NAFTA, 20 Years Later: Do the Benefits Outweigh the Costs?

NAFTA-1024x440In 1992, Independent presidential candidate Ross Perot made opposition to the North American Free Trade Agreement (NAFTA) the cornerstone of his national campaign, warning voters that because of huge wage differentials between the U.S., Canada and Mexico, “There will be a giant sucking sound going south.”

Even now, 20 years after NAFTA was enacted in 1994, the trade agreement’s legacy remains enshrouded in controversy, not only in the United States, but in Canada and Mexico as well.

How much of Perot’s dire forecast came true? What kinds of benefits, if any, has NAFTA brought to the economies of the U.S. and Mexico? Will it ever be possible to know, for sure, what the world would have been like if NAFTA had never been enacted?

During the heated debate that proceeded its enactment, prominent economists and U.S. government officials predicted that NAFTA – a trade agreement aimed at liberalizing trade between member countries — would lead to growing trade surpluses with Mexico and that hundreds of thousands of jobs would be created. “But the evidence shows that the predicted surpluses in the wake of NAFTA’s enactment in 1994 did not materialize,” notes Robert Scott, chief economist at the Economic Policy Institute, a left-leaning think tank in Washington, D.C.

What kind of evidence? “Jobs making cars, electronics, apparel and other goods moved to Mexico, and job losses piled up in the United States, especially in the Midwest where those products used to be made,” says Scott. “By 2010, trade deficits with Mexico had eliminated 682,900 U.S. jobs, mostly (60.8 %) in manufacturing.”

Claims by the U.S. Chamber of Commerce that NAFTA trade has created millions of jobs “are based on disingenuous accounting, which counts only jobs gained by exports but ignores jobs lost due to growing imports,” he adds. “The U.S. economy has grown in the past 20 years despite NAFTA, not because of it. Worse yet, production workers’ wages have suffered in the United States. Likewise, workers in Mexico have not seen wage growth. Job losses and wage stagnation are NAFTA’s real legacy.”

A Closer Look at Job Loss

How much of these job losses can be attributed to the impact of NAFTA? Wharton management professor Mauro Guillen has a very different view, suggesting that without NAFTA, many jobs that were lost over this period would probably have gone to China or elsewhere. “Perhaps NAFTA accelerated the process, but it did not make a huge difference. At the same time, a lot of jobs were created in the U.S. that wouldn’t be there without the Mexico trade. I’m not just talking about Texas or California or Arizona…. Many of the products made in Mexico are designed in the United  States. So there are a lot of jobs created here.”

Walter Kemmsies, chief economist at Moffatt Nichol, an international infrastructure consultancy, notes that close to 40% of what the U.S. imports from Mexico is derived from U.S. sources. “This is the symbol of the success of NAFTA.” Twenty years ago, he estimates, that percentage was less than 5%.

Overall, has NAFTA been a good thing? Morris Cohen, Wharton professor of operations and information management, states that for many years, “economists have been arguing about whether global trade is a net benefit or net cost; who are the winners and who are the losers. There has been lots of ink spilled on that issue. The consensus from my perspective is that trade is generally a good thing; it helps to elevate the standard of living and it raises the level of economic activity on both sides. But there’s a net transfer sometimes, and definitely the notion of winners and losers. We don’t have the luxury of being able to have done the experiment [to find out] what would have happened had there been no NAFTA.” Or, he adds, to figure out to what extent the conditions that exist today are a result of NAFTA, or not the result.

Read the Rest of the Article >>

Originally Published by Knowledge@Wharton on  February 19th, 2014.