How Has NAFTA Affected the United States, Canada, and Mexico?

The North American Free Trade Agreement (NAFTA) was created in 1994 to increase trade between the US, Canada, and Mexico. The Trump administration criticized NAFTA for causing trade deficits, factory closures, and job losses in the US. The three countries' leaders renegotiated and renamed the agreement to USMCA in 2018, which included new provisions.

Basics

The NAFTA came into effect on January 1, 1994, with the primary goal of eliminating trade barriers between the United States, Canada, and Mexico. Its provisions were implemented in stages over 15 years. However, during his campaign, U.S. President Donald Trump strongly criticized NAFTA, promising to renegotiate or terminate the deal if necessary. Eventually, a new agreement known as the United States-Mexico-Canada Agreement (USMCA) was approved in 2020 as an updated version of NAFTA.

The perception of NAFTA varied among people. While some saw its main flaw as a lack of ambition and believed further regional integration was the key, Trump and his supporters considered it "the worst trade deal maybe ever." This discrepancy raised questions about the promises made, the outcomes achieved, and which parties benefited or faced challenges due to the agreement. To understand the complete history of NAFTA, its key players, and its overall impact, a comprehensive examination of the deal is necessary.

A Closer Look at NAFTA

NAFTA, implemented in 1994 during the Clinton administration, aimed to enhance trade within North America among Canada, the United States, and Mexico by eliminating trade barriers, taxes, and tariffs on goods exchanged between the three nations.

The idea of a trade agreement traces back to Ronald Reagan's tenure when he fulfilled his campaign promise by enacting the Trade and Tariff Act in 1984. Four years later, Reagan and the Canadian prime minister signed the Canada-U.S. Free Trade Agreement.

Although George H.W. Bush initially negotiated NAFTA, his successor Bill Clinton continued the talks to foster trade with the U.S. While Bush initially pursued a bilateral agreement with Mexico, President Carlos Salinas de Gortari advocated for a trilateral deal involving all three countries. Eventually, in 1992, Bush, Mulroney, and Salinas signed the agreement, and it took effect two years later after Clinton assumed the presidency.

NAFTA & Trump Administration

The goal of the Trump Administration was to address trade deficits, factory closures, and job losses by pushing for tougher labor and environmental protections in Mexico. They also sought to eliminate certain dispute settlement mechanisms that were causing challenges for specific industries.

During the negotiations, progress was made on several issues, but disagreements arose over the measurement of automobile content origin, with concerns about potential impacts on the market. Additionally, a WTO case filed by one country further complicated the talks.

The process of withdrawal from NAFTA was outlined in Article 2205 of the treaty, allowing a party to exit after providing six months' written notice to the others. The agreement would remain in force for the remaining parties even if one party withdrew.

NAFTA Accomplishments

NAFTA was designed with two main objectives: to boost cross-border trade in North America and foster economic growth for all parties involved. Let's briefly explore these two crucial aspects of the agreement.

NAFTA's Impact on Trade

NAFTA successfully achieved its immediate goal of promoting cross-border commerce in North America. By reducing tariffs and certain non-tariff barriers, such as Mexican local-content requirements, the agreement facilitated a significant increase in trade and investment. Notably, trade between the U.S. and Mexico reached $3.2 trillion from 1993 to 2020, while trade between the U.S. and Canada amounted to $7.4 trillion during the same period. Although trade between Mexico and Canada grew rapidly between 1999 and 2020, it totaled only $594 billion. Overall, NAFTA can be credited with more than doubling real trade among its signatories. However, the full impact of the deal requires a more nuanced assessment beyond these initial achievements.

Per-Capita GDP of Participating Countries

From 1993 to the fourth quarter of 2019, the real per-capita gross domestic product (GDP) of the United States grew by 48% to reach $57,585. During the same period, Canada's per-capita GDP increased by 44% to $45,109 (starting from 1997), and Mexico's per-capita GDP grew by 26% to $9,819.

Surprisingly, despite being an emerging market economy, Mexico's output per capita grew at a slower rate compared to both Canada and the United States. In normal circumstances, one would expect an emerging market's growth to outpace that of developed economies.

Winners and Losers of NAFTA

Is it accurate to consider Canada and the U.S. as winners of NAFTA, while Mexico emerges as the loser? To understand this perspective, let's examine why Trump's 2015 campaign focused on the economic rivalry with Mexico.

