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Abstract

This paper covers the very crucial and a very debatable issue in US, i.e.,

Economic Impact of NAFTA in detail. Present Government of Obama

is facing the criticisms from many economists in this regard.

Trade impact of NAFTA on all of its member states has been studied in

this paper from impact on United States of Americas point of view.

At the end the proposed changes in NAFTA have been described, to

leverage the trades in three countries. The main purpose of this study is

to find out the reasons why the claimed results have not been achieved

and also to highlight the achievements in trades have been marked so

far.


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T ABLE OF C ON T EN TS

1. Introduction ............................................................................. 1

2. Obje ctiv e of the s tudy ................................................................ 2

3. Background K nowl edge.............................................................2

4. How has NAF T A affected the U S Lab o r market?...................................4

5. W hat impact has NAF T A had on Mexic o ?..............................................5

6 . W hat impact has NAF T A had on Ca n ada?..............................................6

7 . C onclu sions & Re comm endation s.............................................. 7

8. Ref er ences ............................................................................... 7


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Economic Imp act of NAFTA By: Rafiq Ahmed Warriech

(Reg. No. 10660)

Page | 2

1 . Objective o f the st u dy:

To study the imp act of NAFTA on tr ade in US with r est of its mem ber states.

2 . Backgr o u n d K nowl edge:

i. W hat is NAF T A

NAFTA is a trilater al fr ee tr ade deal that came into forc e in January 1994 , signed

by Democr atic Pr esident Bill C linton . The centr al thru st of the agr eement is to

elimin ate the vast majority of tariff s on product s tr aded among the U nited States,

Mex ico, and C anada. The terms of the agr eement called for these tariff s to be

phased out gr adually, and the final as pects of the deal wer en't fully impl emented

until January 1, 2008. T he dea l swe pt away ex port tariff s in sever al indu stries:

agricultur e has bee n a major focu s, but tariff s have a lso been r educed on itemslik e textiles and automo biles. NAFTA a lso implemented intellectual- property

protections, established dis pute-r esolution mechanisms, and put into place

r egional labor and environm ental saf eguards, though some critic s now lo bby for

strong er measur es on this front .

ii. How d o Ec ono mists assess NAF T As ec ono mic impact

It is difficult to quantify NAFTA 's e ff ect very pr ecisely, given the compl exities

involv ed in ass igning dir ect causality between NAFTA 's impl ementation and economic shift s. Further, it is impo ssi ble to know the ex tent to which tr ade policy

might have li ber alized even without NAFTA. Ga ry C lyde Huf bauer and Jeffr ey J.

Schott, two ex perts at the Pe ter son Institut e for Internation al Economic s and the

author s of NAFTA Revisited: Achievements and Challenges , say that on a bas ic

level, NAFTA 's impact on North American comp anies is clear . "NAFTA was

designed to promot e economic growth by s purring comp etition in dom estic

mark ets and promoting investment from both dom estic and for eign sourc es," they

writ e. "It has work ed. North American firm s ar e now mor e effici ent and

productiv e. They have r estructur ed to tak e advantage of economi es of scale in

production and intr a-indu stry s pecialization ."

A pa per from thr ee promin ent tr ade ex perts, C . Parr R osson, III, C . Ford R unge,

and K ir by S. M oulton, notes that the idea of tr ade blocs is r elatively new in North


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(Reg. No. 10660)

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America, but argu es that simil ar arr angements e lsewher e in the world have shown

consistent gains wh en viewed from a long -term per s pectiv e. The r e port outlin es

diff er ent form s of " pr ef er ential tr ading arr angements," from fr ee tr ade deals lik e

NAFTA to mor e limit ed custom s union s a nd economic union s, which have bee n

success ful in parts of Europ e. The r e port notes that pr ef er ential tr ading

arr angements can actu ally divert tr ade in the short -term--and can cause labor -

mark et disruption s that ar e painful to some work er s--but also "can be ex pected to

have major long -term benefits."

In May 2003 , the C ongr ess ional Budg et Offic e a ttempted a full -scale exa mination

of NAFTA 's economic con sequences to date, taking car e to note the challenges

inher ent in any effort to assign dir ect causation to one s pecific tr ade agr eement.

