NAFTA countries shown on world map

The Most Over-hyped US Trade Deal Is About to Get a Makeover

Aug. 16, 2017
Rarely has a trade deal unleashed so much sound and fury.

More than 23 years in, and the North American Free Trade Agreement still hasn’t lived up to the hype.

President Bill Clinton pitched it as a jobs engine that would contribute to world peace. One of his opponents in the 1992 election, Ross Perot, predicted it would trigger a “giant sucking sound” as American jobs flowed to Mexico. Unions trashed it. Corporations lionized it.

Earlier this year when the U.S. Trade Representative’s office invited public input ahead of the pact’s first major overhaul that begins Wednesday, the website temporarily went down. Some 12,500 comments have since rolled in. Rarely has a trade deal unleashed so much sound and fury.

While trade on the continent has surged, the academic consensus is that the impact on the U.S. job market wasn’t significant, though some industries and parts of the country were hit hard. And that’s close to the picture that most economists were painting two decades ago.

“Both sides oversold it,” said Sherman Robinson, a senior research fellow at the International Food Policy Research Institute who worked for Clinton’s Council of Economic Advisers. Economists projected the deal would bring modest benefits to the U.S., and that “basic conclusion held up,” he said.

The current president is not one for modest proposals. As his negotiators kick off the first round of official negotiations with Mexico and Canada through Aug. 20, Donald Trump may have already promised too much. At campaign rallies, Trump called it the worst deal in U.S. history and a “total disaster.”

In April he came close to pulling the U.S. out of the deal entirely. Now he’s made it an official negotiating goal to reduce the U.S. trade deficit with its NAFTA partners, putting America’s $63 billion gap with Mexico in the cross hairs. And like Clinton in the early 1990s, he’s vowing to deliver jobs, making trade renegotiations part of his plan to turbo-charge U.S. growth.

'Very Difficult'

“It’s very difficult to link any kind of change in employment to trade agreements,” said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics in Washington. “They’re just a very small factor. The linkage is way overdone in political debates, even to this day.”

Hufbauer was among the economists who tried to predict the impact of NAFTA before the agreement took effect on Jan. 1, 1994. Along with colleague Jeffrey Schott, Hufbauer estimated about 170,000 U.S. jobs would be created under NAFTA within two years -- a small bump compared with the 112 million people working in the country at the start of 1993.

In the long run, they predicted NAFTA wouldn’t have a perceptible impact on employment, with the effects becoming “lost as noise in the background of economic events.” They argued the main benefit would come from firms becoming more efficient, which they predicted would boost incomes.

Some industries have clearly benefited from the deal -- witness the way the auto industry has reorganized its supply chain across the continent to take advantage of each country’s competitive advantage. Some American businesses have gained a renewed appreciation of NAFTA since it became clear the president was going to follow through on his pledge to renegotiate, said John Murphy, senior vice president for international policy at the U.S. Chamber of Commerce. “You don’t know what you have until it’s gone,” he said.

While economists weren’t predicting an employment windfall, Clinton still focused on the jobs angle, predicting the accord would create 200,000 jobs in two years. “NAFTA means jobs, American jobs and good-paying American jobs,” he said.

Last year, the U.S. International Trade Commission reviewed the academic literature. It concluded NAFTA substantially expanded trade volumes in all three countries but led to only a small boost in U.S. welfare, as measured by gross domestic product and consumption. Overall, the ITC said there was “little or no change” in U.S. employment. There were also winners and losers among industries: Wages fell in sectors that were protected before the deal, such as footwear, textiles and plastics, according to one study cited by the commission.

Textbook Theory

In other words, NAFTA has played out much as textbook economic theory predicted. Since David Ricardo pioneered the idea of comparative advantage in the 19th century, mainstream economists have believed it made sense for countries to trade. Nations good at making T-shirts should make T-shirts, and countries good at making jet engines should make jet engines; and by trading for what they make less efficiently at home, they can consume more overall. But economists have also learned that when rich countries with high wages trade with low-wage competitors, wages in the rich country fall.

The negative effects came into focus during the U.S. election, when Trump’s promise to level the playing field with countries such as Mexico and China struck a chord in Rust Belt states such as Ohio and Pennsylvania. More than 900,000 jobs have been certified by the U.S. government as lost to trade with Mexico and Canada since NAFTA came into effect, according to Public Citizen, an advocacy group that tracks an adjustment program for workers hurt by trade. The total job losses are probably several times larger, since that figure only covers jobs reported to the government, said Lori Wallach, global trade watch director at Public Citizen.

“The biggest losers are U.S. workers without a college degree,” she said. “Who have been the winners? The executives and owners of really big multinational companies.”

'Blame the Foreigner'

The question is whether Trump can help blue-collar workers without sacrificing the broad gains from trade. It will be politically challenging for Mexico and Canada to accept a deal that sees their trade balances worsen with the world’s biggest economy, as the Trump administration’s negotiating goals imply. Moreover, some economists believe automation has played a bigger factor than trade in wiping out jobs and depressing wages.

“The elites have adopted their Ricardian view point, that both parties will gain from free trade,” said University of California, Los Angeles economics professor Edward Leamer, who has studied the impact of NAFTA. “The people who are losing their jobs in Michigan and Ohio and Indiana are looking around to see who caused that, and the political instinct is always to blame the foreigner.”

By Andrew Mayeda

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Licensed content from Bloomberg, copyright 2016.

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