Before NAFTA, the trade balance in goods between the U.S. and Mexico slightly favored the U.S. However, in 2019, Mexico sold approximately $101.4 billion more to the U.S. than it purchased from its northern neighbor. NAFTA is a vast and intricate deal, and different viewpoints emerge when evaluating its impact on economic growth versus trade balances. While the overall effects of NAFTA may not be easily discernible, there are clear indications of some winners and losers.

NAFTA & United States

When NAFTA was signed in 1993, it was believed to have the potential to create American jobs and boost the economy. However, concerns were raised about the impact of jobs moving to Mexico. The relationship between NAFTA and overall employment trends is complex, with various opinions on its effects. Some sectors experienced more significant trade-related effects due to the removal of trade barriers. While job displacement occurred in certain industries, the impact on the overall job market is difficult to pinpoint.

United States: Manufacturing and Employment

After NAFTA's implementation, the U.S. experienced a decline in manufacturing employment from 16.8 million to 11.5 million jobs in 2009. By June 2020, when NAFTA ended and USMCA took effect, manufacturing jobs rose to 11.99 million.

Automotive Industry Growth

Initially, the automotive industry saw growth after NAFTA's introduction, with employment peaking at nearly 1.3 million jobs in October 2000. However, job losses intensified during the financial crisis, reaching a low of 623,000 in July 2009, almost returning to pre-NAFTA levels.

U.S. Carmakers in Mexico

Anecdotal evidence suggests some jobs moved to Mexico due to lower wages, with major U.S. car manufacturers establishing factories there. Carmakers now operate in both the U.S. and Mexico, with U.S. imports from Mexico containing 40% U.S. content and 25% for Canada, compared to 4% for China and 2% for Japan.

NAFTA's Impact on U.S. Manufacturing

Economists credits NAFTA with enhancing the global competitiveness of U.S. manufacturing through supply chain development. Despite the loss of U.S. auto jobs, experts believe NAFTA prevented worse outcomes. By integrating North American supply chains, carmakers retained production in the U.S., avoiding potential competition issues with Asian rivals. Though the impact of NAFTA remains hypothetical, it played a crucial role in preserving parts of the industry.

Garment Manufacturing

Garment manufacturing was severely affected by offshoring, with employment declining by almost 88.5% since NAFTA's signing. Nonetheless, Mexico continues to be a significant source of textile imports worldwide.

United States: Consumer Prices and Income

NAFTA had impacts on prices. From 1994 to 2020, the Consumer Price Index rose by 78%, while apparel prices fell by 2.1%. However, it is difficult to directly attribute these changes to NAFTA. People with lower incomes, who rely more on cheaper imported goods, would suffer the most from a shift towards protectionism. Studies suggest that completely shutting off trade could result in a 69% income loss for the poorest 10% of the U.S. population.

United States: NAFTA's Impact on Immigration

NAFTA was intended to reduce illegal immigration from Mexico to the U.S., but the number of Mexican immigrants in the U.S. increased significantly. Instead of decreasing, it more than doubled during certain periods, reaching around 9.4 million by 2000. One reason for this unexpected result was the peso crisis of 1994-1995, which caused a recession in Mexico.

Additionally, changes in corn tariffs didn't lead to more profitable crops, and many farmers gave up agriculture. Moreover, the Mexican government didn't fully invest in promised infrastructure, limiting the pact's manufacturing impact to the northern part of the country. Despite some temporary reversals, the expected reduction in immigration didn't occur. The outcome was different from the initial hope of NAFTA's impact on immigration.

United States: NAFTA's Impact on Trade Balances

NAFTA critics often highlight the U.S.'s trade balance with Mexico, where a significant deficit of $62.4 billion in merchandise trade was recorded in 2016, compared to a surplus of $1.7 billion in 1993. However, the growth in merchandise trade cannot be solely attributed to imports. Real exports to Mexico tripled from 1993 to 2016, increasing by 453%, while imports grew by 635%.

On the other hand, the U.S. maintains a positive balance in services trade with Canada, exporting $56.1 billion in 2015 and importing $28.7 billion. Although the merchandise trade balance is negative, with imports exceeding exports by $22.7 billion in 2017, the surplus in services trade outweighs the deficit. Overall, the U.S. enjoyed a total trade surplus with Canada of $2.4 billion in 2019. NAFTA appears to have improved the U.S.'s trade position with Canada, even though the countries had a free trade agreement since 1988, and the U.S.'s goods trade deficit with Canada was higher in 1987 than in 1993.

United States: Economy Impact of NAFTA

NAFTA had a minimal overall impact on the economy, according to reports from the Congressional Budget Office in 2003 and the CRS in 2017. While it increased the annual U.S. GDP slightly, the effect was negligible, representing only a few billion dollars or a tiny fraction of a percent.

