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NAFTA isn’t perfect, but does it benefit the U.S.?

NAFTA isn’t perfect, but does it benefit the U.S.?

One of Trump’s most strategic campaign moves was to continually slam NAFTA as a quintessential failure of U.S. economic policy. In fact, this was arguably the primary reason for Trump winning the presidency as blue collar workers of the Rust Belt, frustrated with globalization, were extremely receptive to this stance. Now that Trump is president, it does appear that he will try to either renegotiate or leave the North Atlantic Free Trade Agreement altogether. The justification for entering negotiations with Mexico and Canada has been to “fix” the deal so that it represents American objectives and benefits the U.S. However, it is still unclear if NAFTA benefits the U.S. and its other members or if it is as bad as the current administration suggests.

In short, the answer is somewhat mixed. While in many cases it has been good, it has inevitably harmed some workers. NAFTA has been a net positive for the U.S., according to estimates it has had a positive impact of around $80 billion dollars to the U.S. economy, averaging at several billion a year. So why have Trump and many blue collar workers been so critical of the deal? As is often the case when discussing the effects of an economic policy or deal, the loudest groups tend to be most focused upon, even if they are not the largest in number. This is partly because the cost to workers has been fairly concentrated; the biggest casualty has been job loss  specifically in the automotive, textile, and manufacturing sectors. According to some estimates, over half a million U.S. workers have lost their jobs due to NAFTA.

While the loss of upward of 500,000 is certainly a problem, it may, however, be too soon to label NAFTA as the culprit and therefore a bad deal for the U.S. The reality is many of these jobs would likely have been lost anyway as manufacturing naturally shifts to cheaper countries of production. Even Mexico, the country that receives the most ire for taking the production jobs in the automotive industry, has been steadily losing auto manufacturing jobs to places like China. In addition many jobs have been lost and would have regardless of NAFTA as much of the manufacturing industry automates production leading to a lower employment rate in the sector.

Even without NAFTA, the assumption that jobs would have remained in a country that requires higher pay and more benefits is iffy at best. In fact, NAFTA has provided the benefit of allowing shipping across the borders of member countries, therefore making the creation of cross-border supply chains far easier. This in turn has lowered trade cost, improved productivity, and increased competitiveness, while also allowing some manufacturing jobs to remain in the U.S. The result is that while some jobs have been lost, it potentially could have been much more without the same supply chains made possible by NAFTA. Even with the loss of over half a million jobs, according to the Canadian government, over 9 million U.S. jobs currently depend on trade and investment with Canada alone. In fact, Canada is the U.S.’ largest trading partner with just over 15% of its total trade. Therefore loss of jobs by removing NAFTA and imposing tariffs would be large, to say the least.

So how has NAFTA been for Canada and Mexico? For Mexico, the major winners of NAFTA have been large-scale farming, which has tripled since NAFTA implementation and manufacturing where hundreds of thousands of jobs have been created. However, in many ways it has failed to deliver the promises its proponents made such as rapid growth, higher wages, and decreased levels of poverty and inequality. In fact, the Mexican GDP only grew at an average rate of around 1.3% a year from 1993-2013. During this same time period, other Latin American countries that were not part of NAFTA were rapidly expanding their economies. The biggest loser from NAFTA has been small-scale family farmers who had to compete with large US subsidy-backed American farmers. The result has been almost two million small-scale Mexican farmers being put out of work and often having to sell their land, and illegally immigrate to the U.S. in search of employment. This unequal flow of funds has also led to increasing inequality within Mexico. In addition, Mexico now faces increased competition as a low-cost manufacturing country from other countries such as China and Indonesia, which has further hampered growth.

For Canada, NAFTA has been far simpler. It has provided the benefit increased trade, predominantly with the U.S. Its exports to the U.S. have grown at an annualized rate of 4.6%, and the auto manufacture industry has increased from $35 billion in 1993 to $58 billion in 2017 USD. In addition, its overall standard of living has increased as well, although NAFTA alone cannot account for that.

There is final one benefit experienced by all three countries: NAFTA has removed tariffs between member countries, and the overall cost of goods has accordingly decreased for all consumers. This has allowed individuals to save more, which has had a disproportionately positive effect on lower-income consumers. According to a 2015 study, completely closing trade between the U.S., Canada, and Mexico would lead to an average real income loss of 4% for the richest ten percent in the U.S., but a loss of 69% for the poorest ten percent.

In sum, the result has been a modest, yet positive effect on members respective economies.  Even if the benefit hasn’t been as great as some supporters promised, it certainly has not been as harmful as some opponents famously claimed.

What does this mean for negotiations? Even keeping these positive effects of NAFTA in mind, a renegotiation is not a terrible idea. Updating trade deals to meet changing times is generally important and essential to maximizing benefits for all members. In fact, NAFTA itself has already been amended 11 times. However, renegotiation requires a particular mindset to compromise and the ability to recognize that economics are not zero sum, but positive sum. The true folly of the Trump administration and its supporters is that everything should be done from an “America first” perspective. While all countries prioritize their goals and needs to a certain extent, the danger is when favoritism risks becoming protectionist.

Negotiation to attempt to improve problems with NAFTA will certainly fail if the Trump administration looks to implement tariffs, quotas, and border taxes, which detract from the very spirit of a free trade agreement. Trump has been vocal about how NAFTA supposedly is the worst deal in history and how only he can fix it. This U.S.-centric and one-sided approach to the upcoming NAFTA negotiations will ironically risk more jobs that depend on NAFTA than the amount ever lost and will simultaneously hurt the poorest in the U.S.

Economics creates winners and losers, and in free trade zones, sectors of the economy that are not as competitive are the unfortunate losers. If Trump genuinely wants to help those that have been hurt by globalization,  he must fill the shortcomings that economic trade causes such as job loss. Therefore, the governments of NAFTA should instead look for ways to improve government programs (such as the NAFTA-Transitional Adjustment Assistance) designed to facilitate and support individuals who do lose their jobs from trade so that they can receive training to reenter the workforce and financial assistance while out of work. Thereby maintaining the benefits of NAFTA while working to help those who have lost their jobs.

The views expressed in this piece do not necessarily reflect the views of other Arbitror contributors or the views of Arbitror itself.

Photo: “nafta is the criminal,” Originally taken by Jim Winstead for flickr with a CC BY 2.0 licence. No changes were made to the original image. Use of this photo does not indicate an endorsement of its creator.

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