The Success of NAFTA

This article appeared on free​trade​.org on July 1, 1998.
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The ongoing globalization of economic life leaves many Americans nervous and suspicious. Pat Buchanan has played to this anxiety with his book, The Great Betrayal, a root‐​and‐​branch rejection of free trade in favor of a “new nationalism.”

In this series, Cato Center for Trade Policy Studies scholars take issue with much of what Buchanan writes, and offer an alternative perspective to Buchanan’s protectionist analysis.

Buchanan on the North American Free Trade Agreement: “Two years after NAFTA, the predictions of its opponents had all come true. The U.S. trade surplus with Mexico had vanished; a trade deficit of $15 billion had opened up. Trucks heading north out of Mexico were hauling more and more manufactured goods, while those going south carried machinery and equipment for the new factories going up, pointing to endless and deepening U.S. trade deficits. By 1997, 3,300 maquiladora factories were operating, employing 800,000 Mexican workers in jobs that not long ago would have gone to Americans.“1

Despite what opponents of trade liberalization such as Pat Buchanan contend, the North American Free Trade Agreement has been a success by any measure. Trade among the United States, Canada, and Mexico has flourished since the passage of NAFTA, benefiting American consumers and exporters. Since 1993, two‐​way trade with our NAFTA partners has increased by 44 percent, to $421 billion in 1996. That compares with a 33 percent increase in American trade with all other countries.2 Mexico has now become America’s second largest market for exports, just ahead of Japan and behind only Canada.

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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.3 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.4 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.5

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 1997.6 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.7 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.8 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.9

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.10 More important, whereas the slump of 1982 prompted the Mexican government to nationalize its banks and raise trade barriers, the present government successfully resisted backsliding. Just as NAFTA supporters on both sides of the border had predicted, the trade treaty helped to lock in Mexico’s broader economic reforms.

For more on the NAFTA, see “The Fast Track to Freer Trade” by Daniel Griswold.