Should the North American Free Trade Agreement (NAFTA) be repealed?

Should the North American Free Trade Agreement (NAFTA) be repealed?

Abstract on “should NAFTA be repealed?”:

The North American Free Trade Agreement boosts trade and investment within the three countries involved: Canada, Mexico, and the United States. The politicians sold it as a significant boost for the three economies. With increased demand due to trade, the politicians argued that it will increase jobs and thus needs ratification. Through library and internet research the conclusion this paper reaches is that the agreement was nowhere near as good as the politicians said it would be. It did provide a boost in jobs: 14 million jobs depend on trade in America alone, while one in five jobs need trade in Canada. It increased investment for all three countries; specifically, in Mexico investment increased to upwards of 500%. Further, it reduced tariffs that increased trade between the countries, which benefited Canada and Mexico by increasing their exports – Mexico specifically increased its exports to the US by 80%.  But while the increase in trade and investment benefited the economies, it’s difficult to ascertain if it was beneficial on the job market. The difficulty arises due to basic economic cycles and the Peso collapse in 1995. Not withstanding the difficulty economists cite Mexican job growth at 9.3 million. Most notably, Mexico has seen rampant job loss in the farming industry – upwards of one million jobs – due to NAFTA but has benefited from foreign direct investment. The increase in trade, investment, and jobs has been marginally beneficial for all the economies involved. It needs a restructuring as Mexico’s and Canada’s place in the world has changed since the implementation of NAFTA in the mid-90s.

Introduction:

“The real end winner of NAFTA is going to be Mexico because we have the human capital. We have that resource that is vital to the success of the U.S. Economy” (Commanding heights, 2001) stated Vincente Fox, a prominent Mexican statesman. The North American Free Trade Agreement (NAFTA) includes Canada, Mexico, and the United States. In 1994, when NAFTA was first ratified, it created one of the world’s largest free trade zones. The Bill set out the rules for trade and investment. It seeks to create greater wealth for the countries by removing tariffs, import quotas, and other barriers.

Proposed by Bush, Clinton later added a lot of his own reforms to the bill. He added an agreement that helped to ease fears that environmentalists had, primarily fears that the U.S. and Canada would take advantage of the environment in Mexico. Clinton used the environmental addition, along with other benefits in the bill, to convince Congress to pass the agreement.  It was finally implemented and enforced on January 1, 1994.

Economic theory says that free trade is always beneficial in the long run. Free trade allows people to engage in beneficial exchange and encourages countries to specialize economically at what they do best. While NAFTA may have allowed countries to specialize in what they do best, it nevertheless destroyed the livelihood of many individuals who spent their lives specializing in jobs that were then shipped out of the country. People who were previously experts in manufacturing and other such fields had their jobs replaced with lower paying service jobs because Mexico could perform their work for less than they could.

To many people, NAFTA is a success. It has lead to greater imports and exports because of the lack of tariffs. NAFTA increased employment within the American economy. It helped Mexico increase its stability and  maintain its commitment to free trade and open borders. Canada has seen an increase in agricultural trade and crude oil exports. With greater exporting and trade, this increased demand for goods and services, thus created greater employment within the Canadian economy.

Currently, there are other free trade agreements churning through the political machine. NAFTA offers us a chance to look back and see: has one of the largest free trade zones worked? By looking at job growth and loss, as well as net exports and investment, we’ll see that it has been decent. But it has not been the glorious trade deal it set out to be. With Hilary Clinton blaming NAFTA for much of the job losses in the manufacturing industry there has been great resentment towards the deal. Some people are calling for a repeal of NAFTA, but this is an over reaction.

Trade and Investment:

To evaluate NAFTA this report will consider the impact it had on trade and investment within Mexico and Canada. But trade with Canada and Mexico, for the United States, is so a small percent of their total trade that it has little impact on America. Thus America will not be in this section on trade and investments.

Mexico:


The original goal of the North American Free Trade Agreement was to increase trade and investment.  Today, twenty-one years later, we have the data to prove that it has increased both. The greatest benefactor of this increased investment seems to have been Mexico, although only slightly. Currently, about 80% of Mexico’s exports go to the United States (Villarreal, 2010). The exports increased from 15.5 billion to 397.5 billion in 2014 (Villarreal, 2010). In exchange for all this new exporting, Mexico received greater investment from the United States and Canada.  The foreign direct investment (FDI) currently accounts for roughly 2% of Mexico’s GDP (Villarreal, 2010). Further, NAFTA helped increase investor confidence in Mexico by helping Mexico maintain its commitment to open borders and free trade. A study done by the congressional research service found that the there was an increase of 546% of U.S. investment in Mexico between the years of 1993 and 2013 (Villarreal & Fergusson, 2015). This is a very substantial increase in FDI for Mexico and explains why it accounts for 2% of their GDP. While the increased exports help to maintain their economy and promote growth. Mexico wasn’t the only one to receive some benefits and growth as a result of NAFTA.

