NAFTA's Balance Sheet Immediate Pluses of the Trade Agreement for the US in Terms of Job Creation May Be Thin, but the Negatives Raised by Critics Are Thinner

By Alan Stoga. Alan Stoga is managing director of Kissinger Associates, a. New York consulting firm. | The Christian Science Monitor, September 25, 1992 | Go to article overview

NAFTA's Balance Sheet Immediate Pluses of the Trade Agreement for the US in Terms of Job Creation May Be Thin, but the Negatives Raised by Critics Are Thinner


Alan Stoga. Alan Stoga is managing director of Kissinger Associates, a. New York consulting firm., The Christian Science Monitor


THE debate among campaigning US politicians this fall will almost inevitably fail to come to grips with many of the critical issues facing the nation. One concrete issue they will be forced to address, however, will be the future of the North American Free Trade Agreement (NAFTA), scheduled to be considered by the newly elected Congress. Opponents are already attacking the agreement as a sellout of labor and an assault on the environment; advocates argue that NAFTA is the antidote for decaying US industrial competitiveness.

As always in politics, the reality is somewhere between.

The most common criticism of NAFTA will be that the United States will lose jobs to Mexico because of that country's lower wages. Of course, if lower wages were the only determinant of investment decisions, everybody would have long since moved their plants to Ethiopia or Haiti.

Labor costs do matter to some extent, but the simple-minded version of the employment argument ignores the high likelihood that more open borders and faster growth will tend to push up Mexican wages, especially for skilled workers, and that labor costs are a steadily declining share of production costs in most industries. Moreover, critics tend to confuse gross and net. On any analysis, some jobs will be lost and others will be created as a result of NAFTA. On balance, most analysts agree more jobs will be created than lost.

Since everybody agrees that NAFTA is likely to increase Mexican growth, that Mexican growth is relatively import intensive, and that three-quarters of Mexico's imports come from the US, then US exports to Mexico will inevitably grow faster in the next years if the agreement is ratified. That means US export industries will hire more workers. This is already happening: Since 1988 exports to Mexico have nearly tripled, creating around 250,000 new American jobs.

This is good news; the bad news is that relatively few jobs are involved. In a civilian labor force of 118 million, net job creation of even several hundred thousand as a result of NAFTA, which is what seems likely, will scarcely be noticed, except, of course, by those who actually get the jobs.

For better or worse, this is the central economic reality: Mexico is so much smaller than the US that the immediate impact on the American economy from NAFTA is certain to be slight at best. NAFTA can bring some limited benefits to particular US industries or firms and will undoubtedly damage others, but it will produce spectacular immediate results for none.

The US economy is almost 20 times larger than Mexico's, and US per capita income is 10 times as great (roughly $20,000 versus $2,000). Although Mexico is growing faster, the gap is enormous and will remain so for years to come. …

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