An Obituary for NAFTA

This week, the North American Free Trade Agreement (NAFTA) will resolve into the new United States-Mexico-Canada Agreement (USMCA), ending a 26-year-old pact that was once the largest free trade agreement of its time. In these 26 years — and in the many years leading up to its formation — it has found few friends willing to defend it by name. Instead, its quarter century has been suffused with vitriol from those who seek to blame it for every adverse economic condition and stuffy academic assertions of its espoused benefits and shortcomings. But as we say farewell to NAFTA this week, we owe it the time to look back and reflect on its origins, and what it has really meant for both the United States and North America at large.

A North American Common Market

The foundation for the NAFTA we know today was best articulated by a presidential candidate in 1979. In the very speech where he announced that he would seek the presidency, Ronald Reagan declared, “A developing closeness among Canada, Mexico and the United States–a North American accord–would permit achievement of that potential in each country beyond that which I believe any of them–strong as they are–could accomplish in the absence of such cooperation. In fact, the key to our own future security may lie in both Mexico and Canada becoming much stronger countries than they are today.” What started as an agreement between the United States and Canada in the late eighties quickly accelerated to include Mexico shortly thereafter when Reagan’s successor, President George H.W. Bush, began negotiations to use the Canada-US Free Trade Agreement as a template for the more inclusive pact. The impetus to include Mexico was driven by American urgency to counterbalance the rising economic heft across the Atlantic. In the early nineties, the European Union’s Maastricht Treaty would be negotiated and then signed, integrating the economies of Europe, establishing a single market with free movement of goods and people, and ultimately resulting in the creation of a single currency: the euro. Having mercilessly competed with Japan economically in the 80s, the prospect of facing a new economic superpower gave the United States newfound interest in expanding its economic opportunities. By providing companies access to new markets, especially in Mexico where the cost of labor was lower than it was in the United States or Canada, American businesses would be more competitive globally. This would create jobs in Mexico, thus improving the economic situation and discouraging migration to the United States, and in turn bring down prices for consumers in the United States, allowing a specialization in more services and higher-paying labor.

President Bush reached an agreement to create the North American Free Trade Agreement in 1992 and signed the presumptive agreement with Mexico and Canada as a lame duck president in December of that year. When President Bill Clinton came into office a month later, he requested two side agreements to allay two prominent concerns: labor rights and environmental standards. The first provided a right to strike, ensured child labor protections, and maintained worker health and safety measures while the second created the first ever trade sanctions based on environmental laws, which earned the pact the endorsement of groups like the Audubon Society and the Natural Resources Defense Council.

In an optimistic moment of solidarity, Clinton signed the side agreements in September of 1993 flanked by former presidents Bush, Carter, and Ford, as they all advocated Congress’ passage of the final implementation act in the months to come. Clinton spoke of a middle class increasingly working harder for less, of the challenges of global competition, and the need to adapt and change ahead of the new century. “In a fundamental sense, this debate about NAFTA is a debate about whether we will embrace these changes and create the jobs of tomorrow, or try to resist these changes, hoping we can preserve the economic structures of yesterday,” Clinton conceded. But his challenge to America was bold and admirable. “Are we going to compete and win, or are we going to withdraw? Are we going to face the future with confidence that we can create tomorrow’s jobs, or are we going to try against all the evidence of the last 20 years to hold on to yesterday’s?”

After signing the side agreements, the former presidents spoke in turn. Bush expressed his gratitude to the team who negotiated the original agreement and a deep appreciation for having had the opportunity to lay the groundwork for what he felt was a bipartisan accomplishment. “Now I understand why he’s inside looking out and I’m outside looking in,” he humored at Clinton in a way no president who had lost reelection to another would ever be expected to do. Carter spoke of NAFTA as a step towards securing democracy in Latin America and against those who were attempting to stoke the public’s trepidations regarding the agreement. He spoke of “a demagogue who has unlimited financial resources and who is extremely careless with the truth, who is preying on the fears and the uncertainties of the American public,” evoking, in all but name, ardent NAFTA critic Ross Perot. Ford cautioned his former colleagues in the Congress against voting against the agreement, equating it to, in effect, a vote for illegal immigration and admiring that “world trade has been the real engine that has given the free Western industrial nations the capacity to have prosperity and growth” and that there is now “opportunity for future prosperity and good living for people in this entire hemisphere.”

