Is NAFTA The Best Thing That Has Happened To The Americas In The Last 20 Years?

I wonder how many of my friends in The City of Mexico, New York, Los Angeles, Dallas, or Toronto know that NAFTA will celebrate its 20th birthday in January 2014? Probably very few, and those who do know might say, with NAFTA’s detractors, that there is no cause of for celebration.

Yet every economist I know in Canada, Mexico, and the United States believes that NAFTA has been a spectacular success. It has created better jobs and higher incomes in all three partner nations.

But for those of you who are not economists, what exactly is NAFTA? The acronym stands for North American Free Trade Agreement. The goal of NAFTA is very simple and straightforward. It was crafted to eliminate barriers to investment and trade between the three partners. In simplified terms, NAFTA effectively eliminates the economic borders between the three countries and treats them as though they were really just one nation. Of course, the political borders remain.

The agreement came into force, after years of negotiation, on January 1, 1994. On that day, tariffs on something more than fifty per cent of Mexico’s exports to the United States and about 35 per cent of U.S. exports to Mexico went up in smoke. NAFTA created the world’s largest area of free trade, encompassing some 500 million human beings. It allowed us to move something like $1.75 trillion in goods and services around North America every year without tariffs.

It’s hard to get ironclad estimates, but I think most economists would agree that trade among the three partners has tripled or quadrupled since 1994. The numbers are staggering. A back-of-the-envelope calculation shows that Canada and Mexico today account for something like one third of two-way trade with the United States and that NAFTA has probably added something like $75 billion to U.S. gross domestic product.

Given this background, where and how did NAFTA get such a bad rap from politicians in America? The one-sentence answer to that question is that politicians (rather than economists) blame NAFTA for all sorts of local problems that need scapegoating.

There are four main themes cited by American elected officials, usually during campaigns. The first is that NAFTA destroys the American manufacturing base. Ross Perot, years ago, made a joke about buying broomsticks from Mexico rather than homemade broomsticks in America (the joke is that no one has made broomsticks in the U.S. for decades).

The United States, it is said, is no longer a place where “people make things,” and now unemployed steelworkers and carmakers have to go to computer school or take up lower-paying jobs in the service industries — “MacJobs,” they are called, with a sneer or a snarl.

Second, NAFTA has become a magnet for Mexican workers to move to the United States, which has caused problem number three, which is the catastrophic decline of U.S. wages as the labor pool has increased. And lastly, NAFTA has increased the U.S. trade deficit.

NAFTA’s critics rely mainly on anecdotes (not hard data) to make their points, but they are often quite persuasive, at least to the uninformed.

The idea that NAFTA has destroyed jobs anywhere is utter nonsense. Employment has demonstrably risen sharply in all three NAFTA partners, including the United States, though of course all of North America was hit by the recent recession.

So what about lower wages and fewer benefits? Even if one accepts that there has been no net decrease in the number of jobs (probably quite the contrary) isn’t it true that those positions pay less? More seriously, what about the threat that U.S. companies allegedly use to coerce unions to leave them alone: namely that they will move operations south of the border if the workers don’t toe the line.

The actual numbers show that the steepest shortfall in blue-collar compensation took place before NAFTA took effect. That’s because blue-collar jobs are moving to Asia, not to Mexico. Loss of blue-collar jobs probably has nothing to do with Mexico. In fact, four of the top five American states, in terms of volume of trade with Mexico, recorded wage increases far above the national average, led by Texas, which has a booming economy, California, and Arizona.

So what about immigration? NAFTA was never about immigration, it was about trade. It doesn’t address immigration.

Like the EU, North America has developed “soft” borders in the last twenty years as skilled professionals have more easily obtained travel documents and visas, where necessary. People move around North America far more today than they did in 1990.

There is no doubt that NAFTA has improved life in Mexico and that wages in Mexico have risen, but the United States has benefited also, sometimes in ways that don’t seem obvious. Food prices, for example, have fallen dramatically. Something like $32 billion in food imports came from Mexico last year, up from $28 billion in 2009. Without NAFTA, the price of fresh produce, fruits (excepting bananas) and beef would all be higher on American tables.

The bottom line is clear and it is hard to argue with: NAFTA was designed to eliminate tariffs, which are taxes that always add to the cost of cross-border goods. Those tariffs are now gone, they have been gone now for 20 years, and they are not coming back. Lower tariffs mean reduced inflation because the costs of imports fall. Further, NAFTA has greatly simplified the rules for international investment, especially for small businesses. NAFTA has also protected intellectual property.

So what happens next? How will we celebrate NAFTA’s 20th anniversary? Despite all the negativity about NAFTA, indeed, perhaps because of all the bad press, there will probably be a significant analysis and revision of NAFTA starting in 2014. NAFTA was “state of the art” when it was brought into this world in the early 1990s, but after two decades now it could probably use some renovation and refurbishing. The world has changed. Borders have changed. Levels of education have changed. People have changed.

But it’s clear where all this is going: we are moving toward a world of softer borders, a world in which we recognize just how small the planet is, and that will inevitably lead to more NAFTA-like agreements and more NAFTA-like thinking.

And that is surely for the good.

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