Nafta’s Net U.S. Impact Is Modest

Pact leaves winners and losers, but its overall impact is more complex than the trade balance suggests.

For all of the debate sparked by the North American Free Trade Agreement, most economists say its concrete impact on the U.S. economy has been modest—a small gain in growth and efficiency, and a small loss in jobs and lower wages for certain factory workers.

But as with most free-trade agreements, the gains over 23 years have been diffuse and the pains more concentrated, helping stoke the intense political backlash that powered Donald Trump’s presidential campaign, and now his White House move to rip up the agreement.

“Nafta produced large changes in trade volumes, tiny efficiency gains overall, and some very significant impacts on adversely affected communities,” Harvard economist Dani Rodrik said on his blog this week. Mr. Trump exaggerated the pact’s cost on manufacturing jobs, he said, but was “able to capitalize on the very real losses…in certain parts of the country in a way that Democrats were unable to…”

All sides agree Nafta has coincided with a significant increase in economic activity across the U.S.-Mexican border: more trade, more foreign direct investment, and a more-integrated regional manufacturing system, particularly for the auto industry. But they differ on which numbers matter most.

Mr. Trump is correct that Nafta has coincided with a big shift in U.S. trade terms with its southern neighbor, swinging from a trade surplus of $1.7 billion in 1993, the year before Nafta took effect, to a deficit of $61 billion last year, though on a far greater value of bilateral trade overall.

In addition to the impact attributable to tariff cuts under Nafta, currency swings exacerbated the deficit. The Mexican peso plunged the year after the deal took effect, making Mexican exports much cheaper and pricing many American products out of the Mexican market.Nafta advocates say the economic debate misses the bigger point of the deal, which has been to ameliorate longstanding tensions across the border and turn Mexico into a more steadfast U.S. ally. By that standard, they say, the pact has been a great success, fostering more bilateral cooperation on issues from crime to the environment—and keeping Mexico from following the path of left-wing Latin American countries or drifting closer to American rivals like China.

It is that immeasurable gain that Mr. Trump seems most skeptical about, and most willing to put at risk.

Moreover, the numbers and trends behind that top-line figure paint a more complex picture. While Mexico is shipping more to the U.S., it isn’t as if it has closed its borders to U.S. products. In Nafta’s first two decades, U.S. exports to Mexico soared from $41.6 billion in 1993 to $240.3 billion in 2014. Imports from Mexico, however, grew even faster in those years, from $39.9 billion to $294.2 billion.

The impact of trade numbers are hard to sort out, because parts are shipped back and forth within expanded regional production systems. “When we look at the cross-border trade…when you really dig deep, you see that…a lion’s share has value-added on both sides of the border and is inextricably linked to our economy,” Union Pacific Corp. CEO Lance Fritz said on an earnings call last week.

That interdependence flows from a huge increase in American foreign direct investment into Mexico, from $15.2 billion in 1993 to $101.0 billion in 2013. That has taken the form of U.S. manufacturers—of both parts and full products, like cars—shifting into Mexico.

The trade agreement was influential, for example, in Oreo maker Mondelez’s decision to eliminate 600 factory jobs in Chicago and move more production of its cookies to Mexico. Mondelez chose to ultimately upgrade a factory in Mexico instead of investing some $130 million to expand the Chicago factory in 2015. The decision drew criticism from Mr. Trump in his campaign, when he vowed on social media to never eat Oreos again.

A large portion of the big commercial trucks now traveling on U.S. roads and interstate highways were built in Mexico. A decade ago, most of Navistar International Corp.’s heavy-duty models were built at plants in Ontario and Texas. The Illinois-based company closed both facilities to consolidate production in Escobedo, Mexico, near Monterrey. Besides lower labor costs, Navistar said the move brought its production closer to key suppliers that had also relocated to Mexico.

Yet the pact’s advocates say that shift lifted the efficiency of the factories that stayed in the U.S., pre-empting what would have been an even bigger loss of manufacturing. “What seems to have happened is that the North American auto industry reacted to Nafta by rationalizing itself,” Berkeley economist Brad DeLong wrote this week for Vox, “moving those parts of it that could be effectively performed by relatively low-skill workers to Mexico, and thus gaining a cost advantage vis-à-vis European and Japanese producers.”

The hot-button question is what effect Nafta has had on the American workforce—measured by jobs lost and the damping effect on wages as production has shifted to a lower-paid workforce.

Nafta boosters and critics generally agree the pact has led to a reduction of U.S. jobs, but their estimates vary widely, from about 100,000 to 700,000 or so. The pact’s defenders say its critics are looking at the steady drop in U.S. manufacturing workforce in recent decades and improperly tying all of it to Nafta—discounting other factors such as the persistence of a long-term decline that predated Nafta, the sharp increase in automation, and a surge in Chinese imports after Beijing entered the World Trade Organization.

Nafta advocates say the economic debate misses the bigger point of the deal, which has been to ameliorate longstanding tensions across the border and turn Mexico into a more steadfast U.S. ally. By that standard, they say, the pact has been a great success, fostering more bilateral cooperation on issues from crime to the environment—and keeping Mexico from following the path of left-wing Latin American countries or drifting closer to American rivals like China.

It is that immeasurable gain that Mr. Trump seems most skeptical about, and most willing to put at risk.

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