The President’s New Deal
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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowAny deal that is premised upon a lie should immediately draw skepticism. In announcing a new trade deal with Mexico, President Trump perpetuated the lie that the North American Free Trade Agreement has been costly for the United States. In fact, it has been a boon for the U.S.
To say this is not to deny the reality that certain segments of our population have been hurt by the deal. It only means that on the whole, NAFTA has been very good for the U.S. The chief reason the lie persists is that those who have prospered most from trade deals like NAFTA, which is the vast majority of Americans, have been unwise in their stingy refusal to use some of the great bounty that has accrued to our country because of globalization to offset the negative effects on those who were most vulnerable to the forces of international competition.
When the President said the United States "was hurt very badly by NAFTA for many years" he may have been speaking for that subset of our population that has been hurt, but he contradicted a vast body of economic research and the personal experiences of most Americans who today enjoy a wider variety of goods at lower prices than would have been possible without deals like NAFTA.
Recent research on this issue is clear. In 2015, Lorenzo Caliendo and Fernando Parro of Yale and Johns Hopkins, respectively, concluded that NAFTA contributed an overall welfare gain to the U.S. of 0.08 percent of Gross Domestic Product – not a huge number, but a positive effect, driven by efficiency improvements and terms of trade gains. The later of these effects means that NAFTA drove down the prices of things we like to import. That does not hurt us badly.
In 2016, Shushanik Kakobyan and John McLaren, of the International Monetary Fund and the University of Virginia, respectively, found that on the whole NAFTA had not had much of an impact on U.S. workers. The exception is certain important pockets of workers for whom the lowered import barriers resulting from NAFTA did seem to have lowered wage growth below what it would have been without NAFTA. This was particularly true for blue-collar workers, and in certain parts of the country like Georgia, the Carolinas, and Indiana.
In 2017, Brad Delong of the University of California – Berkeley note that NAFTA did cause some job losses, but those losses were, in reality, a small matter in our very large economy. During the NAFTA era, we’ve created far more jobs than NAFTA erased. Many other economists have reached the same conclusion.
In 2017, Dani Rodrik, a respected Harvard trade economist and a vocal critic of the way globalization has worked, said "there is no way you can hold NAFTA responsible for employment de-industrialization in the U.S. or expect that a ‘better’ deal with Mexico will bring those jobs back."
Which brings us back to the president’s new trade deal. Any trade deal that emphasizes local content rules, as this one appears to do, is mostly going to raise the domestic price of things we import. Ironically, this will increase the incentive for low-cost producers elsewhere in the world to find ways to get around the rules.
The key point to remember when you hear that NAFTA has hurt us is that economists never claimed that such deals would help everyone. They only claimed, with strong theoretical and empirical evidence, that on the whole it would be good for us. And on the whole, it has been.
It is not the fault of NAFTA (or other trade deals) that while we have allowed the benefits of free trade to accrue most fully to the wealthiest and most educated in our society, we’ve allowed our infrastructure and public schools to crumble, and our health care system to evolve into a costly and confusing mess.
In 1993, when NAFTA took effect, economists knew that there would be adverse effects on certain segments of the population. Rather than perpetuating the lie that deals like NAFTA are the primary source of our problems, the question we should be asking right now is why didn’t we plan better to mitigate the effects of the changes brought on by globalization and technological change? Over the past 30 years, trade deals like NAFTA helped ensure that we certainly were a wealthy enough society to do so. We just chose not to.
Kevin Christ is an associate professor of economics at Rose-Hulman Institute of Technology.