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 o one doubts that
NAFTA has expanded North American trade. But many question what
it means. Has
NAFTA
displaced U.S. jobs? Has it hollowed out America's manufacturing
base? Has it corrupted our youth with intoxicants, depressed our
job market with illegals?
From 1993, when the North American Free Trade Agreement was enacted,
through 2000, American exports to Canada and Mexico increased from
$142 billion dollars to $290 billion--a gain of 105 percent. During
those years, Mexico replaced Japan as our second largest trading
partner (Canada remained our first). U.S. exports to Mexico rose
168 percent, from $42 billion to $112 billion; our exports to Canada
increased 78 percent, from $100 billion to $179 billion.
All fifty states took part in the new business. Export increases
to the NAFTA countries, 1993-2000, ranged from a low of 19 percent
(Vermont) to a high of 344 percent (Nevada). The largest dollar
increases were recorded in Texas ($16 billion export increase),
Michigan ($14 billion), California ($13 billion), and Ohio ($6 billion).
Exports increased in every category of agriculture and industry
at which America excels: semiconductors, computer accessories, and
industrial machines; automotive vehicles, parts, and engines; telecommunications
equipment and electric apparatus; industrial supplies; consumer
goods; and foods, feeds, and beverages. American exports of services
increased also, for example, in engineering, finance, and pollution
abatement.
But total trade grew even faster than exports. In 1993, our total
business with Canada and Mexico, exports-plus-imports, was $293
billion; in 2000, $656 billion — a 124 percent increase, compared
to our 104 percent export growth. U.S. imports from Canada and Mexico
rose 142 percent during the NAFTA era.
So the U.S. trade deficit with the NAFTA countries jumped from $9
billion in 1993 to $75 billion in 2000. NAFTA enemies, such as Public
Citizen’s Global Trade Watch and its union allies, claim that this
imbalance signifies a hollowing of American industry. Our export
gains, the argument goes, are won at the expense of home-market
sacrifices that more than offset them. The result is a merchandise
trade deficit, reflecting a declining base of manufacturing and
manufacturing employment.
Economists have generally dismissed the importance of trade deficits.
They teach that merchandise trade imbalances are largely irrelevant
— that the foreign exchange market balances accounts among
international transactors in goods, services, and capital investments.
Indeed, the American republic ran merchandise trade deficits for
33 of its first 35 years without notable harm.
But
the years of trade expansion since NAFTA (including the Uruguay
round of GATT, passed one year later), provide occasion to compare
the claims of economists and protectionists on the effects of trade
on manufacturing.
U.S. manufacturing output has increased dramatically — from
$1.13 trillion in 1993 to $1.43 trillion in 1998. (I use the most
recent figures reported in the Census Bureau's Statistical Abstracts
through 2000). Manufacturing payroll has also increased — from
$573 billion (1993) to $689 billion (1997). But what of employment?
From a 1978 peak of 21 million workers, manufacturing employment
declined in ten of the next fifteen years, to 18 million in 1993
— a 13 percent decrease. Production workers, the manufacturing
sector's hardcore, declined from 15 million to 12 million —
an 18 percent decrease.
The
post-NAFTA expansion of world trade halted this sustained slide
in manufacturing employment. By 2000, the manufacturing workforce
had increased by 192,000 in 2000. Production line positions rose
by 101,000.
Usually, employment gains tend to depress gains in productivity
and wages. But surprisingly, these
| “From
1993 to 1996, annual value-added per manufacturing employee
increased from $126,500 to $143,800.” |
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employment
gains occurred in tandem with the greatest productivity surge since
World War II, and the strongest wage gains in a generation. From
1993 to 1999, the hourly earnings in manufacturing rose from $11.74
to $13.91 per hour. Our indices of worker productivity are infrequently
measurement. But their direction since NAFTA is clear enough. From
1993 to 1996, annual value-added per manufacturing employee increased
from $126,500 to $143,800.
Unsurprisingly, the sectors registering significant employment losses
under NAFTA are those that were in decline before its passage —
industries with comparatively low value-added per worker. Since
1993, the U.S. has lost 147,000 textile and 349,000 apparel workers.
But America simultaneously added 767,000 jobs in the manufacture
of durable goods, including 179,000 fabricated metal workers, and
192,000 electronics and electrical workers. The motor vehicle sector
increased its workforce by 161,000. (So much for the decline of
the U.S. auto industry!)
One non-manufacturing sector said to be under siege by Mexican competition
is trucking. The statistics tell another story. Trucking employment
has increased 26 percent under NAFTA, from 1.4 million in 1993 to
1.8 million in 2000.
From 1993 to 2000, America's international trade in goods and services
rose from $1.6 trillion to $2.5 trillion — a 55 percent increase.
This explosion of trade coincided with growth in aggregate employment,
manufacturing employment, wages, and productivity — results
that vindicate the economists, not the protectionists.
Postscript
No discussion of the effects of trade would be complete without
reference to the problems associated with open borders: illegal
drugs and aliens. In either case, trade policy plays a peripheral
role. Closing the nation's border to commerce makes sense only to
those who hate trade in legal commodities.
It is irrefutable that expanded legal trade facilitates illegal
trade. But high demand for narcotics in the United States renders
attempts to stifle supply futile under any trade regime, liberal
or protectionist. It is easier to detect narcotics through their
obvious effects on users than by anticipating the subtle stratagems
of professional smugglers.
In modern times, a war on intoxication cannot be fought (or at least
won) by a war on intoxicants. Transportation, the principle marketing
"obstacle" to successful drug pushing, is cheap, varied, and pervasive.
From an economic point of view, reducing narcotics consumption implies
increasing its cost. This is easier achieved on the demand side
— i.e., by punishing drug abusers, not micro-managing 12,000
miles of border (not to mention airspace!). The sanctions on narcotics
will, over time, replicate those on liquor, where an array of stringent
state and local use-restrictions have replaced a national prohibition.
The case for free trade is clearer with regard to immigration. Again,
other policies figure more prominently — for instance, the
government benefits available to illegal entrants, or the complicity
of a major political party in their crime. But open trade must reduce
the incentive for illegal immigration over time by attracting capital
investment in the native country. This promotes greater capital-per-worker
ratios, which hike productivity and wages in turn. The motive to
emigrate declines.
We've already seen this effect in practice. In the early '80s Mexico
fell into a depression that lasted eight years, made worse by its
government's imposition of restrictions on exchange and investment
in its already over-regulated economy. Illegals flooded our borders.
But when the peso tanked again in the mid-90's, the recession lasted
only three years. Under NAFTA, the export sector of the Mexican
economy remained transparent to market exchange rates. It was the
one sector where wages remained livable, where foreign exchange
was earned, and where the seeds of recovery were planted.
Trade transparency is only one tax cut the Mexican economy needs.
But it is an important one, and an incentive to further market reforms
— as the election of Vincente Fox eloquently affirms.
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