By Jacob M. Schlesinger
For all of the debate sparked by the North American Free Trade Agreement, most economists say the concrete impact on the U.S. economy has been modest -- a small gain in growth and efficiency, and a small loss in jobs and suppressed wages for certain workers.
But as with most free-trade agreements, the gains over 23 years have been diffuse, the pains more concentrated, helping stoke the intense political backlash that powered Donald Trump's presidential campaign, and now his White House move to rip up the agreement.
"Nafta produced large changes in trade volumes, tiny efficiency gains overall, and some very significant impacts on adversely affected communities," Harvard economist Dani Rodrik asked on his blog this week. While he said Mr. Trump had exaggerated the pact's cost on manufacturing jobs, Mr. Rodrik said he was "able to capitalize on the very real losses...in certain parts of the country in a way that Democrats were unable to...."
"In reality, Nafta did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters," the Congressional Research Service wrote in a detailed 2015 report on the trade pact and the various studies across from across the ideological spectrum dissecting its effects. "The net overall effect of Nafta on the U.S. economy appears to have been relatively modest..." The CRS cited one of the more comprehensive studies concluded that the deal would, upon full implementation, probably lift U.S. gross domestic product by less than 0.5%, or about $80 billion, through expanded trade, cheaper imports, and greater efficiencies,
"However, there were worker and firm adjustment costs as the threecountries adjusted to more open trade and investment among their economies," the report concluded.
The biggest impact has come from expanded economic integration with Mexico, because the U.S. and Canada already had a pre-Nafta free-trade pact, and the two economies were more similar in structure to each other than with developing Mexico.
All sides agree Nafta has coincided with a significant increase in economic activity across the U.S.-Mexican border: more trade, more foreign direct investment, and a more-integrated regional manufacturing system, particularly for the auto industry. But they differ on which numbers matter most.
In a tweet Thursday morning, Mr. Trump singled out the U.S. trade deficit with Mexico. "The U.S. has a 60 billion dollar trade deficit with Mexico," he wrote. "It has been a one-sided deal from the beginning...with massive numbers of jobs and companies lost."
Mr. Trump is correct that Nafta has coincided with a big shift in U.S. trade terms with its southern neighbor, swinging from a trade surplus of $1.7 billion in 1993, the year before Nafta took effect, to a deficit of $61 billion last year.
But that isn't all attributable to tariff cuts under Nafta. The Mexican peso plunged the year after the deal took effect, making Mexican exports much cheaper and pricing many American products out of the Mexican market.
Moreover, the numbers and trends behind that top-line figure paint a more complex picture. While Mexico is shipping more to the U.S., it isn't as if it has closed its borders to U.S. products. In Nafta's first two decades, U.S. exports to Mexico soared from $41.6 billion in 1993 to $240.3 billion in 2014. Imports from Mexico, however, grew even faster in those years, from $39.9 billion to $294.2 billion.
The real impact of those trade numbers are also hard to sort out, because parts are being shipped back and forth within expanded regional production systems. "The interdependence of the United States, Canada, and Mexico is striking," the Peterson Institute for International Economics wrote in a 2014 report assessing the trade pact on its 20th anniversary. "For example, goods imported from Canada are estimated to contain 25% of U.S. inputs and from Mexico 40% of U.S. inputs."
That interdependence flows from a huge increase in American foreign direct investment into Mexico, from $15.2 billion in 1993 to $101.0 billion in 2013. That has taken the form of U.S. manufacturers -- of both parts and full products, like cars -- shifting into Mexico, another pattern Mr. Trump has attacked.
Yet the pact's advocates say that shift lifted the efficiency of the factories that stayed in the U.S., pre-empting what would have been an even bigger hemorrhaging of manufacturing. "What seems to have happened is that the North American auto industry reacted to Nafta by rationalizing itself," Berkeley economist Brad DeLong wrote this week for Vox, "moving those parts of it that could be effectively performed by relatively low-skill workers to Mexico, and thus gaining a cost advantage vis-à-vis European and Japanese producers."
The hot-button question is what effect Nafta has had on the American workforce -- measured by jobs lost and the damping effect on wages as production has shifted to a lower-paid workforce.
Nafta boosters and critics generally agree the pact has led to a reduction of U.S. jobs, but their estimates vary widely, from about 100,000 to 700,000 or so. The pact's defenders say its critics are looking at the steady drop in U.S. manufacturing workforce in recent decades and improperly tying all of it to Nafta -- discounting other factors such as the persistence of a long-term decline that predated Nafta, the sharp increase in automation, and a surge in Chinese imports after Beijing entered the World Trade Organization.
"For the average worker, there is not much of an impact, but for certain important pockets of workers, the lowered import barriers resulting from Nafta do seem to have lowered wage growth well below what it would have been," John McLaren, a University of Virginia economist said in an interview posted on his school's website. "This is particularly true for blue-collar workers."
Nafta advocates say the economic debate misses the bigger point of the deal, which has been to ameliorate longstanding tensions across the border and turn Mexico into a more steadfast U.S. ally. By that standard, they say, the pact has been a great success, fostering more bilateral cooperation on issues from crime to the environment -- and keeping Mexico from following the path of left-wing Latin American countries or drifting closer to American rivals like China.
It is that immeasurable gain that Mr. Trump seems most skeptical about, and most willing to put at risk.
(END) Dow Jones Newswires
January 26, 2017 17:43 ET (22:43 GMT)
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