NAFTA’s path, wrath and aftermath

February 19, 2014

The government palace in Toluca, Mexico, where Mexican President Enrique Pena Nieto, President Obama and Canadian Prime Minister Stephen Harper are meeting Wednesday for a one-day summit. (EPA/Jose Mendez)

The North American Free Trade Agreement  is not even drinking age, but, politically, there is still a hangover: After 20 years of lowered tariffs and freer movement of goods amongt the United States, Canada and Mexico, there is still a raging debate over whether the trade pact was a great idea that helped shape a globalized world or marked the beginning of the end of the U.S. middle class.

There have been a flurry of reports, particularly in recent months, analyzing NAFTA. The conclusions are not just historical but relevant. The Obama administration is negotiating two new, even larger, trade agreements -- and the president is in Mexico on Wednesday for a summit with his Mexican and Canadian counterparts to discuss the progress.

NAFTA has been injected into that debate and has taken on a sort of totemic importance: Is the Transpacific Partnership “NAFTA on steroids” – as say critics who are afraid that under the 12-nation TPP someone, say Vietnam, will steal U.S. jobs or allow industry to trample on Australia’s ability to make its own health policy decisions?

Or is NAFTA helping North America evolve into a globally competitive export platform? Combine Canada’s oil sands with Mexico’s labor pool and MIT’s brainpower, and voilà! Who could match that?

Based on the studies cited below, the reality is more ambiguous than either NAFTA critics or defenders allow. But a few themes jump out that put the treaty into context:

1) Whatever NAFTA did was probably happening anyway.

Canada and the United States already had a trade agreement when NAFTA took effect. And the two countries, for historical and cultural reasons, shared major industries like automobile production that dispersed more fully throughout the continent after NAFTA allowed companies to pull Mexico into the supply chain, as well. Mexico was under its own pressures to liberalize. It is, of course, impossible to assess what would have happened without NAFTA, but it is also hard to imagine that the last 20 years would have passed without some greater amount of continental economic integration. How much did NAFTA add to what would have been the overall trends? How much did it change where the United States would have been anyway? America is a big country, as analysts at the Peterson Institute for International Economics noted in a 2007 study, and NAFTA’ s impact on U.S. jobs was likely a “blip” in the overall ebb and flow of U.S. employment.

2) Canada probably made out the best; Mexico’s progress was a disappointment.

Here again, it is hard to be sure about causality. Independent of NAFTA, Canada went through rounds of fiscal reform in the 1990s that left it in strong shape and had a commodities boom would have strengthened the Canadian dollar and supported growth regardless. In Mexico, progress in wages and employment fell short of the expectations offered by NAFTA proponents, and China’s arrival at the World Trade Organization threw an unexpected wrench into things. Some of the businesses that migrated south subsequently migrated east. One argument emerging now is that a further push to integrate, coupled with recent steps in Mexico to open the energy industry, could make North America as a whole – no country in particular – an increasingly competitive place to make stuff.

3) The effect on the political economy is ambiguous.

Haters gonna hate, in other words. As the following collection of papers shows, NAFTA, on net, seems a mixed blessing. It lived up to some of the claims made by Ronald Reagan, George H.W. Bush and Bill Clinton, the three presidents involved in its passage, but by no means all of them. U.S. exports to the two NAFTA countries have risen, but so has the U.S. deficit with those nations. Specific jobs have been lost, and while, for example, the Peterson study said it is hard to tease out a negative net wage impact in the United States, it is also presumed that NAFTA did not increase wages in general.

Which, taken together, is why trade remains such a tough subject politically: The downside is acute and obvious to the people who suffer it; the benefits tend to be more diffuse.

The Congressional Research Service took a look at the effect of the treaty a year ago, for anyone who wants a longer read; but the Council on Foreign Relations did a nice concise overview .

The Center for Economic Policy Research argues NAFTA was an overall disappointment for Mexico, while Standard and Poor's gives the upside argument for our southern neighbors (and Texas!).

The U.S. Chamber argues the good, and Public Citizen’s Global Trade Watch the bad.

Brookings discusses how to make it better. The Economic Policy Institute says it couldn’t be worse.

We’ll give the last word to the U.S. Trade Representative. Recall that President Obama himself criticized NAFTA in his 2008 campaign and said he would amend it. That idea is long gone, but U.S. Trade Representative Michael Froman argues that new agreements being negotiated with Europe and Asian countries will accomplish the same end: Mexico and Canada are part of the TPP, and the aim is to build what Froman has called a "values-driven" trade policy that enhances labor, environment and other conditions around the world. Plus, you can read the treaty if you really want.

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Zachary A. Goldfarb · February 19, 2014