The NAFTA Debate

Those for and against free trade are often motivated by political agendas.


Summary

There is no definitive evidence illustrating NAFTA’s impact on the U.S. job market, though the debate over whether the agreement has helped or hurt the U.S. economy has been around since its implementation in the early 1990s. The lack of decisive evidence is due to the fact that both sides of the debate provide numbers to support their arguments that are at best estimates given the complexities of the economy and shortfalls in modeling.

The 2016 U.S. presidential campaign has brought renewed focus on the agreement and evolved the debate from whether it hurts jobs to what extent it should be changed to protect U.S. jobs.

The Mexican government has already responded, saying it would be open to possible renegotiations and has presented some preliminary ideas on what that may entail. NAFTA’s geopolitical relevance goes beyond domestic U.S. politics in that the agreement’s future will also impact two growing global trends: the nation-state reasserting itself and the exporters’ crisis.

• The future of NAFTA is now in question. It is as much an economic question as it is a political one in the U.S.

• The initial expectations regarding NAFTA’s impact on the U.S. job market do not align with modern assessments.

• The complexities of the U.S. economy and international trade make it extremely difficult to show direct causality between NAFTA and the U.S. job market.

• Potential renegotiations of NAFTA may involve adding modern elements to the treaty, exiting the treaty and having other trade agreements supersede NAFTA.
Introduction

U.S. presidential candidates Donald Trump and Hillary Clinton have raised the possibility of renegotiating the North American Free Trade Agreement (NAFTA) between Canada, the United States and Mexico. While campaign speeches should often be considered political white noise, the core issues being addressed sometimes have geopolitical significance. The future of NAFTA is one of these core issues. It currently serves as the framework that dictates how the U.S., the world’s largest economy, carries out trade with two of its top three trading partners. It also encompasses the three major economies of the Western Hemisphere, distinct for its stability while much of Eurasia is in crisis.

NAFTA’s impact on U.S. employment is the main point of contention inspiring calls for a renegotiation or even an end to the agreement. This debate over the cost of more open trade to U.S. jobs is nothing new. The balance between the benefits of trade and accompanying adjustments in the U.S. job market has been a divisive issue in U.S. domestic policy for decades.

In a 1962 message to Congress, President John F. Kennedy noted: "The burden of economic adjustment should be borne in part by the federal government.... [T]here is an obligation to render assistance to those who suffer as a result of national trade policy."

Controversy over whether NAFTA, which was implemented in 1994, has helped or harmed the U.S. economy dates back to the early 1990s when the agreement was first being negotiated. In the U.S. Congressional debate over NAFTA, the question of employment featured prominently.

Of the 141 statements against NAFTA in the House of Representatives and Senate, 112 asserted that NAFTA would destroy jobs. Meanwhile, 199 of the 219 pro-NAFTA statements argued it would create jobs. And the debate has continued ever since.

However, we appear to be at the start of a shift in the debate. It is no longer about whether it hurts jobs but rather to what extent it should be changed to protect U.S. jobs. Trump has said, if elected, he plans to immediately renegotiate NAFTA so that it is more beneficial for U.S. workers. If such a deal cannot be reached, Trump says he will submit notice of the United States’ intent to withdraw from the agreement. Clinton has publicly said she would like to renegotiate NAFTA to give American workers a level playing field, though she does not foresee ending NAFTA. Rather, she has stated that there have been benefits to free trade, corporations share the blame for lost jobs and globalization is here to stay. Neither candidate has specified which aspects of NAFTA he or she wants to renegotiate. In any case, this issue will continue to be relevant beyond the election.

Impact on Jobs: Initial Expectations

To better understand the current debate over whether NAFTA has been a success or failure, we need to first look back at the initial expectations for its impact on the job market. Many studies were conducted prior to the signing of NAFTA to help determine its potential impact. A comprehensive review of 10 pre-NAFTA impact studies on U.S. jobs was published by the Organisation for Economic Co-operation and Development. Seven used variants of a Computable General Equilibrium model, a class of economic modeling that uses available data to project how an economy might react to changes in policy, technology or other factors. The others used different macroeconomic modeling methods.

Four of the studies determined that NAFTA would have a negligible to little effect on employment. Two concluded in general terms that “gains outweighed losses.” Another two estimated that jobs would increase by 40,800 to 61,000 in one study and 175,000 in the second. The latter estimate (from a study by Gary Hufbauer and Jeffrey Schott) was derived from the forecast that U.S. exports to Mexico would increase by $16.7 billion, imports from Mexico would increase by $7.7 billion and the U.S. trade balance would improve by $9 billion.

Only one study predicted there would be a net job loss, which it put at 1.26 million over a 10-year period. The 10th study concluded that there would be a 225,000 to 264,000 increase or 400,000 to 900,000 decrease in jobs depending on the level of foreign direct investment in Mexico. On the whole, at the time the agreement was signed, these 10 studies expected NAFTA to have a negligible to mild effect (in either direction) on U.S. employment.

