Impact of NAFTA over two decades

NAFTA

The United States signed its first free trade agreement (FTA) with Canada in 1988, and soon began pursuing a subsequent deal with NAFTA that would replace and expand that deal. NAFTA came into force in 1994, and by 2008 all of the duties and restrictions that were included in the deal were eliminated. The agreement was intended to increase trade between the three nations, building on the successes of that initial deal with Canada. This paper will look back at the first 20 years of NAFTA and discuss the impacts of the deal on the American economy. Particular attention will be paid to the city of San Antonio, located in the south of Texas, less than 150 miles from the Mexican border. This geographic positioning gives San Antonio a competitive advantage as a hub for U.S.-Mexico trade, so it is important to examine the issue of how NAFTA has affected business in San Antonio.

The Objectives of Free Trade

Free trade is a manifestation of the neoliberal politics of the 20th century, wherein nations believe that cooperation with each other will ultimately build a stronger world. There is some debate about whether there is a difference between political neoliberalism, which take forms like the EU and the UN, and economic neoliberalism, embodied by free trade agreements (Shah, 2010). Free trade agreements, and economic neoliberalism in general, are rooted in the belief that part of the path to peace and prosperity lies in creating wealth, and that the greatest wealth can be created through the removal of trade barriers. Both classical and liberal economic orthodoxy sees government intervention in markets as a source of market failure, and free trade agreements effectively reduce the role of governments and national borders in the exchange of goods and services (Bhagwati, 2014; Krugman, 1987).

Thus, free trade agreements are brought into place in order to create larger zones where trade is unfettered. The United States was already one of the largest free trade economies in the world prior to NAFTA, but adding Canada and then Mexico increased the power of the trading bloc, making it by far the largest in the world. By creating freedom for movement of goods and services between the three largest countries on the continent, the three largest economies, and with the two countries that border the U.S. By land, the American government believed that it would be able to increase the wealth of the American people.

The way that free trade is supposed to work is that where there are fewer trade barriers, trade will necessarily gravitate towards the nation that has the comparative advantage within that trade union. This will render the economic system more efficient, and more efficient deployment of resources will result in the creation of an overall higher level of wealth, which is essentially divided among the participants (Boudreaux, 2014). NAFTA would remove sources of market failure, bringing about greater economic efficiency.

The challenge for individual companies is that some benefitted from the trade barriers -- they were the benefactors of economic inefficiency, and a move to efficiency would threaten their business. Thus, the benefits of NAFTA were always going to be distributed unevenly among geographies and industries. This reality poses a challenge for cities, especially one like San Antonio, where NAFTA could be expected to create significant opportunity, but also significant challenges -- the outcome of NAFTA on any one city or sector being difficult to predict.

The benefits of free trade are therefore typically reported in aggregate. There are likely to be sectors that have struggled as the result of free trade, ones that perhaps received abnormal benefit from the inefficiencies prior to free trade, or ones that were slow to adapt. For the city of San Antonio, it was critical given its position so close to Mexico that it find ways to adapt to free trade and reap economic benefit from it; these efforts will be outlined later in this paper.

Overall Benefits of NAFTA

The Office of the Trade Representative (USTR, 2014) has all but declared NAFTA an enormous success. It notes that U.S. goods and services trade within NAFTA now total $1.2 trillion, which is bigger than the entire Mexican economy and not much smaller than the Canadian economy. U.S. exports to NAFTA countries totaled $597 billion in 2012, and imports from NAFTA countries were $646 billion. This does represent a trade deficit, but that is not inherently bad. First, the U.S. trades with many other countries -- a deficit with specific ones is not necessarily a problem. The other reason is that when the U.S. imports goods from Canada and Mexico, that is because those goods are cheaper and better than if they were produced in the United States.

