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NAFTA: Are Jobs Being Sucked Out of the United States?
NAFTA, the North American Free Trade Agreement, went into effect on January 1, 1994. The Agreement phases out most tariffs between the United States, Canada, and Mexico. Tariffs, which are taxes on imports, increase the price of foreign goods and thereby benefit domestic producers. The participants in NAFTA agreed to reduce tariffs by 50 percent immediately and to reduce them to zero over the following 15 years. Industries suffering the most because of the increased competition from foreign goods would be given extra time to adjust to the elimination of tariffs on their foreign competitors' products.
Economists are generally in agreement that free trade benefits both parties involved in the exchange. Their argument rests on the principle of comparative advantage. An individual or country may be more efficient in producing all goods. However, both parties benefit if each individual or country specializes in producing goods in which it is relatively efficient and voluntarily trades for those goods in which others produce more efficiently.
The theoretical argument for free trade is persuasive. Nevertheless, many people object to the removal of trade barriers because they believe free trade will have a negative impact on employment and income. Others contend that the net benefits of free trade are positive and that tariffs protect the inefficient to the detriment of the country as a whole.
The International Debate Education Association (IDEA) presents a debate over the pros and cons of the free trade debate. Students could be quizzed on the arguments and asked to take a stand on the issues.
The debate in the United States on NAFTA centers on potential job losses because of competition with Mexico. Specifically, individuals such as Reform Party founder Ross Perot and presidential candidate Patrick Buchanan argue that lower wages in Mexico will result in United States businesses moving to Mexico. This would mean job losses in the United States. Others counter that although wages are higher in the United States, so is worker productivity. The net result in most industries is that costs in the United States are lower than in Mexico.
The effect of NAFTA on the United States economy can be determined only by a look at the data. We must see what has happened to trade since the Agreement took effect and attempt to draw conclusions about its effects.
A Look at the Data
The effects of NAFTA on United States trade with its North American trading partners begins with examining macroeconomic data. Subsequently, we look at disaggregated or micro economic data, i.e., data at the industry and state level. Finally, an examination of employment data will give clues with respect to the impact of NAFTA on the United States economy.
The International Trade Administration in the Department of Commerce gathers and publishes data on foreign trade. The data can be found at their website:
http://trade.gov/index.asp
Students should enter this site, click on the topic "Trade Statistics" and then click on the topic "U. S. Foreign Trade Highlights." Once they get into the foreign trade highlights, students should click on "U. S. Aggregate Foreign Trade Data, 1998 & Prior Years." The tables in this section contain data on United States trade with foreign countries. The students should examine the data in the various tables, do the suggested exercises, and answer the following questions.
1. Which countries are our three top trading partners (see Table 9)?
2. Construct one table and/or one graph showing the dollar volume of trade with Canada, Mexico, and Japan from 1991 through 1998. Construct similar tables and/or graphs for the dollar volume of exports (see Table 10), imports (see Table 11), and our balance of trade (exports minus imports-Table 14) for the same countries over the same years. What do the data show?
The aggregate, macroeconomic data clearly indicate that the volume of trade with Mexico and Canada has increased. Trade with Japan has been steady (flat). Given the very significant increase in exports from the United States to Mexico, it is difficult to state on the aggregate level that the United States has lost jobs to Mexico. Clearly, some industries have gained, while others have probably lost jobs. To attempt to identify gainers and losers from trade with Mexico, look at exports to and imports from Mexico in specific industries. Information on industry-specific foreign trade can be found by returning to the "U. S. Foreign Trade Highlights" page and clicking on the topic "U. S. Commodity Trade by Country (Top 20 SITC-3 and all SITC-1 products), 1994-98."
3. Scroll down the country list on this page until you find "Mexico." Students should enter the site showing trade by commodity with Mexico and should select three industries: high tech, low tech, and the apparel industry (which has been losing jobs to foreign countries for years).
Students then should construct the tables or graphs similar to those they constructed in the previous exercises.
The International Trade Administration’s website contains data on exports by state and by commodity. Data for imports into states are not available. Given that individual states’ resource endowments differ and they produce different goods and services, it is reasonable to expect exports will differ across states. It is also reasonable to assume that imports across states are similar and in relative proportion to a state’s population. State export data can, therefore, give us some information about the impact of NAFTA on individual states and industries within those states.
4. Students should return to the "U. S. Foreign Trade Highlights" page and enter the "State Export Data" section. This section contains data on state exports to foreign countries. Scroll down to the "State Export Totals to Leading United States Export Destinations" and select "Mexico." Scroll to "Export Markets For Each State Ranked by 1998 Export Value" and pick two or three states. Access the files and examine the export data.
Finally, an examination of employment data over the last decade gives some indication whether the United States’ economic performance has been affected negatively by trade with Mexico. Data on employment at the www.bls.gov/data/top20.htm
5. Students can access various historical data series (Tables A and B and the State and Area employment, hours and earnings table in the Employment and Unemployment section in this site) and examine various data series. For example, they can determine what has happened to total United States employment since 1989; they can examine what happened to employment in Minnesota in various industries since 1989; they can examine what happened to non-manufacturing employment in Mississippi since 1989 (it decreased). They can determine what happened to the employment situation in states they have previously examined.
Students can construct tables or graphs to determine the answer to these questions.
The debate on NAFTA, and United States foreign trade in general, usually centers on the potential negative effects of imports on the economy. It is relatively easy to identify who is harmed, because imports displace workers in industries where the comparative advantage lies elsewhere. At the same time, others benefit. Firms whose exports increase clearly benefit. Consumers get the same or higher quality products at lower costs. Are these gains costless? No; some firms lose sales and some individuals lose their jobs. Is protecting firms or industries that are likely to lose costless? No; we lose the gains from trade, and those who would have benefited because they could have increased exports never get the chance to do so.
The purpose of this lesson is to acquaint students with the concept of comparative advantage (relative efficiency) and the arguments for and against foreign trade. Understanding the theory, the debates surrounding the theory, and the relevant data will help students to think clearly about optimum public policy concerning free trade.
