Roosevelt Institute | Cornell University

The Risk of a Simplistic Approach to NAFTA

By Dylan NezajPublished October 19, 2017

The deal that governs trade between the U.S., Canada, and Mexico may be due for a renegotiation. But let's keep in mind the full scope of NAFTA's legacy before we threaten to withraw outright.

The United States' withdrawal from the Trans-Pacific Partnership (TPP) just days after the inauguration demonstrates the President's resolve to terminate trade deals that are allegedly stifling American industry and killing American jobs. To boot, since the spring of 2017, President Trump has been in conversation with Prime Minister Trudeau of Canada and President Peña Nieto of Mexico about the North American Free Trade Agreement (NAFTA), raising fears of an American withdrawal from that deal as well. Perhaps it is time for more than 20 year old deal to be tweaked, but in renegotiating NAFTA, the administration ought to kep in mind the scope of the vast, international economic web that's at stake.

Most trade economists would either tell you that NAFTA has accelerated an inevitable economic trend towards greater North American integration, or that it has at least moderately increased the United States’ GDP. The Agreement's critics, on the other hand, will tell you that the decline in U.S. manufacturing, and in turn a wide range of social woes (including increases in poverty and incarceration) has resulted from this trade deal.

First of all, it is difficult to prove that the U.S. economy has experienced an overall decline in manufacturing. A study by the Journal of Economic Perspectives tells us that since long before 1994, the price-adjusted share of the U.S. GDP that owes to manufacturing has held constant at roughly 13%. However, it is important to note that this stability is largely due to the rise of high-tech manufacturing, which makes up for a decline in other forms of manufacturing such as in the textile and timber industries. All American manufacturing, however, has seen an increase in productivity accompanied by a simultaneous 14 point decrease in the share of  total employment in the manufacturing sector, which is about average for a G-7 economy.

Furthermore, only about 5% of mass layoffs, or jobs lost when a plant is shut down and workers lose their jobs in spite of overall economic growth (mostly due to outsourcing), owe to trade with Mexico. A policy brief by the Peterson Institute for International Economics is very revealing on this matter. It asserts that although 4 million jobs were lost annually due to mass layoffs since NAFTA was enacted, only 200,000 of such losses were due to increased Mexican-American trade. The rest were due either to outsourcing to other nations, such as China, or to domestic developments in productivity driven by automation. Another brief adds that each lost net job lost in fact added $450,000 to the U.S. economy overall. This can be attributed to lower costs for consumers and our economy achieving comparative advantages in production. 

Abandoning NAFTA outright is risky because many sectors of American industry, such as automotive, textile, and computer manufacturing, are integrated into complex webs of trade with Mexico and Canada that are determined by NAFTA. In fact, estimates show that goods imported from Canada are comprised 25% of American-made inputs, and goods imported from Mexico are in fact 40% American.

The decline in manufacturing jobs in the U.S. has caused real hardship for American workers, their families, and their communities. But to promise laid-off American workers that withdrawing from NAFTA will rectify this obfuscates the benefits that trade with our neighbors generally imparts. The United States could instead reinvigorate American manufacturing by discovering new sources of innovation, such as by investing in clean energy and infrastructure. NAFTA alone is not the cause of the vast majority of job loss in the U.S. It may be worthwhile to renegotiate certain aspects of the deal that governs trade between the U.S. and two of its closest partners, but to simply withraw would have great and dire economic consequences, both in terms of the tariffs that it would reinstated, and the message it would send to our friends and allies.

Works Cited