Wednesday, February 08, 2017

Has NAFTA actually been bad for America? (Clue: probably not)

Throughout his election campaign, Donald Trump railed against the North American Free Trade Agreement (NAFTA), calling it, with his typical subtlety and understatement, "the worst trade deal maybe ever signed anywhere". Even Bernie Sanders on the left, and, to a lesser extent, Hillary Clinton in the centre, all but dismissed the agreement as useless, or at least broken (Sanders called it a "death blow for American manufacturing"). The American zeitgeist seems to have turned abruptly against NAFTA (and free trade in general). Canada and particularly Mexico are in a mild panic as Mr. Trump looks to follow through with his electoral pledges and drastically renegotiate, or even potentially scrap completely, the tri-partite 1993 agreement, on the grounds that anything that benefits the USA must necessarily hurt the two other parties.
Now, I know that Trump is not big on evidence, logic, perspective and common-sense, but the issue is far from clear cut. Opposition to NAFTA in blue-collar, manufacturing-heavy states in the mid-West and mid-East arguably won Trump the election. And yet, just this month, the respected American economic think-tank the Center for Automotive Research has warned that pulling out of NAFTA could cost the US economy over 30,000 jobs in the auto sector alone, while leading to higher prices and less choice for consumers.
What, then, is the truth behind Trump's claims, shorn of "alternative facts", truthiness and political bluster? Can the decline in American manufacturing be laid at the door of free trade, or have the jobs just been lost to technology, or to the Chinese decision to join the World Trade Organization? After all, Germany is widely believed to have a strong manufacturing sector, and to have done everything right economically, yet its manufacturing employment share has followed a very similar trajectory to the USA's.
NAFTA, an extension of the earlier Free Trade Agreement between Canada and the USA, was negotiated and signed by Republican President George H.W. Bush in 1992, and steered through Congress in 1993 by his Democratic successor Bill Clinton. It had all-party (although by no means unanimous) support. Since then, its overall effect, at least in terms of American jobs, appears to have been pretty much neutral. In 2015, the non-partisan Congressional Research Service concluded that, "In reality, NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters. The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest". Some areas (like small home appliances and clothing) may have taken a hit, while others have benefitted. Like a medical treatment, though, it is hard to parse exactly what the effect has been, in the absence of any control to compare it with.
What has probably had a much greater effect on the American economy, and particularly its manufacturing base, is China's "most favoured nation" status. The designation, which sets lower tariffs on goods traded between the countries, has been granted to China by American governments of all stripes since the 1980s, and became permanent when China was accepted into the World Trade Organization in 2001. Different studies suggest that between 1 and 2 million American jobs have been lost due to trade with China, and an analysis of American manufacturing employment shows that the steep drop-off in US manufacturing jobs only started after China joined the WTO (not after NAFTA came into effect), and then got a whole lot worse with the Great Recession of 2007-8. All of which perhaps makes it doubly ironic that Donald Trump's first action in office was to definitively nix the Trans-Pacific Partnership, an agreement that did not include China, and that was intended to help the USA compete against Chinese economic influence...
It should also be noted that, even as manufacturing employment has dwindled, American manufacturing output has been increasing since the mid-80s (with a temporary downturn during the Great Recession, which has since been largely made up), reflecting the increased productivity, and automation in the manufacturing sector. In fact, American trade as a whole has boomed since the NAFTA agreement was struck, with trade among the NAFTA partners increasing from about $290 billion in 1993 to over $1 trillion by 2016. Canada and Mexico are the two largest destinations for US exports, making up over a third of the total; the US auto sector become globally competitive due to the cross-border supply chains; and US agricultural exports have nearly doubled to Mexico, and have increased by about 44% to Canada. Canada is the largest destination for US agricultural products and the top buyer of American fresh fruits and vegetables; Mexico is the top export market for US corn, soybean meal and poultry.
But free-trade deals are not only about trade. They are also about fostering positive relations between countries, reducing tensions, and encouraging bilateral cooperation on issues like crime and the environment. In that respect, NAFTA has had a wholly positive effect on all three countries.
Dragging the USA out of NAFTA would be a hugely difficult feat, given how integrated the three economies are now. And even if it were to happen, shifting production of automakers and other manufacturers back from Mexico to the US, where labour costs are significantly higher, could prove very expensive and seriously impact American competitiveness relative to foreign producers. The profitability (and share price) of many S&P500 companies has benefitted substantially from moving some of their operations to Mexico over the last couple of decades. Unwinding the process, would almost certainly have the opposite effect. Donald Trump should be very careful what he wishes for.

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