Why NAFTA Was a Very Good Thing

Fifteen years ago today, on December 17, 1992, the North American Free Trade Agreement was signed by the United States, Canada, and Mexico. It created a huge free trade area of more than eight million square miles, 430 million people, and almost uncountable economic resources. It is the largest free trade area in the world in terms of gross domestic product, $15.3 trillion in 2006.

It began as an extension of a 1989 free-trade agreement between the United States and Canada, and it called for the immediate elimination of tariffs on about half the American goods exported to Mexico, and the phasing out of the rest over a period of up to 15 years. In addition, it strengthened intellectual property rights and made the export of American services easier.

Although the treaty was principally negotiated by the George H. W. Bush administration, and was signed in its last days, it was the Clinton administration, which came into office a little over a month later, that had to push its ratification through Congress. That took a great deal of political muscle and became the most significant accomplishment of President Clinton’s first year in office.

It was in many ways an unusual treaty. Canada and the United States have fully developed first-world economies with very high GDP per capita ($43,800 and $35,700 respectively, as of 2006). They also have relatively unregulated capitalist economies. Mexico, however, is still very much a developing nation, with a much lower GDP ($10,700 per capita). Its domestic economy is much more regulated, and significant portions of it are state-owned. Mexico’s vast, and vastly inefficient, oil industry, for instance, is a state monopoly. While the United States ranks fourth on the Heritage Foundation’s latest Index of Economic Freedom, and Canada tenth, Mexico ranks only forty-ninth. Furthermore, while NAFTA is a treaty involving three nations, much of it was negotiated bilaterally, not trilaterally, and three separate sets of negotiations had to be melded into one treaty.

The arguments in NAFTA’s favor were simple: More trade means more wealth is created, so any trade barriers, such as tariffs, that can be removed will result in increased economic activity and a higher standard of living for everyone, thanks to something economists call “comparative advantage.” 

Economies with low labor costs, many low-skilled workers, and a shortage of capital, like Mexico’s, can produce goods such as textiles and clothing at much lower costs than can countries such as the United States and Canada. Richer nations, in turn, can produce goods requiring high skills and high capital costs, such as microchips, more efficiently than can a Mexico. Services, a major American strength, would also often be more attractive then what was available locally in Mexico. Conservatives, who tend to favor free trade intellectually, and major corporations, which wanted better access to Mexico’s and Canada’s markets and Mexico’s low-cost labor, were the biggest backers of NAFTA.

The arguments against NAFTA were also familiar. Ross Perot, the businessman and sometime presidential candidate, said the agreement would produce “a giant sucking sound,” as manufacturing jobs moved massively to Mexico, hollowing out the American economy, driving up unemployment, lowering American wages, and even endangering American security as domestic manufacturing capabilities diminished. Liberals, increasingly opposed to free trade, and labor unions provided the most powerful political opposition to the treaty.

President Clinton knew it would be a tough sell within his own Democratic party, which had majorities in both houses of Congress. Although the treaty itself could not be altered if it was to pass Congress under the President’s “fast-track authority,” he negotiated separate agreements on labor rights and environmental protection that made the deal less objectionable to Democrats.

The treaty (technically a congressional-executive agreement, under American law) passed the House 234 to 200, with 132 Republicans and 102 Democrats in favor. The Senate then passed it by 61 to 38.

Fifteen years later, NAFTA remains controversial, although more so in the United States than in the other two countries. Canadian labor unions recently removed their objections to it from their platforms, but the AFL-CIO and the more liberal parts of the Democratic Party remain adamantly opposed to it.

Nothing as large and complex as NAFTA could produce only good, of course. In any fundamental change such as the treaty, there will be winners and losers. But NAFTA has produced far more winners than losers. Since 1993, overall trade in goods between the three countries has almost tripled, from $297 billion in 1993 to $883 billion in 2006. American exports of goods to Canada and Mexico are up 157 percent, services up 125 percent.

American manufacturing, meanwhile, has been growing steadily, although huge increases in productivity in recent years have kept manufacturing employment rising much less sharply. Opponents of NAFTA claim that it has cost the country a million jobs. That may well be true, but it has to be put into context. In a capitalist economy, especially in such revolutionary economic times as we now live in, jobs are being destroyed all the time. Lately the United States has been losing about seven million jobs a year to the “creative destruction” of capitalism—while it has created far more. Indeed, since 1994 there has been a net increase of more than 23 million jobs in the American economy, and the unemployment rate has fallen from 6.1 percent to 4.7 percent.

Nor has American investment shifted to Mexico. American manufacturing companies invested more than $200 billion in new plant and equipment in the United States between 1994 and 2001, and invested only $2.2 billion in Mexico.

NAFTA is part of the massive integration of the world economy over the last few decades, a trend that is only accelerating as telecommunications and shipping costs continue to fall. It is also a trend that is unstoppable without withdrawing from the world and turning the United States into a modern version of pre-late-nineteenth-century Japan. So the real question is not whether we should continue with NAFTA and other free trade agreements. It is how we will manage the inevitable continuing creation of a single world economy.

There will be plenty of losers in that creation. But if it’s managed wisely, there will be far more winners in the long and even medium term.