TOPICS > Economy

Why the dreams and nightmares of NAFTA didn’t come true

BY Elizabeth Shell  February 14, 2014 at 12:52 PM EDT
WINDSOR, CANADA - JANUARY 18: Cars sold in the U.S., like this Chrysler Minivan at an assembly plant in Windsor, Ontario, Canada, may bear the distinction of being

Cars sold in the U.S., like this Chrysler Minivan at an assembly plant in Windsor, Ontario, Canada, may bear the distinction of being “Made in North America,” with input from Canada, the U.S. and Mexico. Photo by Fabrizio Costantini/Getty Images

It was 20 years ago this year that Canada, Mexico and the U.S. created the North American Free Trade Agreement. At the time, businessman and presidential candidate Ross Perot predicted a “giant sucking sound” of U.S. jobs heading south into Mexico. The Zapatistas, a Mexican rebel group, labeled NAFTA a “death sentence” to Indian communities all over the country. But the bill went forward. President Bill Clinton signed the agreement into law and said that “NAFTA means jobs, American jobs and good-paying American jobs.”

So, how have the economies from these three countries performed since? For one, they have generally grown, but at different rates. While that fact in itself isn’t hard to assess, determining NAFTA’s direct impact, and whether growth would have been stronger or weaker regardless, is more complicated. Given the multitude of other economic factors and political conditions at play, takeaways implying causation based on correlation — that growth was up during the NAFTA years because of NAFTA — should be made with care.

So what does the economic data from these past 20 years tell us?

1. Neither the nightmares — nor the dreams — came to pass
“When you look at the data you don’t see any jump. NAFTA didn’t force radical changes in U.S. or Canadian or Mexican trade policy,” said Tim Kehoe, professor of economics at the University of Minnesota and adviser to the Mexican government on the impact of joining NAFTA. “It just locked in the changes that were taking place anyway.”

From 1994 through 2013, total U.S. trade with Canada and Mexico — imports and exports combined — grew by just over 111 percent, from $539.7 billion in 1994 to $1.139 trillion in 2013.

But with whom the U.S. does the most trading has fluctuated. In 1994, Canada, Japan and Mexico accounted for almost half of all trade the U.S. does in goods. By 2013, China had taken Japan’s place as our No. 2 trading partner and bumped the U.K. out of the top five.

2. Manufacturing production has increased
A critique of NAFTA was that it would destroy America’s manufacturing sector. Yet while manufacturing production has largely gone up in all three countries, index scores had generally been higher in Mexico and Canada than in the U.S until 2009. (Index scores are calculated against a base year — in this case, 2009 — and characterize the magnitude of change over time.)

3. We still have a negative trade imbalance with Canada and Mexico
While trade and production has increased, the U.S. still imports more from Canada and Mexico than it exports to them.

4. Trade value with Canada has grown
On average, the value of trade with Canada, which has historically always been America’s top trading partner, has increased by an annual average of 3.6 percent per year during 1994 — 2013.

5. But trade value has grown at a higher rate with Mexico

Since 1994, the average annual growth rate for the value of trade with Mexico has been 7.48 percent.

6. Meanwhile, the value of all world trade grew at an annual average of 4.42 percent
U.S. trade value increased faster with Mexico and slightly slower with Canada compared to the world average — an annual rate of 4.42 percent between 1994 and 2013.

“You’re going to find that in the last 20 years, the United States in general has had a lot more trade with the rest of the world than we did before,” Kehoe said.

For the most part, NAFTA trade followed global trends, but at different degrees.

7. GDP per capita has increased
Gross domestic product per capita — an indicator of a country’s standard of living — has grown at different rates for the NAFTA countries, but it’s gone up in all three. Increased trade is generally considered to raise incomes, and create potential for future growth.

Between 1994 and 2013, Canada had the largest growth in GDP per capita based on purchasing power-parity rates — meaning the differences in price levels between countries is eliminated — at nearly 26 percent. Mexico grew nearly 22 percent and the U.S. increased 20 percent.

In dollar amounts, Mexico’s GDP per capita grew from an inflation-adjusted $13,955 per person in 1994 to $16,987 in 2012, the most recent year for which data is available from the United Nations.

