Everyone in Washington hates it. Shouldyou?
NAFTA Explained In 5 Minutes
Everyone in Washington hates it. Should you?
Welcome to the Glad You Asked series, a shame-free zone where we tackle topics you’re too embarrassed to ask even your BFF about. Don’t worry, we gotchu.
In the first debate of the presidential election, Donald Trump argued that “NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” He often repeats his wish to “renovate” the deal, and has even called it a “catastrophe.”
But Trump isn’t the first politician to deride NAFTA. Everyone from Ross Perot to Bernie Sanders disparages the deal. Hating on NAFTA might be one of the most unifying activities in Washington; it’s the political equivalent of sitting around a campfire, crooning “Kumbaya.”
Still, there are economists willing to defend the deal. So who’s right? And what exactly does NAFTA do anyway?
A brief history of NAFTA
The North American Free Trade Agreement is exactly what it sounds like — a trade deal between the three North American countries (the United States, Canada and Mexico).
It all began in 1987, when Canada and the US entered into a free trade agreement, which became the precursor to NAFTA. This deal was suspended in 1992, when President George H.W. Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas first created NAFTA.
The deal took effect on January 1, 1994 when President Clinton signed it into law. And people have been yelling about it ever since.
What does NAFTA do?
The NAFTA document is over 1,700 pages long, but the gist of the treaty can be summed up in one sentence: Before NAFTA, the US taxed goods imported from Mexico and Canada. NAFTA abolished those taxes.
But the tariffs didn’t vanish overnight: The US lowered taxes on imports by approximately 50% in 1994 and then eliminated them entirely in 2008. The treaty reasons that the higher taxes are, the more expensive goods become and the less countries trade. Supporters of the deal hoped that NAFTA’s ratification would boost economic growth by lowering taxes, making goods cheaper and creating more jobs. (Making it easier for Canadians and Mexicans to purchase American-made things, lawmakers thought, would increase demand for those things, thus creating more jobs in America.)
That sounds okay. So, why are we mad about this again?
NAFTA makes it easier for US companies to move their businesses to Mexico, where labor is cheaper. (Labor is one of the most expensive parts of manufacturing anything, so giving manufacturers access to cheaper labor was a huge incentive for them to pick up and move south.)
From the jump, NAFTA’s critics argued that this would result in the loss of homegrown American jobs. They weren’t wrong: the Economic Policy Institute estimates that NAFTA caused 700,000 jobs to move south of the border.
The Turkish economist Dani Rodrik writes that blue-collar employees were especially affected by the treaty. Rodrik notes that less-educated employees of industries like apparel, textiles, footwear, brick and tile experienced “reductions in wage growth by as much as 17 percentage points.”
The idea that manufacturing jobs might disappear en masse scared a lot of people. Political outsider and billionaire businessman Ross Perot garnered serious support during his 1992 presidential campaign by speaking out against the treaty. Perot famously used the phrase “giant sucking sound” to describe US jobs disappearing to Mexico.
Okay, then let’s get rid of NAFTA
Whoa there, partner. It’s not that simple.
Even though critics were correct and some companies did end up moving production and jobs south of the border, we can’t blame NAFTA for the loss of all manufacturing jobs in the US. Those positions have been in decline since the 1950s and factors like globalization, currency valuations, automation and recession are also responsible for helping kill them off.
Today, commerce between the US and Mexico is valued at approximately $1.4 billion a day. Six million US jobs depend on our country’s ability to easily trade with Mexico. If NAFTA disappears, guess what happens to these jobs? (Cue giant sucking sound.)
NAFTA critics argue that Mexico benefits the most from the treaty, but that’s not true. Mexico’s trade has increased a small amount since NAFTA went into effect, but the cheap labor the country provides also means that Americans pay less for goods that are imported from Mexico. If we dissolve NAFTA, prices go up.
What does this all mean?
In 2015, Congress published a non-partisan report that concluded that NAFTA “did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters.”
Since NAFTA was signed into law, US trade with Mexico and Canada has increased by 470%. The US trade deficit with Canada and Mexico has also increased significantly. Goods are cheaper, but there are fewer manufacturing jobs.
All in all, NAFTA is kind of a wash. The treaty hasn’t had a much of an effect on boosting the US economy because in the grand scheme of things, the US’s trade with Mexico and Canada only makes up a small portion of our overall trade.
Delong and others argue that getting rid of NAFTA won’t bring back jobs that automation has already eliminated, but it will increase the price of goods. He also notes that our tendency to scapegoat Mexico for all of our economic struggles might be rooted in racism, saying:
“The American political system right now is blaming all, 100%, every piece of that decline from 30% to 8.6% and every problem that can be laid at its door on brown people from Mexico.”
As president, Trump has the authority to bail on NAFTA — he doesn’t even need approval from Congress (though he does need to give Canada and Mexico six months’ notice).
Considering how seriously Trump takes his campaign promises, it’s likely that the trade agreement that plagued so many politicians may soon come to an end.