A NAFTA Retrospective

by Carl R. Tannenbaum, Ryan James Boyle, Vaibhav Tandon of Northern Trust, 4/27/18
  • A NAFTA Retrospective
  • Rising Stakes in NAFTA Renegotiation
  • Bond Yields Near A Barrier

We have made a decision now that will permit us to create an economic order in the world that will promote more growth, more equality, better preservation of the environment and a greater possibility of world peace.

- President Bill Clinton’s remarks upon signing NAFTA, December 8, 1993

The North American Free Trade Agreement (NAFTA) went into force nearly 25 years ago. The negotiations preceding the agreement spanned three U.S. presidential administrations and became a divisive issue in the 1992 election. What’s old is new again, as renegotiating NAFTA was a plank of Donald Trump’s platform in 2016.

Politics aside, all trade agreements need careful monitoring and occasional amendments as trade relationships evolve. As the U.S. resumes negotiations with Canada and Mexico, a recap of the goals and outcomes of NAFTA is in order.

NAFTA set out to better integrate Mexico into the North American economy, reduce illegal immigration from Mexico and make North American exports more internationally competitive. NAFTA did lower the costs of manufactured goods, benefitting not just consumers, but also the global competitiveness of U.S. and Canadian firms. As more intermediate goods could be produced at a lower cost, the net reduction in costs lowered the price of North American exports and helped the U.S. fight for market share against a rising Asia.



However, the movement of manufacturing to Mexico proved to be transitory for many industries, as China emerged as an even fiercer export competitor. Products more amenable to shipping are now much more likely to be made in China than Mexico. The industries that have remained in Mexico are those whose outputs are intermediate to U.S. factories or are heavier and less practical to ship, like cars and trucks.

Free-trade deals like NAFTA often have diffuse gains and concentrated losses. Most North American residents are better off, through lower prices and more competitive exports. However, per-capita income in Mexico in the early 1990s was only 30% of that in the U.S.; this led scores of lower-skilled jobs to move south of the border. The former employees of factories in the U.S. and Canada who were displaced by NAFTA felt acute pain from the trade agreement.

The impact was not a total loss for the northern partners to NAFTA, as well-paying jobs were created in fields like logistics. Further, the accord has probably taken too much blame for job losses, with only 5% of worker dislocation directly attributable to NAFTA. While some jobs were relocated, the U.S. continues to employ over ten million manufacturing workers.

Changes to gross domestic product (GDP) due to NAFTA have proven difficult to calculate. Most NAFTA policies took effect in the mid- to late-1990s, a time of general prosperity and growth across sectors. China’s entry to the World Trade Organization (WTO) in 2002 changed the landscape for manufacturing employment globally, complicating attempts to isolate NAFTA outcomes. The total gain to the U.S. economy is estimated at up to 1% of GDP. Meanwhile, new foreign direct investment into Mexico led to greater growth and reduced poverty for a once-struggling nation.

More broadly, the agreement helped to normalize relations across the continent. Illegal border crossings fell as economic opportunity in Mexico grew. Mexico entered the agreement as one of the most protected economies in the world, and today, it is one of the most open. The progress that NAFTA represents is substantial, and any changes to the status quo must be carefully considered.