NAFTA as U.S. Deficits Accelerate,

NAFTA

As U.S. deficits accelerate, advocates of particularist protectionism use the data to fuel emotional support for their fight against free trade agreements such as NAFTA. but, to determine whether or not a trade policy is good or bad involves more than just exploring trade balances. A more complex analysis that considers factors such as economic growth, foreign investment and the benefits of market specialization reveal that free trade has a net positive impact. NAFTA is no exception.

The United States has posted a trade deficit since the 1970s, but it has been rapidly increasing since 1997 (see Figure 1). The U.S. trade deficit hit a record high of 763.6 billion dollars in 2006 (Balance of trade). Believers of particularist protectionism assert that free trade agreements such as the North American Free Trade Agreement (NAFTA) are the cause of great economic harm to the United States. The North American Free Trade Agreement (NAFTA) took effect on January 1, 1994 (the effects of NAFTA on U.S.-Mexican trade and GDP, 2003). It phased most restrictions on trade and investment flows among the U.S., Canada, and Mexico over ten years. The seeds for the agreement had already been established the in the Canada-United States Free Trade Agreement of 1989 so the net impact of NAFTA was to include Mexico. More than ten years after the implementation of NAFTA, most artificial impediments to free trade and investment have been removed. In 2001, 87% of imports from Mexico entered the U.S. duty free and the average duty on the remainder of importers was only 1.4%. The overall average Mexican tariff rate in 2001 was only 1.3%, down from 12% in 1993.

The result of NAFTA is increased trade, but with a growing U.S. trade deficit and job dislocation, particularly in manufacturing. In 2006, the U.S. trade deficit with Mexico hit a record of $60 billion, fueling the flames of particularist protectionism (Buchanan, 2007). Noted advocate of particularist protectionismm, Patric Buchanan states that NAFTA is serving the interest of large global corporations at the expense of participating countries and their citizens. Buchanan says, "Today's trade agreements are about reshaping the world to conform to the demands of transnational corporations that have shed their national identities and loyalties and want to shed their U.S. workers." (Buchanan, 2005) Yet, economic growth has fueled overall job and wage growth in the U.S., increasing Gross Domestic Product (GDP), exports and foreign investment. For these reasons, t appears that NAFTA should be embraced despite trade deficits.

Discussion

Increasing trade has been a success, but it is true that beneficiaries have been Mexico and Canada, not the U.S. In the first ten years of NAFTA, trade among the three countries more than doubled, from $306 billion to $621 billion in 2003 (USTR on NAFTA's tenth anniversary). During the same time, U.S. exports to Canada and Mexico grew from $142 billion to $263 billion. However, Mexican and Canadian exports to the U.S. have grown even faster, leaving a huge U.S. trade deficit with these countries. Before NAFTA, the U.S. maintained a modest trade surplus with Mexico. Now, the U.S. has a huge trade deficit with Mexico as Mexican exports to the U.S. grew 242% during the decade of NAFTA execution (USTR on NAFTA's tenth anniversary).

And, the U.S. trade deficit with Canada has increased fivefold.

Still, the dismantling of trade barriers and opening of markets have led to economic growth and rising prosperity in the U.S., Mexico and Canada. The real GDP growth for all NAFA partners from 1993 to 2005 has been impressive (NAFTA: A strong record of success, 2006). U.S. GDP during this time period grew 48%t while Mexico's increased by 40% and Canada's grew by 49%. However, because the Canadian and Mexican economies are much smaller than the economy of the U.S., their increases actually represent much larger growth rates. Further, as shown in Figure 2, U.S. export growth with NAFTA trading partners has been far greater than with others (NAFTA partners lead strong U.S. export growth).

There is great debate about the job and wage impact of NAFTA. U.S. unemployment has fallen from 7.5% just before the signing of NAFTA, while trade deficits over the last decade grew by nearly 300% (CAFTA, trade deficits and jobs). Further, total U.S. employment grew by twenty-two million jobs between 1990 and 2000, and U.S. average per capita real income rose by 26% over the same period. Since 1994, the real hourly wages for workers rose 38.4%, while prices rose at a slower rate of 27.1%. Detractors of NAFTA counter that its impact on jobs in the U.S. has been obscured by the "boom-and-bust" cycle that drove domestic consumption, investment, and speculation in the mid- and late 1990s (Scott, 2003). U.S. unemployment began to rise early in 2001, and 2.4 million jobs were lost between March 2001 and October 2003.

The manufacturing sector in the United States took the brunt of NAFTA job losses with a total decline of 2.4 million jobs between March 2001 and November 2003 as American manufacturers cut production costs by opening factories in Mexico. As a result, one of every five people in Mexico is now employed in export-oriented jobs and half of the 3.5 million new jobs generated in Mexico in 1995-2000 were a result of NAFTA and export growth (USTR on NAFTA's tenth anniversary). and, growth in Mexican exports accounted for more than half of the increase in Mexico's real national income during the period from 1993 to 2001. Mexico's leading exports to the United States in 2005 were automobiles, oil, electrical machinery, computers, furniture, textiles and apparel while the United States' leading exports to Mexico were plastics, chemicals, cereals, cotton, meat, paper, oil seed, aluminum, copper and knitted or crocheted fabrics (Buchanan, 2006).

Overall, trade liberalization has also benefited Mexican agriculture. The U.S. Department of Agricultures estimates that each $1 billion in agricultural exports supports 15,000 American jobs (Peterson, 2005). Thus, a reduction of exports by $9.3 billion translates into an American job loss of 140,000 agricultural jobs. Critics of NAFTA charge that the beneficiaries in that country have been a few larger farmers and transnational food conglomerates at the expense of smaller subsistence farmers in Mexico and small farmers in the U.S. (Henriques and Patel, 2004).

Supporters of NAFTA claim that trade liberalization leads to job losses in certain inefficient industries, but that export jobs will pay higher than average wages and offset losses (the ten-year track record of the North American Free Trade Agreement: U.S. workers' jobs, wages and economic security). Economists estimate the impact of trade on income inequality along with the impact of trade on worker's wages via de-unionization and other factors to have cost the 75% of U.S. workers without college degrees an amount equal to 12.2% of their wages. but, since 1994, the real hourly wages for workers has risen, so there are gainers as well. The income of educated workers is increasing while the income of less skilled workers is decreasing.

Foreign investment has proven to be one of the agreement's most successful propositions (NAFTA works brochure). Between 1994 and 1999, NAFTA partners invested $247 billion in each other's economies, with total foreign direct investment in NAFA countries reaching $1.22 trillion. All countries have benefited, with the U.S. showing the most dramatic increase. Between 1994 and 1999, investment from Canada and Mexico increased 92%. Foreign direct investment in the U.S. through 1999 totaled almost $987 billion, 8.4% of which came from Canada and Mexico. During this same five-year period, Canada's investment coming from the U.S. And Mexico increased more than 69%. Total foreign investment in Canada totaled $162 billion. Of this figure, more than 72% came from the U.S. which invested $116.4 billion and Mexico which invested $336.4 million. and, total foreign direct investment in Mexico through 1999 was $71 billion. More than 67% of this money came from Canada and the U.S.