increased productivity, and increased U.S. competitiveness. To quote UC San Diego economist Gordon Hanson," Without the ability to move lower-wage jobs to Mexico we would have lost the whole industry." American manufacturers today are more productive today than they were in the year 2000. Even adjusted for inflation, manufacturing output in the US totaled 5.9 trillion in 2000 and 5.94 trillion in 2016. (9)
Why then is the agreement under such attack? The answer is due in part to the very nature of trade agreements. The benefits of trade are dispersed and appreciable only over time while its costs are sometimes ideating and are highly concentrated in specific industries such as auto manufacturing. As such, attacking trade agreements is politically very easy, since the vast majority of people whose standard of living has been improved are unaware of it while those who have bared the cost care very much. Attacking free trade is an issue that polls well, but what is good politics is not always good economics. (10) Trying to reject a free trade deal between America and its neighbors would upend major industries and 30 years of economic integration for the imagined gain of jobs that are simply not competitive on the world market. NAFTA has had its flaws but it has created a structure that is integral to the US economy, and to tear it down would be a mistake, and as a result, the United States would find poorer and isolated within the world economy.