NAFTA at 22: An Analysis

“a disaster!”

“terrible!”

One would ask what could be the subject of such strong displeasure and forceful condemnation.  No, these opinions are not taken from reviews of the 2016 remake of the classic film Ben-Hur; rather, these statements are the policy positions held by Donald Trump and Bernie Sanders respectively on the North American Free Trade Agreement, commonly referred to as NAFTA, which turned 22 years old on January 1st 2016.

Though the presidential race in the United States has moved from the primary to the general election phase and now features four candidates of statistical significance in polling with only two main candidates (Clinton and Trump) possessing a substantial chance of winning the White House (which is far less than the grand total of seventeen candidates who were vying for the nomination of the Republican Party months ago), the debate has intensified particularly on the subjects of jobs and foreign trade.

In the 2016 United States Presidential Election, there are a total of thirteen battleground or toss up states currently being fought over by the major campaigns.[1]  Four of the thirteen battleground states are generally considered to be part of the “rust belt;” a region of the United States characterized by gradual job loss, economic hardship, population flight, and urban blight spanning the mid-20th century to the present.  Many of the people within these economically pressed states have blamed globalization and free trade for taking all of the well-paying manufacturing jobs which supported the growth of the middle class in communities across the Northeastern and Midwestern United States.  The largest culprit blamed for the loss of employment is NAFTA.  This strong distaste for NAFTA is also shared to the north in Canada where the trade agreement garners a meager 25% approval rating.[2]

NAFTA was an agreement signed by the governments of the United States, Canada, and Mexico to lower trade barriers and stimulate cross-border economic activity.  The ratification of NAFTA coincided with the accession of Mexico to membership in the Organisation for Economic Co-operation and Development (OECD), an intergovernmental economic organization composed of developed nations with the goal of expanding trade and furthering economic growth.  Though there had been forerunner trade agreements to greater link what were (at the time) the first, seventh, and twelfth largest economies in the world by standards of nominal Gross Domestic Product (GDP)[3], NAFTA’s negotiation and ratification was groundbreaking in that it was the first major free trade agreement (FTA) that was simultaneously approved with separate provisions to protect the environment and safeguards for labour in its constituent countries.[4]  In addition to being revolutionary in its design, NAFTA was also one of the longest trade agreement documents of its era stretching over 2,000 pages.[5]

This was NAFTA then.  Where are we now?

When analyzing the effects of NAFTA on the GDP of the United States, most economists agree that the results of the trade agreement have been slight but positive with a 0.5% increase in GDP measured over the two decades that the trade deal has been in effect.[6]  The situation is similar in Canada where the net change in GDP as a direct result of the agreement has been negligible, with some economic sectors and provinces benefiting from increased trade opportunities more compared to others.[7]

Though the effects of NAFTA in terms of GDP have been limited, the free trade agreement was extremely successful in stimulating exchange between the three nations.  The amount of total trade between the United States and its Canadian and Mexican partners soared from $337 Billion in 1993 to more than $1.2 Trillion today.[8]  Canada’s intra-bloc trade increased by 11% as a direct result of this liberalization of trade with its North American neighbours.[9]  Though some industries in Canada suffered as the removal of trade barriers opened domestic sectors up to increased foreign competition, Canada’s agricultural, raw materials, and tech sectors benefitted from increased access to the United States and Mexico.[10]

However, the debate in the United States and Canada on the topic of NAFTA centers on the question of whether the trade deal has indeed been a net benefit to the peoples under its jurisdiction.  On the topic of jobs, the American Federation of Labour (AFL-CIO) blames NAFTA for the loss of over 700,000 American jobs.[11]  Though NAFTA has certainly caused shifts in employment, the manufacturing jobs lost in the United States as a result of the agreement have been largely replaced by export-import oriented positions which pay 15-20% more than the jobs lost as a consequence of NAFTA and 13-16% more than the nationwide average.[12]  Moreover, the United States, Canada, and Mexico experienced increases in real wages resulting from the economic changes caused by NAFTA.[13]

As macroeconomics is a discipline that takes into account the effects of numerous factors upon large swaths of people, it is helpful to judge NAFTA on the basis of its influence on welfare, economic well-being on an aggregate level, in its constituent nations.  In 2014, Lorenzo Caliendo and Fernando Parro evaluated the effects on welfare in the United States, Canada, and Mexico resulting from NAFTA’s reduction in trade barriers using a Ricardian welfare model comprising of numerous industries (both tradeable and non-tradeable).  The model postulates that the United States experienced a 0.08% gain whereas Canada endured a 0.06% loss in overall welfare.  The overall welfare is expressed as a combination of gain (loss) stemming from the changes in total volume of trade and the terms of trade as a consequence of the trade deal.  Canada experienced an increase in welfare of 0.08% due to the growth in total trade volume; however, this was dampened by trade diversion (trade with other nations outside of the agreement that was forgone as a result of NAFTA) and the decrease in welfare as a result of the changes in terms of trade, 0.04% and 0.11% respectively.[14]

Though NAFTA has been in existence for more than two decades and has served as a model for many trade agreements that have followed in its footsteps, the verdict on whether this landmark trade deal is seen as a success or failure will be determined in the decades to come. NAFTA’s overall effects have been minor in the areas of GDP and welfare, disputed in employment, though acting as an impetus for greater international trade between the United States, Mexico, and Canada which has strengthened ties between these neighboring nations. Much like the United States Presidential Election in November, common opinions on NAFTA and its legacy will be decided by the people themselves.

By,

John Butler

Works Cited

[1] Real Clear Politics http://www.realclearpolitics.com/

[2] Angus Reid Institute Poll June 27, 2016

[3] http://en.classora.com/reports/t24369/ranking-of-the-worlds-richest-countries-by-gdp?edition=1994

[4] The North American Free Trade Agreement Congressional Research Service. Villarreal and Fergusson 2015

[5] http://www.naftanow.org/agreement/default_en.asp

[6] Council on Foreign Relations http://www.cfr.org/trade/naftas-economic-impact/p15790

[7] http://www.investopedia.com/articles/economics/08/north-american-free-trade-agreement.asp

[8] http://www.ft.com/cms/s/0/b7230156-4c51-11e3-923d-00144feabdc0.html#axzz4KO5pSU4R

[9] “Estimates of the Trade and Welfare Effects of NAFTA” Lorenzo Caliendo and Fernando Parro. 24 July, 2014

[10] http://www.investopedia.com/articles/economics/08/north-american-free-trade-agreement.asp

[11] American Federation of Labor (AFL-CIO) NAFTA job losses

[12] Hufbauer, Gary Clyde and Schott, Jeffrey J. NAFTA Revisited. Institute for International Economics, October 2005.

[13] “Estimates of the Trade and Welfare Effects of NAFTA” Lorenzo Caliendo and Fernando Parro. 24 July, 2014

[14] “Estimates of the Trade and Welfare Effects of NAFTA” Lorenzo Caliendo and Fernando Parro. 24 July, 2014

Picture titled, "Toronto", taken by Blok 70 on May 18, 2016 obtained through Creative Commons (https://flic.kr/p/Hc43EG)