Was NAFTA Really So Bad for the Economy?
Business + Economy

Was NAFTA Really So Bad for the Economy?

NAFTA is taking a beating this election season.

Donald Trump called the trade agreement between Canada, Mexico and the United States “the single worst trade deal ever approved in this country” during the first presidential debate against Hillary Clinton. Earlier this year, Bernie Sanders leveled a similar criticism, calling it disastrous when debating the former secretary of date during the primaries.

But whether NAFTA has been good or bad for the U.S. economy depends largely on who you ask. American companies that benefit from lower-wage workers in foreign countries give it a thumbs-up, while the American workers who’ve lost jobs or are earning lower wages decry the agreement.

NAFTA, short for the North American Free Trade Agreement, has been around since 1994 and was the product of both George H.W. Bush’s and Bill Clinton’s administrations. It was designed to reduce barriers to trade and investment by eliminating tariffs between the three North American countries.

NAFTA “means jobs. American jobs, and good-paying American jobs. If I didn't believe that, I wouldn't support this agreement,” then-President Clinton said in 1993.

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Fast forward more than two decades later and NAFTA is rallying cry for those who believe free trade has done more for other countries than for American workers. Trump and Sanders have been at the forefront of this criticism, while Clinton began to back away from her full-throated support of NAFTA when she first ran for president in 2008, and more so as she battled Sanders and now Trump in 2016.

Trump has promised to renegotiate NAFTA’s terms “to get a better deal for our workers,” according to his campaign site. If that doesn’t work, he vows to withdraw from the agreement altogether.

Clinton doesn’t address NAFTA specifically on her campaign site, but promises to “reject trade agreements that don’t meet “her high standard of raising wages, creating good-paying jobs,” while cracking down on companies that move jobs overseas.

According to one widely cited analysis, NAFTA has been a bad deal for tens of thousands of American workers. A study from the left-leaning Economic Policy Institute found that the trade deficit with Mexico and Canada ballooned more than tenfold from $17 billion to $177.2 billion between 1993 and 2013. That trade flow displaced 851,700 American jobs as companies moved production facilities out of the country in pursuit of cheaper labor.

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“Prominent economists and U.S. government officials predicted that NAFTA would lead to growing trade surpluses with Mexico and that hundreds of thousands of jobs would be gained,” the study said. “The evidence shows that the predicted surpluses … did not materialize.” Instead, trade deficits became larger.

But not everyone agrees with the overall assessment. The non-partisan Congressional Research Service last year concluded that NAFTA had a “relatively modest” effect on jobs and the overall economy, largely because trade with Canada and Mexico was a relatively small percentage of the country’s gross domestic product. “In reality, NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters,” the study said.

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Part of the reason it’s hard to parse out the specific effects of NAFTA is because the economy is so large and complex, and other forces are continuously at work. For example, deindustrialization in the U.S. is a long-term trend that was well underway before the trade agreement was implemented. Most economists believe that the movement of low-end production out of the country would have happened with or without NAFTA, though the agreement may have hastened the process.

The late ‘90s was a period of strong economic growth in North America, and it’s hard to see negative effects from the agreement in the data. Trade between the three countries increased almost three-fold between 1993 and 2006 and total employment rose, with nearly 50 million new jobs being added in the treaty nations.

So if the U.S. economy did so well after NAFTA, is there any reason to think the trade agreement was harmful? It all depends on where you are in the economic structure. A 2012 review by the Organization for Economic Cooperation and Development weighed NAFTA’s macroeconomic benefits against the plight of the thousands of largely low-skilled workers who were displaced in its wake. Many of them could not bridge the gap in skills to take the higher-skilled positions that had replaced the jobs they had lost to trade. Retraining and assistance programs didn’t “appreciably” help those workers find new jobs, either, the report said.

The report questioned whether the gains in trade under NAFTA were enough to offset the struggles of displaced workers and recommended that future agreements include stronger provisions to protect U.S. workers exposed to foreign competition.

But it may be too late for those Americans who have already lost their jobs to overseas competition and have been unable to enjoy the fruits of the larger and more efficient economy. Those workers are the ones who may use their votes this November as a referendum on free trade.