The issue with NAFTA lies in its distribution of benefits and costs. Although the economy as a whole saw some improvement, certain sectors and communities faced significant disruptions. For example, when a textile mill closed, hundreds of jobs were lost in a town in the Southeast, while consumers enjoyed slightly cheaper clothes. The economic gain might be more noticeable at a broader level, but it's hardly felt by individuals. Similarly, while the overall economic loss might be relatively small in the big picture, it can be devastating for those directly impacted.

NAFTA & Mexico

In 1994, NAFTA brought hope to optimists in Mexico. It extended the 1988 Canada-U.S. Free Trade Agreement, becoming the first to connect an emerging market economy with developed ones. Mexico embraced significant reforms, shifting away from one-party state economic policies to embrace free-market principles. Supporters believed that integrating the country's economy with its wealthier northern neighbors would solidify these reforms, fostering economic growth, and eventually narrowing the gap in living standards between the three economies.

Mexico: Impact of NAFTA on the Economy

Immediately after NAFTA's implementation, Mexico faced a currency crisis, causing its local-currency GDP to shrink by 9.5% between 1994 and 1995. Despite President Salinas's expectation that emigration to the U.S. would decrease, it actually accelerated. The removal of corn tariffs further contributed to the exodus, with family farm employment falling by 58%, resulting in a net loss of 1.9 million jobs.

According to the Center for Economic and Policy Research (CEPR), Mexico's growth rate from 1994 to 2013 averaged just 0.9% per year, making it the 18th-worst performer among 20 Latin American countries. CEPR argues that if Mexico had maintained its growth rate from 1960 to 1980, it could have achieved per-capita output similar to Portugal's. However, this was not the case, and the country's poverty rate remained almost unchanged from 1994 to 2012.

Mexico: Economic Reforms and Political Changes

NAFTA appears to have locked in some of Mexico's economic reforms as the country refrained from nationalizing industries or incurring massive fiscal deficits after the 1994 to 1995 recession. However, these economic changes were not immediately accompanied by political differences. Jorge Castañeda, Mexico's former foreign minister during Vicente Fox Quesada's administration, asserted that NAFTA provided crucial support to the Institutional Revolutionary Party (PRI), which had been in power since 1929 until Vicente Fox, a member of the National Action Party, broke the PRI's streak by becoming president in 2000.

Mexico: Manufacturing and Employment

NAFTA brought some positive changes to Mexico. It turned the country into a major car manufacturing hub, attracting companies like General Motors, Fiat Chrysler, Nissan, Volkswagen, Ford Motor, Honda, Toyota, and others. This was possible due to the significant increase in U.S. foreign direct investment (FDI) in Mexico since 1993.

However, Mexico's overall FDI from all sources still lags behind other Latin American economies. The auto industry, leading the way, helped Mexico achieve a $101.4 billion trade surplus in goods with the U.S. in 2019, a notable improvement from the deficit before NAFTA. This growth also contributed to the emergence of a well-educated middle class. In 2013, Mexico had about 4.9 engineering graduates per 1,000 people, compared to 3.6 in the U.S., and by 2022, Mexican engineering students represented 20% of all engineering graduates globally.

Mexico: Economic Criticism of NAFTA

In 2013, Castañeda pointed out that the increase in Mexican imports from the U.S. led to lower consumer goods prices, which contributed to an overall improvement in prosperity. Despite this positive effect, he concluded that NAFTA had not fulfilled most of its economic promises. Castañeda proposed a more comprehensive deal that would cover energy, migration, security, and education, envisioning "more NAFTA, not less." However, the likelihood of such an expansion remains uncertain in the present day.

NAFTA & Canada

Unlike Mexico, Canada experienced a more modest increase in trade with the U.S. due to NAFTA. While it maintains a mild trade surplus with the U.S., it was surpassed by China as the largest supplier to the U.S. in 2007, and later by Mexico, which became the second-largest by 2015. Although Canada sells more goods to the U.S. than it buys, resulting in a $26.8 billion deficit in 2019, a significant services trade surplus of $29.32 billion helps balance things out.

