1
2008
Has NAFTA Had a
Significant Impact On
The U.S Economy?
Always a hot topic in the American political climate, the North American
Free Trade Agreement has led to the creation of one of the world’s largest
trading blocs. But politicians and economists are divided on what effect it
has had on our nation. Using statistical analysis on a variety of data
collected prior and after NAFTA, as well as examining the existing
literature, this paper makes the claim that the agreement has in fact had a
positive impact, although the extent of which cannot be effectively
determined due to a large variety of external macroeconomic factors.
Kyle Whittaker
Department of Economics - The University of Akron Fall 2008
11/20/2008
2
Introduction
In the current political and economic climate, with the economy faltering and
unemployment rising, a great deal of emphasis is being placed on what can be done to help
restore balance and save the markets. During the last presidential election cycle, between
Senators Obama and McCain, both candidates traded words over a piece of legislation enacted in
1994: The North American Free Trade Agreement (NAFTA). The subject of much debate prior
to and after its inception, NAFTA aimed to promote an increase in trade between three countries:
The United States, Canada, and Mexico. The trading bloc created an alliance that as of the year
2007 was number one worldwide in terms of purchasing power parity, and second in terms of
nomical GDP1. However, much disagreement remained about its effects on the economy of the
United States, and so it remains a political issue today.
There a great many arguments for and against NAFTA. Opponents of the agreement
believe that NAFTA has had a negative impact on the jobs of U.S citizens, claiming that workers
will lose their jobs to lower paid Mexican citizens, who can do the same jobs cheaper and more
efficiently for less money. They also claim that the amount of U.S exports has been decreased
simultaneously. On the other hand however, proponents argue that the trade agreement plays to
one of the fundamental principles of economics, that of comparative advantage. Each side may
lose jobs in certain sectors, but the overall gain will be positive, as each nation can take
advantage of liberalized trade and non-existent tariffs to produce and ship goods for less.
More than a decade later, what have we seen as a result of the treaty’s implementation?
This paper will attempt to extract, from data obtained on economic indicators, as well as the
current body of literature, an answer as to the significance NAFTA has had. First, collected data
1
Source: http://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement
3
will be examined, and through statistical methods of interpretation, some answers will be found.
Then attention will be paid to other effects of NAFTA, on jobs and national unemployment as
well as target industries: agriculture, automobiles, and textiles.
Data Analysis and Methodology
To properly examine the situation, data is needed from years both prior to and after
NAFTA came into existence. This paper will use data from the beginning of the 1990’s to
present, in an effort to gain some perspective on the impacts. Two major economic indicators,
GDP and unemployment are necessary to help paint the picture, but some other information also
proves useful. Such factors include imports and exports as a portion of yearly GDP, and the
amount of manufacturing, service, and goods related job in the nation.
Year Unemployment Year Unemployment
5.6
4.2
1990
1999
6.8
3.9
1991
2000
7.4
4.7
1992
2001
6.9
5.7
1993
2002
6.1
5.9
1994
2003
5.5
5.5
1995
2004
5.4
5.1
1996
2005
4.9
4.6
1997
2006
4.5
4.6
1998
2007
Figure 1 displays the yearly unemployment
Figure 1
Coincidental or not, it seems to be a good
Source: Bureau of Labor Statistics
numbers, averaged from month to month, as
collected from the Bureau of Labor Statistics. It
is interesting to note that of all the years
present, only one year before NAFTA has an
unemployment rating of below six percent.
opening case for a positive effect of NAFTA. After all, keeping unemployment at a low level,
preferably full-employment, is a good indicator of economic success. From only the data in
Figure 1, it appears that NAFTA is effective in reducing unemployment. The data concerning
GDP increases on a consistent year to year basis, so further manipulation is needed. To do this,
the SAS software was used, through importation of data from both the Bureau of Labor Statistics
4
as well as the Bureau of Economic Analysis, to determine correlation coefficients between
variables. One particularly informative result of this analysis was that the correlations between
Variables related to imports and exports totally change in their relativity to unemployment, a
relationship illustrated
Variable
in Figure 2. The
relationship between
Unemployment
Pre-NAFTA
Unemployment
Post- NAFTA
Net Exports
0.75854
0.00183
Exports
0.21108
-0.26163
Imports
-0.10389
-0.13520
Goods-Producing Employees -0.93873
-0.69816
Manufacturing Employees
-0.85950
-0.33581
Service Employees
-0.13504
-0.18576
total exports and
unemployment went
from a strong
correlation to an
almost non-existent
Figure 2
Numbers > [.6] represent strong correlations.
one, while imports remained mainly unchanged. This seems to signify that NAFTA has not
impacted the exports sector in a large way in how exports relate to unemployment, but rather
removed some sort of restraining mechanism. When seen graphically, in Figure 3, it can be be
noticed that employment parallels the exports and imports as a whole prior to NAFTA, but
afterwards that their movements are wildy divergent, implying NAFTA removed any
relationship the two had. Figure 4 illustrates the further lack of correlation between NAFTA and
jobs in the manufacturing sector, an area in which opponents of NAFTA feared would take a
massive hit after the legislation’s ratification. Although the number of total employees is lower
today than during 1994, the amount actually rose after NAFTA and didn’t take a large fall until
the 2000’s, again suggesting a lack of impact.
5
8
0
7
-100
6
-200
5
-300
4
-400
Unemployment
3
-500
Net Exports
2
-600
1
-700
0
-800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Left, % Unemployment, RIight $ in bn
Unemployment and Net Exports
Figure 3
Source: BLS and BEA
Unemployment and Manufacturing Jobs
% Unemployment, left, total employees in millions left
8
18000
7.5
17000
7
6.5
16000
6
5.5
15000
5
14000
4.5
4
13000
3.5
3
12000
Unemployment
Figure 4
Source: BLS and BEA
Manufacturing Employees, Total (In millions)
6
Further, the amount of employees in service jobs has steadily risen without fall since
before the enactment of NAFTA, suggesting an overall transition from manufacturing economy
to service-based economy is proceeding without any help in either way from NAFTA. This
reflects the pro-NAFTA argument of comparative advantage: Other countries will take over
manufacturing based jobs while the U.S. moves to its stronger side of service-based industries.
