NAFTA

Trade has been on the forefront of the economic conversation in the US since the 2016 presidential election. Having already scrapped the TPP during its first days in power, the Trump Administration has set its sights on NAFTA calling it a “catastrophe” and “unfair for the American worker.”

Entering into force in 1994, the North American Free Trade Agreement facilitated the increased movement of goods across the Mexico-US and US-Canada borders. In light of manufacturing jobs moving to Mexico and persistent US trade deficits with both Canada and Mexico, the question remains whether it has actually been a net positive for the US economy and labor force. A dive into the data sheds some light on the issue, but is far from offering a definitive answer.

Long story short, the following charts and analysis argue that although the US has imported more than it has exported under NAFTA, the US economy nevertheless may have been the ultimate winner in this arrangement. And as it relates to our southern neighbors, it is hard to argue that Mexico has won out at the expense of the US.

The Data

The US Census Bureau, oddly enough, tracks trading activity specifically tied to NAFTA. It publishes monthly data of the value of goods imported into the US from Canada and Mexico and the value of goods the US exports to the two countries. This was the data that I was primarily interested in. To add a bit more color to the picture, I grabbed information on Total Factor Productivity in all three countries from the Federal Reserve and unemployment and GDP figures from the World Bank.

The Results

Economic theory maintains that trade is a positive sum game, in that free trade increases the size of the economic pie for everyone. When Country A and Country B liberalize trade, there will necessarily be winners and losers in each country, but the gains to the winners will be more than enough to offset the losses suffered by the losers. This seems to hold true in the NAFTA context.

Figure 1

Looking at trade from the perspective of the US, trade with both countries has flourished under NAFTA. Interestingly, while Mexico bears the brunt of the criticism in today’s political climate, as the above graph demonstrates, total trade with Canada has consistently dwarfed that of Mexico.

Breaking trade into its constituent parts, both exports from the US and imports into the US have risen fairly steadily. And while imports have consistently outpaced exports, the rate of change (the slope of each line) has been roughly equal.

Figure 2

Looking specifically at the difference between imports and exports, however, draws a more negative picture.

Figure 3

The above certainly lends credence to the argument that NAFTA has been bad for the US. Trade was roughly in balance prior to NAFTA, but it began to steadily decline once NAFTA was enacted (red line in figure above marks the first year of NAFTA). Interestingly, the 2008 financial crisis has been good for this balance. While both imports and exports declined during this period, the comparably fast rebound in the US led to a sharp strengthening of the trade balance, which still holds to this day.

However, when looking beyond just the trade figures, a more positive picture for the US begins to emerge. First, looking at US unemployment relative to its neighbors, the US has not fared too poorly.

Figure 4

The years following the institution of NAFTA saw falling unemployment in all three countries, with the most dramatic drop in Mexico. Unemployment then began to rise following the bursting of the dot com bubble and during the runup to the 2001 recession, illustrated by the first vertical red line. In subsequent years, unemployment resumed its decline in all three economies until the subprime mortgage crisis, which ushered in the the deeper, longer lasting recession of 2007, as marked by the second vertical red line. Prior to the Great Recession of 2007-2009, unemployment in the three nations rose and fell roughly in concert, with US unemployment lower than in Canada but higher than in Mexico. The aftermath of the Great Recession appears to have upended that pattern, with the US unemployment rising and then declining more sharply than that of Canada and Mexican unemployment somewhat plateauing at or near its height. While Mexican unemployment still stands below that of the US, the gap appears to the shrinking as the US enjoys a more robust recovery.

The next two graphs show an even starker contrast between the economic fates of US and Mexico following the adoption of NAFTA.

Figure 5

GDP per capita in the US greatly outpaces GDP per capita in Mexico, which is not surprising given the leading position of the US in the global economy. Nevertheless, the rate of growth of GDP per capita is strong across the region, with Canada leading the pack. The compound annual growth rate of GDP per capita in Canada starting from the adoption of NAFTA in 1994 clocked in at 4.7%, compared to 3.4% in the US and 3.0% in Mexico. While growth rates in GDP per capita were obviously affected by more than just NAFTA, it is interesting to note that during the NAFTA period, US and Canada both saw greater economic growth per inhabitant than in Mexico.

Similarly, Total Factor Productivity (TFP), which is an indirect measure of economic gains derived from efficiency and technological improvement, suggests that the Mexican economy may have gained the least through the NAFTA partnership.

Figure 6

Relative to the US, TFP in both Canada and Mexico have declined during the NAFTA period, with Mexico, which was already on the decline prior to NAFTA, declining from 0.78 in the pre-Nafta period to 0.60 in 2014, the latest period for which data is available. This represents a decline of 23.0% in Mexico, compared with just a 8.3% decline in Canada. It is important to note here that this measurement of TFP is relative to the US. It is completely possible that the efficiency of the Mexican economy has remained steady, or even grown, over the period, but has been consistently outpaced by efficiency growth in the US and thus this measure of TFP has declined. Nevertheless, the argument that the Mexican economy has grown at the expense of the US economy is not borne out by the data presented here.

Conclusion

The above data suggests that in the case of NAFTA, economic trade theory holds in that the size of the pie has increased for all three countries. One of the glaring problems in trade theory, however, is that while there are enough trade-derived resources to compensate the losers, in reality channeling those resources has proven difficult. A US corporation may benefit from moving manufacturing to Mexico, but transferring the correct portion of those gains to the factory labor who have lost their jobs as a result does not work out as cleanly as economists would have you believe. This disconnect between the winners and losers is sowing discord throughout the economy and the trade deal itself, rather than the lack of mechanism for wealth transfer, is named the primary culprit. As with everything else, it becomes more of a political question than an economic one.

The current political rhetoric of the benefits of NAFTA flowing first and foremost to Mexico do not seem to be supported by the economic data over the two decades of NAFTA’s existence.The ill effects of free trade are concentrated in the few while the benefits are diffused among the many. Those who have lost car manufacturing jobs to Mexico, for example, speak more loudly than those of us that enjoy a modest savings in the purchase of a new car as a result.  

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