NAFTA: Good news or bad? Manufacturing facts to suit your opinions


THE NORTH AMERICAN Free Trade Agreement (NAFTA) is the most analyzed and propagandized trade agreement in history. Unfortunately, all of these analyses have more to do with election-year politics than sound economics.

Not surprisingly, most of the assessments focus on NAFTA's effect on jobs. It is difficult, however, to isolate the effects of NAFTA from the larger economic forces that affect U.S. employment and trade with Mexico and Canada. The normal churning of the economy results in the destruction and creation of millions of jobs each year. Isolating the effect of NAFTA in all that churning is only a little easier than picking out a specific snowflake in a blizzard.

The complexity of the task is increased by an important fact: Canada and Mexico were, respectively, the United States' first and third largest trading partners before NAFTA ever happened. Further, the United States has had a free trade agreement with Canada since 1989. So even without NAFTA, periodic changes in trade with these countries resulting from other factors, including exchange rates and relative growth rates, would certainly influence U.S. employment.

Many of the estimates that have been quoted this year ignore these complexities. The estimate of job losses used by Public Citizen and other groups is not an independent estimate. Instead, it uses the number of workers granted job displacement assistance under a special NAFTA program administered by the Department of Labor.

About 60,000 workers have successfully applied for assistance under this program, but this figure is not intended, and cannot be credibly used, as an estimate of NAFTA's total employment impact.

First, the program includes those who have lost their jobs because of trade with Canada, not just trade with Mexico. Second, while these job losses are linked to trade, it is impossible, for the reasons cited above, to link them conclusively to NAFTA. Finally, the Labor figure is not intended as a comprehensive measure of NAFTA's employment impact; it is merely the number of workers who have successfully sought relief under this program.

Presidential candidate Patrick J. Buchanan claims more than 300,000 Americans have lost their jobs because of NAFTA. His figure is derived by simply applying a widely used jobs estimate -- a $1 billion increase in exports creates 19,000 jobs -- to the change in the trade balance with Mexico since NAFTA took effect. Economists, however, would almost universally argue that the deterioration in the U.S. trade balance with Mexico is the result of the Mexican peso crisis, not NAFTA.

Although some Buchanan defenders try to rebut this argument by claiming that NAFTA caused the peso crisis, this is, at best, a partial rebuttal. It may be that NAFTA affected the timing of the peso devaluation, but there can be little doubt that the Mexican government eventually would have been forced to devalue its currency. Further, Mexico's larger economic problems, though perhaps exacerbated by the handling of the peso devaluation, are the result of underlying weaknesses in the Mexican economy that eventually would have come to the surface. If anything, NAFTA may well have helped to ameliorate these weaknesses by increasing confidence in the Mexican economy.

To sell NAFTA to Congress, the Clinton team relied on an estimate that NAFTA would create 200,000 jobs. In light of the peso crisis and other subsequent events, the economist who originally generated that estimate has said the figure is wrong, and argued that he never intended it to be used in this manner.

Nonetheless, the Clinton administration now claims NAFTA has led to a gain of 214,000 jobs. The Clinton estimate is more credible than the others, and most economists would agree that NAFTA ultimately will result in economic gains.

But the administration's estimate also has shortcomings. First, it measures jobs created by increased exports even though those exports may have taken place with or without NAFTA. Second, although job growth data are used to defend trade with Mexico, the job gains cited are virtually all from trade with Canada. Finally, the administration figure is not a net number; it doesn't account for jobs lost due to imports.

There is an adage: "Everyone is entitled to their own opinions, but not to their own facts." Unfortunately, with regard to NAFTA, many observers seem to be manufacturing their own facts to support their opinions.

Greg Mastel is a vice president of the Economic Strategy Institute in Washington. He wrote this article for The Journal of Commerce.

Pub Date: 5/05/96

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