NAFTA and the USMCA: Weighing the Impact of North American Trade

Mexican commercial trucks cross the border into the United States at Laredo, Texas.
Mexican commercial trucks cross the border into the United States at Laredo, Texas. (Josue Gonzalez/Reuters)

bob体育网址President Trump reached a deal with Canada and Mexico to restructure the North American Free Trade Agreement, hoping a new trilateral accord will reinvigorate the U.S. manufacturing sector.  

Last updated July 1, 2020

Mexican commercial trucks cross the border into the United States at Laredo, Texas.
Mexican commercial trucks cross the border into the United States at Laredo, Texas. (Josue Gonzalez/Reuters)
Backgrounder
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bob体育网址The North American Free Trade Agreement (NAFTA) was a three-country accord negotiated by the governments of Canada, Mexico, and the United States that entered into force in January 1994. NAFTA eliminated most tariffs on products traded between the three countries, with a major focus on liberalizing trade in agriculture, textiles, and automobile manufacturing. The deal also sought to protect intellectual property, establish dispute resolution mechanisms, and, through side agreements, implement labor and environmental safeguards.

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bob体育网址NAFTA fundamentally reshaped North American economic relations, driving unprecedented integration between the developed economies of Canada and the United States and Mexico’s developing one. In the United States, NAFTA originally enjoyed bipartisan backing; it was negotiated by Republican President George H.W. Bush, passed by a Democratic-controlled Congress, and was implemented under Democratic President Bill Clinton. Regional trade tripled under the agreement, and cross-border investment among the three countries also grew significantly.

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Yet NAFTA was a perennial target in the broader debate over free trade. President Donald J. Trump says it undermined U.S. jobs and manufacturing, and in December 2019, his administration completed an updated version of the pact with Canada and Mexico, now known as the U.S.-Mexico-Canada Agreement (USMCA). The USMCA won broad bipartisan support on Capitol Hill and entered into force on July 1, 2020. 

How did NAFTA fit into the broader debate over trade policy?

When negotiations for NAFTA began in 1991, the goal for all three countries was the integration of Mexico with the developed, high-wage economies of the United States and Canada. The hope was that freer trade would bring stronger and steadier economic growth to Mexico, by providing new jobs and opportunities for its growing workforce and discouraging illegal migration. For the United States and Canada, Mexico was seen both as a promising market for exports and as a lower-cost investment location that could enhance the competitiveness of U.S. and Canadian companies.

The United States had already completed a free trade agreement (FTA) with Canada in 1988, but the addition of a less-developed country such as Mexico was unprecedented. Opponents of NAFTA seized on the wage differentials with Mexico, which had a per capita income  [PDF] that of the United States. U.S. presidential candidate Ross Perot argued in 1992 that trade liberalization  a “giant sucking sound” of U.S. jobs fleeing across the border. Supporters such as Presidents Bush and Clinton countered that the agreement  hundreds of thousands of new jobs a year, while Mexican President Carlos Salinas de Gortari saw it as an opportunity to modernize the Mexican economy so that it would “.”   

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NAFTA's goal was the integration of Mexico with the developed economies of the United States and Canada.

bob体育网址NAFTA also ushered in a new era of FTAs, which proliferated as the World Trade Organization’s (WTO) , and it pioneered the incorporation of labor and environmental provisions, which have become  [PDF] in subsequent FTAs. The USMCA achieved stronger enforcement mechanisms for labor provisions than the original deal, leading the AFL-CIO, the largest collection of U.S. labor unions, to support the pact—a rare endorsement from a group that heavily criticized NAFTA.

Economists largely agree that NAFTA benefited North America’s economies. Regional trade  [PDF] over the treaty’s first two decades, from roughly $290 billion in 1993 to more than $1.1 trillion in 2016. Cross-border investment also surged, with U.S. foreign direct investment (FDI) stock in Mexico increasing in that period from $15 billion to more than $100 billion. But experts also say that it has proven difficult to tease out the deal’s direct effects from other factors, including rapid technological change and expanded trade with countries such as China. Meanwhile, debate persists regarding NAFTA’s effect on employment and wages. Some workers and industries  as they lost market share due to increased competition, while others gained from the new market opportunities that were created. 

