NAFTA: Setting the Record Straight

Abstract

HE North American Free Trade Agreement (NAFTA) was sold on the basis that it would bring a substantial expansion of US exports to Mexico and boost Mexico’s economic growth. Since its passage, however, not everything has gone as planned. In 1995 — scarcely a year after NAFTA came into effect — Mexico was in the midst of its worst economic crisis in decades. Meanwhile, rather than the anticipated expansion, US exports to Mexico went down. Has, then, NAFTA failed? The short answer is ‘no’. While many more years will be required before it is possible to make a meaningful assessment of the agreement, NAFTA’s expected benefits are beginning to materialise. Trade among the three NAFTA countries has been expanding to record levels and the number of US-Mexican business partnerships is on the rise. Moreover, despite the 45 per cent real devaluation of the peso, the seven per cent drop in Mexican output and Mexico’s 22 per cent fall in real wages during 1995, 1 US exports to Mexico were much less affected than Japanese or European exports largely thanks to NAFTA. Indeed, while exports to Mexico from the rest of the world, notably Japan and the European Union, fell by about 25 per cent, US exports contracted by less than two per cent. 2 Despite these positive trends, many Americans in and out of the Congress are proclaiming that NAFTA was a mistake. To a large extent, the statements against NAFTA are based on erroneous beliefs or egregious distortions. NAFTA is blamed for US job losses or declining living standards of workers, particularly the unskilled. In reality, the impact of NAFTA on gross job displacement in the United States has been negligible. Furthermore, there is some evidence that NAFTA’s net employment effect (the difference between jobs displaced and jobs created) has been positive.