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PPI | Backgrounder | September 13, 1993
Setting the Record Straight on NAFTA
By M. Jeff Hamond
Critics of the pending North American Free Trade
Agreement are distorting the pact's likely economic effects.
Most objective evaluations by non-partisan researchers and
government agencies have concluded that the trade pact will
help expand the U.S. economy by boosting exports and
creating more high-wage, high-skill jobs. Here are
some major points to consider when weighing the pros and
cons of the NAFTA.
NAFTA will create jobs. Mexico is our fastest-growing
export market, and the second largest importer of U.S.
manufactured goods. The share of all U.S. exports purchased
by Mexico rose from 5.9 percent in 1987 to 9.1 percent in
1992, and 48 of the 50 states expanded their exports to
Mexico during that period. Mexicans purchase more U.S.
products per capita than either Germans or Japanese -- even
though these countries are much wealthier. In fact, since
Mexico began to open up and reform its economy in
preparation for NAFTA, the number of American workers
producing exports to Mexico has risen from 274,000 in 1986
to about 700,000 in 1992.
Remember: The elimination of tariffs means that
Mexican imports of U.S.goods and services will
increase, and more American exports to Mexico mean
job gains, not job losses. NAFTA equals more jobs.
Mexico will develop without us. Mexico will not stop
growing, and if NAFTA is defeated other countries will reap
the benefits of this growth. Do we want to be a part of
Mexico's growth, and the benefits that will result from it
(e.g., more exports, less illegal immigration)? Or do we
want to defeat the trade agreement because we are afraid
that another country's economy may grow more quickly
than ours?
Remember: If NAFTA is approved, as Mexico grows it
will turn first to the members of its own trade
association for imports, as do the members of the
European Community. As a result, the NAFTA will give
the U.S. a competitive edge in this rapidly-growing
market.
The "sucking sound" heard from Mexico will be from rising
exports, not job losses. Labor costs are only one factor in
U.S. firms' production siting decisions; other factors such
as infrastructure, market access, availability of capital,
and costs per unit of production are often more important.
Remember: If lower wages were the only reason that
companies moved production abroad, Haiti and Bangladesh
would be economic powerhouses today.
Yes, there will be losers as well as winners. There
is no question that more open trade with Mexico will produce
both winners and losers, since the two economies have
different strengths and, weaknesses. But the NAFTA will
promote growth in high-wage jobs, since the U.S. has the
advantage in sectors that require capital and skilled labor.
Democrats should push to retrain any displaced workers for
new high-wage, high-skill jobs.
Remember: Sectors that rely on lower-wage labor may
indeed suffer some job displacement, but the
Congressional Budget Office reports that net job
effects in the U.S. will be positive. Gary Hufbauer
and Jeffrey Schott of the Institute for International
Economics forecast a net increase of 170,000 jobs.
We can compete with Mexico. Although recent growth has
been sluggish, the United States is still the largest, most
productive economy in the world. Defeating NAFTA because of
a reluctance to change would not only signal vulnerability,
but also signal to countries in the process of reforming
their economies that the effort may not be worth it. The
U.S. economy is 18 times the size of Mexico's. For this
reason alone, the NAFTA simply cannot have a sudden drastic
impact on the economy; it is much more likely to have a
small, positive impact.
Remember: The long-term benefits of promoting economic
reform in Latin America and elsewhere can only help the
U.S. economy. Non-partisan agencies, such as the CBO
and the GAO, all predict that NAFTA will result in
higher average U.S. wages, and that the overall impact
will be positive.
Illegal immigration may be abated. As Mexican workers
grow wealthier and their jobs become more secure as the
result of increased trade, legal and illegal immigration
from Mexico should decline. This could have a positive
impact on the wages of low-skilled and rural American
workers.
Remember: Nothing in NAFTA changes U.S. immigration
law.
NAFTA will not destroy the environment. NAFTA maintains
existing U.S. health, safety, and environmental standards.
Without the agreement, nothing will be done to clean up the
environment on the Mexico-U.S. border.
Remember: The U.S. can prohibit the entry of goods
that do not meet its standards.
NAFTA provides everything we need for a thriving trade
bloc. The trade association will provide access to: 1) the
world's largest market, with more than 370 million consumers
and over $6.5 trillion of production; 2) low-wage labor in
Mexico for low value-added, labor-intensive industries; 3)
capital, technology, innovation, and high productivity in
the United States for growing, high-wage sectors; and 4)
Canada's virtually limitless natural resources.
Remember: The three countries working together can do
more than each working separately. A more efficient
distribution of productive capacity will make our
products more competitive in world markets.
M. Jeff Hamond is economic policy analyst at the Progressive Policy Institute.
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