NAFTA at 15: Assessing its Benefits, Accord has Boosted Jobs, Exports Across the U.S.

President Barack Obama will travel to Canada on February 19 for his first foreign trip. One item on his agenda with Canadian Prime Minister Stephen Harper will be the North American Free Trade Agreement (NAFTA). The meeting follows a similar encounter with Mexican President Felipe Calderón on January 12, after which a spokesman referred to the idea of an “upgrade” for the agreement.

In this context, understanding NAFTA is more important than ever. Since it entered into force in January 1994, rapid growth in trade between the United States, Canada, and Mexico has created significant new opportunities for workers, farmers, consumers and businesses in all three countries. However, despite this 15-year record, many of the agreement’s benefits are poorly understood. Below, we address its benefits, debunk some criticisms of the agreement, and place it in proper context.

The remarkable results of NAFTA are most obvious in the tripling of U.S. trade with Canada and Mexico over the past 15 years. Trade in goods between the three countries rose from $293 billion in 1993 to just under $1 trillion in 2008. In addition, U.S. exports of services to Canada and Mexico exceed $60 billion annually. Each day, the three North American countries conduct well over $2.5 billion in trade.1

In fact, Canada and Mexico are by far the two largest markets in the world for U.S. exports, purchasing more than a third of total exports. U.S. merchandise exports to Canada and Mexico rose from $142 billion in 1993 to a projected $422 billion in 2008. This represents a near tripling in U.S. goods exports to Canada and Mexico (a rise of 197%) in a period when U.S. exports to the rest of the world grew by 141%.

While NAFTA has probably boosted U.S. economic growth in limited ways, it certainly hasn’t hurt it. In the 1993-2007 period, U.S. GDP grew by 54%,Mexican GDP grew by 48% and Canadian GDP expanded by 56%.2

While some critics have claimed NAFTA caused the loss of a million U.S. jobs, U.S. employment has risen from 110.7 million in January 1994 to 138.9 million in December 2007. This represents an increase of more than 28 million jobs, or a 25% expansion in the number of Americans working.3

At the same time, the U.S. unemployment rate was markedly lower in the years after NAFTA came into force. In the period 1993-2007, it averaged 5.1%. This compares with an average rate of 7.1% during a period of similar length just before NAFTA came into force (1982-1993). 4 While the financial crisis that struck in 2008 has caused unemployment to rise sharply, this has nothing to do with the 15-year old trade agreement.

Did NAFTA lead to the creation of 28 million jobs or reduce U.S. unemployment rates by two percentage points? No. During a time of dramatic changes in the U.S. economy, the vast majority of economists believe the agreement has had little net effect on the number of jobs. But it has fostered growth in export riented jobs over jobs that aren’t tied to exports. Jobs tied to exports generally pay 5-20% higher ages than those that aren’t, so the shift in the mix of U.S. jobs toward more export-oriented industries represents a net gain for working Americans.5

Small and mid-size firms have long been the primary motor of U.S. job creation, accounting for well over half of all new jobs in recent years. Today, more than 110,000 of America’s small and mid-size firms export to Canada and Mexico. These small exporters hail from all 50 states. The states that export the most to Canada and Mexico are Texas, California, Michigan, Ohio, Illinois, New York, Indiana, Pennsylvania, Indiana and Washington.

The dollar value of small business exports is anything but small. U.S. small and medium-size companies exported $70 billion worth of manufactured goods to Mexico and Canada in 2006. Canada and Mexico together accounted for more than one-quarter of U.S. merchandise exports from small and medium size companies.

While NAFTA critics say that the agreement has harmed U.S.manufacturing, U.S. industrial production — three-quarters of which is manufacturing — rose by 57% between 1993 and 2007. This performance significantly outpaced the 28% increase in U.S. industrial production between 1981 and 1993.6

In recent years, U.S. manufacturers have set new records for output, revenues, profits, profit rates, and return on investment prior to the recent financial crisis. At the same time, growth in America’s service sectors — which employ some 80% of U.S. workers — has reduced the share of U.S. GDP represented by manufacturing from 15.6% in 1993 to about 12% in 2007.7

However, U.S. manufacturers shed about three million jobs between 2000 and 2003, despite the dramatic growth in output since NAFTA entered into force. Where have the lost manufacturing jobs gone? Not to Canada or Mexico, nor to China or India. Rather, they’ve been lost to a country called “productivity.”

A productivity revolution has allowed manufacturers to greatly increase output with fewer workers. Technological change, automation, and widespread use of information technologies have allowed firms to boost output even as some have cut payrolls.

This productivity revolution is a complex phenomenon. NAFTA critics are correct when they say that manufacturing employment hit a peak and then began a steady decline. However, the peak was in 1979, 15 years before NAFTA came into force.8

Today, with American manufacturers facing severe difficulties in the face of a sharp recession, revenue from exports to Canada and Mexico is critical. More than 13 million Americans are employed in manufacturing. These workers produced $870 billion worth of exports in 2007. Canadians and Mexicans alone purchased $330 billion of U.S. manufactured goods in 2007.

In other words, the NAFTA market brings export revenue of $25,000 for each and every American factory worker. Compare this to the salary of the average U.S. manufacturing worker — about $37,000. How could manufacturers make their payroll without the revenues they earn by exporting to Canada and Mexico? The short answer is, they couldn’t.9

For U.S. agriculture, NAFTA has been critical to export growth. Canada and Mexico account for 37% of the total increase in U.S. agricultural exports since 1993. Moreover, the share of total U.S. agricultural exports destined for Canada or Mexico has grown from 22% in 1993 to 30% in 2007. 10

Thanks in large part to NAFTA, Canada today is the top U.S. export destination for wheat, poultry, oats, eggs and potato exports. It is the second-largest U.S. export market for beef, pork, apples and soybean meal, and third largest for rice and dry edible bean exports.11

NAFTA did even more to open the Mexican market for U.S. farmers and ranchers. Mexico’s “MFN tariffs” — those paid by exporters from countries that lack a free trade agreement with Mexico — were highest for agricultural products; NAFTA allowed American farmers and ranchers to get past those barriers.

Thanks to this access, Mexico is the top U.S. export destination for beef, rice, soybean meal, apples, cheese and dry edible bean exports. It is the second largest U.S. export market for corn, soybeans and oil, and third largest for pork, poultry, eggs, and cotton.12

NAFTA is more important than ever. The members of the U.S. Chamber of Commerce have seen its benefits firsthand as it has generated new opportunities for workers, farmers, consumers and businesses. As President Obama considers the path forward for the U.S. economic partnership with our North American neighbors, NAFTA should continue to play the foundational role it has for the past 15 years.

1 All trade statistics are from the U.S. Department of Commerce.
2 International Monetary Fund.
3 U.S. Bureau of Labor Statistics.
4 Ibid.
5 Office of the U.S. Trade Representative.
6 U.S. Federal Reserve.
7 U.S. Bureau of Economic Analysis.
8 U.S. Federal Reserve.
9 U.S. Bureau of Labor Statistics and U.S. Department of Commerce.
10 Office of the U.S. Trade Representative.
11 U.S. Department of Agriculture.
12 Ibid.