The r e port came to thr ee main conclu sions:y U.S. tr ade with Mex ico was growing befor e NAFTA 's impl ementation, and

would lik ely have continu ed to grow with or without the deal on a scale that

"dwarf s the e ff ects" of NAFTA itself;

y The dir ect eff ect of NAFTA on U.S.-Mex ico tr ade is f airly small, and thus the

dir ect impact on the U.S. labor mark et is a lso small; and

Over all, the NAFTA deal has ex panded U.S. gro ss domestic product (GDP )

"very slightly, " and has had a similar eff ect-both positive and small-on theC anadian and Mex ican economi es.

iii. W hat impact has it had on trade specia ll y

Tr ade r elation s among C anada, Mex ico, and the United States have broadened

su bstantially since NAFTA 's impl ementation, though ex perts disagr ee over the

extent to which this ex pansion is a dir ect r esult of the deal. According to data

from the offic e of the U.S. T r ade Re pr esentative (USTR ), the U nited States' chief

negotiator in for eign tr ade and a major boo ster of NAFTA a nd oth er fr ee tr ade

accord s, the over all value of intr a-North American tr ade has mor e than tripl ed

since the agr eement's ince ption . The USTR a dds that r egion al business investment

in the United States rose 11 7 percent between 1993 a nd 2007 , as comp ar ed to a 45

percent rise in the fourt een year s prior . Tr ade with NAFTA partner s now account s


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(Reg. No. 10660)

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for mor e than 80 percent of C anadian and Mex ican tr ade, and mor e than a third of

U.S. tr ade.

3 . How has NAF T A affected the U S Lab o r market?

Ther e ar e diff er ent comm ents on this as pect of NAFTA , some economi sts s peak

in the f avor of NAFTA while r est of them have their r eservation s about NAFTA.

C o mme n ts i n fav o r o f NAF T As r ol e:

Meas uring the impact of a s pecific tr ade deal on a country' s labor mark et is not a

str aightforw ard exercise, and analysts disagr ee on how to gauge NAFTA 's e ff ects.

The USTR claims a b roadly positive influ ence, citing figur es that show an

incr ease in over all U.S. e mploym ent of 24 percent since NAFTA 's ince ption, as

well as declining unemploym ent r ates over the same period . In addition, theUSTR cites data showing that inflation -ad justed U.S. wages rose 19.3 percent

between 1993 a nd 2007 , as comp ar ed to only 11 percent in the fourt een year s

prior .

Many economi sts agr ee that NAFTA has had some positive impact on over all

U.S. e mploym ent. But most also agr ee that gains have bee n accomp anied by som e

painful side eff ects. Edward Alden, a senior f ellow at the C ouncil on For eign

Re lation s, not es that wages haven't k e pt pace with labor productivity and that

incom e inequality has risen in r ecent year s, in part due to pr essur es on the U.S.

manuf acturing base. T o some ex tent, he says, tr ade deals have hastened the pace

of these changes in that they have "r einforc ed the glo balization of the American

economy ."

But most economi sts say it's a s tr etch to blame these s hift s on NAFTA. "T he

pro blems in Young stown, Ohio, and other places lik e that go back decades be for e

NAFTA ," says Da niel T. G riswold, the dir ector of the C enter for Tr ade Policy

Studies a t the li bertarian C ato Institut e. Griswold says jo b losses a r e " part of astructur al shift of the U.S. e conomy " away from a focu s on heavy manuf acturing

and tow ard a focu s on light manuf acturing and high -end servic es. " It's a cruel

illusion to say if we just go in and tink er with NAFTA ther e will be some kind of

indu strial r enaissance," he says. A lden echo es this idea and says that broader


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economic tr ends a ff ecting U.S. e mploym ent--the rise of C hina and skyrock eting

energy prices, for instance--wouldn't be su bstantially alter ed by U.S. policy shift s

tow ard NAFTA.

C o mme n ts agai n st the NAF T As r ol e:

O pponents of NAFTA tak e a stark er position . Thea M. Lee is policy dir ector for

the AFL- C IO, which oppo ses NAFTA a nd lo bbies against other fr ee tr ade

agr eements as unf air to U.S. work er s and corpor ations unless they includ e

provisions that r equir e signatory countri es to r aise labor and environm ental

standards. Lee a rgu es one of the main upshots of the deal has bee n to "forc e

work er s into mor e dir ect comp etition with each other, while assuring them f ewer

right s and protection s." T he Economic Policy Institut e, a left-leaning r esea rch

org anization, says in a policy pa per on NAFTA that the deal's tr ade agenda has

served to widen U.S. tr ade deficit s a nd has indir ectly pushed some U.S. work er s

into lower - paying jo bs.

4. W hat impact has NAF T A had on Mexic o ?

Analysts cite economic growth in Mex ico since NAFTA was impl emented.

Attri buting this growth dir ectly to the deal is a fuzzy process, how ever, and som e

ex perts say Mex ican growth has und erperform ed ex pectation s.The Economist notes that des pite incr eased comp etition, Mex ican f arm ex ports

to the United States have in f act tripled since NAFTA 's impl ementation, in part

because of r educed tariff s on maize.

