NAFTA took effect in 1994 during the Clinton administration although he had to rely on support from the Republicans in the House – 60% of congressional Democrats voted against NAFTA. NAFTA got rid of tariffs on more than half of its members’ industrial products and by 2009 the deal eliminated tariffs on all industrial and agricultural goods.
Positives of NAFTA
- American corporates believed the deal would cut labour costs and therefore increase efficiency and international competitiveness.
- American consumer would also benefit from lower prices.
- It would raise Mexico’s living standards especially in the north.
- Trade between the USA and Mexico has risen 1.3% in 1994 to 2.5% in 2015
- Mexico’s real income has risen – $10,000 in 1994 to $19000 in 2015
- Less Mexicans are migrating to the USA – 500,000 a year to virtually nothing.
Mexican incomes are no better, as a share of those in the US, than they were in 1994. Americans are slightly better off. NAFTA has caused significant job losses in the manufacturing industry.
However there are some unseen circumstances which have affected the deal.
1. The crisis of the Mexican Peso in 1994-95 – Zapatista rebels launched an uprising in Southern Mexico and the leading presidential candidate was assassinated. Worried about stability, foreign investment began to flee the country. It was eventually brought under control by a loan from the US government.
2. September 11th – this terrorist attack increased the cost of moving goods and people
3. The rapid growth on the Chinese economy which accounted for more than 13% of global exports and 25% of global manufacturing value-added. This puts a lot of pressure on global supply chains.
Have job losses been a result of NAFTA?
Brad DeLong (University of California) estimated that NAFTA could be blamed for only 0.1% of job losses in the US economy. This equates to fewer jobs than the US economy adds in a typical month. But to be realistic job losses would have increased without NAFTA for the following reasons:
1. the advances in technology would see labour being substituted
2. the strong US dollar would make US exports less competitive and thereby making overseas production attractive
3. Transport and communications improvements have made overseas production also attractive
Source: The Economist – 4th February 2017
Below is Paul Krugman on Bloomberg news. He talks of the poor performance of NAFTA for Mexico in that the country hasn’t developed as a whole. Some of the northern states have done well but southern Mexico is still very poor.
In his US Presidential campaign one area that Donald Trump was clear about was trade. During the oil crisis years of 1973 (oil prices quadrupled) and 1979 (oil prices doubled) the traditional US car / truck became very expensive to run and Americans started to buy significant numbers of Japanese cars which were much more reliable and cheaper to run. Trump alluded to this and stated that Japan was robbing America blind. He also criticised inept and corrupt elites for moving jobs abroad – ‘China is killing us’ he said.
In order to even the playing field he has vowed to:
- impose a 45% tariff on imports from China to compensate for their manipulation of its currency.
- impose a 35% tariff on goods from Mexico in order to protect American jobs.
- renegotiate existing agreements like the North American Free Trade Agreement with Canada and Mexico
- pull out of the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.
- Trump has threatened to withdraw from the World Trade Organisation (164 members)
America has free-trade agreements with 20 other states and the percentages below tell you how important trade is. See also the graphic from The Economist.
- 33% of America’s imports come from countries they have free trade agreements
- 50% of Americas’ exports come from countries they have free trade agreements
If Trump does go ahead with a trade-war it is estimated employment in private companies employment would decline by 4.8m jobs by 2019. It is ironic that the very group that supported Donald Trump will be the most disadvantaged. Furthermore, with anti-free trade policies comes higher prices which will harm living standards and worsen Americas fiscal position. Although it might preserve some jobs it will worsen prospects and lower well-being for others – OECD.
With America pulling out of the TPP China maybe keen to take the place of the US in this agreement with 11 other Pacific nations.
TPP [would be] a good thing in the long run because it sets high standards for international trade and investment,” says Prof. Larry Qiu, of Hong Kong University’s School of Economics and Finance. He adds that what the world needs is not “more trade and investment … but higher quality and better ordered trade and investment
The rise of China as a producer of just about anything has had a detrimental impact on the industry of many developed nations. Brazil and Argentina are particularly concerned about cheap imports from China impacting on their main export market – North and South America.
Brazil and Argentina are worried about deindustrialisation and have resorted to protectionism – trade barriers/import restrictions. This protectionist policy means that the consumers are the ones that suffer from the higher prices. Argentine officials now require importers to match the value of their orders with exports which had led some car importers to sell wine. This is a particular worry for South American countries as history tells us that for large countries to become developed there needs to be a strong industrial sector. For Brazil the problems are:
– the high domestic interest rates – 9.75% – which make the currency uncompetitive for exports
– a high tax level
– poor infrastructure
Brazil and Argentina had the chance to turn the NATFA (North America Free Trade Agreement) into a 34 country Free-Trade Area of the Americas but they turned it down. If they are to succeed they will need to embrace the global economy and maybe revisit potential trade agreements.