By Jacob M. Schlesinger, Andrew Tangel and Valerie Bauerlein
For all of the debate sparked by the North American Free Trade Agreement, most economists say its concrete impact on the U.S. economy has been modest -- a small gain in growth and efficiency, and a small loss in jobs and lower wages for certain factory workers.
But as with most free-trade agreements, the gains over 23 years have been diffuse and 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 said on his blog this week. Mr. Trump exaggerated the pact's cost on manufacturing jobs, he said, but was "able to capitalize on the very real losses...in certain parts of the country in a way that Democrats were unable to..."
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 two tweets Thursday morning, Mr. Trump singled out the trade imbalance. "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 froma trade surplus of $1.7 billion in 1993, the year before Nafta took effect, to a deficit of $61 billion last year, though on a far greater value of bilateral trade overall.
In addition to the impact attributable to tariff cuts under Nafta, currency swings exacerbated the deficit. 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.
Among the American winners from the deal: soybean farmers, who enjoyed a quintupling of their sales to Mexico from 1993 to 2015. "We're watching the administration's decisions very, very closely, and it's fair to say that we're nervous," said Ron Moore, president of the American Soybean Association.
Caterpillar Inc. last year exported $33 million more in products to Mexico than it imported from the country, according to Chris Rogers at trade analysis firm Panjiva. He said the data highlight how the Peoria, Ill., company runs a "flexible, cross-border supply chain and sales business," allowing it "to move parts and completed vehicles to where the optimal labor cost and skill sets are, without having to suffer significant bureaucratic or tariff hurdles."
The impact of trade numbers are hard to sort out, because parts are shipped back and forth within expanded regional production systems. "When we look at the cross-border trade...when you really dig deep, you see that...a lion's share has value-added on both sides of the border and is inextricably linked to our economy," Union Pacific Corp. CEO Lance Fritz said on an earnings call last week.
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.
The trade agreement was influential, for example, in Oreo maker Mondelez's decision to eliminate 600 factory jobs in Chicago and move more production of its cookies to Mexico. Mondelez had planned to invest some $130 million to expand the Chicago factory, but instead decided in 2015 to save money by reallocating those funds toward upgrading a factory in Mexico. The decision drew criticism from Mr. Trump in his campaign, when he vowed on social media to never eat Oreos again.
A large portion of the big commercial trucks now traveling on U.S. roadsand interstate highways were built in Mexico. A decade ago, most of Navistar International Corp.'s heavy-duty models were built at plants in Ontario and Texas. The Illinois-based company closed both facilities to consolidate production in Escobedo, Mexico, near Monterrey. Besides lower labor costs, Navistar said the move brought its production closer to key suppliers that had also relocated to Mexico.
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 loss 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, aUniversity of Virginia economist said in an interview posted on his school's website. "This is particularly true for blue-collar workers."
Mr. McLaren said his study found the largest impact "in parts of Georgia, North Carolina, South Carolina and Indiana, with areas like Washington, D.C., Northern Virginia and Maryland among the least vulnerable locales." The study tried to document how the losses in certain communities might ripple beyond the factories affected. "A high-school dropout living in an apparel and footwear dependent small town in South Carolina, even if she is employed in the nontraded sector such as in a diner where she would appear to be immune to trade shocks, would see substantially lower wage growth," the paper says.
The collapse of the textile and apparel industry was devastating in central North Carolina, where mill towns dried up in places like Richmond County. The county is poorer, older and less educated thanthe state and the U.S, with 13% holding a bachelor's degree, less than half the national average of 30%.
"Nafta destroyed this county," said Robert Lee, owner of a local gun shop. "It took all the jobs."
The county is slowly shrinking in population, and jobs are commonly in low-paying service jobs without benefits, which limits their ability to buy things. "People that wait tables and flip burgers, they don't buy new cars and new homes," Mr. Lee said. "They work to go to work."
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 rivalslike China.
It is that immeasurable gain that Mr. Trump seems most skeptical about, and most willing to put at risk.
--Annie Gasparro and Jesse Newman contributed to this article.
Write to Jacob M. Schlesinger at email@example.com, Andrew Tangel at Andrew.Tangel@wsj.com and Valerie Bauerlein at firstname.lastname@example.org
(END) Dow Jones Newswires
January 26, 2017 19:34 ET (00:34 GMT)
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