Study: NAFTA raised pay here and abroad

November 12, 2012

Mexican president Felipe Calderón, left, President Obama and Canadian Prime Minister Stephen Harper in April 2012.  (Charles Dharapak/Associated Press)

It's easy to forget that in 2008, Barack Obama ran on a pledge to renegotiate the North American Free Trade Agreement (NAFTA), which effectively eliminated tariffs and sharply reduced other trade barriers between the United States, Canada and Mexico.

That idea was scuttled pretty quickly, with future CEA chair Austan Goolsbee reportedly disavowing the pledge in talks with Canadian officials during the campaign, and by April of 2009, the U.S. trade representative, Ron Kirk, was telling reporters it wasn't going to happen. And a new study suggests that might be just as well.

Economists Lorenzo Caliendo of Yale and Fernando Parro of  the Federal Reserve built a trade model to analyze how the agreement changed the level of trade between the three countries and their residents' welfare levels. They find that the effects of NAFTA dwarf those of any other agreement, with greater effects than all other tariff reductions undertaken by the three countries put together.

All three countries saw real wages increase as a result of NAFTA. The effects in the United States and Canada, however, are fairly mild. Wages in Canada grew 0.96 percent, while U.S. wages grew 0.17 percent. That's something, and given that U.S. wages have been stagnant or falling in recent decades, any gains are good news.

But the real success story is Mexico, where wages grew 1.3 percent due to NAFTA. That's to be expected, since trade with Canada and the U.S. is a more important part of its economy than, say, trade with Canada and Mexico is to the U.S. It also saw the biggest tariff reductions of the three, further amplifying the effects. 1.3 percent isn't a ton, and the productivity gains the country has seen since have disappointed some former advocates. But it's not nothing.

This is the pattern generally with trade liberalization. All else being equal, all parties tend to benefit, but developing countries benefit most. That's why global development advocates at institutions like the Center for Global Development have been pushing hard for the Obama administration to eliminate barriers that harm export industries in poor countries.

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Ezra Klein | November 12, 2012