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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Nov 07 2016

NAFTA Has Had Limited Impact on Trade Deficits, Jobs

In this U.S. presidential election cycle, the North American Free Trade Agreement (NAFTA), which liberalized trade among the U.S., Mexico and Canada, has become a hot-button issue. Much of the debate surrounding NAFTA centers on whether it has cost the U.S. jobs, particularly in manufacturing, and if it is responsible for the U.S. trade deficits with Mexico and Canada. The fact is that this is a reductive view of a complex agreement in need of context.

When NAFTA came into force in 1994, the U.S. had a modest goods trade surplus with Mexico. Since that time, however, the U.S. has had persistent trade deficits with both Mexico and Canada. Yet, when considering the U.S. goods trade balances with Mexico and Canada as shares of U.S. GDP, it is clear that these trade deficits are a relatively small fraction of the U.S. economy (Chart).



At its widest, the U.S. goods trade balance with Mexico was just -0.6% of GDP in December 2007 (green line), and it has generally hovered in the -0.4 to -0.3% range since 2012. With Canada (red line), the post-NAFTA trade balance troughed at -0.8% of GDP in December 2005 and July 2008, but in April 2016 it was in balance for the first time in its 32-year history.

It should be noted that the U.S. actually gained three-quarters of a million manufacturing jobs in the four years following January 1994, when NAFTA was enacted. Then, in the years leading up to and including the 2001 recession, the economy lost almost two million manufacturing jobs, and another 1½ million between December 2001, when China joined the World Trade Organization (WTO), and February 2004. After a period of stabilization, the U.S. lost another 2¾ million manufacturing jobs from the spring of 2006 to the spring of 2010 straddling the Great Recession, with fewer than a million manufacturing jobs having since been clawed back during the current expansion (not shown).

While correlation is not causation, and some of the jobs lost around the last two recessions may have gone to Mexico and China, the fact remains that the U.S. gained many manufacturing jobs for several years after the U.S. joined NAFTA, whereas it lost twice as many such jobs in the years after China joined the WTO. Separately, NAFTA’s impact on U.S. GDP through increased trade deficits has been mixed, staying relatively stable with Mexico and getting somewhat better with Canada in recent years, with many estimates concluding that trade with those economies provides the U.S. with several billion dollars of added GDP each year.

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