5 Myths About NAFTA

By Philippe Legrain
Sunday, April 6, 2008; B03
Washington Post

Sen. Hillary Rodham Clinton often likes to take credit for her husband's achievements as president. But then there's NAFTA. Clinton may have been present at the creation of the North American Free Trade Agreement in 1994, but she wants everybody to know that it's not her baby. She now proposes to "fix" the agreement to make trade "work for working families." Sen. Barack Obama, meanwhile, makes the fallout from NAFTA sound downright nuclear, lamenting that "entire cities . . . have been devastated as a consequence of trade agreements that were not adequately structured to make sure that U.S. workers had a fair deal." Despite the heightened rhetoric, he, too, wishes to "fix" the treaty, not nix it. Only the presumptive Republican nominee, Sen. John McCain, would leave NAFTA untouched; his priority is freeing up global trade.

The Democratic rivals have bought into most of the myths that have been peddled about the agreement and have placed their opposition to NAFTA at the center of their campaigns. Here's some information that could help them update their stump speeches.

1 NAFTA has transformed the U.S. economy.

Hardly. Critics rightly point out that NAFTA's economic benefits were oversold, but they're wrong to heap the blame for all America's woes on it. NAFTA, which expanded the existing Canadian-U.S. free-trade area to Mexico, has had only a marginal effect on the U.S. economy. Yes, exports to Mexico have more than tripled since 1993 -- but at $161 billion last year, they still account for only 1.1 percent of the economy. Considering that total U.S. exports have more than doubled over the same period, to more than $1.6 trillion a year, the boost from NAFTA is just a trifle.

Though imports from Mexico have risen nearly five-fold since 1993 -- potentially threatening some U.S. businesses -- they only amounted to $230 billion in 2007, or less than 1.7 percent of the $14 trillion U.S. economy. That's peanuts. And for all the fears of factories being shipped south on the back of an 18-wheeler, the total U.S. investment in Mexican factories and offices adds up to a mere $75 billion. Mexico received just $19 billion in foreign direct investment in 2006, while the United States attracted $175 billion. Thus, the "giant sucking sound" that Texas businessman and independent presidential candidate H. Ross Perot heard back in the 1990s doesn't sound so giant after all. But the benefits of NAFTA don't seem so remarkable, either.

2 NAFTA has put countless Americans out of work.

Not really. Obama claims that NAFTA has destroyed a million American jobs. Suppose he's right. Total employment still rose by 27 million jobs between 1993 and 2007, to 137.6 million, and the unemployment rate has fallen. At worst, then, NAFTA has cost only a tiny minority of American workers their jobs. And even that is a one-sided view. As Mexico opened its economy to U.S. trade and investment, NAFTA created new American jobs, too.

NAFTA critics also decry the trade deficit with Mexico, but at $70 billion a year, it accounts for only 0.5 percent of the U.S. economy. These figures should quiet NAFTA foes, who point to lost jobs and stagnant manufacturing wages, as well as boosters, who trumpet claims of rising output and record-high exports. The fact is, NAFTA has had only a fractional impact on these trends. Mexico's biggest impact on the U.S. labor market is not through trade, but through immigration. And the money that Mexican migrants send home contributes more to the Mexican economy than foreign direct investment does.

3 "Fixing" NAFTA would be easy and cost-free.

Not so. Any changes would require a lengthy and complex renegotiation with Canada and Mexico. As Canada's prime minister, Stephen Harper, has pointed out, "Of course, if any American government ever chose to make the mistake of opening [NAFTA], we would have some things we would want to talk about as well." Just the threat of pulling out of NAFTA would do some damage, too. Far from boosting America's international reputation -- something all presidential candidates agree is important -- it would fan fears that the United States is an unreliable ally and discourage foreign governments from committing to future agreements with Washington. The slim chance of concluding the World Trade Organization's Doha round of global trade talks would vanish. And if the next president wants, for instance, Mexico's help in dealing with immigration reform and Canada's hand in combating terrorism, then blaming America's friendly neighbors for its perceived woes is hardly the way to start.

4 Making NAFTA's labor and environmental regulations stricter would benefit U.S. workers.

Probably not. Clinton wants to make the treaty's labor and environmental provisions "far tougher and absolutely binding" and to require that all future trade agreements include similar language. The stated purpose is to raise labor and environmental standards around the world and to make it harder for companies to ship jobs to countries where workers have fewer protections than in the United States. But America's trading partners would probably see the move as covert protectionism -- since when have the Teamsters cared about Mexican wildlife? -- and may retaliate. Meanwhile, consumers would probably resent the increased cost of their imports.

In any case, tough social clauses could backfire on the United States. Canada's labor and environmental standards are generally higher than the United States', and Canadians could claim that lax American standards amount to unfair competition. Given that Canada and Mexico have joined global efforts to curb climate change, they might wish to restrict American imports if the United States continues to hold back. And Mexican workers arguably have stronger labor rights than Americans: Unlike the United States, Mexico has ratified most of the International Labor Organization's conventions on core labor standards, including those on freedom of association, collective bargaining and employment discrimination. If the United States bashes Mexican labor practices, what's to stop Mexico from objecting to American imports produced in non-unionized factories?

5 Renegotiating NAFTA should be a priority for the new president.

Absolutely not. With the housing market plunging, the financial system seizing up and the economy apparently shrinking, tinkering with a treaty that governs trade with two of Washington's trading partners is a costly distraction -- whatever your view of NAFTA. The next president will have much bigger things to worry about, such as stopping the economy from going into a tailspin; cushioning the blow for vulnerable Americans who lose their homes, their jobs and their health care in the downturn; and helping frame new regulations that protect the economy against future financial excesses without stifling the market. Compared to all that, changing NAFTA looks like small change.


Philippe Legrain is a journalism fellow with the German Marshall Fund of the United States and the author of "Immigrants: Your Country Needs Them."