JHI on the Issues 2016: Who Benefits More from NAFTA?

Candidate Statement: While campaigning in Maine on October 15, 2016, Trump said “We are living through the greatest jobs theft in the history of the world.  If I win, day one, we are going to announce our plans to renegotiate NAFTA. If we don’t get the deal we want, we’ll leave NAFTA and start over to get a much better deal."

Summary: The implied proposition—which has been more explicitly stated in the past—that Mexico “benefits more” from a “defective” NAFTA agreement is imprecise, hard to measure, and overlooks two critically important effects of NAFTA for the United States.  NAFTA has made U.S. businesses 1) better able to compete in the globalized world and has 2) raised standards of living in the United States by lowering the costs of commercial goods. Americans are now able to afford more products because of overall lower prices.

Talking Points:

  • International trade is not a zero-sum contest.  It takes place for the same reason that domestic trades takes place: because both sides gain.  Free trade benefits developing economies while at the same time boosting U.S. export sales and production.  The economic logic for free trade deals has not changed: U.S. trade barriers are already relatively low, so the U.S. gains more once a free-trade agreement removes other countries’ obstacles to trade.
  • The two economies and supply chains of Mexico and the United States are so intertwined that roughly 40 percent of imports from Mexico are U.S. content that was previously exported to Mexico.[1]
  • There has been massive growth in U.S. exports to Mexico and jobs related to it since NAFTA came into effect.  Prior to NAFTA, the Mexican economy was largely closed to U.S. exports.  Since NAFTA, Mexico has become the United States’ second largest goods export market, generating up to 6 million jobs for U.S. workers.[2][3]
  • Specifically, after NAFTA came into force, Mexico became the United States’ second largest export market for cars, after Canada.
  • Viewing trade solely through the lens of trade deficits is a mistake in basic economics.  If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a deficit or a surplus in the international balance of trade.  Let’s not forget that for every year of the Great Depression in the 1930s the United States had an export surplus—a “favorable” balance of trade.[4]
  • See JHI’s book Choosing to Lead for a future trade agenda that would benefit American consumers.

Analysis:

  • A July 2016 Rasmussen poll found that 50% of likely U.S. voters think that NAFTA needs to be renegotiated, illustrating that political challenges remain for support of the free trade regime. It is interesting to note, however, that the level of support for NAFTA renegotiation is actually down 6 percentage points from the 56% during the 2008 election.[5]
  • Yet as former U.S. Trade Representative Bob Zoellick has pointed out, the U.S. has free-trade agreements with 20 countries, and in the first five years after the U.S. concluded these agreements, U.S. exports have on average increased three times as rapidly as export growth globally.  With these partners, the U.S. runs a trade surplus for manufactured goods, and more than 11 million U.S. workers and about 1 million farmers rely on exports. U.S. manufacturing workers whose jobs depend on exports earn on average 18% more than other workers.
  • It is not clear what the statement “Mexico benefits more” actually means or how that is quantified.  It may refer to the fact that the United States now has a trade deficit of goods and services with Mexico of roughly $49 billion in 2015.[6]   What this statement overlooks is that our two economies and supply chains in many industries are so intertwined that roughly 40 percent of imports from Mexico are U.S. content that was previously exported to Mexico.[7]
  • This statement also overlooks the massive growth in U.S. exports to Mexico and the jobs related to it.  In 1992, U.S. exports to Mexico were approximately $40 billion.  In 2015, total U.S. exports of goods and services to Mexico totaled $267 billion.[8] For example, Mexico was effectively closed to cars made in the United States because of protectionist economic policies.  Since NAFTA came into effect, Mexico has become the United States’ second largest export market, generating up to 6 million jobs for U.S. workers.[9][10]
  • The statement may refer to trends in overall employment in the U.S. manufacturing sector.  In modern economies across the globe, manufacturing employment has declined, this is true.  But the decline trend has been steady for 50 years and was in place well before NAFTA was conceived.  Declines are related to global factors most attributable to new technologies, automation, and increased competition from Asia, including China.[11]  Indeed, other G-7 countries have also seen manufacturing jobs decline over decades, including European and Asian countries that have marginal economic relationships with Mexico.  As such, it is not plausible to argue that Mexico is the main driver of the shift of the U.S. manufacturing base and overall employment trends in manufacturing. 
  • Following candidate Trump’s visit to Mexico, the Mexican president’s popularity dropped further, eroding his ability to assist the United States and making it harder for him to compromise on issues. Mexico´s Minister of Finance, a close Peña Nieto advisor, was forced to resign in the wake of the candidate Trump visit.  Continued harsh rhetoric against Mexico and Mexicans may increase the risk that a more anti-American candidate could emerge in Mexico in the next presidential election in 2018.
  • The main reason that the U.S. candidates were invited to Mexico during the campaign is that the Mexican economy and international markets are nervous about campaign rhetoric about NAFTA and the border.  Over 70 percent of Mexico’s exports are sent to the United States and the markets appear worried about how plans to renegotiate NAFTA and address border security would impact the Mexican legal economy and flows of good and services. 
  • Mexico’s credit rating is at risk, with Standard & Poors lowering Mexico´s sovereign debt rating to negative in late August.[12]  The Mexican peso has declined roughly 10 percent this year, a drop that economists contribute to fears about how Trump’s policies might affect the Mexican economy.[13]

