Do NAFTA's 6 Pros Outweigh Its 6 Cons?

coffee is cheaper thanks to NAFTA
NAFTA lowered the prices of imports from Mexico and Canada. Photo: Silvestre Machado/Getty Images

The North American Free Trade Agreement created the world's largest free trade area. It links 450 million people. Its member economies generate $20.8 trillion.It's also highly controversial. Do the pros of NAFTA outweigh the cons?

Pros

NAFTA has six advantages. First, it quadrupled trade between Canada, Mexico, and the United States. That's because the agreement eliminated tariffs. Trade increased to $1.14 trillion in 2015.

Second, it lowered prices. The United States imports Mexican oil for less than before the agreement. That’s because NAFTA got rid of tariffs. This decreases reliance on oil from the Middle East. Food can also be transported for lower costs, reducing grocery bills. Costs are lowered for farm products, too.

Third, economic output in the trade area grew.  It boosted U.S. growth by as much as 0.5 percent a year. Three industries benefited the most from increased exports: agriculture, automotive, and services such as health care and financial services.

Fourth, NAFTA created jobs. Increased exports led to nearly 5 million new U.S. jobs. Furthermore, manufacturers created 800,000 jobs in the first four years of NAFTA.

Fifth, foreign investment more than tripled. U.S. businesses invested $452 billion in Mexico and Canada. Companies in those two countries invested $240.2 billion in the United States.

That helped manufacturing, insurance, and banking companies.

Sixth, NAFTA reduced government spending. That's because each nation's government contracts became available to suppliers in all three member countries. That increased competition and lowered costs. For more details, see NAFTA Advantages.

Cons

NAFTA also had six disadvantages.

First, it led to the loss of 500,000-750,000 U.S. jobs. Most were in the manufacturing industry in California, New York, Michigan and Texas. Companies in some industries moved to Mexico because labor was cheap. These industries were automotive, textile, computer and electrical appliance.  

Second, job migration suppressed wages. Sixty-five percent of companies in the affected industries threatened to move to Mexico. The U.S. workers remaining in those industries could not bargain for higher wages. Between 1993 and 1995, 50 percent of all companies in the industries that were moving to Mexico used the threat of closing the factory. By 1999, that rate had grown to 65 percent. (Source: Kate Bronfenbrenner, "Uneasy Terrain: The Impact of Capital Mobility on Workers, Wages, and Union Organizing," Cornell University, September 6, 2000.)

Third, NAFTA put Mexican farmers out of business. It allowed government-subsidized U.S. farm products into Mexico. Local farmers could not compete with the artificially low prices.

Fourth, as Mexicans lost their farms, they went to work in sub-standard conditions in the maquiladora program. Fifth, U.S. companies degraded the Mexican environment to keep costs low.

Sixth, NAFTA allowed Mexican trucks access into the United States. Mexican trucks are not held to the same safety standards as American trucks. Therefore, Congress prohibited this provision. For more, see NAFTA Disadvantages.

Chart of NAFTA Pros and Cons

ListProsConsWorth It?
TradeIncreased Yes
JobsCreated 5 million U.S. jobs682,900 U.S. manufacturing jobs lost in some statesYes
WagesAverage wages increasedRemaining U.S. factories suppressed wagesYes
WorkersU.S. unions lost leverageMexican workers exploitedNo
EnvironmentCanada exploited shale fieldsMexican environment deterioratedNo
OilU.S. costs lowerImproved Mexican economyYes
FoodU.S. costs lowerMexican farmers went out of businessNo
ServicesU.S. exported finance and healthcare services Yes
FDIIncreasedNoneYes
Government SpendingReduced due to more competitive bidding Yes

 

Do NAFTA's Pros Outweigh Its Cons?

NAFTA's disadvantages are significant. Can anything justify the loss of entire industries in New York or Michigan, worker mistreatment in the United States or in the maquiladora program, and environmental damage along the border?

But from an economic perspective, NAFTA is a success. Without it, the United States would not be as strong a competitor with the European Union or China. That's critical now that both of these trade areas rank above the United States as the world's largest economies.

The increased trade was sorely needed after the 2008 financial crisis. Even more people would be unemployed without NAFTA.

Perhaps NAFTA should have been designed with better protections. At the same time, free trade agreements are a necessity for the United States when competing in an ever more globalized world.  

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