The following op-ed was co-authored by Clark Packard, outreach manager and trade analyst for the R Street Institute.
Even as renegotiation of the North American Free Trade Agreement just got underway, President Trump continues to hint he may prefer to tear up the 23-year old agreement, complaining on Twitter that trading partners Canada and Mexico are “being very difficult.”
From the American side of the table, the focus is on the agreement’s impact on U.S. labor markets and workers. Indeed, there is wide scope to modernize and improve NAFTA to benefit of American businesses, workers and consumers. Alas, protectionist efforts to reduce America’s trade deficits and to restrict cross-border flows will harm the very people that trade skeptics claim to want to help. Such concerns, highlighted by the Trump administration’s Office of the U.S. Trade Representative, stem from the faulty assumption that importing more goods from Canada and Mexico than we export to them has harmed American workers.
Yet American workers have not been harmed notably under the agreement. In fact, according to economists John Francis and Yuqing Zheng, since it was implemented in 1994, NAFTA has reduced the annual growth of unemployment in the United States by more than 4.4 percent, with only small effects on the real wages of American workers. Moreover, virtually all economists agree that the trade deficit is driven by macroeconomic factors such as the rate of American savings and the value of the U.S. dollar, not trade policy.
A 2014 study by the U.S. International Trade Commission reviewed the economic literature on the impact of NAFTA on the American labor market, finding that it had little to no effect on aggregate labor-market outcomes in the United States. Compared to the broader effects of globalization and technological change, NAFTA has had only a very modest impact on American labor markets over the past 23 years.
NAFTA did produce adjustment costs to the American labor market, as witnessed by the movement of some manufacturing jobs from the United States to Mexico in the years immediately following the agreement’s ratification. However, expanded American exports to Mexico and Canada also have helped U.S. manufacturing. About 8,500 manufacturing jobs are produced for every $1 billion in added exports from trade liberalization.
Furthermore, it is likely that many of the manufacturing jobs moved to Mexico would have been offshored to lower-cost competition in Asia, as this trend began in earnest with the 1979 economic reforms in China. Instead, those jobs were incorporated back into the American economy indirectly through regional supply chains that benefit Americans directly.
Attempts by USTR to reduce America’s bilateral trade deficits with Mexico and Canada are likely to harm American workers. The robust supply chains that were developed in North America as a result of the agreement created significant American value-additions within Mexican and Canadian imports. About 40 percent of the value added in a typical Mexican product originates in the United States. Because of these interconnected supply chains, any attempt to squeeze Mexican imports would have the side effect of harming American firms and reducing American labor demand.
This is not to say that NAFTA is perfect or could not stand to be modernized. The agreement lacks provisions to protect and foster trade in digital goods, which are far more important to the U.S. economy now than they were in 1994. A legal framework that lowers barriers to digital trade would be particularly helpful for American workers, many of whom operate as independent contractors or within small business on digital platforms.
Similarly, increasing the de minimis threshold — which exempts imported items below a certain value from taxes, duties and most customs paperwork — would reduce collection costs for all three countries, while facilitating greater cross-border flows. The United States has an $800 de minimis threshold; Canada, by contrast, has a C$20 threshold — the lowest in the industrialized world. Raising the threshold would especially benefit consumers and workers in border regions, who disproportionately gain from enhanced trade between their home and neighboring countries.
Any discussion about the net winners and losers of NAFTA should also include a broader commitment toward policies that help America’s labor force become more dynamic and flexible, which would improve workers’ ability to adjust to the impacts of trade liberalization. Policymakers should identify ways to enhance the prospects of negatively affected workers through such policies as mobility grants, portable social-welfare benefits and privately supported worker retraining programs. These could go a long way toward smoothing the adjustment process for the losers of increased free trade.
America should build on NAFTA’s strengths while enhancing the U.S. labor force to better adjust for trade-related disruptions. Together, those two policies would be a much more effective strategy to improve American workers’ prospects than protectionist policies ever could be.
Image by Willrow Hood