NAFTA - The “Worst” Trade Deal Ever

With time on my hands over the last week of the holiday season, I spent a bit more time than usual surfing news channels and watched a press conference by U.S. President Donald Trump in  which among other things he again reiterated how the United States had been hard done by NAFTA and that it was the worst trade deal ever.   Needless to say, while he has pronounced from the mount on this matter numerous times, for some reason it particularly annoyed me this time, so I decided to see what simple evidence could be mustered to weigh in on this point.

So, off to the IMF-WEO Database for some data on the US, Canadian and Mexican economies. The indicators I have mustered have generated four charts.  First, per capita GDP in current prices (PPP International dollars) for the years 1994 – the start of NAFTA – and the tail end in 2018 plotted below in Figure 1.  Second, the percent change in per capita GDP between 1994 and 2018.  Third, the average annual unemployment rate for all the years from 1994 to 2018. Fourth, the average annual growth rate of the volume of exports of goods and services for all the years from 1994 to 2018.  I would have also liked to compared employment levels and growth of employment for all three countries also but the IMF-WEO data base only had employment data for Canada and the United States for the entire 1994 to 2018 period.

So, what does this simple evidence suggest about how these three economies have fared during the NAFTA era?  Well, in 1994, per capita GDP in PPP dollars was highest in the United States at 27,674 followed by Canada at 22,773 and then Mexico at 10,145.  By 2018, the relative rankings had not changed with the United States still first at 62,518 followed by Canada at 49,936 and finally Mexico at 20,645.  Growth in per capita GDP between 1994 and 2018 was the highest in the United States at 126 percent, followed by Canada at 119 percent and then Mexico at 104 percent. 

The average annual unemployment rate for all the years from 1994 to 2018 was the lowest in Mexico at 4 percent, followed by the United States at 5.8 percent, and then Canada at 7.5 percent.  While complete employment levels are not available for Mexico, it should be noted that Canadian employment from 1994 to 2018 expanded from 13.061 million to 18.587 million jobs – an increase of 42 percent.  Meanwhile, the United States saw an expansion from 123.071 million to 155.691 million jobs – an increase of 27 percent.  For Mexico, data was available from 2000 at this site and suggest an increase between 2000 and 2018 from approximately 38 million to 54 million – an increase of 42 percent meaning it has likely seen employment growth greater than 42 percent since 1994.

As for growth of exports in goods and services, the average annual growth rate for all the years from 1994 to 2018 was highest for Mexico at 6.4 percent followed by the United States at 4.8 percent and finally Canada at 3.4 percent. While not all of this export activity was a result of NAFTA, it remains that all three countries saw growth in their exports.

So, it would appear that during the NAFTA era, all three economies appear to have seen growth in key economic indicators. Per capita GDP remained the highest in the United States throughout the period and expanded the most in the United States.  Mexico saw the lowest gains in per capita GDP during this period.  As for unemployment rates, they were the lowest in Mexico during the 1994 to 2018 period and the highest in Canada.  In terms of employment generation, it was indeed the highest in Mexico, followed by Canada and then the United States.  Finally, export growth was the highest in Mexico, followed by the United States and finally Canada.

So, from all this, one can conclude that the NAFTA era saw economic growth in all three of these countries and the claim that it was the “worst” trade deal is hard to justify – but that is not a big surprise.  However, there was some differential performance in these three economies during the NAFTA era though of course this could be the result of any number of labour market or international competitiveness and productivity factors aside from the NAFTA agreement itself. And of course, no account is taken of the importance of the resource sector in the Canadian case during this period when it comes to economic performance.

Mexico seems to have had the most employment creation, the lowest unemployment rates and greatest export growth during the NAFTA era, but this has not translated into income increases comparable to the other two countries.  The United States has seen the second lowest unemployment rates, second highest export growth and the highest GDP growth, but its total employment growth was the lowest of the three countries.  As for Canada, it had the worst unemployment rate performance of the three countries and the lowest average annual export growth.  Mexico appears to have done a better job of taking advantage of export opportunities than Canada given its export expansion and this does seem to have translated into employment generation but not income generation.  

This evidence does explain to me some of the aspects of the USMCA/CUSMA/MUSCA deal that ultimately emerged.  Despite the evidence that the United States has done well during NAFTA in terms of its overall economic performance and remains North America's preeminent economy, the US push for higher domestic content requirement for the auto sector with 40 percent being produced by workers making at least $16 an hour was likely driven by the view that Mexico has seen the greatest export volume and employment gains during NAFTA era.  When it comes to trade or the Olympics, it does not matter to Donald Trump that the United States generally comes out first overall in the standings, he wants it to be first in each and every category also.   

Comments

[Hadrian Mertins-Kirkwood]

Two main problems with this analysis. First, these indicators don't actually say anything about the impact NAFTA had on the economies of the three countries. Yes, we saw growth in GDP/employment between 1994 and 2018 (the "NAFTA era"), but we don't know how much more or less growth we would have seen in the absence of the deal.
Second, these indicators don't reflect many of the concerns of NAFTA's critics, such as rising inequality and stagnant wages. See, for example: https://www.policyalternatives.ca/publications/reports/ascent-giants
Trump's characterization of NAFTA is misguided and opportunistic, but that doesn't necessarily mean the deal has been a good one for the three countries.

[Livio Di Matteo]

Well a full counterfactual analysis perhaps using general equilibrium modelling of what the performance of the economies of Canada, the USA and Mexico would have been like in the absence of NAFTA would be the ideal way to better explore the issue. I would suggest that some Canadian economic think tank might want to put it on its 2019 list of projects. In the absence of that, you might want to check out the following:
https://academic.oup.com/restud/article/82/1/1/1547758
http://www2.hawaii.edu/~noy/362texts/NAFTA-US.pdf
Both of these studies show overall positive gains for everyone but with Mexico getting the largest gains.

[Bob Smith]

For a nice summary of some of the older research on the impact of NAFTA on productivity and wages in Canada, US and Mexico, see: https://www.researchgate.net/publication/23729683_Globalization_and_Its_Impact_on_Labour

Key take away: "There is substantial evidence for North America that free trade has led to higher levels of productivity and real wages. That is especially true for Canada and the United States."

It also references Dan Trefler's earlier work on Canada.