NAFTA's Balance Sheet
Immediate pluses of the trade agreement for the US in terms of job creation may be thin, but the negatives raised by critics are thinner
THE debate among campaigning US politicians this fall will almost inevitably fail to come to grips with many of the critical issues facing the nation. One concrete issue they will be forced to address, however, will be the future of the North American Free Trade Agreement (NAFTA), scheduled to be considered by the newly elected Congress. Opponents are already attacking the agreement as a sellout of labor and an assault on the environment; advocates argue that NAFTA is the antidote for decaying US industr ial competitiveness.Skip to next paragraph
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As always in politics, the reality is somewhere between.
The most common criticism of NAFTA will be that the United States will lose jobs to Mexico because of that country's lower wages. Of course, if lower wages were the only determinant of investment decisions, everybody would have long since moved their plants to Ethiopia or Haiti.
Labor costs do matter to some extent, but the simple-minded version of the employment argument ignores the high likelihood that more open borders and faster growth will tend to push up Mexican wages, especially for skilled workers, and that labor costs are a steadily declining share of production costs in most industries. Moreover, critics tend to confuse gross and net. On any analysis, some jobs will be lost and others will be created as a result of NAFTA. On balance, most analysts agree more jobs will be created than lost.
Since everybody agrees that NAFTA is likely to increase Mexican growth, that Mexican growth is relatively import intensive, and that three-quarters of Mexico's imports come from the US, then US exports to Mexico will inevitably grow faster in the next years if the agreement is ratified. That means US export industries will hire more workers. This is already happening: Since 1988 exports to Mexico have nearly tripled, creating around 250,000 new American jobs.
This is good news; the bad news is that relatively few jobs are involved. In a civilian labor force of 118 million, net job creation of even several hundred thousand as a result of NAFTA, which is what seems likely, will scarcely be noticed, except, of course, by those who actually get the jobs.
For better or worse, this is the central economic reality: Mexico is so much smaller than the US that the immediate impact on the American economy from NAFTA is certain to be slight at best. NAFTA can bring some limited benefits to particular US industries or firms and will undoubtedly damage others, but it will produce spectacular immediate results for none.
The US economy is almost 20 times larger than Mexico's, and US per capita income is 10 times as great (roughly $20,000 versus $2,000). Although Mexico is growing faster, the gap is enormous and will remain so for years to come. Indeed, if either country should be worried about being overwhelmed economically, it should logically be Mexico.
Some opponents of NAFTA have come to understand this and have retargeted their criticism. The problem with NAFTA, they argue, is that the agreement as drafted fails to cushion the impact on whatever workers will be displaced, to improve the rights of Mexican workers, to solve severe industrial pollution problems in Mexico and along the border, or to build the economic infrastructure needed to raise US international competitiveness.
To a considerable extent these criticisms are disingenuous, since they really are aimed at broader issues of national economic strategy, not the relationship between the US and Mexico. To the extent the issue is NAFTA, however, there is considerable evidence that the faster a country grows the more it can afford to spend on the environment and on worker health and welfare.
When the Mexican economy contracted during the debt crisis, wages fell dramatically and pollution got measurably worse. Since the economy has begun to recover, jobs are being created, wages are rising and spending on environmental protection is increasing. Indeed, the competition among companies for skilled labor is becoming fierce.
Some politicians are using the NAFTA debate as a stalking horse for their efforts to increase national job training programs, expand infrastructure spending, and mandate higher environmental standards. These are interesting proposals, but linking them to NAFTA is an artifice. What is the logic of a retraining program for workers displaced by the movement of factories to Mexico, but not for the movement of factories to China or Malaysia? More importantly, the economic dislocation associated with reduced d efense procurement will be many times greater than job losses to Mexico and with a less immediate and less concrete offset.
In the final analysis, the economic argument for NAFTA is relatively simple. In the short run it is a nearly risk-free operation for the US, with some upside potential and the certain advantage of promoting a healthier economic climate in a neighbor with whom the US shares a 2,000 mile border. In the medium run it could contribute to resuscitating US competitiveness by expanding the market for US produced goods, encouraging the rationalization of US manufacturing on a regional basis, and forcing American
industrialists - and perhaps a few politicians - to think about coping with, rather than hiding from, global competition.
If NAFTA does no more than this, the results would be a significant and lasting improvement in American economic welfare.