The comradery of presidents from every party, who had defeated or been defeated by one another, envisioning a better world, not just for themselves or their nation, but for all mankind, tugs at the heart a little here in 2020. And it worked. Congress — with bipartisan majorities in each chamber, fervently opposed by bipartisan minorities all the while — passed the North American Free Trade Agreement Implementation Act in November of 1993, and it was signed by President Clinton on December 8. “There is no turning back from the world of today and tomorrow, we must face the challenges, embrace them with confidence, deal with the problems honestly and openly, and make this world work for all of us,” observed Clinton. Ending his remarks in palpable contrast with the modern day, conjuring American exceptionalism as an ideal to aspire to and a force for good rather than a nationalistic cry for the past, Clinton affirmed, “America is where it should be, in the lead, setting the pace, showing the confidence that all of us need to face tomorrow. We are ready to compete, and we can win.” 

NAFTA went into effect January 1 of 1994, and over the course of the next 25 years, trade between the US and Mexico more than doubled, from 1.3% to 2.7% of combined GDP. Trilateral trade between the three nations increased three-fold. Mexico’s GDP per capita at purchasing power parity also more than doubled; as did the United States’. Net migration from Mexico to the United States fell below zero, Canada and Mexico now buy more American exports than the United States buys Chinese imports, and the world’s largest land border between two countries remained open up until COVID-19 resulted in its closure for the first time since Canada became a nation. 

“A Giant Sucking Sound”?

The trade pact was never for want of controversy. On the day of NAFTA’s enactment in 1994, the Zapatista Army of National Liberation, a Mexican guerilla group, staged the Zapatista uprising, seizing towns in the Mexican state of Chiapas in response to the pact. In 1999, domestic opposition to free trade climaxed with the Battle of Seattle, which led to violent conflict between police and protestors and the deployment of troops in Seattle. In 2014, the AFL-CIO critiqued “the legacy of NAFTA and the flawed U.S. trade policy it both shaped and reflects has been stagnant wages, declining social standards and increased inequality.” Vermont Senator Bernie Sanders spent years thereafter condemning the deal and, of course, Donald Trump spent the height of the 2016 presidential campaign calling NAFTA “the worst trade deal maybe ever.” 

Ross Perot argued in 1992 that NAFTA would result in a “giant sucking sound” as jobs moved from the United States to Mexico. Thousands of US jobs did disappear, especially in manufacturing — estimates vary, but tend to put the number at around 600,000 jobsAny fair economic analysis would concede some jobs shifted and were lost in this period following the enactment of the pact, though whether NAFTA is to blame for the loss, or whether it simply accelerated this trend, is up for debate. 87% of the decline in manufacturing jobs is accounted for by automation, not trade, and manufacturing jobs have been in decline as a proportion of overall employment since the 1950s even though American manufacturing output has actually increased overall

The often overlooked reality is that NAFTA supports 4.9 million jobs in the United States and 34 million private sector jobs were gained over the 25 years since its enactment, at a rate of about 1.3 million jobs per year, well surpassing the 600,000 that may have been lost. The Peterson Institute’s Gary Fubauer and Cathleen Cimino-Isaacs found that, in fact, “Since NAFTA’s enactment, fewer than 5 percent of US workers who have lost jobs from sizable layoffs (such as when large plants close down) can be attributed to rising imports from Mexico” and that “for every net job lost in this definition, the gains to the US economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households.” NAFTA contributed to lower food, oil, and other import prices and may have been the prevailing factor saving the American automobile industry from tenacious Asian and European competition. As of 2014, it was estimated that the United States is $127 billion richer every year because of the additional trade courtesy of NAFTA, equivalent to $400 per American. Canada has also benefited from the deal, seeing a decline in unemployment and an increase in productivity. Its government’s factsheet on NAFTA paints a positive picture of “economic growth and middle class job creation… unprecedented economic integration between partners, creating a platform where companies from Canada, the U.S. and Mexico make things together rather than simply sell to each other.” 

The situation, contrary to American critics’ claims, is actually less clear in Mexico. Some studies have found “relatively large positive effects” but others have found effects that are — to say the least — underwhelming. Omitted from many of these depictions of depreciated wages in Mexico is the Tequila crisis, a currency crisis that pushed Mexico into a severe recession in 1994, causing a 20% decline in wages that took years to recover from, giving the appearance of economic failure in the early NAFTA years. In reality, Mexico’s new relationship with its northern neighbors, who were anxious “not to let [their] new partner go under”, encouraged an American-led bailout that made for a more expedient recovery than Mexico had seen in similar crises before NAFTA’s implementation.