The two NAFTA countries are the top two export destinations for U.S.-made goods, with Canada purchasing $300.3 billion and Mexico purchasing $226.2 billion. Machinery, vehicles, electrical machinery, mineral fuel and oil, agricultural products and plastic were among the leading export categories (USTR, 2014). The two NAFTA countries ranked #2 and #3 in terms of countries that supply goods and services to the United States, behind China. Major imports are oil, vehicles, electrical machinery, machinery and agricultural products.

According to the 2012 data, foreign direct investment (FDI) from NAFTA countries was at $452.5 billion, up 7.1% from 2011 levels (USTR, 2014). This total amounts to around a quarter of total FDI inflows that the U.S. receives from all nations. Despite fears of capital flight, the U.S. receives more inflows than does Mexico by a wide margin, and U.S. outflows to Mexico could not be a significant amount of total U.S. FDI outflows.

What all this means is that the United States has in general been a beneficiary of NAFTA. The country has increased its trade significantly, and NAFTA has made the U.S. An even more attractive destination for foreign direct investment. There is no evidence that there has been a substantial capital flight to Mexico. What NAFTA has done is that it has been able to leverage the power of comparative advantage to improve the volume and value of trade between these three countries.

There is another way to evaluate NAFTA, and that is on the human level. NAFTA has always had its opponent among those who stood to suffer ill-effects from free trade, by losing their privileged positions and being unable to adapt. The reality is that there were always going to be such casualties, and that they were going to exist in all three countries. Typical opposition to NAFTA comes loaded with anecdotal evidence, rather than evidence from across the entire economy. One such argument (Burke, 1993) prior to NAFTA predicted massive capital flight to Mexico (which never materialized relative to gains made elsewhere) and on the argument that NAFTA was designed to protect North America from Europe. Moving manufacturing to low-wage Mexico in particular would erode the manufacturing employment base in the U.S. The reality is that China, not Mexico, has emerged as America's low cost production center, and that aside from during recession, unemployment has generally been low in the U.S. It was that way during a boom under Clinton and again during George W. Bush's second term. Where employment has been hurt it was nothing to do with the impacts of NAFTA. It could be argued that the real wage has not gained since the late 1970s, but if that is the case then this is not an argument against NAFTA or even free trade in general, as NAFTA was still fifteen years away. There are negative economic issues that should be of concern to Americans, but they do not stem from NAFTA on aggregate, but from other policies and factors more directly applicable.

External bodies have also sought to examine the effects of NAFTA on the U.S., in case the USTR is not considered trustworthy, as part of the Executive branch that strongly supports free trade initiatives. Caliendo and Parro (2014) found that Mexico was the greatest beneficiary of NAFTA, its welfare increasing by 1.31%. The United States saw only modest improvement in welfare, at 0.08% and Canada actually suffered ill-effects. The latter point is not surprising, since it already had the agreement it wanted with the U.S. That the U.S. did not gain much by these scholars' measures is more surprising. They found that interbloc trading increased by 41% with the U.S., and given the increases in both Canada and Mexico it is safe to say that almost all of the U.S. increase in trade was with Mexico. The benefits of NAFTA, therefore, are likely to be disproportionally along the southern border.

An independent study on wages showed that real wage growth in the U.S. has suffered during the time period in which NAFTA has been in place, and tied this to the vulnerability of local industry in those regions to Mexican imports. The authors therefore are seeking to make a case that part of the real wage stagnation in the United States is due to NAFTA (McLaren & Hakobyan, 2012).

A different study looked at different industries to see NAFTA's creation and diversion effect, that is to say what new industries have emerged as the result of NAFTA and which ones have moved (Karemara & Ojah, 1998). The authors found that the United States will be one of the immediate beneficiaries of NAFTA. They argued that crude oil prices declined, in part because of more secure access to supply from Canada, one of the world's largest producers. Many manufactured goods from Mexico also found markets in the United States. U.S. exporters gaining from NAFTA included automatic data processing equipment makers and waste paper products (Ibid).