Canada:

Canada has received some direct investment from Americans due to NAFTA. But this increase is hard to attribute to NAFTA, because there was a free trade agreement in place between the U.S. and Canada before NAFTA.  The only sure thing is that bi-lateral investment continued to grow between the United States and Canada (Villarreal & Fergusson, 2015). There was some investment in many industries but the main industry to benefit from NAFTA was energy. The major export Canada has seen a benefit in from the reduction of tariffs is oil. Nearly two thirds of Canada’s oil production is now exported to the U.S.  Most of this oil is crude oil, making Canada the largest exporter of crude oil to the United States in the world (Lanthemann, 2014). Canada has seemed to fare well under NAFTA benefiting most from the elimination of tariffs on their exports.

NAFTA set out to increase economic growth by spurring competition through increased trade and investment. There is little doubt that NAFTA has increased investment and export flows between the three countries. However, there is more doubt about how the free flow of labor has affected the job market.

Jobs:

This section, will look at the impact NAFTA had on the job market for all three countries.


USA
:

Economic theory generally supports the idea that with greater trade comes greater supply and demand. With greater demand there should be a more jobs gained and fewer jobs lost. The reality is not always that simple. There can be major job losses in specific industries and job gains in others. For example, some economists estimate that America job losses were above half a million “682,900 U.S. jobs [to be exact], mostly (60.8%) in manufacturing” (Robert, 2011). Despite these large job losses to the American economy, some economists see it as a structural shift in the economy, a shift away from manufacturing.

The U.S. Chamber of Commence study claims that NAFTA has created lots of jobs. Indeed, they assert that 14 million jobs depend on trade with Mexico and Canada, with 5 million of those jobs coming directly from increased trade as a result of NAFTA (2015). The idea here is that while America experienced a variety of job losses, more jobs experienced creation than were lost, resulting in net job growth. The lost jobs were just part of the process of restructuring the economy.

It’s important to note that jobs which rely on exporting “pay 20% more on average than those focused on domestic” good production (Sergie, 2014).  So the American economy has seen a net positive job gain along with increasing the pay of those jobs. Indeed, we can see that one small company in wire production relies upon exporting. Marlin Steel Wire Production in Maryland uses trade with Canada and Mexico. One fourth of the company’s 33 workers receive employment as a direct result of greater exports. Those exports to Mexico and Canada represent 10% of their company’s sales, or two to three paychecks (US Chamber of Commerce. 2015). This means Marlin was able to spend 10% more on employment after NAFTA than before it, perhaps through additional hires or higher wages for current employees. Indeed, NAFTA helped some workers but many Americans were hurt as their jobs moved south to Mexico.

Mexico:

 

With the decrease in tariffs due to NAFTA, many American firms hoped to benefit from cheap labor in Mexico. This lead to large, American based firms moving their production across the border to maquiladoras (a manufacturing operation in Mexico which imports duty free equipment for assembly and exports the assembled product). To the Mexican people, this seemed like it would boost the growth of the middle class.  Most of the manufacturing plants are close to the border to take advantage of the cheap labor. This plan increased imports into Mexico and exports to the United States.  The Mexicans benefited from the maquiladoras. During the late 90’s, a new factory arose almost daily. In those same years the maquiladoras counted for roughly 25% of Mexico’s GDP and almost 20% of Mexico’s total employment (Hausman, 2003). The reason the maquiladoras did so well initially is they enjoyed the low shipping costs of close production and cheap labor (Audley, 2004). Over time, as the economic climate changed, much of this production got outsourced to China in early 2000’s. This further slowed job growth as competition increased (Robert, 2011). American profits and Mexican job growth weren’t great in Mexico. Indeed, the introduction of maquiladoras and American business lead to some unintended consequences for Mexico.

The maquiladoras plans for Mexico failed to be extremely productive, much to the American firms dismay. Likewise, with the lowering of tariffs, many of the smaller subsistence farmers are among those who lost jobs in the changing economy.  They were able to find jobs in the growing auto and aerospace manufacturing jobs that became available as firms moved their production south (Beltrame, 2013). As American firms started shipping their manufacturing jobs south, higher wages for the Mexicans came with them. Higher wages came with them because the difficulty of manufacturing for aerospace and the auto industry requires higher skills (Beltrame, 2013). This helped with the significant job loss in the agricultural industry in Mexico, but it was not enough to make up for a 1.3 million job loss. The cited job growth was much higher than 1.3 million at 9.3 million. It’s difficult to directly attribute this job growth towards NAFTA, because of factors such as the currency collapse Mexico had in 1995 and economy cycles. Further, it’s complicated by the Internet boom of the late 90’s, making it difficult to cite 9.3 million as all resulting from NAFTA (Villarreal & Fergusson, 2015). Sadly, many suffered, as the subsistence farmers couldn’t keep up with the larger scale American farms. Mexico was having difficulty adjusting to the new shifts in the economy; meanwhile, Canada was faring decently.

