NAFTA at 10: an economic and foreign policy success - Worldview

USA Today (Society for the Advancement of Education), May, 2003 by Daniel T. Griswold

IN DECEMBER, 1992, leaders of the U.S., Canada, and Mexico signed the historic North American Free Trade Agreement. Although NAFTA remains a lightning rod for critics of free trade, by any measure used, it has been a public policy success.

As a trade agreement, it has delivered its principal objective of more trade. Since 1993, the value of two-way U.S. trade with Mexico has nearly tripled, from $81,000,000,000 to $232,000,000,000, growing twice as fast as U.S. trade with the rest of the world. Canada and Mexico are now America's number-one and -two trading partners, respectively, with Japan a distant third.

One reason NAFTA remains controversial today is that advocates and opponents alike were guilty a decade ago of exaggerating its impact. Advocates claimed it would create hundreds of thousands of jobs in the U.S. economy due to a dramatic rise in exports; opponents claimed far more jobs would be destroyed by a flood of imports entering the U.S. and a stampede of American companies moving to Mexico to take advantage of cheap labor. During a debate in 1992, presidential candidate H. Ross Perot famously predicted, "You're going to hear a giant sucking sound of jobs being pulled out of this country."

In reality, NAFTA was never going to have an overwhelming impact on the U.S. economy. America's Gross Domestic Product at the time was almost 20 times larger than Mexico's, and U.S. tariffs against Mexican goods already averaged a low two percent.

For the U.S., NAFTA was more about foreign policy than about the domestic economy. Its biggest payoff for America has been to institutionalize its southern neighbor's turn away from centralized protectionism and toward decentralized, democratic capitalism.

By that measure, NAFTA has been a spectacular success. In the decade since signing NAFTA, Mexico has continued along the road of economic and political reform. It has successfully decoupled its economy from the old boom-and-bust, high-inflation, debt-ridden model that characterized it and much of Latin America up until the debt crisis of the 1980s. In 2000, Mexico avoided an election-cycle economic crisis for the first time since the 1970s. Today, Mexico and Chile are the most-stable and dynamic economies in Latin America, as well as the two that have reformed most aggressively.

Just as important, the economic competition and decentralization embodied in NAFTA encouraged more political competition in Mexico. It broke the economic grip in which the dominant Institutional Revolutionary Party (PRI) held the country for most of the 20th century. It is no coincidence that, within seven years of NAFTA's implementation, Vicente Fox became the first opposition-party candidate elected president after 71 years of the PRI's one-party role.

With a decade of hindsight, it is difficult to find any evidence of a "giant sucking sound" of jobs, investment, and manufacturing capacity heading south.

American jobs. Trade is not about more or fewer jobs, but about better ones, and NAFTA is no exception. While competition from Mexico closed some U.S. factories, those closures have allowed resources to shift to sectors where American producers enjoy greater advantages in efficiency. That is the whole idea of trade--to increase production in sectors and industries where one can produce more efficiently. The result is a shift to better-paying jobs. Meanwhile, the overall level of employment is determined by such macroeconomic factors as monetary policy, labormarket regulations, and the business cycle.

For the record, the American economy created millions of new jobs after passage of NAFTA. Civilian employment in the U.S. grew from 120,300,000 in 1993 to 135,100,000 in 2001, an increase of almost 2,000,000 jobs per year. The unemployment rate fell steadily after the enactment of NAFTA, from an average of 6.9% in 1993 to under 4% in 2000. The unemployment rate jumped to 6% in 2002, but that was because of the relatively mild recession of 2001--one brought on not by NAFTA, but by rising interest rates and energy prices as well as a falling stock market.

Foreign investment. Despite predictions, NAFTA did not cause anything like an exodus of manufacturing investment to Mexico. U.S. investment in Mexico did rise after NAFTA, along with trade, but those flows are a trickle compared to what is invested domestically. In the eight years after the implementation of NAFTA, American manufacturing companies invested an average of $2,200,000,000 a year in factories in Mexico. That is a mere 1% of the $200,000,000,000 invested in manufacturing each year in the domestic U.S. economy.

The small overflow of direct manufacturing investment of Mexico has been overwhelmed by the net inflow of such investment from the rest of the world--an average of $16,000,000,000 a year since 1994, most of it from Europe and Japan. At the end of 2001, the stock of U.S. direct manufacturing investment in Mexico was $19,700,000,000, less than one-tenth the stock of U.S. investment in high-wage, high-standard Europe.