Is Donald Trump right to call NAFTA a "disaster"?
Commentary
Recently, Donald Trump made a strong claim about the North American Free Trade Agreement (NAFTA) in an interview on CBS 60 Minutes:
"It's a disaster. ... We will either renegotiate it, or we will break it. Because, you know, every agreement has an end. ... Every agreement has to be fair. Every agreement has a defraud clause. We're being defrauded by all these countries."
Is he right? Was NAFTA a disaster? The answer to that question depends on how we measure the results. For the U.S. -- where the Bill Clinton administration sold the agreement as a job-creating policy because U.S. exports would grow by more than its imports -- the agreement has not lived up to its promise.
Estimates vary, but it appears that somewhere in the neighborhood of 350,000 to 700,000 jobs were lost due to the agreement, and when these workers eventually found new jobs, their incomes fell slightly (though some claim that incomes went up modestly).
Relative to the size of the U.S. labor market, approximately 130 million jobs in the 1990s, that's not a large loss. It surely had a big impact on households who suffered job losses, but the effect on the country as a whole wasn't very consequential. But it was negative, and the agreement failed to live up to the claims made prior to its passage.
If we take a broader view and include the impacts of NAFTA on other countries, Mexico in particular, the answer isn't as clear. Most estimates find that the trade deal did create jobs in Mexico. UC Berkeley economist Brad Delong, who worked on the agreement when he was at Treasury during the Clinton administration, estimates that 1.5 million jobs were created in Mexico, though others claim the true number is smaller than that.
But whatever the actual number, just like for the U.S., it's also relatively small. The agreement didn't produce an economic boom in Mexico, one that would halt the flow of illegal immigrants seeking better opportunities here.
And for some segments of the Mexican population, such as peasant farmers who were displaced when larger corporate farms emerged as a result of NAFTA and had no place to go to replace their lost income, the agreement made them worse off.
Why didn't it produce larger, positive impacts for both the U.S. and Mexico? The biggest factor was the unforeseen rise of China. Much of the production and jobs that would have ended up in Mexico as a result of NAFTA went to China instead. If those jobs had gone to Mexicans, much of their new income would have been used to purchase goods produced in the U.S. thereby nullifying NAFTA's negative effects for U.S. workers.
The idea was that both countries would gain jobs because the GDP of both countries would increase as a result of NAFTA. But the rise of China prevented that outcome.
Still, there's an idea behind NAFTA that's worth considering at a time when candidates on the campaign trail are so concerned about illegal immigration from Mexico. The easiest way to stop illegal immigration is to remove the incentive to come here. That can be done with carrots or sticks.
Using carrots means creating job opportunities in Mexico, but that won't happen quickly if Mexico is left to develop on its own. Foreign investment in Mexico is needed to spur economic development and reduce the incentive for Mexicans to come to the U.S.
Thus, investment by U.S. companies in Mexico would have a two-pronged benefit. First, it would raise Mexican income, which would benefit the U.S. in the long run through increased exports, and it would reduce the incentive for Mexican workers to illegally enter America.
The other approach is to use sticks -- walls along the U.S.-Mexican border, enhanced patrols, electronic surveillance and so on. However, the impact of this approach on illegal immigration appears to be limited. The U.S. has been trying this method for a long, long time, but increasingly sophisticated deterrence is matched by increasingly sophisticated entry methods.
In addition, building walls without developing what's on the other side misses out on the long-run mutual benefits from increased investment in and development of Mexico's economy.
This would be an easy call if U.S. workers weren't having their own problems. In a world where America was at full employment, with worker incomes rising and inequality falling, government policy could encourage investment in Mexico with little or no cost to U.S. workers.
For instance, in an overheated economy where the Fed would need to raise interest rates rapidly to avoid inflation, encouraging firms to locate in Mexico would reduce domestic inflationary pressures and the need to hike rates. It would be a win-win situation.
If the U.S. had better social services for workers hurt by international trade, it would be a much easier call as well.
But that's not the world we live in. American workers have good reason to worry about every job that could have come to the U.S. or stayed here, but didn't.
The evidence suggests that immigration and offshoring aren't the biggest source of the problems workers face. Technological change, particularly digital technology, appears to be a much bigger factor. But that doesn't lessen the anxiety and insecurity workers feel who wonder if their job will still be here a year or a decade from now.
So, there are no easy answers. But it's clear that getting the U.S. back on a solid economic track ought to be the first order of business. Building fences on the border isn't the answer to that problem. Nor is it the kind of infrastructure investment the country needs to retain its competitive edge.