Thus, there is evidence that the United States has benefitted overall from NAFTA. There are some individual losses in terms of industrials and people who have struggled as the result of the change in trade patterns brought about from NAFTA, but there are others who have benefitted. Their stories are less likely to make the evening news. The one area where NAFTA seems to have hurt the U.S. is in real wages, if not overall employment. Real wages were stagnating before NAFTA, and the increase in trade since NAFTA has not brought wage growth back. Doubtless the fact that Mexican manufacturers have been cited as major beneficiaries of NAFTA reflects in part why real wages in the U.S. have not increased despite the overall increase in economic activity as the result of NAFTA. Still, with higher levels of trade, a strong regional trade bloc, and greater economic efficiency, NAFTA's impact on the U.S. has generally been positive.

San Antonio

San Antonio realized early that NAFTA was going to present some interesting challenges and opportunities. With unknown outcomes, it was entirely possible that the economic makeup of the city would be transformed by NAFTA. Yet, situated so close to Mexico with a majority Hispanic population, San Antonio was also well-situated to benefit from increased trade with Mexico. However, it was never going to be a given that the city would be a beneficiary, and it would have to compete with a number of other cities, some right on the border, for the benefits of the trade.

One of the most immediate impacts of NAFTA was the creation of trade zones in the north of Mexico were factories known as maquiladoras would operate, producing goods for export into the United States duty-free. Major border cities would have the opportunity to warehouse and distribute those goods to the rest of the United States. NAFTA brought with it an increase from $2.5 billion in foreign direct investment to $20 billion as a direct result of NAFTA (Guajardo, 2013). San Antonio, as the place where NAFTA was signed, was always going to be competitive in attracting new business.

Consulting is one business where San Antonio has excelled, both Mexican and American businesses needed advice on cross-border trade and legal issues. With the knowledge that barriers between the two countries were being removed, more people felt comfortable with cross-border investment in particular. One law firm has estimated that San Antonio has seen the single biggest benefit of any city from NAFTA, at an estimated $2 billion per year (Goddard, 2012).

One of the major reasons why the legal and trade businesses have excelled in San Antonio was the creation of the North American Development Bank, which local officials had lobbied for. The bank has helped facilitate cross-border trade and is the epicenter of the consulting industries that have mushroomed since the trade agreement was signed.

The city has also made other contributions to encouraging economic growth in the wake of NAFTA. Kelly Air Force Base was converted into Port San Antonio, taking advantage of San Antonio's geographic position to be a major transportation hub for cross-border trade (Goddard, 2012). Further investments in transportation infrastructure are only going to build on the initial efforts to make San Antonio the major NAFTA transport center. For example, Union Pacific built a $90 million intermodal rail terminal, to be part of a greater plan to position San Antonio as an inland port (Corsi, 2007).

One success story in particular is the Toyota plant, which takes advantage of parts made in Mexico to assemble cars for shipment all over North America. Before NAFTA, it would have been unthinkable to build cars in San Antonio, but the deal made it a reality. The fact that there is a strong manufacturing base in Mexico did not hurt San Antonio, instead of brought jobs, as goods and money are able to move freely across the border. San Antonio does need to compete, and realistically will have trouble competing with Mexico's low cost business environment, but it has found ways to attract higher-value business, something that has resulted in a massive boom in the city's economy since NAFTA was signed.

Some of the figures highlighting the positive impact that NAFTA has had on San Antonio are astounding. The San Antonio region saw exports from the region increase 231% from 2005 to 2010 -- that's in the middle of the Great Recession -- from $1.1 billion to $3.6 billion. It has been estimated that the net job creation from NAFTA in the region has been nearly 23,000 jobs, over 7400 of which were in the city itself. Small businesses have been some of the biggest beneficiaries of this increased trade. The presence of trade resources for these businesses has meant that San Antonio receives a lot of small business investment, as it is simply easier to start a business in the city than in other places that lack the same trade infrastructure. The International Trade Center, a trade resource, has noted that it helped to create over 300 jobs and retain 1100 more for small businesses in the area. Small businesses, leveraging this infrastructure, are able to get the financing that they need to expand, creating further economic gains.