North American Free Trade Agreement: Everybody Wins

Article excerpt

Despite critics' dire warnings, the U. S., Canada, and Mexico all should benefit from the pact.

On Dec. 17, 1992, the U.S., Canada, and Mexico signed the North American Free Trade Agreement (NAFTA), an accord with far-reaching implications for the economies of North America. The legislatures in all three countries must ratify the historic accord before it can take effect on Jan. 1, 1994. Pres. Clinton has called for the negotiation of supplementary agreements on labor, the environment, and safeguards in parallel with Congressional consideration of NAFTA.

NAFTA will create about 171,000 net new U.S. jobs by 1995, compared with 1990. With surging American exports to Mexico ($43,000,000,000 in 1992, compared with $28,000,000,000 in 1990), many already have resulted.

If rejected, the U.S. is likely to experience job losses in comparison with the situation in 1992. It also probably would cause capital to leave Mexico. The resulting slowed growth south of the border and potential devaluation of its currency would contract that nation's imports and expand its exports, thereby slashing the U.S. trade surplus with Mexico.

An estimated gross total of 316,000 Americans jobs will be created by NAFTA, while 145,000 will be dislocated. As part of the NAFTA package, the U.S. therefore will need better training programs for dislocated workers. However, this retraining should be seen in a larger context, since job dislocations will be less than two percent of total displacements in the American labor market over five years. It is recommended that the U.S. earmark up to $335,000,000 of existing tariff revenues for worker adjustment to help American employees identifiably dislocated by NAFTA. This would serve as an interim measure until an economy-wide retraining program - the ultimate answer to all such labor adjustment problems - is enacted.

Based on the 1990 composition of trade, the median weekly wages associated with U.S. jobs supported by exports to Mexico and those dislocated by imports from Mexico were practically the same (about $425 per week). There is no over-all tendency for exports to Mexico to support high-skilled American jobs or for imports from Mexico to displace low-skilled positions.

The efficiency benefits and growth stimulus of NAFTA could exceed 15,000,000,000 annually. Over the long term, this figure, rather than jobs gained or lost, is the true measure of the economic gain from the NAFTA accord. Annual gains of $15,000,000,000 are equivalent to making an addition to the combined capital stock of the three nations of about $75,000,000,000. As the heretofore most protected and regulated of the three economies, Mexico will accrue the largest share of these gains.

NAFTA likely will lead to long-term growth in Mexican per capita income. Over a period of three or four decades, it might reach half the U.S. level, a gain that substantially would ease illegal immigration to the U.S. Nevertheless, Mexican immigration may increase in the next five to 10 years for demographic reasons having nothing to do with NAFTA.

Implications

For the U.S., NAFTA reforms will enhance an already important export market. Exports to Mexico have expanded rapidly since 1986, reaching an annual rate of about $43,000,000,000 in 1992. Suppliers of capital goods and high-technology products should continue to reap large benefits as prime suppliers of the burgeoning Mexican market.

For Mexico, NAFTA reinforces the extensive market-oriented policy reforms implemented since 1985. These have promoted real annual growth of three-four percent in recent years and a falling rate of inflation, now approaching single digits. The pact should reinforce the fast pace of change in the Mexican economy by locking in the Salinas reforms and buying insurance against future U.S. protectionism. It also should extend the reform process to sectors such as autos, textiles and apparel, finance, telecommunications, and land transportation. …