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No Giant Sucking Sound

NAFTA has been modestly beneficial for the U.S. economy, even though

Mexico's economy is relatively small compared to the American economy. It is obvious

today that the "giant sucking sound" predicted by Ross Perot has not been heard. Since

the passage of NAFTA in 1993, the real gross domestic product of the United States has

expanded by 12 percent and civilian employment has grown by more than 8 million,

including a net increase of half a million jobs in manufacturing.11 Inflation has remained

subdued at 2 to 3 percent, thanks partly to the price competition of imports.

The job "losses" that critics of free trade blame on NAFTA are mostly fictitious,

based on the misuse of trade deficit numbers. About 150,000 Americans have filed for

benefits under a program for workers allegedly displaced by increased imports from

Mexico and Canada.12 As painful as the displacement may be for those workers, the U.S.

economy during the last four years has created that many net new jobs approximately

every three weeks.13

Nor has investment in the United States suffered since the passage of NAFTA.

Total nonresidential fixed investment in the United States has risen by one-third since

1993, from $600 billion to an annual rate of more than $800 billion so far in 1997. 14

Investment in the U.S. last year included $77 billion in direct foreign investment, making

the United States the No. 1 destination in the world for foreign capital. In contrast,

American direct investment in Mexico since the passage of NAFTA has averaged about

$3 billion a year, or less than one-half of 1 percent of the capital invested in the United

States during the same period.15 So much for a giant sucking sound.

Mexican Reforms on Track

Opponents of free trade blame NAFTA for Mexico's painful peso crisis of 1994-

95. But the plunge in Mexico's output in 1995 had nothing to do with free trade and

everything to do with politics and botched monetary policy. Mexico's peso collapse was

caused by a lethal combination of loose monetary policy and an inflexible and overvalued

exchange rate, both aimed at boosting consumption in an election year. Indeed, Mexico

has suffered a severe financial crisis in every election cycle since 1976--long before

anyone had ever heard the term NAFTA.16 To blame the peso crisis on NAFTA makes no

more sense than to blame a drunken driver's latest accident on his new car.

In reality, NAFTA and other market reforms softened the severity of the crisis and

spurred Mexico's recovery. Today, the Mexican economy has resumed a growth rate of

more than 5 percent, the unemployment rate has fallen to precrisis levels and personal

consumption of goods and services is once again rising at a healthy, sustainable rate.17

This NAFTA-era recovery contrasts starkly with the protracted slump in Mexico

that followed the 1982 debt crisis. Then it took the Mexican economy six years to recover

its precrisis levels of production.18 More important, whereas the slump of 1982 prompted

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