Conventional Wisdom
The North American Free Trade Alliance (NAFTA) has allowed Mexico and Canada to drive down U.S. wages and destroy U.S. jobs
Facts
Since the NAFTA trade and tariff agreements went into effect on January 1, 1994, replacing the U.S.-Canada Free Trade Agreement implemented in 1989, real average hourly earnings in the U.S. business sector have risen by 9.5% from $7.55 in January 1994 to $8.27 in December 2007. By contrast, in the 14 years prior to NAFTA, real wages actually dropped by -8.3% from $8.23 in December 1979 to $7.55 in January 1994. 95 There is therefore clearly no evidence that NAFTA put downward pressure on U.S. wages.
Rather than hurting jobs in this country, NAFTA has, in fact, boosted the rate of new job creation. Between December 1993 and December 2006, U.S. employment rose from 112.2 million to 137.2 million jobs, a 22% increase, with a total of 25 million new jobs. On the other hand, the average rate of unemployment during the same period was 5.1%, compared to 7.1% during the period 1981-1993.
In addition, NAFTA has boosted manufacturing as well, with output increasing by 63% between 1993 and 2006, topping the 37% increase in manufacturing between 1980 and 1993.96 And wages for manufacturing workers have gone up. Average real compensation grew at an average annual rate of 1.6% from 1993 to 2006, compared to 0.9% between 1980 and 1993.
Conventional Wisdom
Lowering tariffs and throwing open the borders to U.S. markets for Canada and Mexico hurt business in this country.
Facts
Again, since NAFTA went into effect, both trade and investment have increased substantially in this country and across the borders with Mexico and Canada. From 1993 to 2006, trade among the three NAFTA partners has climbed 198%, from $297 billion to $883 billion. During this period of time, exports of U.S. goods to those countries grew even faster than imports. While exports to all other countries grew at a rate of 108%, trade with Mexico and Canada grew at a rate of 157%. The net result is that business has boomed since the NAFTA accords were put in place.
Boosting North-American Investment
According to the most recent U.S. Department of Agriculture (USDA) figures, Mexico and Canada have become two of the top three U.S. poultry markets in the world. In 2004, U.S. poultry exports to Mexico were valued at $331.1 million, while Canada reached $330.3 million (the Russian Federation came in at $530.5 million). Exports to Mexico increased 61.5%, and increased 100% to Canada since 1993. Export increases from 2003 are especially remarkable, at 27.6% for Mexico and 22.8% for Canada.
At the same time, U.S. pork producers credit NAFTA with their gains in market share in Mexico for pork products, which increased 3.5 times to $430.7 million between 1993 and 2004, and more than seven-fold to $259.8 million to Canada during the same period. One-year increases from 2003 to 2004 are striking, as well, as exports to Mexico and Canada surged 93.6% and 49% respectively.
Exports of U.S. fresh fruits and vegetables to Canada, our top market, reached $1.9 billion in 2004. This is an increase of 45.5% since 1993, and 5% since 2003. Mexico's growth as a market for these products is even more impressive, according to the USDA, rising from America's fifth largest market in 1993 to the third largest in 2004. Exports to Mexico surged 98%, from $134 million in 1993 to $265.8 million in 2004. Changes between 2003 and 2004 were mixed, as exports to Canada rose 5% while exports to Mexico declined by 0.5%.97
In addition, investment in business, which is important for maintaining a high standard of living in the NAFTA countries, has increased substantially. Excluding housing, U.S. non-residential business investment has increased by 107% since 1993, compared to 45% between 1980 and 1993. The result is that U.S. economic growth over this same period has been remarkably strong, and the cooperation between these North American partners continues to bring opportunities for new growth opportunities.
As of 2007 Canada was the largest market for U.S. exports. The American trade deficit with Canada decreased by $5.7 billion in 2006, and it continued to decrease in 2007 as exports to Canada increased even faster than US demand for Canadian oil and gas.
U.S. exports of private commercial services to Canada, excluding military and government-related trade, were $32.5 billion in 2005 (latest data available), and U.S. imports were $22.0 billion. Sales of services in Canada by majority U.S.-owned affiliates were $46.9 billion in 2004 (latest data available), while sales of services in the United States by majority Canada-owned firms were $36.6 billion. Meanwhile, the stock of U.S. Foreign Direct Investment (FDI) in Canada in 2005 was $234.8 billion, up from $212.8 billion in 2004. U.S. FDI activity in Canada is concentrated primarily in the manufacturing, finance, and mining sectors.
Conventional Wisdom
NAFTA destroyed American jobs.
