U.S.-Mexico: Trump’s Misguided Approach to NAFTA Renegotiation

By Robert A. Blecker*

Three people stand at podiums with flags behind them

Canadian Foreign Minister Chrystia Freeland, U.S. Trade Representative Robert Lighthizer, and Mexican Minister of Economy Ildefonso Guajardo (L to R) participate in the fourth round of NAFTA negotiations in Washington, DC in October 2017. / State Department / Flickr / Creative Commons

President Trump has characterized NAFTA as a “win” for Mexico and a “loss” for the United States; his administration is currently working on a renegotiated “deal” that would allegedly reduce the U.S. trade deficit and recapture lost manufacturing employment, but his nationalistic approach fails to recognize the fundamental causes of both U.S. and Mexican economic problems.  In fact, NAFTA was a huge success for President George H.W. Bush and his administration, as it achieved their fundamental goal of enabling U.S. corporations to make products in Mexico with low-cost labor – without fear of expropriation, regulation, or other loss of property rights – and export them to the United States duty-free.  The Mexican government went along because it thought NAFTA would bring in desperately needed foreign investment and provide a growth stimulus, while U.S. and Canadian workers rightly feared that they would lose jobs as a result.  While much discussion has focused on which country “won” or “lost” in NAFTA, that is the wrong way to evaluate a trade agreement.  The two key criteria for judging the accord are which sectors, groups, or interests won and lost in each country, and how it, in conjunction with other policies, has affected long-term growth, development, and inequality in each.

  • Under NAFTA, U.S.-Mexican trade in goods and services has grown exponentially, reaching $623 billion (with a U.S. deficit of $69 billion) last year. However, NAFTA (along with other causes and policies) has contributed to worsening inequality in both the United States and Mexico.  Less-skilled U.S. workers definitely lost, with wage losses up to 17 percent in local areas most exposed to NAFTA tariff reductions.  In Mexico, although consumer gains from trade liberalization were widespread, upper-income groups and the northern region benefited the most.  Real wages for Mexican manufacturing workers have stagnated since 1994.  Labor shares of national income have fallen in both countries since the late 1990s.
  • Domestic policies, exchange rates, financial crises, and the impact of China can make the impact of NAFTA difficult to identify, but effects in some sectors are clear. Mexico gained jobs in automobiles and parts, appliances, electrical and electronic equipment, and seasonal produce.  The United States gained in basic grains, soybeans, animal feed, and paper products.  Although about a half million jobs in automobiles and related industries have “moved” to Mexico, total U.S. job losses in manufacturing (5 million since 2000) have been much more affected by China and technology than by Mexico.  What Trump’s nationalistic rhetoric ignores is that U.S. companies capitalized on these dislocations to raise their profit margins and increase their bargaining leverage over workers and governments both within North America and globally.

Trump’s aggressive posture about NAFTA exploits political discontent with these sectoral effects and the overall worsening of inequality, but the U.S. Trade Representative (USTR)’s key demands in the renegotiation appear unlikely to remedy either problem.  USTR Lighthizer is focused on protection for the auto sector, by requiring higher U.S. content (or higher wages for Mexican auto workers), and on changes to dispute resolution procedures that would favor investment in the United States instead of in Mexico.  At best, these measures could bring back a small number of U.S. jobs; at worst, they could make some U.S. industries less competitive (if costs increase).

All of this debate in the United States ignores the fact that NAFTA has been a huge disappointment for Mexico.  Although export industries like automobiles have prospered, the gains to domestic sectors of the Mexican economy have been limited, resulting in sluggish growth (only 2.5 percent per year since 1994, far below the 7.6 percent achieved in East Asia) and leaving millions in poverty while millions more emigrated to the United States.  Of course, other policies and events (including Chinese competition) played into these outcomes, but NAFTA (and related liberalization policies) didn’t turn out to be the panacea for the Mexican economy that then-President Carlos Salinas promised in 1993.  Yet, in the short run the Mexican economy remains highly dependent on foreign investment and exports to the U.S. market, so Trump’s demands for a revised NAFTA and his threats to withdraw are undermining Mexico’s current economic prospects.  Instead of following Trump’s nationalistic approach, the three NAFTA members should focus on making all of North America into a more competitive region with rising living standards for workers in all three countries.  This would start with policies at home, such as public investment in infrastructure, education, and R&D, that could foster industrial growth, along with redistributive measures like higher minimum wages consistent with each country’s economic conditions.

May 11, 2018

* Robert A. Blecker is a Professor of Economics at American University.

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