Fears over job losses due to NAFTA persisted among those opposed to the agreement; those in favor recognized there would be some job market adjustment period. In response to these fears and with the goal of getting the agreement passed, the Bill Clinton administration and Congress agreed to legislation creating a NAFTA Trade Adjustment Assistance Program (NAFTA-TAA). This program was very similar to other trade adjustment assistance programs that the U.S. had been carrying out since the 1960s. The NAFTA-TAA was designed to provide assistance to all workers who could show that they lost their jobs or that their hours of work and wages were reduced as a result of trade with, or a shift in production to, Canada or Mexico. Since this program was implemented in 1994, 845,000 applicants have benefited from its services, which include job training and help finding a new job.

The Argument Against NAFTA

The arguments on both sides of the debate are important because their assertions would come into play in the event of a renegotiation. The main argument cited by those who believe NAFTA has harmed U.S. employment is that a growing trade deficit means more companies or facilities will be moved or closed. One major consequence of this is a rise in the number of dislocated workers.

According to the U.S. Census Bureau, the U.S. trade deficit with Mexico has increased since NAFTA was enacted. The U.S. had a trade surplus of $1.66 billion with Mexico in 1993, the last year before NAFTA’s implementation. This has turned into a $60.66 billion trade deficit in 2015.

There are multiple estimates of the number of jobs lost because of NAFTA. The Economic Policy Institute (EPI) published a study saying that from 1994 to 2004, 1 million jobs that would otherwise have been created were lost due to NAFTA. The statement is based on EPI estimates that during this time 2 million job opportunities were lost while only 1 million export jobs were created by the agreement. In addition, the U.S. Department of Labor reported that 5 million manufacturing jobs have been lost since NAFTA was implemented. A report by think tank Public Citizen estimates that one in four of these job losses was NAFTA-related. While the Department of Labor’s number is reliable, the department tracks employment on a broad scale. Therefore, the think tank’s calculation of how many of these jobs were lost due to NAFTA is only an estimate.

Trade policy experts employ variations of the same methodology to estimate the number of jobs lost due to an increase in the trade deficit. The models can be designed using sector-specific data. Also, nearly all assume a baseline scenario of full employment. One major issue with these models – as well as the impact studies cited above – is that they do not factor in macroeconomic forces that also affect trade, employment and growth in a given time period.

For example, they would not have accounted for the balance of payments crisis in Mexico that occurred the same year that NAFTA was enacted. One consequence of this crisis was that the value of the Mexican peso relative to the American dollar declined by 60 percent, a factor that greatly affected the price of Mexican goods. A weaker peso makes Mexican exports cheaper and more attractive to foreign consumers. A fluctuation of this nature dramatically impacts the macro-economy, trade flows and deficits but is not always predicted and incorporated into models.

Lastly, there is the commonly circulated figure that 845,000 jobs have been lost as a result of NAFTA. Even former Democratic presidential contender Bernie Sanders cited this. This number is based off the number of people who received NAFTA-TAA services benefits from the U.S. government. The number does not indicate in any way how many of these workers acquired a new job through TAA. Groups like EPI and labor group AFL-CIO argue that the program is insufficient because displaced workers earn on average 11 percent to 13 percent less than they did at their previous jobs. It is also commonly noted that new jobs do not always spring up in the same location as the old jobs and relocation becomes an obstacle.

The Argument in Favor of NAFTA

Those who support NAFTA argue that the benefits of free trade are long term. Preferential trade brings in lower cost imports to a market. Consumers will likely purchase these lower priced goods rather than domestically produced equivalents. This may create some short-term job losses for the importing country. However, in the long term, preferential trade is supposed to encourage specialization, economies of scale and more export-oriented jobs.

Advocates for NAFTA offer both conceptual reasoning and statistical evidence to support their view. The conceptual arguments look at what the job market would be like if NAFTA had not been implemented. The Council on Foreign Relations points out that many economists argue manufacturing in the United States was under stress before NAFTA. It asserts that job losses in the manufacturing sector should be viewed as part of a structural shift in the U.S. economy toward light manufacturing and high-end services rather than jobs lost to cheaper imports.

A 2014 report by the Wharton School of the University of Pennsylvania argues that “without NAFTA, many jobs that were lost over this period probably would have gone to China or elsewhere.” It also argues that job losses due to cheaper imports cannot be blamed on NAFTA because the U.S. trade deficit was and still is bigger with China than Mexico.

Like those opposed to NAFTA, those in favor have published various reports trying to illustrate their view with numbers. They say that NAFTA has not had a large, negative impact on the U.S. job market. Supporters of the agreement accept that some jobs will be lost. As a result, many of their numbers aim to illustrate that the job loss is negligible and leads to better economic conditions and job creation in other sectors, particularly those that are focused on exporting.

