Trade Distortions

Monday, December 3, 2007

POLLS SHOW that many Democratic voters are nervous about the potential impact of globalization on their job security. So some Democratic candidates are competing to validate every trade-related anxiety and grievance, no matter how far-fetched. The campaign is turning into a contest to see who can make the most extreme denunciation of the nearly 14-year-old North American Free Trade Agreement. In the Nov. 15 debate in Las Vegas, former North Carolina senator John Edwards called NAFTA "a complete and total disaster" that has "cost us millions of jobs." Sen. Barack Obama (Ill.) claimed that NAFTA had resulted in a net loss of more than 10,000 jobs in Iowa. Feeling the heat, Sen. Hillary Rodham Clinton (N.Y.) has distanced herself from the agreement, which her husband pushed through a Democratic Congress. "NAFTA was a mistake to the extent that it did not deliver on what we had hoped it would, and that's why I call for a trade timeout," she now says.

Such demagoguery is worth matching against the facts about NAFTA's impact. Among nonpartisan economists, the consensus (as summarized in a 2004 Congressional Research Service report) is that while the bulk of increased trade between the United States and Mexico since NAFTA probably would have occurred anyway, the agreement's positive effects have increased over time. NAFTA did not cause the current U.S. trade deficit with Mexico ($64 billion last year, out of a $13.3 trillion U.S. economy). Nor did NAFTA cost the United States any jobs, on net, though it might have created a couple of hundred thousand. The agreement contributed marginally to the shifting of workers from some less competitive sectors to others. As for wages, a gap between higher- and lower-paid workers has indeed developed in the NAFTA years, but the main culprit is technology, which increases demand for highly educated and trained workers.

Not that any of the Democratic candidates seem to care, but the impact of NAFTA seems to have been both larger and more positive in Mexico than in the United States. Mexico's gross domestic product, now more than $875 billion, has more than quadrupled since 1987. The poverty rate dropped 10 percentage points in the second half of the 1990s. Average wages have not grown and wage inequality remains a stubborn challenge, but pay grew most swiftly in the Mexican industries most exposed to trade, according to the World Bank. And Mexico, once considered the sick man of Latin America, has logged its progress while also accomplishing a mostly peaceful transition to multiparty democracy.

A final verdict on NAFTA is not possible yet, because the last deferred provisions won't be phased in until Jan. 1, just two days before Iowans go to the caucuses. Among them is the long-awaited elimination of all remaining barriers on American corn exports to Mexico. Corn -- don't they grow that in Iowa?

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