Industry-Specific Effects
It also important to look at the effects NAFTA has had on specific industries, namely the
automobile industry, textiles, and agriculture. These were three industries that many feared
would be adversely affected by NAFTA. As far as agriculture goes, the USDA maintains that
trade in that sector have prospered immensely since 1993. U.S exports of pork to Mexico
increased by a sizable 350% from 1993 to 2004, and similar exports to Canada experienced an
even larger increase as exports grew seven times over (USDA 2005). The Heritage Foundation
estimates similar increases for the corn growers in the states. They claim that sales of corn grew
by 127% to Canada during the 1990’s, and by a massive 18 times to Mexico (Fitzgerald, 2001).
As far as textiles go, NAFTA was due to eliminate 60% of tariffs by 2000. Although the industry
was in decline prior to NAFTA, production has since increased (although the number of jobs has
decreased, this is attributed to technology). In fact, it is theorized that the rules of origin put in
place actually helped to save some U.S textile jobs rather than causing them to be lost to Mexico
(Burfisher, 2001). So what then of the automobile industry? The prevailing fear was that skilled
workers with a lower wage rate would decimate the auto industry in North America. Once again,
results seem to be positive. NAFTA immediately decreased tariffs on U.S. cars on its inception,
and most were eliminated by 1999. The agreement also dictates that to be counted as an
7
American car, 62.5% or more of the parts in the vehicle must come from the states (Gould 1998).
According to Burfisher, politicians had placed the auto industry near the top of their list of
“endangered jobs.” However, she states that the rules of origin had the effect of increasing
integration in the industry, and U.S automakers began using their Mexican plants to supplement
U.S. demand. This caused an increase in the importation of Mexican vehicles, but it also caused
a 14-fold increase in similar exports from the U.S. to Mexico (Burfisher, 2001). The Bureau of
Labor Statistics adds that the industry added jobs five times faster after NAFTA than before
(Fitzgerald, 2001).
Jobs – The Overall Effect.
It is difficult to totally isolate the direct effect of NAFTA on unemployment levels and
job creation rates in the U.S. economy, given the sheer variety of macroeconomic factors at
work. However, it is possible to get a broad picture of the amount of jobs created by looking at
increases in aggregate demand over the desired period. “When demand increases, a firm creates
jobs by hiring more workers.” According to the Progressive Policy Institute, in the three years
following NAFTA, the U.S economy created the amount of jobs lost to the shifting of jobs in one
month, suggesting that the agreement, whether it was responsible for such growth, certainly did
not impede it (Datelle 1997). Furthermore, the employment statistics previously presented in
Figure 1 demonstrate an economy with no serious problems concerning employment (Present
recessionary period excused), as the majority of years following NAFTA all have unemployment
rates of under six percent. In addition, the U.S. Labor Department had certified a mere 316,000
jobs as lost due to NAFTA as of 2001, a paltry sum compared to the twenty million created in
the same period (Whalen, 2001). Fitzgerald quotes the Department of Commerce: “We estimate
U.S. exports to Canada and Mexico support over 600,000 more jobs now than in 1993.” They go
8
on to state that “Jobs supported by exports pay 13 to 16 percent more than other U.S. jobs,” a
positive argument to be sure for the case of NAFTA (Fitzgerald, 2001).
Summary
After examining the impact of NAFTA on jobs, various industries, and evaluating the
correlations of economic indicators on import/exports and unemployement before and after
NAFTA, it can be concluded that the impacts of NAFTA are altogether positive. Some jobs have
been lost, but the comparative creation has been far more substantial, and the gains made in trade
on both the import and export side have had the effect of increasing, not decreasing employment.
Although many of the industries mentioned are currently struggling, this is due to other factors
besides NAFTA, as in the years following the creation of the trading bloc saw large increases in
trade, especially on the agricultural and automotive sides. Furthermore, correlations between
factors such as unemployment and net exports are not significant enough to indicate any negative
or positive impact of NAFTA on the larger economy. As a result of these factors, it can be
concluded that NAFTA has affected our economy in a positive manner, although the true extent
of which is hard to determine.
9
Works Cited
Burfisher, ME. " The Impact of NAFTA on the United States." Journal of Economic
Perspectives 15.1 (2001): 125.
http://home.coa.edu/faculty/webpages/dtaylor/impact%25of%25nafta.pdf
Datelle, David C. "NAFTA's Effect on U.S. Jobs." Progressive Policy Institute. 1 Oct. 1997.
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=127&contentID=1391
Fitzgerald, Sara J. "The Effects of NAFTA on Exports, Jobs, and the Environment: Myth vs.
Reality." Backgrounder #1462 (1 Aug. 2001)
http://www.heritage.org/Research/TradeandForeignAid/BG1462.cfm
Gould, David M. "Has NAFTA Changed North American Trade?." ECONOMIC REVIEW. 1
Jan. .
http://www.dallasfed.com/research/er/1998/er9801b.pdf
U.S. Department of Agriculture, "Benefits of NAFTA, May 2005.
http://www.fas.usda.gov/itp/policy/nafta/nafta_backgrounder.htm
Whalen, Charles J. "NAFTA's Scorecard: So Far, So Good ." BusinessWeek. 9 July 2001. 1 Jan.
http://www.businessweek.com/magazine/content/01_28/b3740089.htm
Data: