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.