Facts
The primary fear, repeated in many political venues and by many in the mainstream media, is that NAFTA destroys jobs. That fear is neatly encapsulated by the following statement from the Public Citizen website:
Here are the more relevant numbers: U.S. manufacturing employment declined from 16.8 million people in 1993 to 13.9 million people in 2007, a decrease of nearly 3 million manufacturing jobs, and nearly 20% of the total. Moreover, the $190 billion U.S. trade deficit with NAFTA countries--as a simple accounting matter--corresponds to manufacturing jobs that could have been here. The Economic Policy Institute estimates that the United States could have had over one million additional manufacturing jobs had there been trade balance between NAFTA countries alone. This figure subtracts from the NAFTA trade deficit our oil and gas trade deficit, which has always been significant, although it has shrunk 40% as a share of our total deficit since the deal went into effect.98
It's hard to believe that all job losses in the U.S. manufacturing sector are related to NAFTA, since the U.S. goods deficit with its NAFTA partners, excluding oil import/export, is about $45 billion annually, or about 0.3% of GDP. Trade with NAFTA is huge and valuable allowing the US to focus on what it does best and allowing our partners to do the same. The net of the buys and sells is just .3% of GDP. Even if one were to believe that 0.3% of GDP may have a measurable impact on jobs and wages, there are other larger trends to be considered. Total industrial production jobs peaked at around 25 million in 1974, long before NAFTA. Since then, production jobs, which include manufacturing, have trended down to near 20 million.
At the same time, as industrial production jobs have dropped about 5 million total, U.S. industrial output since 1974 has more than doubled. Clearly U.S. industrial output and employment has primarily been responding to productivity changes. The clearest way of tracking NAFTA related job losses is the number of claims filed under the Trade Adjustment Assistance Act. Since 1994, 1.8 million claims have been accepted for reimbursement under this act, which covers many areas, including manufacturing.
There are limitations to this number, since not all claims are accepted, and it's not simple to qualify. However, even if you assume the correct number is not 1.8 million but triple that (or 5.4 million), that is still only 105,000 jobs per quarter over 13 years. The government's JOLTS Survey, which reports on job losses and gains, indicates that the U.S. creates and eliminates millions of jobs each quarter. An extra 105,000 job, plus or minus, is not likely to create a major shift in overall employment patterns.
Since the 1970s, as industrial jobs have dropped, the average unemployment rate has also dropped. In the 1970s, 6% was considered full employment, but since 1992 the U.S. unemployment rate has averaged 5.2%. The broad indicators clearly do not support the argument that the job market as a whole has been hurt by NAFTA, even if some jobs were lost in some areas.
An Accurate Picture
If you believe everything the political candidates are saying, you would have to believe that NAFTA is responsible for the loss of some 3 million jobs in the manufacturing sector, or that outsourcing production to Mexico and Canada has led to an "exploding trade deficit." Unfortunately, such claims may be long on drama, but they're short on facts. An insightful commentary in the Wall Street Journal by former Michigan Governor John Engler points out that the trade imbalance has nothing to do with NAFTA, but instead is primarily due to the high volume of oil imports.
As discussed in Chapter 10, Canada and Mexico are the number-one and number-two suppliers of crude oil to the United States. In September 2007, the U.S. imported more than 75 billion barrels of oil from Canada, which was 18.3% of total oil imports. At the same time, we imported 43.6 billion barrels from Mexico, for 10.65% of the total. More recently, in January 2008, the U.S. imported 71.4 billion barrels from Canada, or 19.5% of the total, and 38.5 billion barrels from Mexico, which was 10.5% of all crude oil imports.
Insert Chart 17_C (Oil Accounts for More ...)
Petroleum imports accounted for 55% of the entire U.S. trade deficit in the fourth quarter of 2007. Outside of oil and gas imports, the U.S. trade deficit has narrowed by 40% over the past
three years and now, at 2.3% of GDP, is at the lowest level since 1999. As Gov. Engler points out, the trade deficit has almost doubled between 2000 and 2007, from $77 billion at the turn of the century to $140 billion in 2007. Nevertheless, the problem was not in manufactured goods but in energy imports. Of the $62 billion increase in trade deficits since NAFTA began, $58 billion (95% of the total) is energy related. Except for energy, the trade deficit with our NAFTA partners has grown by just $3.5 billion since 2000, less than .03% of GDP while sales of agricultural and manufactured goods to Canada and Mexico have almost kept pace with imports.
Insert Table 17_D (US Imports of Crude by Selected ...)
Assessment
NAFTA helped the U.S. economy far more than it hurt. If over the past seven years, U.S. trade with the rest of the world had performed as well as with NAFTA countries, the U.S.'s non-energy trade deficit would only have grown by $25 billion, instead of the actual growth of $155 billion. Our thinking about NAFTA should be similar to that about outsourcing explained in Chapter 5.
Lastly, since free trade is an absolute necessity for the progress of third world countries, the U.S. must set an example by eliminating trade barriers. There is an enormous global value created when the U.S. continues to show the way.
Bureau of Labor Statistics www.bls.gov Office of the U.S. Trade Representative, "Policy Brief: NAFTA Facts," Oct. 2007. [http://www.export.gov/fta/ USDA: Foreign Agricultural Service. Backgrounder: "Benefits of NAFTA," May 2005. [http://www.fas.usda.gov/itp/ "Debunking USTR Claims in Defense of NAFTA: The Real NAFTA Score 2008," PublicCitizen.org. 2007. [http://www.citizen.org/trade/ 4 John Engler, "What Nafta Trade Deficit," Wall Street Journal, Apr. 21, 2008. A15. [Available at: http://online.wsj.com/article/
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