Finance and economic: Free exchange: Better than a wall
Understanding NAFTA, a disappointing but under-appreciated trade deal.
The North American Free Trade Agreement (NAFTA) has long been a populist punchbag.In the American presidential campaign of 1992, Ross Perot—an oddball Texas billionaire and independent candidate—claimed to hear a “giant sucking sound” as Mexico prepared to hoover up American jobs.Since its enactment, right-wing conspiracy theorists have speculated that NAFTA is merely a first step towards “North American Union”, and the swapping of the almighty dollar for the “amero”.Donald Trump, who plans to renegotiate (or scrap) the deal, mined a rich vein of anti-NAFTA sentiment during his campaign, calling it “the single worst trade deal ever approved in this country”.Even NAFTA’s cheerleaders (a more reticent bunch) might concede that the deal has fallen short of their expectations.
But it is in none of the signatories’ interests to rip it up or roll it back.America and Canada opened talks on a free-trade area with Mexico in 1990, shortly after securing their own bilateral deal, and it was bringing in Mexico that proved so contentious in America.When NAFTA took effect in 1994, it eliminated tariffs on more than half of its members’ industrial products.Over the next 15 years the deal eliminated tariffs on all industrial and agricultural goods.(The three economies would have further liberalized trade within the Trans-Pacific Partnership, which Mr Trump scotched in one of his first acts as president. )Americans hoped lower trade barriers would foster growth in cross-border supply chains—a “Factory North America” —to rival those in Europe and Asia.By moving parts of their supply chains to Mexico, where labor costs were low, American firms reckoned they could cut costs and improve their global competitiveness.
American consumers might also benefit from cheaper goods.For its part, Mexico sought improved access to America’s massive market, and sturdier positions for its firms within those North American supply chains.Both countries hoped the deal would boost Mexico’s economy, raising living standards and stanching the flow of migrants northward.NAFTA was no disaster.Two decades on, North America is more economically integrated.Trade between America and Mexico has risen from 1.3% of combined GDP in 1994 to 2.5% in 2015.Mexico’s real income per person, on a purchasing-power- parity basis, has risen from about $10,000 in 1994 to $19,000.The number of Mexicans migrating to America has fallen from about half a million a year to almost none.
And yet the deal has disappointed in many ways.Mexican incomes are no higher, as a share of those in America, than they were in 1994.(Chinese incomes rose from about 6% of those in America to 27% during that time. )Estimates suggest that the deal left Americans as a whole a bit better off.But the gains have proved too small, and too unevenly distributed, to spare it continued criticism.