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How did NAFTA affect the U.S. economy?

In the years since NAFTA, trade between the United States and its North American neighbors more than tripled, growing more rapidly than U.S. trade with the rest of the world. Canada and Mexico are the two largest destinations for U.S. exports, accounting for more than one-third of the total. Most  [PDF] that the deal increased U.S. gross domestic product (GDP) by less than 0.5 percent, an addition of up to $80 billion to the U.S. economy upon full implementation, or several billion dollars of added growth per year.

Such upsides of trade often escape notice, because although the costs are  in specific industries such as auto manufacturing, the benefits of a deal such as NAFTA are distributed widely across society. NAFTA supporters  some fourteen million U.S. jobs rely on trade with Canada or Mexico, and that the  export-related jobs created annually by the pact pay 15 to 20 percent more on average than the jobs that were lost.

bob体育网址On the other hand, critics of the deal argue that it was to blame for job losses and wage stagnation in the United States, driven by low-wage competition, companies  to Mexico to lower costs, and a widening trade deficit. The Center for Economic and Policy Research’s (CEPR)  and the Economic Policy Institute’s argue that the surge of imports after NAFTA caused a loss of up to six hundred thousand U.S. jobs over two decades, though they admit that some of this import growth would likely have happened even without NAFTA.

Many workers and labor leaders such as NAFTA for the decline in U.S. manufacturing jobs. The U.S. auto sector  since 1994—a third of the industry—while Mexican auto sector employment spiked from 120,000 to 550,000 workers.

bob体育网址But other economists, including Gary Clyde Hufbauer and Cathleen Cimino-Isaacs of the Peterson Institute for International Economics (PIIE), have emphasized that increased trade produces overall gains for the U.S. economy. Some jobs are lost due to imports, but others are created, and consumers benefit significantly from falling prices and often improved quality of goods. Their  found a net loss of about fifteen thousand jobs per year due to the pact—but  for each job lost, in the form of higher productivity and lower consumer prices. 

Additionally, many economists assert that the recent troubles of U.S. manufacturing have little to do with NAFTA, arguing that domestic manufacturing was under stress decades before the treaty. Research by David Autor, David Dorn, and Gordon Hanson  [PDF] found that competition with China has had a much bigger negative impact on U.S. jobs since 2001, when China joined the WTO. Hanson, an economist and trade expert at the University of California, San Diego (UCSD), says that the steepest decline in manufacturing jobs—seventeen million to eleven million between 2000 and 2010—is mostly attributable to trade with China and underlying technological changes. “China is at the top of the list in terms of the employment impacts that we found since 2000, with technology second, and NAFTA far less important,” he says.

bob体育网址In fact, NAFTA helped the U.S. auto sector compete with China, says Hanson. By contributing to the development of cross-border supply chains, NAFTA lowered costs, increased productivity, and improved U.S. competitiveness. This meant shedding some jobs in the United States as positions moved to Mexico, he says, but without the pact, even more could . “Because Mexico is so close, you can have a regional industry cluster where goods can go back and forth. The manufacturing industries in the three countries can be very integrated,” Hanson says. These linkages, which have given U.S. automakers an advantage over China, would be much more difficult to achieve without NAFTA’s tariff reductions and protections for intellectual property.

CFR’s Edward Alden says that anxiety over trade deals has grown because wages  with labor productivity while income inequality has risen. To some extent, he says, trade deals have hastened the pace of these changes in that they have “reinforced the globalization of the American economy.”

How did it affect the Mexican economy?

bob体育网址NAFTA boosted Mexican farm exports to the United States, which have . Hundreds of thousands of auto manufacturing jobs have also been created in the country, and  [PDF] that the agreement increased productivity and lowered consumer prices in Mexico.

The pact catalyzed Mexico’s transition from one of the world’s most protectionist economies to one of the most open to trade. Mexico had reduced many of its trade barriers upon joining the , the precursor to the WTO, in 1986, but still had a  [PDF] of 10 percent.

