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The Legacy of NAFTA (Episode 13)

Though the North American Free Trade Agreement (NAFTA) is no longer in effect, as the predecessor of the United States-Mexico-Canada-Agreement, it is a crucial piece of the North American economic puzzle. NAFTA went into effect on January 1, 1994, and was replaced by the USMCA on November 30, 2018. Like its name suggests, NAFTA created a free trade zone across all of North America by eliminating most tariffs on imports and exports between the three countries. In economic theory, free trade is considered beneficial because it allows for the most efficient use of resources. Technically, unregulated trade should permit each country to export the goods they have a comparative advantage in producing and import other necessary goods. In terms of production, comparative advantage is the ability to produce a good or service with a lower opportunity cost than competitors. Essentially, the producer sacrifices less than its competitors because the producer’s alternatives are not as lucrative as those of the competitors. It boils down to the idea that each country is exporting what it is most equipped to produce, boosting efficiency and lowering prices. Naturally, when prices fall, people have more purchasing power and thus are able to buy more goods, stimulating the economy. The removal of trade barriers through agreements such as NAFTA and the USMCA aims to increase trade and economic activity between participating countries. Though NAFTA was relatively successful, it also had many unintended effects, which I will further discuss on a country-by-country basis.


The impacts of NAFTA are hard to isolate, since the Agreement does not exist in a vacuum. The rise of China as a major global economic power, the United States’ transition into a service-based economy, great advancements in technology, and other shifts in the world economy have also influenced Canada, the United States, and Mexico. However, by looking at trends in the North American economies from 1994 to 2018, when NAFTA was in effect, we can analyze its effects.


To begin with, let's examine the U.S. economy. According to Investopedia, trade between the United States and its North American neighbors went from around $290 B in 1993 to over $1.1 T in 2016, an increase of over 300%. Furthermore, Canada and Mexico are the largest importers of U.S. goods, together comprising over ⅓ of America’s export market. NAFTA made industry more competitive in the United States. According to Foreign Affairs and the Council on Foreign Relations, some fourteen million U.S. jobs rely on trade with Canada or Mexico, and the nearly two hundred thousand export-related jobs created annually by the pact pay 15 to 20 percent more on average than the jobs that were lost. On the flip side, the Center for Economic and Policy Research’s (CEPR) Dean Baker and the Economic Policy Institute’s Robert Scott argue that the surge of imports after NAFTA caused a loss of up to six hundred thousand U.S. jobs over between 1994 and 2014. Garment workers and autoworkers in particular were negatively impacted by NAFTA as companies moved jobs to Mexico, where wages are lower than in the U.S. or Canada. According to the Council on Foreign Relations, the U.S. auto sector has lost some 350,000 jobs since 1994—a third of the industry—while Mexican auto sector employment spiked from 120,000 to 550,000 workers. The removal or trade barriers, such as tariffs on imported goods, has removed some of the incentive companies had to manufacture products in the United States. However, it is also important to remember that millions of manufacturing jobs have moved overseas regardless of trade barriers, especially to countries like China and Vietnam. So, some of the jobs lost in the United States would have moved abroad regardless - NAFTA simply sped up the process and made production in Mexico more attractive. Furthermore, cheaper labor allows for cheaper prices for consumers in the U.S.


NAFTA was a mixed bag, and that trend continued in Mexico, where President Andres Manuel Lopez Obrador (AMLO) promised that the Agreement would drive wages up, stimulate economic growth, and reduce emigration. The Mexican economy grew at an average rate of only 1.3% between 1993 and 2013. Moreover, between 1994 and 2020, poverty levels remained at the same place instead of decreasing. Wages failed to rise significantly and unemployment actually increased, despite the influx of manufacturing jobs. Mexican farmers, particularly corn growers, suffered due to competition with U.S. agriculture, which the government heavily subsidizes. Studies estimate that NAFTA drove roughly 2 million small farmers out of business, therefore increasing illegal immigration to the United States. So, in summary, while NAFTA did raise wages, increased manufacturing jobs, and encouraged foriegn investment in the industrialized regions of northern Mexico, those benefits are balanced by the heavy toll that NAFTA took on Mexican agriculture.


NAFTA arguably had the least impact on Canada, which had already established a free trade zone with the United States dating back to 1989. The effects have been overwhelmingly positive: since 1993, Mexican and American investments in Canada have tripled, and the agricultural sector has seen a boost in agricultural exports. However, there has not been a major increase in productivity and Canada’s dependence on the United States has grown. America accounts for 75% of Canada’s export market, an unusually high number for a high-income country.


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