Commentary

After 10 Years, NAFTA Continues to Pay Dividends

By Daniel Griswold
January 8, 2004

January 1 marked the 10th anniversary of the controversial North American Free Trade Agreement. And by any objective measure, NAFTA has been a great public-policy success.

For one thing, it has delivered on its principal promise of increasing trade. Since 1993, the year before the pact took effect, two-way commerce between the United States and Mexico roughly tripled, from $81 billion to $232 billion. For another, NAFTA has helped speed Mexico’s dramatic economic and political transformation. The trade agreement marks a major milestone in Mexico’s turn away from a closed, centrally directed economic system under the authority of a one-party state, to an open and dynamic market democracy.

NAFTA helped to break the grip of the once-dominant PRI party over the daily life of Mexicans. It set the stage for the election of Vicente Fox in 2000 as the first opposition-party candidate to be elected president in 71 years. NAFTA has also encouraged higher regulatory standards in Mexico and more cross-border cooperation on sensitive environmental issues. A stable, democratic and modernizing Mexico is profoundly in America’s national interest, and the pact has helped to make that a reality.

Nevertheless, ill-informed domestic critics continue to assert that NAFTA has cost hundreds of thousands of American jobs and, further, is somehow responsible for the lingering recession in U.S. manufacturing. They use NAFTA as an argument against proposed trade agreements with Central American and other Latin American countries. But an objective look at the record shows that none of the dire warnings about the agreement have come true.

There has been no “giant sucking sound” of jobs and investment heading south. In the past decade, the U.S. economy has added a net 18 million new jobs. America’s unemployment rate is actually lower today than it was in the year before NAFTA went into effect. Since NAFTA, about 400,000 Americans have qualified for trade adjustment assistance under a special program for workers displaced by imports from Mexico, but that is a small number when spread over a decade and when compared to the millions of jobs being eliminated and created every quarter in the U.S. economy.

Though U.S. investment in Mexico has increased, American cash hasn’t exactly been gushing southward. In the past four years, America’s direct manufacturing investment in Mexico has averaged $1.9 billion a year, a fraction of the $200 billion invested annually in our domestic manufacturing capacity. In fact, U.S. companies invest far more each year in other high-wage, high-standard economies, such as those of Western Europe and Canada, than they do in such developing countries as Mexico.

NAFTA has been a blessing for many U.S. manufacturers. Our domestic automobile industry, for example, now produces about the same number of cars and light trucks in the United States as it did before the agreement, but it assembles those vehicles more cost-effectively by spreading out its sourcing among the three NAFTA countries — the United States, Mexico, and Canada. Total manufacturing output in the United States has risen 41 percent during the past ten years, compared to 34 percent in the preceding 10 years. In the first five years of NAFTA, the U.S. economy added a net half million manufacturing jobs. By allowing American manufacturers to more efficiently allocate their production, NAFTA deserves a share of the credit for the healthy uptick in U.S. worker productivity since the mid-1990s.

The recession in manufacturing sector that began in 2000 cannot be reasonably blamed on NAFTA. It began years after the agreement took effect, and for reasons unrelated to NAFTA, such as the East Asian financial crisis, the bursting of the dot com and telecom bubbles, a collapse of business investment and demand, corporate scandals and uncertainty caused by the war on terrorism. In fact, since 2000, imports from and exports to Mexico have both declined. The problem for U.S. manufacturers is not too much trade with Mexico, but not enough.

After 10 years, NAFTA has proven its enduring worth to the United States and to Mexico. It has made Americans more productive and more secure by deepening relations with our southern neighbor.

Daniel T. Griswold is associate director of the Center for Trade Policy Studies at the Cato Institute.