Accessibility links

10 Years After Implementation, NAFTA's Results Are Mixed - 2003-12-31


January 1 marks the ten-year anniversary of a landmark trade pact that remains controversial to this day: the North American Free Trade Agreement (NAFTA) that eliminated trade barriers between the United States, Canada and Mexico. At the time of its implementation, backers predicted the accord would greatly expand opportunities and boost prosperity in all three countries. Opponents warned of a severe migration of jobs from the United States and Canada to Mexico. Today, the consensus view of NAFTA seems to lie somewhere between the wildly optimistic and gloomily pessimistic predictions of the early 1990s, with some gains and some losses for each of the three nations.

NAFTA has been in place for 10 years. But in 1992, the treaty's implementation was far from certain. NAFTA became one of the most contentious issues of the U.S. presidential race that year. During a debate in Michigan, independent candidate Ross Perot said, "You implement that NAFTA, the Mexican trade agreement, where they pay people a dollar an hour, have no health care, no retirement [benefits,] no pollution controls, and you are going to hear a giant sucking sound of jobs being pulled out of this country."

Bill Clinton went on to win the election, and the U.S. Congress ratified NAFTA the following year. And what of Ross Perot's dire prediction? "This is why you hear about NAFTA and you do not hear about Ross Perot anymore," answers Jeffrey Schott, a senior fellow at Washington's Institute for International Economics.

"NAFTA has contributed to a strong period of economic growth in all three countries," Mr. Schott added. "Without NAFTA, all three countries would not be as rich as they are today, employment would not be as high and trade relations would not be as smooth."

Indeed, trade among the three nations has more than doubled, from $306 billion worth of goods in 1993 to $621 billion in 2002. U.S. trade with its NAFTA partners has grown twice as fast as trade with the rest of the world. Regardless of any NAFTA-related job losses in the United States, unemployment declined sharply after the agreement's implementation, from nearly seven percent in 1993 to four percent in 2000. U.S. manufacturing expanded by a third between 1993 to 2001.

Among manufacturers that have done well in the last decade is Bison Gear and Engineering, a maker of power transmission equipment in St. Charles, Illinois. The company's president, Ron Bullock, says Bison has thrived with the opening of new markets to the north and south.

"We have very positive feelings that it [NAFTA] has been successful, that it has been very beneficial in our trade north of the border in Canada," he explained. "We have seen nice growth with the easing of tariffs. Mexico has [also] been very beneficial for a number of our customers that are selling down there."

But critics of NAFTA say the rosy picture painted by free trade proponents is misleading and masks an overall decline in America's manufacturing base. They point out that the trade pact was enacted at the start of a boom period for the U.S. economy, and contend that most Americans prospered during the mid-to-late 1990s in spite of rather than because of NAFTA.

"NAFTA has cost a lot of jobs in the United States - good jobs, manufacturing jobs," Thea Lee is chief international economist for America's main labor organization, the AFL-CIO. "We have seen a lot of plant closings. We have seen a lot of American companies shut down factories and move to Mexico or Canada. This has been good for the owners of the companies, but it has been very bad for the workers and the communities left behind."

And what of Mexico? Since NAFTA's implementation, direct foreign investment in Mexico has totaled $124 billion - more than five times the amount recorded during the previous decade. Mexico's exports to the United States have nearly tripled, making it America's second-largest trading partner, topped only by Canada. Mexico's economy has averaged a four percent growth rate over the last 10 years, despite a devastating financial crisis in 1995.

Even so, Mexico's overall poverty rate has remained static, at roughly one fourth of the population. The World Bank's vice president for Latin America and the Caribbean, David de Ferranti, says NAFTA has been a boon to Mexico's northern regions, which saw a surge in manufacturing activity, but has had little if any impact on the rest of the country. Speaking at a recent conference in Washington, Mr. De Ferranti described NAFTA as a moderate success for Mexico.

"Overall positive, but falling unevenly across the economy and population of Mexico," he said. "The benefits could have been better if more had been done in Mexico to address key development issues, for example, to correct under-investment in education, innovation and infrastructure."

Today, in the debate over jobs and job losses in North America, one hears more about China than one does about NAFTA. Even Mexico has lost an estimated 200,000 manufacturing jobs to China over the last three years. Its average factory wage of about $1 an hour is still much higher than what Chinese workers are paid.

According to economist Jeffrey Schott, NAFTA's most enduring legacy may not be jobs or profits, but rather the example it has set for other trade pacts, including the proposed hemisphere-wide Free Trade Area of the Americas (FTAA), which negotiators hope to finalize by 2005.

"NAFTA has provided a very important template for moving forward in international trade relations. It has been the base for new free trade agreements that we have negotiated with Chile and Singapore and are about to conclude with the countries of Central America," he said. "It also has provided new models for international agreements in the World Trade Organization."

Mr. Schott adds that in absolute terms, free trade is always beneficial, but the elimination of trade barriers inevitably produces some economic dislocation even as new opportunities arise. He says, as nations pursue more open trade through bilateral, regional or global initiatives, it is increasingly important for governments to provide assistance and training for those who lose their jobs.

XS
SM
MD
LG