Canada:

 

As of 2008, in Canada, one in five jobs rely on trade and exporting (North American Free Trade Agreement, 2012).  The United States is the largest importer of Canadian crude oil. This increased exporting of crude oil and many other products has a positive effect on jobs. Since 1994 there have been 4.3 million jobs created due to NAFTA (NAFTA, 2012). Without the reduction in tariffs, trade between the United States and Canada would be slower than it is today. One in five people would be out of a job or in a different job if NAFTA had never taken place. We know jobs involved with exporting make 20% more than jobs focused on domestic goods (Sergie, 2014). These higher paying jobs help to sustain and build the Canadian economy.  There are job losses for Canada as well, but they have not been as severe due to the previous free trade agreement that the United States and Mexico had. The majority of the job losses are in the manufacturing industry, which many economists account to globalization and not directly towards NAFTA (Villarreal & Fergusson, 2015). At any rate, Canada seems to have been the greatest beneficiary of this trade agreement.

Job growth is extremely important for countries. Keeping their citizens employed and at a suitable standard of living is a task many legislators struggle with. NAFTA has increased jobs in Canada and the United States. But in Mexico, it has struggled to be the deal that politicians promised. It has done one thing the politicians promised it would do. It has increased trade and investment between the three countries quite well.

Counter Argument:

 

When all three nations proposed the agreement, they promised that it would create jobs and increase trade and investment. To many people, the promises remain unfulfilled. To a growing number, the agreement needs abolishment.

Some believe that many jobs are wrongly attributed to NAFTA, and critics point towards factories closing down as an indicator. In the first five years of NAFTA’s existence, there was significant job growth. This 5-year period coincided with the technology boom of the mid-late 90s. Opponents attribute the technology boom of the 90s as the reason for job growth, not NAFTA. It’s not insignificant, either that a total of 709,988 jobs experienced creation in the five-year period (Hufbauer, & Scott, 2005). Critics cite the number of factories closing down as a direct result of NAFTA. This simply is not true as the numbers shows little change from previous periods (Kletzer, 2008). For the people who lost their jobs, it’s easy to point fingers and blame NAFTA as the culprit.

It makes little difference to a factory worker that investment and trade has increased when they get fired from their job. Then, when they do find another factory job, the factory worker experiences shock to discover that they will have to take a pay cut to stay competitive. They accept the job because they have a family to support. This is the situation that half a million or more U.S. factory workers have found themselves in as their jobs moved south to Mexico. This is also a similar fate that lots of farmers faced in Mexico.

The agreement suppressed wage growth for factory workers in America because companies began threatening workers to move completely if they demanded higher wages. Pre-NAFTA about 50% of manufacturing companies would use the threat of closing as a deterrent for increasing workers pay; after NAFTA, it grew to 65% of companies employing this strategy (Amadeo, 2014).

Mexico:

 

Wage suppression and the intimidation of workers isn’t the only negative side affect that came with NAFTA: Mexican job loss, political manipulation, and Mexican environmental problems all came with it. After the implementation of NAFTA, big American business moved south which, in turn, helped employ some Mexican people. However, when big business introduced their larger, more efficient farming equipment on the recently bought plots of land, the amount of Mexicans they employed dropped, whereas the smaller farms employed more people due to their lack of efficiency. The resulting job loss for the Mexican labor force was 1.3 million farming jobs (Amadeo, 2014). A fair amount of this came from political maneuvering on the part of the Americans. NAFTA allows foreign firms to sue governments for lost revenue due to regulation. Through suits brought against the Mexican government, big agriculture turned a policy meant to provide a minimum level of income for farmers into a subsidy for their larger foreign farms. The amount going to the larger farms in the north was $1.4 billion in 2008 (Tariffs and tortillas, 2008).

In order to stay competitive and recoup lost income, lots of the Mexican farms needed to use more productive land for their pastures and food production. This need lead to an increase in deforestation. The estimated deforestation rate is an average of 630,000 hectares (1 hectare is about 2.7 acres) since 1993 (Audley, 2004). This environmental impact was higher than anyone anticipated.

It’s unlikely that many of these things would have happened if NAFTA had not passed. If it weren’t for the manipulation and competitive nature of large firms, the Mexican public might have a minimum level of income for their farm workers, larger forests, and more jobs. Although given the current political landscape, the Mexican workers are stuck with the status quo.