Questions the Press should be Asking:

  • NAFTA set the rules of the game for trade with Mexico and Canada.  If NAFTA were eliminated, small and medium sized businesses would lose the investment protections they currently have and the rules of the game would become unclear, overnight.  How would you ensure that U.S. companies are treated fairly absent NAFTA? What enforcement mechanisms would be in place? How sure are you that you could get a new trade agreement through the U.S. Congress?
  • Campaign rhetoric surrounding NAFTA has paid little attention to Canada. How has NAFTA affected the U.S. and Canadian economies? And how would renegotiating NAFTA affect that relationship?
  • TPP effectively modernizes NAFTA by adding provisions for which many people, including Democrats, have been calling for decades.  These include state-of-the-art environment and labor protections.  TPP is, in effect, the renegotiation of NAFTA.  If you want to renegotiate NAFTA, why do you oppose TPP?  What was not done that should have been in the negotiation of TPP? 
  • NAFTA played a major role in moving Mexico towards a multiparty democracy, how would renegotiation of NAFTA affect political stability on our southern border?
  • In July Mexicans were asked if they were interested in leaving NAFTA. 52% were solidly opposed to a “Mexit,” but 33% supported the leaving the trade bloc despite how many Mexican jobs depend on the agreement. What effect would a “Mexit” have on American companies? Would it be a net gain or loss?[14]

Footnotes:

[1]Christopher E. Wilson, “Economic Ties between the United States and Mexico, “ The Wilson Center, see at https://www.wilsoncenter.org/sites/default/files/Working%20Together%20Full%20Document.pdf

[2] Jodi Hanson Bond, “The U.S.-Mexico Relationship Stands the Test of Time – With Jobs,” The U.S. Chamber of Commerce, see at https://www.uschamber.com/above-the-fold/the-us-mexico-relationship-stands-the-test-time-jobs

[3] U.S. Trade Representative U.S.-Mexico Trade Facts, see at https://ustr.gov/countries-regions/americas/mexico

[4] Thomas Sowell, Basic Economics: A Citizen’s Guide to the Economy (New York: Basic Books, 2007), 435.

[5]http://www.rasmussenreports.com/public_content/politics/general_politics/june_2016/voters_aren_t_happy_with_nafta_other_free_trade_deals

[6] U.S. Trade Representative

[7] Wilson Center

[8] U.S. Trade Representative

[9] U.S. Chamber

[10] U.S. Trade Representative

[11] Martin Neil Bailey and Barry P. Bosworth, “Manufacturing: Understanding Its Past and Potential Future,” Journal of Economic Perspectives, Winter 2014. 

[12] Anthony Harrup, “Standard & Poor’s Lowers Mexico’s Outlook to Negative” Wall Street Journal, August 23, 2016, see at http://www.wsj.com/articles/standard-poors-lowers-mexicos-outlook-to-negative-1471984298

[13] Anthony Harrup, “Mexican Peso Recovers After Falling on Clinton News” Wall Street Journal, September 12, 2016, see at http://www.wsj.com/articles/mexican-peso-recovers-after-falling-on-clinton-news-1473716910

[14] Ioan Grillo, “Forget Trump’s Wall: For Mexico, the Election Is About Nafta” New York Times, September 23, 2016, see at http://www.nytimes.com/2016/09/25/opinion/sunday/forget-trumps-wall-for-mexico-the-election-is-about-nafta.html?_r=0