Create Jobs? Destroy Jobs? What the Research Shows

THE BALTIMORE SUN

Washington. -- Confused about North American Free Trade Agreement? Aren't we all?

Will it help or hurt the U.S. economy? Will it destroy or create jobs?

These are fundamental questions to which there seem to be no clear answers. Those arguing on each side show equal conviction and counter-balancing facts.

Take just one example: The Clinton administration says NAFTA will create 200,000 new jobs over five years. Ross Perot says it will throw more than 5 million existing jobs into jeopardy.

Who's right?

The problem in answering that question is that in assessing the impact of NAFTA, you have to make certain assumptions, such as how much U.S. investment will flow to Mexico. This is crucial to how many U.S. jobs will be lost. Opponents say a lot of investment will head south. Proponents say only a little will go.

With congressional hearings on NAFTA starting this week, we are all about to be deafened by both sides of the argument over the pros and cons of creating the world's largest free trade zone between the United States, Canada and Mexico -- a common market of 365 million consumers with a joint annual output of $6.5 trillion.

It is timely, then, to try to get some basic idea of what it means.

One way to do this is to turn to the Congressional Budget Office, one of this nation's most prestigious economic organizations. It serves Congress, no matter which party is in power. It uses tested and respected methods of analysis, and its projections and estimates are generally regarded as reliable. It recently analyzed no fewer than 38 independent studies of the economic impact of NAFTA by other forecasting groups, before running its own macro-economic simulation.

It has to be said that the outside studies were completed before all the final details of NAFTA were known, but enough of the treaty's broad outlines had already been published to give economists plenty of grist for their mills. They have not stopped grinding, and new studies, like the CBO's, keep being added to what is already almost a library of literature on the treaty.

It also must be said the CBO's assessment has its critics. Economic forecasting is at best an imprecise science -- just look back a few years a projections of the federal deficit! -- and the CBO analysis is accused by proponents of the treaty of understating the likely flow of U.S. investment to Mexico and therefore reduces the negative impact of the treaty, particularly job losses.

The CBO itself points to the difficulty that all NAFTA analysts face in aligning U.S. and Mexican economic data, pre-judging investor sentiment and making appropriate economic assumptions.

In general, the research suggests that NAFTA is not as big a deal for the United States as its proponents would have us believe, or as threatening as its opponents keep telling us.

The CBO study produced this assessment on the key economic elements of NAFTA:

* Overall impact:

NAFTA would produce both winners and losers in the United States, but the total gain of the winners is expected outweigh the total loss of the losers.

Both positive and negative impacts on the United States would be small for three reasons: U.S. trade tariffs and barriers are already low so there would be no great surge in imports from Mexico; their elimination would be phased in slowly on both sides, further reducing the prospect of surges either way; the Mexican economy is only 4 percent the size of the U.S. economy, suggesting that whatever happens it is hardly likely to make much of a dent here.

Conversely, Mexico would stand to gain or lose more because its tariffs and barriers are high and the effects of their reduction would be more dramatic, and the U.S. economy is so much larger. But as the Mexican economy grows, the benefits to the United States are also likely to increase.

"NAFTA might thus be viewed from the U.S. perspective as an agreement to integrate the U.S. and Mexican economies now, when the pain of transition is small and the benefits slightly larger, in order to obtain much larger benefits many years down the road, when the Mexican economy will be much larger," said the CBO in its analysis of the 38 outside studies, adding: "Integrating the two economies after the Mexican economy has grown larger would be more painful than doing it now. The pain and benefit for Mexico would both be large in either case."

* Economic impact:

The U.S. gross domestic product -- the total value of all goods and services produced with the nation's borders -- would be increased by one-quarter of one percent due to implementation of NAFTA over the next 15 years. The increase in Mexican output would be much higher -- from 6 percent to 12 percent over a 20 year period.

* Jobs:

In the short run, U.S. employment would increase by between 35,000 and 170,000 jobs as U.S. companies respond to increased Mexican demand. But there would also be some job losses as companies relocate in Mexico. How many jobs would go south? "A qualified not many," according to the CBO. Most studies suggest less than 200,000 over a decade.

Warning that "considerable skepticism" is warranted on job loss projections, the CBO said: "Even if the number of workers displaced because of NAFTA were twice the high end of the range of job losses . . . that would still be less than 400,000 job losses in an economy with nearly 120 million jobs." Total U.S. employment, in normal times, grows at more than four times this figure annually, it said.

It also noted that the numbers facing dislocation in the 1990s due to NAFTA were small compared to the 20 million U.S. workers involuntarily displaced from their jobs in the 1980s. However, half of those displaced workers were either not working or earning less than 80 percent of their previous wages one to three years after they lost their jobs, suggesting that the consequences for workers hit by NAFTA could be "quite large." The Clinton administration will introduce a program to help retrain and relocate displaced workers.

* Wages:

Average U.S. wages could increase over the long-run by one-half of one percent, but the average wages of rural workers could drop by as much as 1.5 percent, and one study suggested that even high-skilled workers could suffer a 1 percent decrease.

The impact in Mexico would likely be more noticeable. Average wages there could be increased by between 3 percent and 9 percent.

Mexico's low wage advantage would continue to be offset by its low productivity. Also as U.S. imports of Mexican-made goods increases, the value of the peso is likely to increase, making Mexican goods and services more expensive and U.S. exports to Mexico cheaper. The value of the peso has already increased more than 40 percent since its low point in 1987.

* Investment:

As an expanding and open economy, Mexico would be a much more attractive place to invest. The CBO estimated that Mexico could benefit from an annual capital inflow of between $3 billion and $9 billion for up to a decade. This could increase the value of the peso by 15 percent to 30 percent. The new investment would spur the supply of labor-intensive Mexican-made goods for the U.S. market and increase Mexican demand for U.S.

capital-intensive products, such as computers and telecommunications systems. Funds invested in Mexico would not be available for investment in the United States, but this would have insignificant impact because of the huge imbalance between total U.S. and Mexican investment flows. Even if $15 billion in new investment a year flowed into Mexico and all of it came from the United States, it would be less than 2 percent of this country's annual savings.

* Industries:

Likely to gain would be industries with highly skilled work forces, producing capital-intensive products, for which Mexican demand is likely to increase as its economy expands. Computers and telecommunications are examples. Likely to lose would be industries employing unskilled labor and benefiting from high protective U.S. trade barriers. The Mexicans would be able to do the job cheaper and the protection would be eliminated under NAFTA. Examples: apparel and food processing.

* Productivity:

The increased use of U.S. technology, management techniques and production methods would improve Mexican productivity, accelerating the pace of economic growth and altering the patterns of trade between the two countries, as each took advantage of its competitive strengths. The CBO suggests Mexican productivity could grow by 12 percent during the 15-year transition period. The implication for the United States is that a more productive Mexico would be a more competitive one, but as each country exploited its strengths, both would also stand to gain.

* Trade:

The U.S. trade balance with Mexico would be improved "for many years," with exports initially increasing by $7 billion per year as the U.S. caters to Mexico's expansion. Imports from Mexico should fall by slightly more. But the U.S. trade balance with the whole world -- a more important measure -- would scarcely be affected. Mexico's global trade balance would deteriorate as its worldwide exports fall by $19 billion annually.

* Mexican migration:

Although the negative impact of NAFTA on some sectors of the Mexican economy, especially corn, could increase illegal migration to the United States, overall economic growth in Mexico should increase local job opportunities and lessen migratory pressures. Either way, the overall impact on the U.S. labor market should be "very small," according to the CBO.

Gilbert Lewthwaite writes about economic issues from the Washington bureau of The Baltimore Sun.

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