The Case For NAFTA

Policy Backgrounders | Trade

No. 130
Monday, November 15, 1993
by Edward L. Hudgins, Ph.D.

Economic Benefits For America

Figure III - Net U.S. Jobs Created by NAFTA

Free trade is one of the few issues that economists across the ideological spectrum agree on. Scholars at the liberal Brookings Institute, the moderate American Enterprise Institute, the conservative Heritage Foundation and the libertarian Cato Institute all believe that NAFTA will raise living standards in the United States, Mexico and Canada. Every living American Nobel Prize winner in economics, whether liberal or conservative on other political issues, supports NAFTA. Among the many economic benefits of NAFTA are the following:

More American Exports. America's exports to Mexico are likely to continue at high levels under NAFTA for two reasons. First, the removal of Mexico's trade barriers will make more U.S. goods available to Mexicans at cheaper prices. Second, the continued growth of the Mexican economy will result in an expanding market for U.S. exports. As a less developed country converting to a free market economy, Mexico will need to import many products for its modernizing industries and its consumption-hungry citizens.

The experience of the developed countries after World War II suggests what America can expect from NAFTA and from expanded free trade throughout the hemisphere. Primarily through the General Agreement on Tariffs and Trade (GATT), the average tariff level for industrialized countries dropped from 40 percent to 5 percent. By 1960, Western Europe had recovered from the war and rebuilt its economies. Since then, worldwide exports have skyrocketed from $100 billion to over $3 trillion today, and the United States has been a major beneficiary:

  • American exports of goods and services have grown from $25.3 billion in 1960 to $640.5 billion in 1992.
  • The U.S. Department of Commerce's estimate that every $1 billion in exports supports 22,800 jobs implies that 14.5 million Americans are working to satisfy the growing foreign demand for American products.

"There is little to stop American businesses from moving to Mexico now, and many have."

Keeping Factories in the United States. Contrary to what NAFTA critics maintain, there is little or nothing to stop American businesses from relocating to Mexico. In fact, many already have, and trade barriers are part of the reason. High tariffs and other restrictions keep many American goods out of Mexico. In response to these barriers, many American enterprises have moved to Mexico so they can sell directly to Mexican consumers. By removing these barriers, NAFTA would encourage American firms to stay in the United States.

Some critics claim that Mexicans currently purchase little from the United States. They claim that much of the $40.6 billion in American exports to Mexico in 1992 was "round-tripped" that is, American components were sent to assembly plants in Mexico, counted as exports, then returned as assembled products to the United States. The facts are that some 83 percent of American exports to Mexico are purchased and consumed by Mexicans. Only about 17 percent go into goods that could be reexported to the U.S or elsewhere.2

Table I - The Top Twelve Exporters To Mexico

"Most studies show that the United States will gain jobs."

Further, some critics claim that freer trade with Mexico would cause American companies to move south of the border simply to take advantage of low-wage labor. But if this were true, these employers would already have moved to Puerto Rico, an American commonwealth with virtually unrestricted access to the U.S. market. Consider that:

  • Puerto Rico, with a population of over 3.5 million, employed some 148,000 manufacturing workers in 1989 at an average annual salary of $14,700.3
  • The 18.8 million American manufacturing workers in 1990 had an average salary of $28,250.4
  • Yet even with these lower wages, unemployment in the Caribbean island is over 14 percent,5 twice as high as the 7 percent rate in the United States.6

Although the average Mexican manufacturing wage is about $4.50 per hour, wages make up on average only about 15 percent of the cost of manufacturing in Mexico.7 Low wages certainly are important for the production of labor-intensive goods employing lower-skilled labor. But other factors usually are even more important. The infrastructure in Mexico is poor. Transportation costs for shipping parts and products between the United States and Mexico are high. The cost of energy, utilities and other factors of production in Mexico can be high as well. These are only a few of the reasons why many American enterprises prefer to produce goods in the United States. NAFTA will make it easier for them to do so.

Job Creation. There have been a number of studies of the effects of NAFTA on jobs. Most show job gains for the United States. [See Figure III.]

  • The bipartisan International Trade Commission (ITC) reviewed a number of studies and concluded that NAFTA would lead to between 35,000 and 93,000 new jobs in the United States.8
  • Gary Clyde Hufbauer and Jeffrey J. Schott of the nonpartisan Institute for International Economics predict that over five years NAFTA will create 316,000 American jobs while displacing 145,000 American workers, for a net job gain of 171,000.9

Hufbauer and Schott also compared Mexico to South Korea during the latter's period of economic growth. They concluded that if development patterns between the countries remain similar, as they likely will under NAFTA, Mexico will continue to purchase substantial quantities of American products and produce an increasing number of American jobs.

"The competition created by NAFTA will boost America's entrepreneurial spirit."

Higher Living Standards for Americans. Rising material living standards result from rising productivity. To be more productive, American businesses must produce more goods and services, given the amount they use of such inputs as labor, capital, land and raw materials. The only way workers can trade their labor for more real purchasing power is if they produce more goods and services. NAFTA will make that possible by allowing a better division of labor. Mexicans and Americans will dedicate more resources to the production of goods and services at which each is most efficient.

Further, the world's leading industrial countries are those that pioneer new products and services. The competition created by NAFTA will boost America's entrepreneurial spirit. The combination of greater competition and a larger market will help America remain the world's most productive economy.

Helping Northeastern and North Central States. Some may jump to the conclusion that most benefits of free trade with Mexico will flow to such border states as Texas and California. While these states will benefit, so will others. As Table I shows, of the 12 states with the largest value of sales to Mexico, six are in the northeastern and north central areas. These states will benefit even more under a NAFTA agreement which opens Mexico's market to more American manufactured products.

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