[Election Spam] Study on the Operation and Effects of the NAFTA

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From: Jim Whitehead (ejw@cse.ucsc.edu)
Date: Mon Oct 16 2000 - 10:06:58 PDT

Ah, the simple pleasures of election spam. As I recall, Clinton lobbied hard
for NAFTA, demonstrating vision as the leader of a party the GOP likes to
paint as beholden to labor interests.


Study on the Operation and Effect
of the North American Free Trade Agreement

Chapter 1

Summary of Findings

Under NAFTA, Mexico has reduced its trade barriers on U.S. exports
significantly, while the United States -- which started with much lower
tariffs -- has made smaller reductions:

In 1993, just prior to NAFTA, the average Mexican tariff applied to all U.S.
exports was 10 percent, while the United States applied an average tariff of
only 2.07 percent. Moreover, U.S. average tariffs would have declined
further because of the U.S. Uruguay Round commitments, thereby increasing
the disparity. Mexico's applied rates have actually increased to countries
other than the U.S. and Canada.)

As a result of NAFTA, Mexico’s average tariffs on American-made products
have dropped from 10 percent to approximately 2.9 percent (a 7.1 percentage
point difference); whereas, U.S. tariffs fell from 2.07 percent to 0.65
percent (a 1.4 percentage point difference).

The NAFTA also required Mexico to dismantle a wide variety of protectionist
rules and regulations, while the United States made only a few adjustments
beyond the 1.4 percentage point reduction in already low U.S. tariffs.

U.S. exports to Canada and Mexico increased since 1993, supporting more
higher-paying American jobs:

Exports of U.S. goods to Mexico grew by nearly 37 percent (or $15.2 billion)
in the three years after NAFTA went into effect to a record high of $56.8
billion. This large increase came during a three-year period when Mexico
experienced a three percent decline in total domestic demand. At the same
time, the United States widened its lead over its trade rivals in sales into
the Mexican market -- increasing its share of Mexico's imports from 69
percent in 1993 to 75 percent in 1996, and displacing imports, particularly
from Asia.

U.S. exports to Mexico in the first four months of 1997 virtually equaled
exports to Japan, our second largest export market, even though Japan's
economy is 12 times larger than Mexico's. In April of this year, U.S.
exports to Mexico actually exceeded those to Japan by nearly $200 million.
U.S. sales to its number one export market, Canada, have increased by $33.8
billion since 1993. In the first four months of 1997, U.S. exports to Mexico
were up by another 23 percent relative to the same period of 1996, while
exports to Canada increased by 12.4 percent. Export growth to Mexico and
Canada, combined, during the first four months of 1997 accounted for 53
percent of total U.S. export growth to all countries. Mexico and Canada
account for almost one-third of global U.S. trade.

By 1996, goods exports to Mexico and Canada supported an estimated 2.3
million U.S. jobs: 749,000 associated with exports to Mexico and 1.56
million with exports to Canada. Jobs for non-supervisory production workers
supported by goods exports pay 13 to 16 percent above the national average

The movement of the U.S. trade balance with Mexico to a deficit in 1995 and
1996 reflected Mexico’s sharp recession and the U.S. economy's strength, as
U.S. consumers and firms increased purchases from all sources.

Several outside studies conclude that NAFTA contributed to America's
economic expansion. The NAFTA in isolation had a modest positive effect on
U.S. exports, income, investment and jobs supported by exports:

The task of isolating the economic effects of NAFTA after little more than
three years of operation is challenging; while Mexico's tariff cuts have
been substantial, its market-opening rules are not fully phased in (some
will take 12 more years) and there are only three years of data to analyze.
The challenge is compounded by the several significant events that directly
affected trade flows during the first three years of NAFTA's operation.
These were: (1) the strong performance of the United States economy; (2)
Mexico's balance-of-payments crisis and 1995 recession, its worst since the
1930s; and (3) implementation by the United States beginning in 1995 of MFN
tariff cuts agreed to in the Uruguay Round and implemented in the World
Trade Organization (WTO).

Nevertheless, a recent study by DRI/McGraw-Hill concludes that NAFTA,
controlling for the effects of the peso crisis, increased U.S. exports to
Mexico by $12 billion by 1996. This same study concludes that NAFTA
increased U.S. imports from Mexico by $5 billion annually, for an increase
in net exports of $7 billion. Two other studies reach similar conclusions. A
study by the International Trade Commission (ITC) reported that NAFTA caused
U.S. export growth to Mexico to exceed import growth from Mexico in 1994,
with those results reversing in 1995 and 1996. The ITC characterized 1994 as
the "only year in which the NAFTA was in place and the peso devaluation does
not confound the estimates... ."

Based on DRI's estimates, the short-run effect of NAFTA was to increase U.S.
GDP by approximately $13 billion by 1996. Also, in the first three years of
NAFTA, U.S. GDP may incorporate as much as $3 billion to $14 billion of the
expected long-run annual gains (permanent gains from improved efficiency and
possibly greater investment in the U.S. economy). Estimates of the long-run
annual gains to U.S. GDP when NAFTA is fully implemented -- not just in the
first three years -- run as high as $40 billion. None of the studies
examined found negative effects from NAFTA on the U.S. economy.

Based on Commerce Department estimates regarding the link between U.S.
exports and employment, the gains in U.S. exports to Mexico associated with
NAFTA alone support an estimated 90,000 to 160,000 American export-related

As noted, Mexico experienced its sharpest recession since the 1930s in 1995;
the sudden contraction in the Mexican economy reduced demand for U.S.
exports, contributing to the difficulty in isolating the effects of NAFTA.

Trade flows with Mexico were affected much more by the drop in the price of
Mexican imports caused by the 50 percent decline in the value of the peso
than by price changes caused by the less than 1.4 percentage point drop in
U.S. tariffs or the larger drop in Mexican tariffs.

Growth in U.S. imports from Mexico during the period largely reflected the
relative strength of the U.S. economy over the last three years, rather than
NAFTA. U.S. tariffs were so low when NAFTA took effect that NAFTA lowered
U.S. trade barriers very modestly. The shift in trade balance was due to the
relatively much stronger U.S. economic performance, the dampening effect of
Mexico’s recession on its purchases, and the depreciation of the peso
exchange rate. If anything, outside studies (DRI and the Dallas Federal
Reserve) suggest that NAFTA on its own worked to increase U.S. net exports
to Mexico since 1994.

The NAFTA protected U.S. exports and jobs during Mexico's recession:

Mexico's actions towards U.S. exports were sharply different in its 1995
recession than during its financial and economic crisis in the early 1980s.
Then, Mexico imposed quotas and duties of up to 100 percent on American
products, prompting U.S. exports to Mexico to plunge by 50 percent. It took
nearly seven years for U.S. exports to Mexico to return to their 1981

Despite its worst recession since the 1930s, Mexico continued to lower its
tariffs on U.S. and Canadian imports, as NAFTA required, even though it
raised tariffs on products from other countries. Thus, although Mexican GDP
contracted by over 6 percent in 1995 when the recession took effect, U.S.
exports to Mexico recovered in 18 months to reach record levels. (U.S.
exports dropped only 9 percent in 1995, compared to a 25 percent drop for
Japanese and European exports to Mexico.)

*snip* (there's more analysis on the actual site -- this is just the

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