The Peterson Institute for International Economics (PIIE) published a report in 2008 that said about 16.5 million people quit or lost their jobs each year in the U.S., which has a total civilian labor force of roughly 140 million. At the same time, more than 18 million Americans acquire new jobs each year. The report also stated that, while the government recognizes that NAFTA results in a gross loss of 100,000 jobs annually, the figure is a mere 0.06 percent of the regular annual turnover in the U.S. job market. An economic study commissioned by the U.S. Chamber of Commerce found that trade with Canada and Mexico supports approximately 14 million U.S. jobs, of which nearly 5 million are supported by the increased trade generated by NAFTA. Like the anti-NAFTA group, the numbers come from modeling and estimates.

Pro-NAFTA groups often cite a 2015 U.S. Congressional Research Service report that says economists estimate that 40 percent of U.S. imports from Mexico and 25 percent of U.S. imports from Canada contain components that originate in the U.S. This figure is notably higher than the average of 4 percent for imports from China. The argument is that imported products can help sustain U.S. jobs because they contain material that was made in the U.S.

Lastly, there is emphasis on the fact that export-related jobs pay 7 percent to 15 percent more than jobs that focus on the domestic market. Those in favor of free trade foresee import-related jobs switching over to specialized export jobs as market production shifts to acknowledge competitive advantages and economies of scale.

Conclusión

As is commonly the case with contentious issues, critics and advocates of NAFTA have their respective leading experts who are associated with institutions that support a particular position. Gary Hufbauer and Jeffrey Schott are both affiliated with PIIE, which has published numerous reports in support of NAFTA. Meanwhile, Robert Scott at EPI is almost always the source of the latest information on NAFTA’s negative impact on the U.S. job market. About a quarter of EPI’s funding comes from union groups while about 44 percent of PIIE’s funding comes from major corporations. Given that rising nationalism in the United States is coinciding with an election year, those with political agendas and interests are pushing their agendas and framing the debate in favor of their interests. In the case of NAFTA, the debate will be centered on jobs.

In the U.S.’ advanced, complex economy, it is very difficult to isolate one particular element that contributes to the larger picture and make sweeping conclusions. It is also impossible to know with certainty the course of an alternative history – in other words, what the U.S. economy and job market would have looked like today if NAFTA had never been implemented. There will always be reports on such issues that seek to buttress both sides. In the end, the public perception of free trade will determine the future of NAFTA. Presently, there is a strong anti-free trade sentiment in the U.S. A Pew survey showed 55 percent of those polled were against free trade agreements because they are bad for jobs. There was little to no recognition of the fact that exports generate jobs as well.

While the evidence is inconclusive, there is growing public pressure through the U.S. presidential campaigns to renegotiate NAFTA to protect U.S. jobs. There are several avenues through which this can take place but no specific information at this time of what concrete changes in NAFTA would look like. A renegotiation of the actual treaty would require participation from Canada and Mexico, who could bring their own proposals. On a purely domestic front, the government could seek to make changes to the NAFTA-TAA to better support workers, though adjustments to this domestic legislation have not yet figured prominently into the presidential campaigns.

Equally important is the fact that the U.S. may not be alone in wanting to renegotiate the agreement. On July 25, Mexico’s Secretary of Foreign Relations Claudia Ruiz Massieu said that Mexico would be open to modernizing NAFTA should the U.S. and Canada bring forth the idea. Mexico's Secretary of Economy Ildefonso Guajardo Villarreal said that NAFTA could be updated through the implementation of the pending Trans-Pacific Partnership.

Bear in mind that NAFTA originally started as a free trade agreement between the U.S. and Canada. When the trilateral group formed, the new agreement superseded the previous bilateral agreement. Mexico’s former Secretary of Trade Jaime Serra Puche said that NAFTA should first incorporate new measures like e-commerce and anti-corruption measures not included in the original treaty before thinking about changing the existing treaty. Puche served as Mexico’s principle negotiator in the original NAFTA negotiations. The Canadian government has yet to state its stance on whether it would be willing to renegotiate NAFTA.

All this matters because NAFTA’s geopolitical relevance goes beyond domestic U.S. politics, as the agreement now intersects two major geopolitical trends underway. First, we have been tracking the rise of nationalism, especially in the United States and Europe. We see the nation-state reasserting itself as the primary vehicle of political life. Multinational institutions like the European Union and multilateral trade treaties are being challenged because some believe they are not in the national interest. Additionally, the world is currently in the midst of an exporter crisis that will have an impact on export sales. NAFTA members have access to both the Atlantic and Pacific oceans, which gives them an advantage in global trade. For these reasons, the future of NAFTA – and its potential renegotiation – matters both on a geopolitical level and for U.S. domestic politics.

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