The most accurate critique of NAFTA may be that it did not go far enough, and its benefits have had a comparatively small impact compared to what they could have been. Had Mexico’s economy grown more rapidly and seen a diversification in jobs, they’d be better positioned to buy more American goods and services. Plans to expand NAFTA, or at least the scope of cooperation between the nations, may have reached their peak in 2001, as then-president George W. Bush and Mexican President Vicente Fox met to discuss immigration and Fox addressed a joint meeting of Congress. With border control on the mind, Bush remarked, “The best way to take pressure off our borders is for Mexico to grow a middle class, and the avenue for Mexico to grow a middle class is trade.” Of course, history got in the way, and only a few days later on September 11th, the Bush administration would be deviated from the pursuit of an expanded relationship with its southern neighbor. 

Most studies have found a relatively modest but nonetheless positive impact on GDP thanks to NAFTA. Not the great boon to economic growth nor responsible for perceived economic stresses of the 21st century that various sides have hailed. But the aim of free trade between nations is not a zero sum game. It speaks to the virtues they espouse, whether they will work together or separately, and whether making a neighbor better off is worth it. It demonstrated how nations come together to forge a common future for all of their people and for the world, and how benevolent leaders can work with each other to try and make things better for the next generation. The real tragedy of the USMCA is that these high-minded ideals of progress and North American cooperation did not drive it as they did its predecessor, and it instead represents a retreat from those ideas entirely.

NAFTA 2020

It’s unfair to really call this the death of NAFTA. The USMCA has been characterized as more of a revision, or a “NAFTA 2.0” than President Trump and his cries of “ending the NAFTA nightmare and signing into law the brand-new U.S.-Mexico-Canada Agreement,“ seem to imply. The USMCA makes a series of tweaks like increasing intellectual property protections, slight opening up the Canadian dairy market, beefing up labor and environmental protections in Mexico, and an increase of the percentage of a car that must be made in North America from 62.5% to 75% for it to qualify for zero tariffs provided that at least 30% of work done on vehicles is by workers earning $16 per hour. If that seems fiddly and minute, that’s because it largely is. The Economist noted that “this victory of governmental micromanagement comes with costs,” emphasizing that the United States’ most-favored nation tariff on non-USMCA imports of passenger vehicles are a mere 2.5%, so “car manufacturers could [opt] to ignore the deal, pay the 2.5% tariff for non-USMCA imports and source parts wherever made business sense.” This means car prices would rise for American consumers and, if automakers find it more cost-efficient to produce cars outside of the now higher-cost North America, it would lead to a further decline in manufacturing and employment at home.

This comes after years of threats and insinuations by Trump that he would completely withdraw from NAFTA,1Withdrawal from NAFTA would have caused an economic crisis resulting in price spikes across the bloc, would have put exorbitant pressure on supply chains, and reduced competitiveness with major manufacturing powers in Europe and Asia. This makes the allegation that White House economic advisor Gary Cohn single-handedly stopped this by simply taking the piece of paper off of Trump’s desk somewhat concerning, to say the least. the assumption of negotiations without a common understanding for the need for an agreement at all, demands for a sunset clause and other non-starters, moving ahead with Canada out of it entirely if they didn’t get on board with Trump’s demands, a capitulation from Canada and Mexico so as to avoid a painful withdrawal, and a spate of domestic politics in which Trump again threatened to terminate NAFTA so that Congress would move on his new deal quickly. All of this resistance and uncertainty, spitefully manufactured by America, just to get perfunctory adjustments that add little to the grand aspirations for the region.

The Trump administration’s approach to the treaty was mercantilist, short-sighted, self-interested, and inconsistent with the ideals for North American partnership that began the march towards NAFTA. It is a far cry from Reagan’s — and his preceding and succeeding presidents — vision of “looking outward… confident of our future; that together we are going to create jobs, to generate new fortunes of wealth for many, and provide a legacy for the children of each of our countries.”

Trade deals have always been easy targets; their defenders are quiet technocrats and academics, and politicians like Barack Obama and Hillary Clinton, both of whom came to govern as staunch free trade advocates, have railed against them for electoral reasons. Making a compelling case to spread prosperity outside one’s own borders and compete openly in the global economy at the expense of fading jobs at home is a cause few politicians are brave enough to champion. But the world should remember NAFTA fondly, and recall the enlightened aims it sought — not as an end, but as one step towards something even better. 

NAFTA was never perfect. No agreement framed by governments with varying interests ever is. But it was characteristic of an era of American foreign and domestic policy where its leaders did not promise the bygone past at the expense of opportunity in the future. Instead, NAFTA was about three nations coming together because they knew they were stronger together rather than apart. That’s something worth celebrating, and something to mourn the loss of in 2020.