Ditching NAFTA Would Be a Bad Deal for America

Daniel Griswold of Mercatus.

"With all the challenges confronting the United States, the two major presidential candidates have committed themselves to picking a needless trade fight with the two biggest customers for U.S. exports: Canada and Mexico. Hillary Clinton recently joined Donald Trump in threatening to reopen and potentially scuttle the 22-year-old North American Free Trade Agreement. But tearing up NAFTA would be an economic and foreign-policy blunder of historic proportions.

NAFTA was a bipartisan achievement, approved by Congress with strong Republican support and signed into law by Bill Clinton in 1993. Once fully implemented, the agreement eliminated virtually all trade barriers between the United States, Canada and Mexico. By every reasonable measure, NAFTA has been a success.

The trade agreement delivered its core promise of deeper North American economic integration. Since its passage, our two-way trade with Canada and Mexico has more than tripled, with trilateral trade flows within NAFTA topping $1 trillion in 2011. Canada and Mexico are now the No. 1 and No. 2 foreign markets, respectively, for U.S. goods and services, collectively buying 34 percent of total U.S. exports.

NAFTA delivered the level playing field politicians say they want. Before NAFTA, Mexico imposed tariffs on U.S. agricultural and manufactured goods that were significantly higher than U.S. tariffs on Mexican goods. NAFTA reduced all duties in all directions to zero. What could be more fair than that?

As a result, North American production and capital markets are highly integrated, making companies in all three partner countries more competitive in global markets. The auto sector is especially intertwined, going back to the U.S.-Canada auto pact of 1965. NAFTA is a major reason, despite other challenges, the North American economies have outperformed those of the European Union and Japan.

Critics of NAFTA make outlandish claims about its impact on American workers and industry. Trump asserts that the agreement has been “totally disastrous” for the United States. More than two decades ago, H. Ross Perot warned that passage of NAFTA would unleash “a giant sucking sound” of jobs and investment going south of the border. Critics were wrong then, and they’re wrong now.

NAFTA was never going to have a huge positive or negative effect on the United States, though most studies show a modest positive effect on the U.S. economy. When NAFTA took effect, our economy was more than 17 times larger than Mexico’s, our barriers were already low, and our two-way trade with Mexico was a mere 1.4 percent of the U.S. gross domestic product.

Manufacturing investment to Mexico did increase after NAFTA, but it remains a fraction of annual manufacturing investment in the U.S. domestic economy. In the five years after NAFTA’s passage, the U.S. economy added more than 500,000 manufacturing jobs. Real, inflation-adjusted manufacturing output is up 40 percent since NAFTA came into effect. The loss of manufacturing jobs since 2000 wasn’t because of NAFTA, but because of gains in productivity fueled by automation.

Along with the economic gains, NAFTA has been a foreign policy success. It locked in Mexico’s economic reforms and stabilized its economy. Today Mexico is a multi-party democracy with a growing middle class. Relations with our southern neighbor and its 100 million citizens have never been better.

Mexico’s improving economy has reduced the incentive for its citizens to migrate to the United States. Net immigration from Mexico has turned negative in recent years, with more Mexicans returning to their homeland each year than entering the United States. If Mexican workers are barred from selling their goods in the United States, they’ll be more tempted to export their labor.

Withdrawing from NAFTA would be a disaster for the United States. What sort of business model would impel a company or a nation to provoke an unnecessary fight with its top two customers? 

Overturning this successful, 2-decade-old commercial agreement would disrupt supply chains and put millions of current U.S. jobs at risk. It would make U.S. companies less competitive in global markets, reducing U.S. imports, exports, output and employment.

That would be a bad deal by any measure."