8. Labor productivity has grown in the U.S. — and that has an impact on jobs

Jobs — their creation, destruction, whether they’re good or bad, pay well or don’t — is probably one of the most contentious and controversial subjects related to the NAFTA conversation.

The Economist, while assessing the 10-year impact of NAFTA, wrote at the end of 2003 that it was unfair to look to NAFTA as a job creator. “Trade policy is not a driver of overall employment; it affects the pattern of jobs, rather than the total number.”

Edward Alden, a senior fellow at the Council on Foreign Relations, wrote that it’s incorrect to point to NAFTA as the culprit for the troubles of the U.S. economy, such as the widening income inequality.

“Wages have not grown significantly in the last decade and certainly have not kept up with labor productivity,” Alden said in an interview with cfr.org. “A lot of that anger has focused on NAFTA. The question is whether NAFTA is the appropriate target for that anger. Clearly it is not.”

But Thea Lee, AFL-CIO policy director, is critical of NAFTA’s impact on jobs. “It’s been very good for protecting the interests and concerns of the multinational corporations, so that they can move their production, their jobs, around from country to country with very few obstacles. And it’s not so good for the people left behind,” Lee told the NewsHour in a previous story. “Almost all the benefits are going to the folks at the top, and increasingly at the very, very top, like the 0.1 percent of the top of the income distribution.”

Kehoe points to structural change for that job loss, not necessarily trade. “A lot of job loss in manufacturing jobs we’ve had in the United States is something that’s happened in the United States for 50 years, regardless of trade.” Why? Because productivity has increased in manufacturing much faster than compared to other sectors, he argues.

“Productivity in manufacturing has gone up so much faster than in other sectors, especially services. That explains the bulk of losses in manufacturing jobs. And to the extent to which we had kept good manufacturing jobs in United States I think it’s because North American industry has become more competitive with the integration across Canada the United States and Mexico.”

“The great sucking sound was meant to be that the United States was going to move all of our manufacturing jobs to Mexico, and that’s something that just for sure did not happen,” said Kehoe. “It’s things like, do we have good jobs or bad jobs that things like trade determine, not the overall volume of jobs.”

Real (adjusted for inflation) hourly wages have changed, with growth in what workers earned strongest during the first years of NAFTA. However, that growth has leveled off since around the mid-2000s.

9. The U.S. still depends on trade

Even as efficiency has improved, exports still support U.S. jobs — and the rate at which they are a share of all U.S. jobs has been growing over the past decade.

“Over the past year a lot of the expansion in jobs in the United States [has been] due to U.S. exports,” Kehoe said.

Since 1994, the number of jobs supported by exports has increased by more than 25 percent, from 7.6 million jobs to 9.8 million jobs in 2012.

Yet labor productivity associated with exports has increased. From 1994 to 2012, the number of jobs supported by $1 billion in exports has fallen by roughly 60 percent.

However, the percent of overall employment that’s supported by exports has been growing over the last decade.

10. China plays a (really) big role
“Now how about trade with our two NAFTA partners compared with overall growth in trade? Over the twenty years a big part of the growth in trade is trade with Mexico and Canada, but that was bigger in the first half of the period,” Kehoe said. But, “The big things that have happened in trade, in the last 10 or 12 years, have not been that related to NAFTA. They’ve been related to China.”

“But,” Kehoe added, “Mexico’s making a big comeback. Even compared to China. If you look at the last two years you’ll find that Mexico’s coming back and the Chinese have declined in importance with us. If current trends continue, Mexico is coming back and will pass China as our second-largest trading partner.”

11. The lasting impact of NAFTA may be more “North-American-ness” of what we trade
“NAFTA made a lot of industry in the United States and Canada, Mexico be North American,” Kehoe said.

Take automobile manufacturing. Any American-labeled car — Ford, GM, Chrysler — may have a chassis made in the U.S., doors made in Canada and may have been assembled in Mexico.

“It’s completely integrated,” Kehoe said. “So if you had a Ford and you asked, ‘Was it made in the United States, Canada or Mexico?’ — that’s almost a meaningless question.”