Exp o rts fr o m Mexic o to US :

Since 1994 , Mex ico's GDP has incr eased at an aver age annual r ate of 2.7

percent, below the aver age growth r ates of 3.3 percent and 3.6 percent in

the United States and C anada, r es pectively. Mex ican ex ports to the United

States have quadrupl ed since NAFTA 's impl ementation, from $6 0 billion

to $280 b illion per year .

I mp o rts i n Mexic o fr o m U S :

American ex ports to Mex ico have a lso incr eased sharply, mor e than

tripling as Mex ico's economy has grown . In addition, ex perts say tr ade


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(Reg. No. 10660)

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li ber alization between Mex ico and the United States has brought broad

positive con sequences for r egular Mex icans, not just Mex ican business

inter ests. For instance, the dea l has led to a dr amatic r eduction in prices

for Mex ican con sumer s. GEA , a Mex ico C ity-base d economic con sulting

firm, estimates that the cost of basic household good s in Mex ico has

halved since NAFTA 's impl ementation .

5. W hat impact has NAF T A had on Ca n ada?

Lik e the U nited States and Mex ico, C anada, the leading ex porter of good s

to the United States, has ex perienced economic growth since NAFTA 's

impl ementation . If anything, C anada has see n the strong est gains, though

again it is difficult to attri bute dir ect causation, particul arly given that

C anada a nd the U nited States had a fr ee tr ade deal that pr edated NAFTA.C anada's GDP has grown at a f aster r ate than either Mex ico's or the United

States' since 1994. Be tween 1994 a nd 2003 , C anada's economy show ed

aver age annual growth r ates of 3.6 percent, comp ar ed to 3.3 percent in the

United States and 2.7 percent in Mex ico . C anadian employm ent levels

have also shown steady gains in r ecent year s, with over all employm ent

rising from 14.9 million to 15.7 million in the ea rly 2000s. E ven C anadian

manuf acturing employm ent held steady, though Schott and Huf bauer not ethat C anadian economi sts r emain conc erned about the " productivity ga p"

between the C anadian and U.S. e conomi es. U.S. labor productivity has

consistently outp aced C anada's, and the ga p has b roadened since NAFTA

was put in place.

I mp o rts i n Ca n ada fr o m U S ?

One of NAFTA 's b iggest economic eff ects on U.S.- C anada tr ade has bee n

to boost bilater al agricultur al flow s. C anada is the leading import er of U.S.

agricultur al product s and U.S. a gricultur al ex ports to C anada roughly

dou bled between 1994 a nd 2003. T he U.S. De partment of Agricultur e

off er s a sector -by-sector r eview of U.S.- C anada tr ade since NAFTA 's

impl ementation, which show s broad incr eases in tr ade in sever al diff er ent

sector s.


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(Reg. No. 10660)

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6. C on clu sion & Rec o mme n dati on

W hat cha n ges t o NAF T A have bee n pr o p o sed?

During the 2008 e lection campaign C linton and Obama, as well as many oth er leading Democr ats, called for the amendm ent of NAFTA to includ e addition al

labor and environm ental standards. C linton had advoc ated for the impl ementation

of periodic r eviews of NAFTA , and both candid ates pledged in a Feb ruary 26

campaign debate to use the lever of a U.S. " opt -out " to pr ess C anada and Mex ico

to r enegotiate the terms of the deal. C anadian offici als have not ed they also hold a

major negotiating card in the se nse that U.S. e conomic inter ests could f ace se ver e

pro blems if C anada uses a r enegotiation to stiff en condition s on energy ex ports.

Mex ico has made simil ar thr eats ( IBT ), saying it might not be as a ccommod ating

about acce pting U.S. a gricultur al ex ports the second time around . S ince the

election, neither Pr esident Obama nor Secr etary of State C linton have made any

mention of str ength ening NAFTA 's provi sions for labor and environm ental

standards.

Many economi sts who broadly support NAFTA a gr ee that TAA r eform s could

prove broadly useful as a way of quelling anger dir ected at tr ade li ber alization .

Ex perts including Alden not e that positive long -term economic change oft en isaccomp anied by jo b-mark et tur bulence. T he U nited States is curr ently working to

r eform TAA , which helps r etr ain and r elocate work er s who f ace jo b loss due to

tr ade. One compon ent of a r eformed TAA could be wage insur ance, which a

r ecent C ouncil S pecial Re port argu es would protect work er s who f ace sustained

long -term wage losses.

7 . Refere n ces:

Lee Hudson Teslik, "NAFTA s Economic Imp act,"http ://www .cfr .org / pu blication /157 90/naftas_economic _ impact .html (Accessed Decem ber 17 , 2010).

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