 

Conclusion:

 

Some economists say that free trade is always good, and in the long run it leads to greater economic growth and prosperity for the people. Generally, this is true, except in the short-run where things tend to be rocky and unstable while the economy adjusts. Given that we are 20 years into the trade deal we should have seen the majority of what NAFTA has to offer.

The trade deal for Mexico was more negative than positive. Including, the rampant job loss in agriculture, political manipulation, and increased deforestation, it’s difficult to argue that it was for their benefit even with increased FDI and the ever-slowing maquiladoras employment. Likewise, for the Americans it wasn’t a stellar deal either. They lost half a million jobs, but they did see an overall net gain in jobs. However, even if taken at the bare minimum of what the Chamber of Commerce said, that 5 million jobs were a direct result of NAFTA, the Chamber of Commerce did not take into account the resulting wage suppression that companies used after NAFTA’s implementation, so America got jobs but they were lower paying jobs. It seems, that Canada is the only one without major losses and changes to its economy.

For all the negatives, NAFTA did excel at one thing: increasing investment and trade between all the countries. Canada grew to be America’s biggest supplier of crude oil, which leads towards greater job creation.  For Mexico, the FDI it receives from the United States and Canada supports 2% of their GDP and NAFTA raised exports to America by 80%.  Increased investment is good, but the impact it had on the economies is mitigated by the job loss and other negative side-affects.

All said NAFTA has been barely positive; it increased trade and investment but at the cost of jobs. NAFTA doesn’t need abolishment, what it really needs is a restructuring to better suit the needs of a modernizing Mexico and the recovering economies of Canada and the U.S.

 

References:

Amadeo, K. (2014, April 19). 6 Negative effects of NAFTA. Retrieved November 23, 2015, from http://useconomy.about.com/od/tradepolicy/p/NAFTA_Problems.htm

Audley, J. (2004, January 5). NAFTA’s promise and reality. Retrieved November 23, 2015, from http://carnegieendowment.org/files/nafta1.pdf

Beltrame, J. (2013, December 29). NAFTA’s biggest winner is.. Retrieved November 26, 2015, from http://www.huffingtonpost.ca/2013/12/29/nafta-mexico_n_4515862.html

Commanding heights. (2001, April 4). Retrieved from http://www.pbs.org/wgbh/commandingheights/shared/minitext/int_vicentefox.html

Hausman, A. & Haytko, D.L. (2003) “Cross‐border supply chain relationships: interpretive research of maquiladora realized strategies”, Journal of business & industrial marketing, 18, 545 – 563

Hufbauer, G. C., & Scott, J.J. (2005, October) NAFTA revisited: achievements and challenges. Washington, DC: Institute for International Economics.

Kletzer, L. G. (1998). Job displacement. The Journal of Economic Perspectives12(1), 115-136. Retrieved from http://www.jstor.org/stable/264694

Lanthemann, M. (2014, January 7). NAFTA and the future of canada, mexico and the united states. Retrieved November 18, 2015, from http:// www.forbes.com/sites/stratfor/2014/01/07/nafta-and-the-future-of-canada-mexico-and-the-united-states/

North american free trade agreement. (2012, April 4). Retrieved November 26, 2015, from http://www.naftanow.org/facts/default_en.asp

Polaski, S. (2004, February 25). Mexican employment, productivity and income a decade after NAFTA. Retrieved December 3, 2015, from http://carnegieendowment.org/2004/02/25/mexican-employment-productivity-and-income-decade-after-nafta

Robert, E. S. (2011, May 3). Heading South: U.S.-Mexico trade and job displacement after NAFTA. Economic policy insitute, 308, 2. http://www.epi.org/files/page/-/BriefingPaper308.pdf

Sergie, M. (2014, February 14). NAFTA’s economic impact. Retrieved November 18, 2015, from http://knowledge.wharton.upenn.eduhttp://www.cfr.org/trade/naftas-economic-impact/p15790/article/nafta-20-years-later-benefits outweigh-costs/

 

Tariffs and tortillas. (2008, January 26). Retrieved November 23, 2015, from http://www.economist.com/node/10566845

 

US Chamber of Commerce. (2015, October 27). NAFTA triumph: assessing two decades of gains in trade, growth and jobs.Retrieved November 26, 2015, from https://www.uschamber.com/sites/default/files/documents/files/nafta_triumphant_updated_2015.pdf

 

Villarreal, M, & Fergusson, I. Free Trade. The North American free trade agreement. (2015). Retrieved from: https://www.fas.org/sgp/crs/row/R42965.pdf

 

Villarreal, M. (2010, June 3). NAFTA and the Mexican economy. Retrieved

November 18, 2015, from https://www.fas.org/sgp/crs/row/RL34733.pdf

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