NAFTA's Real Economic Impact

The recent Democratic primary campaign in Ohio made the North American Free Trade Agreement, or NAFTA, a central issue in the discussion of the impact of free trade and global economy on local economies. In particular, both Hillary Clinton and Barack Obama blamed NAFTA for job loss, wage depression, and general economic decline. In response, the likely Republican candidate, John McCain, strongly supported NAFTA. It appears that NAFTA will be a contentious issue in the general election no matter who wins the Democratic nomination.

The real question is what exactly has been NAFTA's real economic impact on the the US economy. The answer: much less impact than either its supporters would claim or its detractors would decry.

Since NAFTA is fundamentally a free trade agreement, it would appropriate to look at what's happened to trade among the three countries (Canada, Mexico, and the US). There is no doubt that since NAFTA took effect in January 1994 intra-North American trade has tripled. Today, trade with NAFTA partners now represents more than a third of all US trade and more than 80 percent of Canadian and Mexican trade. Clearly, NAFTA's free trade objectives have been a huge success.

But at what price, ask the skeptics. Here is where things get a lot more complicated to measure and explain. First of all, even with trade numbers it is impossible to assign a direct causation to NAFTA because trade was rapidly increasing among the three participants well before 1994. It is even more difficult to measure the impact of such a complex agreement on such key issues as US job loss and wage decline. What we do know is that during the period since NAFTA went into effect many more jobs were created in the US than lost. And on the subject of wage decline, the statistics (from the US Trade Representative office) show that inflation-adjusted US wages rose 19.3 percent between 1993 and 2007. Wages rose only 11 percent in the fourteen years prior.

So it appears that at the macro level, NAFTA was probably a net contributor to both jobs and wage increases. Of course, it is at the micro or individual level where the impact is being felt. What happened during the past 14 years is that wages have not kept up with rapidly increasing labor productivity and, as a result, inequality has risen sharply in recent years. This has been particularly felt in the manufacturing sector. Today the US manufactures more goods than in 1994 but with many fewer workers. NAFTA sped up structural changes that were already well underway as part of the productivity revolution and globalization of the American economy.

The candidates have missed a huge opportunity to level with and educate the American people about the realities of what NAFTA means in the larger global context. Among the things that need to be pointed out are:

• Positive, long-term economic change is often accompanied by job-market disruptions.

• The NAFTA agreement represents the politicians catching up with the the trade and investment trends that were well established for decades prior to 1994.

• Tinkering with the NAFTA agreement will do nothing to address the real issues of manufacturing job loss and rising income disparities.

• Opting out of NAFTA is not a real option and provides only an illusion of a return of manufacturing jobs that are, in fact, forever lost.

At the same time, there does need to be thoughtful adjustments to all free trade agreements. The anger against trade liberalization in general and NAFTA in particular is real and require serious responses. Among the more constructive proposals currently circulating are:

• A real strengthening of the US Trade Adjustment Assistance job retraining program for workers who have indeed lost jobs to off-shore manufacturing

• Implementation of a wage insurance program to protect workers who face sustained long-term wage loses

• Consider a form of trade adjustment funding in future trade deals and perhaps even with Mexico to fund better educational systems, infrastructure development, and other critical investments to stimulate economic growth in partner countries.

The US has approached free trade as an ideology rather than a strategy. Supporters must recognize that free trade, in and of itself, will not solve the serious disruption and dislocation issues caused by the rapidly globalizing economy. Detractors must also accept that free trade has enormous benefits all participants but requires a new structure that accomplishes the larger development objectives.