NAFTA not a big deal overall, but huge for a few Americans.

Kevin Drum wrote that NAFTA isn’t a big deal and produced a graph similar to the one below except that he used an inflated measure of trade: gross imports plus exports. Net exports (NX) is a better measure of the effect of NAFTA upon the US economy. For example, if you are worried about NAFTA sucking jobs out of the US economy, the increase in exports tends to boost American jobs, but the increase in imports tends to shrink jobs in the short run so they have opposite effects. Of course, in the long run, there isn’t any effect, but if the effect on jobs is what you are worried about, then you should look at NX at the right side of the graph.  The bars are so tiny, you might have to squint to see them.

Total net exports with Mexico and Canada were only 1% of GDP in 2014 and if NAFTA produced 20% of that as analysts suspect, then we are talking about a fifth of a percent of GDP. That is pretty small and it only has short term effects on employment anyhow, so at this point I would guess that approximately zero percent of our unemployment is due to the shadow of NAFTA’s passage nearly a quarter century ago.

Trade deals also have other effects such as producing inequality, and for thinking about that a better measure would be to average imports and exports, but this is rarely done even though it is better than adding imports and exports together. Adding both together is double counting and greatly exaggerates the effect of trade.

Even though NAFTA has very little impact on the American economy overall, it has had a radical effect on particular sectors of the economy. For example, Mexican imports of avocados had been banned previous to NAFTA and now thanks to NAFTA, Americans eat three times more avocados and limes than we did before.

NAFTA also increased US corn exports to Mexico by about 600% which is why the US farm lobby loves trade deals like NAFTA. If Trump follows through in his promise to put tariffs on imports, the reduction in trade will end up hurting a lot of the rural voters who supported him because the US is the world’s largest exporter of grains. US grain production is so enormous, we are even the third largest exporter of rice despite having very few rice farmers. Have you ever even seen a rice paddy in the US? There are very few regions of the US that grow it.

NAFTA benefited some Americans and cost others, but the net effect is very modest. Dani Rodrik suggests that the gains were negligible:

A recently published academic study by Lorenzo Caliendo and Fernando Parro uses all the bells-and-whistles of modern trade theory to produce the estimate that these overall gains amount to a “welfare” gain of 0.08% for the U.S.

Brad DeLong argues that the gains were larger than that, but pretty much all economists agree that there was some amount of net gains to Americans from NAFTA even though many argue that the gains weren’t distributed fairly. Most of the costs of a trade deal like are caused by the transitional costs of adjusting to the new prices. For example, vegetable farmers in Ohio had to reduce their vegetable production and increased their corn production. That was costly to do because they cannot use the same equipment and skills for both kinds of production. If Trump ends NAFTA, there will be the same kinds of costs again as corn farmers in Ohio have to sell off corn equipment and buy more vegetable equipment, but this time there will be a net welfare loss and it isn’t at all clear if the losses will be distributed fairly this time either.

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Posted in Globalization

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