Mexican policymakers saw NAFTA as an opportunity to both accelerate and lock in these  of the Mexican economy. In addition to liberalizing trade, Mexico’s leaders reduced public debt, introduced a balanced-budget rule, stabilized inflation, and built up the country’s foreign reserves. So although Mexico  [PDF] by the 2008 financial crisis due to its dependence on exports to the U.S. market—the next year, Mexican exports to the United States fell 17 percent and its economy contracted by over 6 percent—its economy bounced back relatively quickly, returning to growth in 2010.

But Mexico’s NAFTA experience suffered from disparities between the promises of some of its supporters—that the pact would deliver rapid growth, raise wages, and reduce emigration—and the deal’s outcomes. Between 1993 and 2013, a period when Latin America was , Mexico’s economy grew at an average rate of just 1.3 percent yearly. Poverty  at the same levels as in 1994. And the expected convergence of U.S. and Mexican wages , with Mexico’s per capita income  of just 1.2 percent annually in that period—far slower than Latin American countries such as Brazil, Chile, and Peru.

bob体育网址Unemployment , which some economists have blamed on NAFTA for exposing Mexican farmers, especially corn producers, to competition from heavily subsidized U.S. agriculture. A study led by CEPR economist Mark Weisbrot estimated that NAFTA put almost  [PDF] out of work, in turn driving illegal migration to the United States. (Migration to the United States, both legal and illegal, more than doubled after 1994, peaking in 2007. The flow reversed after 2008, as more Mexican-born immigrants began .)

Many analysts explain these divergent outcomes by pointing to the “” nature of Mexico’s economy, in which NAFTA drove the growth of foreign investment, high-tech manufacturing, and rising wages in the industrial north, while the largely agrarian south remained detached from this new economy. University of Pennsylvania economist  that Mexico’s rising inequality stemmed from NAFTA-oriented workers in the north gaining much higher wages from trade-related activity.

Ultimately, many experts say, Mexico’s recent economic performance has been affected by non-NAFTA factors. The 1994 devaluation of the peso drove Mexican exports, while competition with China’s  [PDF] likely depressed growth. Unrelated public policies, such as land reform, made it easier for farmers to sell their land and emigrate. UCSD’s Hanson  [PDF] that Mexico’s struggles have largely domestic causes: poorly developed credit markets, a large and low-productivity informal sector, and dysfunctional regulation.

What was the impact on Canada?

Canada saw strong gains in cross-border investment in the NAFTA era: Since 1993, U.S. and Mexican investments in Canada have tripled. U.S. investment, which accounts for more than half of Canada’s FDI stock,  [PDF] $70 billion in 1993 to more than $368 billion in 2013.

bob体育网址However, the most consequential aspect for Canada—opening its economy to the United States, by far Canada’s largest trading partner—predated NAFTA, with 1989 entry into force of the Canada-U.S. Free Trade Agreement (CUSFTA). Overall Canada-U.S. trade increased rapidly in the wake of Canada’s trade liberalization. Post-NAFTA, Canadian exports to the United States  [PDF] $110 billion to $346 billion; imports from the United States grew by almost the same amount.

bob体育网址Agriculture, in particular, saw a boost. Canada is the leading importer of U.S. agricultural products, and Canadian agricultural trade with the United States has more than tripled since 1994, as did Canada’s total agriculture exports to NAFTA partners.

bob体育网址Neither the worst fears of Canada’s trade opponents—that opening to trade would gut the country’s manufacturing sector—nor the highest hopes of NAFTA’s advocates—that it would spark a rapid increase in productivity—came to pass. Canadian manufacturing employment held steady, but the productivity gap between the Canadian and U.S. economies wasn’t closed: by 2017, Canada’s labor productivity remained at  [PDF] of U.S. levels.

bob体育网址Overall, Canada became more dependent on trade with the United States, relying on its southern neighbor for 75 percent of its exports. Other high-income countries tend to be much more diversified, rarely relying on a single partner for more than 20 percent. U.S. presidents have long shared warm relationships with Canadian prime ministers, but Trump has not hesitated to use this dependence as leverage. In the course of USMCA talks, he on Canadian auto parts if Ottawa did not agree to trade concessions.

What’s next for North American trade?

