A Politically Unpopular Success Story

The North American Free Trade Agreement among Canada, Mexico, and the United States, born in conflict, remains contentious to this day, five years later. Overall, NAFTA has been an economic success in all three countries, but a political liability in Mexico and the United States.

When the agreement was first debated, there were two ways of looking at it. The first was partisan, and the arguments on both sides were loaded with hyperbole. For example, the United States would lose an immense number of jobs, anywhere from 200,000 to 1 million, because of the competition from cheap labor in Mexico. This was the position of organized labor and sympathetic politicians. These critics feared that NAFTA would lead to the hollowing of U.S. industry as a result of investment moving to Mexico to exploit cheap labor. On the other side, the Clinton administration, supported by big business, predicted gains of at least 200,000 jobs from growth in exports to Mexico. The administration also asserted that NAFTA, by stimulating growth in Mexico, would reduce immigration to the United States.

None of these predictions have materialized. Instead of losing jobs, the United States has been creating between 2 million and 3 million jobs every year since NAFTA has been in effect. Unemployment last year averaged 4.5%, the lowest in 40 years. These developments have little to do with NAFTA. The United States has an $8-trillion economy and neither exports to nor imports from Mexico represent as much as 1.5% of the total. This is not trivial, but it is marginal when measured against the vast economic size of the United States. Immigration from Mexico has not diminished.

The second kind of pre-NAFTA analysis came from economists who, it must be admitted, are free traders by training. They overwhelmingly supported NAFTA on the ground that regional production and trade would increase efficiency and maximize consumer benefits. The one caveat some economists emphasized was that regionalism was less beneficial than reducing trade barriers worldwide. This amounted to an argument that regionalism in North America would work well for NAFTA members--at the expense of the world’s welfare.

Similarly, there are two levels at which the economics of NAFTA must be examined today. The first is national: How a country as a whole has fared. Data on trade creation is relevant here. So is the undisputed fact that export jobs pay higher salaries, about 10% to 15% higher, than jobs unrelated to foreign trade. The second level is local. Increased imports do displace workers in industries and services that cannot compete. Investment in Mexico and other foreign countries does leave U.S. workers high and dry when a U.S. plant closes down. These realities explain much of the opposition to NAFTA by organized labor. They also push politicians to seek protection from imports of goods that compete with production in their districts.

There is no denying that local job displacement hurts, even if it is smaller in numbers than the rate of job creation taking place across the country. When industry moves from one part of the United States to another, as the textile industry did when it left New England for the South, some workers are hurt. Beneficial changes in technology can have similar effects. The practical choice is not to forego the gain, but to minimize the pain through safety nets and assistance to displaced workers.

A few facts point to the economic success of NAFTA. U.S. merchandise exports to Mexico rose from $41.5 billion in 1993 to an estimated $78 billion in 1998, or by 14% annually in the years NAFTA has been in existence. This compares with an increase in U.S. exports to all other countries of 9% a year during NAFTA’s existence. Mexico has now displaced Japan as the second-largest market for U.S. exports, after Canada. Together, the two NAFTA countries absorb one-third of all U.S. exports. The United States imports more from Mexico than it exports, but this reflects the strong U.S. economy.

Despite these favorable economic numbers, most polls indicate that NAFTA is not popular with the U.S. public. This is something of an overstatement. NAFTA’s unpopularity has chiefly to do with imports from Mexico, even though imports from Canada are higher. The U.S. trade deficit with Canada is larger than with Mexico, and U.S. investment is higher in Canada than in Mexico.

Organized labor’s opposition to the trade agreement with Mexico continues unabated. Since labor and the Democratic Party are close, the Clinton administration has not officially responded to NAFTA’s critics, which helps explain the agreement’s political unpopularity. Furthermore, workers who lose their jobs because of imports make a more vivid impression on the public mind than any benefits from exports. This, too, contributes to the unfavorable impression many have of the agreement.

Because NAFTA went into effect on Jan. 1, 1994, and Mexico suffered a severe economic crisis at the end of the year, many blame the second on the first. Mexico’s recovery was rapid in 1996, thanks in part to NAFTA and the growth in exports to the United States, but this has not erased the memory of the hardships in 1995. In addition, poverty in Mexico remains substantial, and the pre-NAFTA hype by the Mexican government led many to expect the agreement to be a panacea. While trade is more important for Mexico than for the United States, NAFTA could not compensate for poor macroeconomic policy.

There was fierce disagreement before Canada and the United States entered into a free-trade agreement in 1989. Ten years later, the political side of free trade is a nonissue in Canada. This transition from contention to satisfaction has not occurred in the other two NAFTA countries, at least not yet.

Economists who supported NAFTA believed that production based on regional specialization would stimulate efficiencies in all three countries. This specialization has taken place. The best example of it is that each country ships more automotive products, based on specialized production, to the other two than any other manufactured goods. Employment has increased in the auto industry in the United States since NAFTA, even as it has decreased in Mexico, because of increased productivity in both countries. The same division of labor is evident in the electronics industry, particularly computers, where parts get produced in one place and assembled into final products in another. The situation is similar for many other activities.

NAFTA is a work in progress. The European Union has been in existence for more than 40 years and has had its ups and downs. NAFTA is a mere babe in arms by comparison. So far, some of the expectations of its supporters are panning out, while others are not. Meanwhile, the economic relationship between the two countries is becoming more intense each day, mostly quietly and profitably.