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NAFTA SOS: In Defense of a Good Deal
A look at how NAFTA creates benefits for the United States, Canada, and Mexico, including beyond trading relationships
After calls with Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto, the Trump administration this week backed away from imminent withdrawal of the North American Free Trade Agreement (NAFTA) in favor of renegotiating the treaty. While the White House announcement is reassuring, the continued skepticism of NAFTA’s value is troubling.
U.S. consumers and workers have, on net, reaped immense benefits since the beginning of NAFTA. In 2014, the U.S. traded over $1.3 trillion worth of goods and services with its two NAFTA partners, equal to 7.6 percent of U.S. GDP. This figure has increased by 166 percent in real terms — from a little over $500 billion — since 1990.
Perhaps surprisingly, over the same time span annual U.S. goods exports (think manufacturing) to the rest of the world have nearly doubled. They have surged from around $500 billion in 1990 to nearly $1 trillion in 2015.
Without the ability to utilize supply chains that extend into Canada and Mexico, U.S. exporters would face a severe disadvantage when trying to compete against our competitors in Asia and Europe, who use similar supply chains to manage costs and compete globally. In fact, “American” cars may have ceased to exist without NAFTA.
Critics of NAFTA like to blame the deal for the loss of U.S. manufacturing jobs over the past two decades. However, such criticism ignores the fact that robots, not Canadians and Mexicans, are responsible for most of the job losses in the U.S. manufacturing sector.
Despite first impression, this is not a bad thing: the current volume of U.S. industrial production is 42 percent higher than at the beginning of the 1990s. That growth is only slightly less than Mexico’s during the same time span, and Mexico started from a much lower base.
Furthermore, since 1990 hourly earnings in U.S. manufacturing have increased by 53 percent. The U.S. manufacturing sector is still achieving record levels of productivity, as fewer workers use sophisticated machinery and a high level of skill to produce more. What is more, the U.S. Chamber of Commerce reports that 14 million U.S. jobs depend on trade with Canada and Mexico, jobs that could be threatened with the elimination of NAFTA.
NAFTA also creates substantial benefits for all three countries that extend beyond the sphere of trade. NAFTA has driven a process of converging environmental standards, safety regulations, and rules of business ethics that has improved working and living conditions in all three countries. These common standards signal credibility to the rest of the world, which has allowed North America to attract growing levels international investment since the beginning of NAFTA.
For example, between 1990 and 2014, Mexico’s inward stock of foreign direct investment (FDI) from North America grew by over 500 percent, from $19 billion to $190 billion. During the same time, Mexico’s inward stock of FDI from the rest of the world expanded by an even greater 915 percent, from $21 billion to $219 billion.
Thanks to free trade, America has been able to share in the success from the growth of Mexico’s consuming class. Trade between the two partners is hardly a one-way street – and in fact, the U.S. benefits immensely from its ability to sell goods to Mexico.
In 1990, Mexico was the destination for only about 7 percent of total U.S. goods exports. By 2015, that percentage had risen to nearly 16 percent. Canada and Mexico are the top two destinations for U.S. exports, together accounting for more than a third of the total.
On top of all that, an estimated full 40% of the content in U.S. imports from Mexico, and 25% of the content in U.S. imports from Canada, actually represents value produced in the U.S. Those numbers highlight the prevalence of production sharing and the interdependent, mutually beneficial nature of North American supply chains.
Efforts to retreat from the global marketplace will only undercut the gains the U.S. has achieved from free trade, like more affordable consumer goods and the ability to capture competitive gains from specialization across the North American continent. Instead of reverting to disproven and antiquated methods of protectionism, methods that stifle innovation and the free flow of goods, services, and capital, policymakers should focus on expanding retraining and adjustment programs that prepare workers to thrive in a globalized, technologically-advancing economy.
Note: All monetary figures are in inflation-adjusted 2015 U.S. dollars.
We invite you to visit our North American Scorecard and Integration website to learn more about how NAFTA has generated economic prosperity throughout the North American continent by way of increased trade, investment, output, productivity, and employment.