Ten years ago this month, leaders of the United States, Canada, and Mexico signed the historic North American Free Trade Agreement. Although NAFTA remains a lightning rod for critics of free trade and will be debated anew as Congress soon considers a free-trade agreement with Chile, by any measure it has been a public policy success.
As a trade agreement, NAFTA delivered its principal objective of more trade. Since 1993, the value of two-way U.S. trade with Mexico has almost tripled, from $81 billion to $232 billion, growing twice as fast as U.S. trade with the rest of the world. Canada and Mexico are now America’s No. 1 and No. 2 trading partners, respectively, with Japan a distant third.
One reason NAFTA remains controversial today is that advocates and opponents alike were guilty a decade ago of exaggerating its impact. Advocates claimed it would create hundreds of thousands of jobs because of a dramatic rise in exports; opponents claimed far more jobs would be destroyed by a flood of imports and a stampede of U.S. companies moving to Mexico to take advantage of cheap labor. During a presidential debate in 1992, H. Ross Perot famously predicted, “You’re going to hear a giant sucking sound of jobs being pulled out of this country.”
In reality, NAFTA was never going to have much of an impact on the economy. America’s gross domestic product at the time was almost 20 times Mexico’s, and U.S. tariffs against Mexican goods already averaged a low 2 percent. Its biggest dividend for the United States has been in foreign policy.
NAFTA has institutionalized our southern neighbor’s turn away from centralized protectionism and toward decentralized, democratic capitalism. The economic competition and decentralization embodied in NAFTA encouraged more political competition in Mexico. It broke the economic grip in which the dominant Institutional Revolutionary Party (PRI) held the country for most of the last century, and set the stage for the election of Vicente Fox in 2000 as the first opposition-party candidate to win after 71 years of the PRI’s one-party rule.
With a decade of hindsight, there is no evidence of a “giant sucking sound” of jobs, investment and manufacturing capacity heading south. After passage of NAFTA, in fact, the U.S. economy created millions of jobs. Civilian employment in the U.S. economy grew from 120.3 million in 1993 to 135.1 million in 2001—an increase of almost 2 million jobs per year—the unemployment rate fell steadily, and real wages have risen up and down the income scale. Blame for the recent rise in unemployment belongs to the relatively mild recession of 2001—a recession brought on not by NAFTA but by rising interest rates and energy prices and a falling stock market.
Despite predictions, NAFTA did not cause an exodus of manufacturing investment to Mexico. U.S. investment in Mexico did increase after NAFTA, along with trade, but those flows are a trickle compared with what we invest domestically. In the eight years after the implementation of NAFTA, from 1994 through 2001, U.S. manufacturing companies invested an average of $2.2 billion a year in factories in Mexico, a fraction of the $200 billion invested in manufacturing each year in the domestic U.S. economy. The small outflow of direct manufacturing investment to Mexico has been overwhelmed by the net inflow of such investment from the rest of the world—an average of $16 billion a year since 1994.
Nowhere were the predictions about NAFTA more apocalyptic than in regard to manufacturing. The critics warned that NAFTA would “deindustrialize” the United States, but between 1993 and 2001, U.S. manufacturing output rose by one-third, and output of motor vehicles and parts rose nearly as fast. Since 1993, manufacturing output in the United States has risen at an annual average rate of 3.7 percent, 50 percent faster than during the eight years before enactment of NAFTA. The number of Americans employed in manufacturing grew by more than 700,000 in the first four years of NAFTA, from January 1994 to January 1998. Of course, this is not an argument that NAFTA was the primary cause of the acceleration in manufacturing output, but it does knock the wind out of the myth that NAFTA has somehow “deindustrialized” our economy.
By every reasonable measure, NAFTA has been a public policy success. It has deepened and institutionalized Mexico’s drive to modernize and liberalize its economy, society and political system. It has spurred trade, investment and economic integration in North America. And it has enhanced American productivity and prosperity—refuting the critics who were wrong 10 years ago and are just as wrong today.