NAFTA: evaluating the agreement

Free-trade deal neither a panacea nor a disaster

WASHINGTON ”” The beauty, and the curse, of NAFTA is that people have come to see exactly what they want to see in the historic 14-year-old pact.

To its greatest boosters, the North American free-trade agreement is a wondrous jobs- and investment-creation machine that has brought vast riches to all three partners: Canada, the United States and Mexico.

To its harshest critics, however, the deal created a giant manhole that continues to suck millions of good U.S. jobs to low-wage Mexico and elsewhere.

“NAFTA has become a fulcrum on which the whole body of trade agendas, and globalization, has come to rest,” argued Gary Hufbauer, a former top U.S. Treasury official and now a senior fellow at the Peterson Institute for International Economics in Washington. “It’s like something out of Alice in Wonderland.”

The agreement has become a reflection of all the biases and preconceived notions about trade. And yet it is neither a panacea, nor a disaster.

The truth, as is often the case, lies somewhere between these two extremes.

That’s been lost in the rhetorical heat of the U.S. presidential campaign, where the two surviving Democratic candidates are now desperately fighting for delegates in the economically battered and heavily unionized state of Ohio.

“It’s distressful,” lamented Sidney Weintraub, a former top U.S. diplomat and now an academic at the Center for Strategic and International Affairs in Washington. “I assume [Hillary Clinton and Barack Obama] think it’s good politics.”

Both candidates have suggested they would scrap NAFTA if they can’t get a better deal for U.S. workers.

Ohio voters, Mr. Weintraub points out, are a receptive audience for that kind of NAFTA-bashing because the blue-collar state has a clutch of industries – autos, steel and tire-making – that have suffered heavy job losses. In the past five years alone, Ohio has lost 185,000 factory jobs, most of those union jobs.

And yet even Ohio doesn’t prove the case of NAFTA critics. Since the deal was signed in 1994, its jobless rate has fallen, factory output has gone up and exports have soared (even to Mexico). Ohio’s manufacturing output is 6 per cent higher than it was in 1992. Exports have grown by nearly 10 per cent every year since.

The numbers are equally compelling for North America as a whole.

Merchandise trade between the three countries more than doubled between 1993 (the year before the deal went into effect) and 2006, from $297-billion (U.S.) to $883-billion.

All three countries have created more jobs and grown more rapidly in the years since NAFTA than in those before the deal. From 1994 to 2006, the Canadian economy expanded an average of 4.1 per cent, the United States 3.8 per cent and Mexico 3.5 per cent.

The NAFTA partners did more trade with each other and with the rest of the world. They do $1.7-million in trade among themselves every minute.

The Bush administration estimated recently that a U.S. family of four gains anywhere from $350 to $930 a year because of NAFTA from the growing economy and lower prices on imported goods.

Since 1993, the U.S. economy has generated 25 million new jobs. The average U.S. jobless rate has been 5.1 per cent in the NAFTA era, compared with 7.1 per cent in the 13 years before the deal.

The gains are even more pronounced in Canada. Its economy has grown more rapidly, while its trade surplus with the United States has soared.

The trouble with this analysis is that it’s static. It simply lays the economic statistics over the NAFTA time frame.

The deal did not occur in a vacuum. North America, and particularly Canada and the United States, was well on its way to freer trade and greater economic integration before the deal. Likewise, the 1990s witnessed a massive technological and globalization revolution, which shifted jobs between regions, countries, industries and skills. Many jobs vanished, and many more were created.

The Peterson Institute’s Mr. Hufbauer, who has studied the impact of NAFTA for years, said the deal undeniably expanded U.S. trade with Canada and Mexico, with benefits flowing to all three. He added that the deal has had a minimal impact on investment in all three countries.

The most controversial scorecard on NAFTA has always been jobs. And on that front, there has been a net benefit for the United States, but much smaller than most people think. Mr. Hufbauer said NAFTA has created a net gain of 60,000 U.S. jobs a year in an economy that creates and destroys 16 million jobs every year.

In terms of relative beneficiaries, Mr. Hufbauer ranks Canada first, Mexico second and the United States third.

It’s worth remembering that no matter how nasty the NAFTA debate gets in the United States, the vitriol is seldom directed at Canada.

“It’s not Canada they are after,” Mr. Weintraub said of Mr. Obama and Ms. Clinton. “It’s the low-wage countries they are concerned about.”

That’s probably a blessing for Canada. If Ohio’s economic problems were the result of trade, the culprit almost certainly would be Canada, its largest trade rival. In 2006, Ohio had a $3.3-billion merchandise trade surplus with Canada on $33.3-billion in two-way trade. That vastly exceeds its trade with Mexico.