NAFTA Effects Research Paper

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NAFTA

The United States signed its first free trade agreement (FTA) with Canada in 1988, and soon began pursuing a subsequent deal with NAFTA that would replace and expand that deal. NAFTA came into force in 1994, and by 2008 all of the duties and restrictions that were included in the deal were eliminated. The agreement was intended to increase trade between the three nations, building on the successes of that initial deal with Canada. This paper will look back at the first 20 years of NAFTA and discuss the impacts of the deal on the American economy. Particular attention will be paid to the city of San Antonio, located in the south of Texas, less than 150 miles from the Mexican border. This geographic positioning gives San Antonio a competitive advantage as a hub for U.S.-Mexico trade, so it is important to examine the issue of how NAFTA has affected business in San Antonio.

The Objectives of Free Trade

Free trade is a manifestation of the neoliberal politics of the 20th century, wherein nations believe that cooperation with each other will ultimately build a stronger world. There is some debate about whether there is a difference between political neoliberalism, which take forms like the EU and the UN, and economic neoliberalism, embodied by free trade agreements (Shah, 2010). Free trade agreements, and economic neoliberalism in general, are rooted in the belief that part of the path to peace and prosperity lies in creating wealth, and that the greatest wealth can be created through the removal of trade barriers. Both classical and liberal economic orthodoxy sees government intervention in markets as a source of market failure, and free trade agreements effectively reduce the role of governments and national borders in the exchange of goods and services (Bhagwati, 2014; Krugman, 1987).

Thus, free trade agreements are brought into place in order to create larger zones where trade is unfettered. The United States was already one of the largest free trade economies in the world prior to NAFTA, but adding Canada and then Mexico increased the power of the trading bloc, making it by far the largest in the world. By creating freedom for movement of goods and services between the three largest countries on the continent, the three largest economies, and with the two countries that border the U.S. By land, the American government believed that it would be able to increase the wealth of the American people.

The way that free trade is supposed to work is that where there are fewer trade barriers, trade will necessarily gravitate towards the nation that has the comparative advantage within that trade union. This will render the economic system more efficient, and more efficient deployment of resources will result in the creation of an overall higher level of wealth, which is essentially divided among the participants (Boudreaux, 2014). NAFTA would remove sources of market failure, bringing about greater economic efficiency.

The challenge for individual companies is that some benefitted from the trade barriers -- they were the benefactors of economic inefficiency, and a move to efficiency would threaten their business. Thus, the benefits of NAFTA were always going to be distributed unevenly among geographies and industries. This reality poses a challenge for cities, especially one like San Antonio, where NAFTA could be expected to create significant opportunity, but also significant challenges -- the outcome of NAFTA on any one city or sector being difficult to predict.

The benefits of free trade are therefore typically reported in aggregate. There are likely to be sectors that have struggled as the result of free trade, ones that perhaps received abnormal benefit from the inefficiencies prior to free trade, or ones that were slow to adapt. For the city of San Antonio, it was critical given its position so close to Mexico that it find ways to adapt to free trade and reap economic benefit from it; these efforts will be outlined later in this paper.

Overall Benefits of NAFTA

The Office of the Trade Representative (USTR, 2014) has all but declared NAFTA an enormous success. It notes that U.S. goods and services trade within NAFTA now total $1.2 trillion, which is bigger than the entire Mexican economy and not much smaller than the Canadian economy. U.S. exports to NAFTA countries totaled $597 billion in 2012, and imports from NAFTA countries were $646 billion. This does represent a trade deficit, but that is not inherently bad. First, the U.S. trades with many other countries -- a deficit with specific ones is not necessarily a problem.

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The other reason is that when the U.S. imports goods from Canada and Mexico, that is because those goods are cheaper and better than if they were produced in the United States.

The two NAFTA countries are the top two export destinations for U.S.-made goods, with Canada purchasing $300.3 billion and Mexico purchasing $226.2 billion. Machinery, vehicles, electrical machinery, mineral fuel and oil, agricultural products and plastic were among the leading export categories (USTR, 2014). The two NAFTA countries ranked #2 and #3 in terms of countries that supply goods and services to the United States, behind China. Major imports are oil, vehicles, electrical machinery, machinery and agricultural products.

According to the 2012 data, foreign direct investment (FDI) from NAFTA countries was at $452.5 billion, up 7.1% from 2011 levels (USTR, 2014). This total amounts to around a quarter of total FDI inflows that the U.S. receives from all nations. Despite fears of capital flight, the U.S. receives more inflows than does Mexico by a wide margin, and U.S. outflows to Mexico could not be a significant amount of total U.S. FDI outflows.

What all this means is that the United States has in general been a beneficiary of NAFTA. The country has increased its trade significantly, and NAFTA has made the U.S. An even more attractive destination for foreign direct investment. There is no evidence that there has been a substantial capital flight to Mexico. What NAFTA has done is that it has been able to leverage the power of comparative advantage to improve the volume and value of trade between these three countries.

There is another way to evaluate NAFTA, and that is on the human level. NAFTA has always had its opponent among those who stood to suffer ill-effects from free trade, by losing their privileged positions and being unable to adapt. The reality is that there were always going to be such casualties, and that they were going to exist in all three countries. Typical opposition to NAFTA comes loaded with anecdotal evidence, rather than evidence from across the entire economy. One such argument (Burke, 1993) prior to NAFTA predicted massive capital flight to Mexico (which never materialized relative to gains made elsewhere) and on the argument that NAFTA was designed to protect North America from Europe. Moving manufacturing to low-wage Mexico in particular would erode the manufacturing employment base in the U.S. The reality is that China, not Mexico, has emerged as America's low cost production center, and that aside from during recession, unemployment has generally been low in the U.S. It was that way during a boom under Clinton and again during George W. Bush's second term. Where employment has been hurt it was nothing to do with the impacts of NAFTA. It could be argued that the real wage has not gained since the late 1970s, but if that is the case then this is not an argument against NAFTA or even free trade in general, as NAFTA was still fifteen years away. There are negative economic issues that should be of concern to Americans, but they do not stem from NAFTA on aggregate, but from other policies and factors more directly applicable.

External bodies have also sought to examine the effects of NAFTA on the U.S., in case the USTR is not considered trustworthy, as part of the Executive branch that strongly supports free trade initiatives. Caliendo and Parro (2014) found that Mexico was the greatest beneficiary of NAFTA, its welfare increasing by 1.31%. The United States saw only modest improvement in welfare, at 0.08% and Canada actually suffered ill-effects. The latter point is not surprising, since it already had the agreement it wanted with the U.S. That the U.S. did not gain much by these scholars' measures is more surprising. They found that interbloc trading increased by 41% with the U.S., and given the increases in both Canada and Mexico it is safe to say that almost all of the U.S. increase in trade was with Mexico. The benefits of NAFTA, therefore, are likely to be disproportionally along the southern border.

An independent study on wages showed that real wage growth in the U.S. has suffered during the time period in which NAFTA has been in place, and tied this to the vulnerability of local industry in those regions to Mexican imports. The authors therefore are seeking to make a case that part of the real wage stagnation in the United States is….....

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