Has NAFTA – the North American Free Trade Agreement – been a disaster for working Americans? Barack Obama and Hillary Clinton seem to think so; they have been attacking it. Obama has claimed that “one million jobs have been lost because of NAFTA.”
NAFTA does not deserve these attacks.
What, after all, is NAFTA? And what effects has it had? The NAFTA treaty was negotiated in 1991-93, under the first President Bush and Bill Clinton, and Clinton fought hard for congressional approval of the treaty. Since it came into force in January 1994, it has eliminated or reduced many – but not all – tariffs and other trade barriers between the U.S., Canada and Mexico. It also has reduced cross-border barriers to capital investment by each country.
Many economists strongly support free trade, including agreements like NAFTA that implement free trade principles within one region of the world. That support is rooted in the wisdom of David Ricardo, the 19th century British economist who neatly explained free trade’s benefits.
Countries differ in their ability to produce different goods and services, Ricardo noted. If each country tried to produce everything it consumes, it would produce some goods very inefficiently. For example, the U.S. could produce coffee beans only at very high cost. But if each country specializes in the goods it produces most efficiently, then sells some of these goods to other countries, it can earn the foreign currency it needs to import goods it cannot produce efficiently. The U.S. exports corn and airplanes, so it can import coffee and TV sets.
Tariffs and other trade barriers hamper the free flow of goods across borders, preventing countries from specializing in the goods they produce most efficiently. Under NAFTA’s lower tariffs, U.S. trade with Canada and Mexico has risen rapidly.
As imports from Canada and Mexico have risen, some workers have lost their jobs. But as our exports have risen, our export industries have created jobs. The net impact of these job gains, offset by the losses, is believed to be small. In fact, studies have made crude estimates – the data do not allow for precision – that NAFTA has created about 40,000 jobs per year. The estimate of a net loss of 1 million jobs, cited by Obama and others, is fundamentally flawed.
If NAFTA has been a disaster for Americans, we would expect – at best – economic stagnation. But the economy has been far from stagnant: Since 1993, when NAFTA was passed, total U.S. employment has grown from 120 million to 146 million, a gain of 26 million that dwarfs even the most pessimistic estimates of job losses due to NAFTA. Meanwhile, our unemployment rate has fallen from 6.9 percent to 5.1 percent.
In Maine too the labor market has improved. Since 1993, employment has grown by 82,000 while unemployment has dropped from 6.6 to 5.0 percent.
Economic performance in all three countries has been good. Since 1993 real output per person has risen 32 percent in the U.S., 37 percent in Canada, and 26 percent in Mexico.
To be sure, NAFTA is not the major cause of the good U.S. economic performance – the Mexican and Canadian economies are small compared with our economy, so freer trade with them could not have affected us hugely. But NAFTA has surely helped. And our rapid job growth has no doubt helped unemployed workers find new jobs, including workers who lost jobs due to NAFTA.
Sadly, Obama and Clinton not only have attacked NAFTA, they have sometimes opposed free trade generally. So let’s broaden our view beyond the NAFTA countries and also look at a longer time span. Since World War II, the world has gradually shifted toward free trade: average import tariffs have fallen dramatically in the U.S. and almost all other countries, and U.S. exports and imports both have risen rapidly.
A giant expansion of the U.S. economy has accompanied this move toward free trade. Since 1950, total employment has more than doubled and real output per person has more than tripled. Family incomes, after accounting for inflation, have more than doubled.
Freer trade also leads to lower consumer prices. We enjoy buying inexpensive clothing from China – but higher import tariffs would lead to higher prices for Chinese goods, and if tariffs were raised dramatically they simply would not be imported at all.
A number of other factors, of course, underlie our remarkable post-1950 economic growth, but certainly the move toward freer trade has contributed significantly.
John McCain has championed NAFTA and free trade. While most economic policies of the two Democrats are superior, in my view, to McCain’s, the Democrats’ trade policies are an important exception.
Though it would be politically difficult, especially in states like Pennsylvania and Ohio, Obama and Clinton should recognize that free trade helps American workers and consumers. Let’s hope they wake up and smell the coffee, even if the beans were grown in El Salvador or Colombia.
Edwin Dean, an economist and seasonal resident of Vinalhaven, writes monthly about economic issues.
Comments
comments for this post are closed