NAFTA was long a political target. In 2008, then presidential candidate Barack Obama responded to widespread trade skepticism among the Democratic base by promising to renegotiate NAFTA to include tougher labor and environmental standards. The Obama administration sought to address the issues with NAFTA in negotiations for the Trans-Pacific Partnership, a massive trade deal with eleven other countries including Canada and Mexico. The TPP was deeply unpopular—Hillary Clinton ultimately came out against the deal during her 2016 presidential run—and President Trump withdrew the United States from the TPP in one of his first acts in office.   

During the 2016 presidential campaign, both Trump and Senator Bernie Sanders, an independent, criticized NAFTA for bringing U.S. job losses. After entering office, Trump opened renegotiations to get a “better deal” for the United States. Trade remains a hot-button issue, with candidates in the 2020 racebob体育网址 divided over whether to support the USMCA.

bob体育网址Much of the debate among policy experts has centered on how to mitigate the negative effects of deals such as NAFTA, including whether to compensate workers who lose their jobs or provide retraining programs to help them transition to new industries. Experts say programs such as the U.S. , which helps workers pay for education or training to find new jobs, could help quell anger directed at trade liberalization.

bob体育网址Many economists argue that current TAA funding levels are  to address the increase in trade-related job losses. “There are pockets that have felt lots of pain,” says Hanson. “The existence of those pockets highlights our policy failures in helping regions and individuals adjust to the impact of globalization.”

There are pockets that have felt lots of pain. The existence of those pockets highlights our policy failures.
Professor Gordon Hanson, UC San Diego

Eschewing these policy proposals, Trump instead made good on his campaign promise to renegotiate NAFTA. He used tariffs as bargaining leverage throughout the process, applying import tariffs on steel and aluminumbob体育网址 in early 2018 and threatening to do the same with automobiles. Trump’s demands included more access to Canada’s highly protected dairy market, better labor protections, dispute resolution reform, and new rules for digital commerce.

In late 2019, the Trump administration won support from congressional Democrats for the USMCA after agreeing to incorporate stronger labor enforcement. In the updated pact, the parties : Rules of origin for the auto industry were tightened, requiring 75 percent of each vehicle to originate in the member countries, up from 62.5 percent; and new labor stipulations were added, requiring 40 percent of each vehicle to come from factories paying at least $16 per hour. A proposed expansion of intellectual property protections for U.S. pharmaceuticals—long a red line for U.S. trade negotiators—was sacrificed. The USMCA also significantly scales back the controversial investor-state dispute settlement mechanism, eliminating it entirely with Canada and limiting it to certain sectors with Mexico, including oil and gas and telecommunications.

As part of the deal, Canada agreed to allow more access to its dairy market and won several concessions in return. The USMCA will keep the Chapter 19 dispute panel, which Canada relies on to shield it from U.S. trade remedies. It also avoided a proposed five-year sunset clause, instead using a sixteen-year time frame with a review after six years.

In early 2020, the U.S. Congress approved the USMCA with large bipartisan majorities in both chambers, and the deal entered into force on July 1. Yet that the new rules of origin and minimum wage requirements are onerous and amount to government-managed trade. CFR’s Alden was more sanguine, saying the administration can take credit for restoring bipartisanshipbob体育网址 to U.S. trade policy. He warns, however, that “if this new hybrid of Trumpian nationalism and Democratic progressivism is what it now takes to do trade deals with the United States, there may be very few takers.”

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Resources

bob体育网址This 2017  [PDF] explains the history of NAFTA and its effects over twenty years.

Economists David Autor, David Dorn, and Gordon Hanson weigh the impacts of trade with China and Mexico on the U.S. labor market in this  [PDF] for the National Bureau of Economic Research.

In Foreign Affairs, former U.S. Trade Representative Carla Hills explains the . The issue also includes essays on views from  and .

The Economist examines NAFTA’s progress after two decades in .

This  from the University of Pennsylvania’s Wharton School evaluates the costs and benefits of NAFTA for the U.S. and Mexican economies.

bob体育网址Claims on both side of the NAFTA debate have been overblown, argue experts in this  [PDF] by the Peterson Institute for International Economics.

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