Canada: Impact of NAFTA on FDI and GDP

Canada did benefit from a real increase of 404% in FDI from the U.S. between 1993 and 2013, and its real GDP per capita growth outpaced that of the U.S. from 1993 to 2015. Similar to the U.S. and Mexico, NAFTA didn't fully meet the extravagant promises of its Canadian supporters nor the worst fears of its opponents. However, the Canadian auto industry raised concerns about job losses to Mexico due to lower wages. For instance, when General Motors moved 625 jobs from an Ontario plant to Mexico in January, Unifor, Canada's largest private-sector union, attributed it to NAFTA. Jim Stanford, an economist representing the union, referred to it as a "manufacturing catastrophe in the country" in 2013.

Canada: Oil Exports

NAFTA's advocates often highlight Canada's increased oil exports as a positive outcome. In 1993, the U.S. imported $37.8 billion worth of crude oil, with 18.4% coming from Saudi Arabia and 13.2% from Canada By 2015, Canada's crude oil sales to the U.S. had notably risen to $49.8 billion, making up 41% of the U.S.'s total crude imports. During that period, Canada's oil sales to the U.S. experienced an impressive growth of 527%, solidifying Canada's position as the largest supplier of crude oil to the U.S. since 2006.

However, it's worth noting that Canada had been selling 99% or more of its total oil exports to the U.S. even before the free-trade agreement in 1988. In other words, NAFTA didn't seem to significantly open the U.S. market to Canadian crude; Canadians simply produced more. NAFTA had a mixed impact on Canada's economy. Although some feared Canada becoming a glorified 51st state, that scenario didn't materialize. On the other hand, Canada also couldn't close the productivity gap with the U.S. Despite the changes brought by NAFTA, the transformation was not as dramatic as predicted.

NAFTA's Global Economic Changes

Assessing NAFTA's impact is challenging due to the complexity of isolating its effects from other factors. While NAFTA was in effect, China's rapid rise as the world's top exporter and second-largest economy happened. In 1993, the U.S. imported only 5.8% of its goods from China, but by 2015, this number surged to 21%.

Researchers like Hanson, David Autor, and David Dorn found that increased import competition, especially from China between 1990 and 2007, contributed to a significant decline in US manufacturing employment, accounting for a quarter of the overall decline. Although they recognized that Mexico and other countries might also influence US labor-market outcomes, the primary focus was on China. It's important to note that China is not part of NAFTA despite joining the World Trade Organization (WTO) in 2001.

Furthermore, Japan's share of U.S. imports decreased from 19% in 1993 to 6% in 2015, even though Japan is not a participant in NAFTA either. These factors highlight the challenges of precisely measuring NAFTA's impact amid broader global economic changes.

Other Factors

Unrelated Issues

NAFTA is often unfairly blamed for various issues that may not be directly linked to it. For instance, a report in 1999 mentioned an Arkansas town's potential collapse, connecting it to NAFTA's impact on jobs lost to countries like Sri Lanka and Honduras. However, it's important to note that Sri Lanka and Honduras are not part of the agreement.

Evaluating NAFTA's Effects

Though NAFTA initiated a new generation of trade agreements globally, evaluating its specific effects is complicated due to rapid technological advancements. Over the years, real U.S. manufacturing output increased by 30% from 1993 to 2016, despite declining employment, which was largely influenced by automation.

North American Economy

Several significant events unrelated to NAFTA greatly influenced the North American economy, including the tech bubble burst, the September 11 attacks leading to stricter border crossings, and the 2008 financial crisis.

Scrapping NAFTA

While NAFTA might have had some impact on certain industries, its potential scrapping is likely influenced by factors like automation, China's rise, and the aftermath of these major events rather than its inherent merits or flaws.

NAFTA’s Advantages & Disadvantages

USMCA: A New Trade Agreement for North America

In 2018, the United States, Mexico, and Canada replaced their previous agreement, NAFTA, with the United States-Mexico-Canada Agreement, also known as NAFTA 2.0. The USMCA was ratified by all three countries in 2020. Notable provisions include improved access for American farmers to the Canadian dairy market, requirements for cars to have a significant portion of their parts made in North America to qualify for tariff-free status, and an extension of copyright terms. The USMCA is set to expire after 16 years, with a review every six years to determine if an extension is necessary. This comprehensive trade agreement aims to foster economic cooperation and growth among the three nations.

Conclusion

The impact of NAFTA on its participant countries has proven difficult to gauge. Some view it as a success, as increased trade and financial flow have been experienced by the United States, Mexico, and Canada. However, NAFTA has also faced criticism for contributing to growing unemployment in the U.S. due to the elimination of manufacturing jobs, leading to workers moving into lower-paying and less secure positions. The final judgment on NAFTA's overall success or failure hinges on how citizens and legislators in the participating countries address and assess its shortcomings in the years to come.