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Dear Dr. Dollar:

Free-traders claim that free trade will increase U.S. exports, providing more jobs for Americans. So I would expect that NAFTA increased U.S. exports and reduced our trade deficit. I would also expect to see employment increase both in our country and in our trading partners. Has that in fact happened?
—Lane Smith, Ronkonkoma, New York.

This article is from the January/February 2003 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org

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This article is from the January/February 2003 issue of Dollars & Sense magazine.

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Since the North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada went into effect, trade within North America has increased dramatically. Exports from the United States to Mexico have risen 150% and exports to Canada are up 66%. This much is beyond dispute.

NAFTA’s effects on employment, on the other hand, are hotly debated. Clinton administration officials estimated in the late 1990s that expanded trade in North America had created over 300,000 new U.S. jobs. Economic Policy Institute (EPI) economists Robert Scott and Jesse Rothstein contend, however, that such claims amount to “trying to balance a checkbook by counting the deposits and not the withdrawals.”

This is because NAFTA and other trade agreements have also increased U.S. imports from Canada and Mexico—and by quite a lot more than exports. Since 1993, America’s trade deficit with its North American trading partners (exports minus imports) has ballooned from $16 billion to $82 billion annually. As Scott points out, “increases in U.S. exports create jobs in this country, but increases in imports destroy jobs because the imports displace goods that otherwise would have been made in the U.S. by domestic workers.”

Employment in virtually all U.S. manufacturing industries has declined since NAFTA went into effect. Counting jobs that actually left the United States plus those that would have been created if not for rising imports, EPI estimates that NAFTA caused a net loss of 440,000 U.S. jobs. In fact, during the 1990s, the overall U.S. trade deficit quadrupled, resulting in a net loss of 3 million jobs, according to EPI president Jeff Faux.

Of course, in a large and complex economy, trade is only one of many factors that affect job creation, and its influence is difficult to isolate. As trade expanded during the 1990s, for example, the United States also experienced an investment boom that created jobs faster than rising imports destroyed them; overall, the number of jobs in the United States has risen by 28 million since 1994.

Any free-trade booster worth her lobbying fees would argue that the boom itself resulted from liberalized trade. Lower trade and investment barriers, the story goes, unleash entrepreneurial talents, spurring innovation and productivity gains. Old jobs lost are offset by new jobs gained, and falling wages by cheaper prices on imported goods. Moreover, free-traders contend, any reckoning of NAFTA’s impact should tote up new jobs and factories in Mexico against shuttered plants in the United States.

So what about NAFTA’s effect on Mexico? In a study for the Interhemispheric Resource Center, analysts Timothy Wise and Kevin Gallagher conclude that NAFTA has given Mexico “trade without development.” Since NAFTA weakened barriers to U.S. investment in Mexico, foreign investment into the country tripled and exports grew rapidly. But the development promised by free-trade advocates never materialized. Mexican employment did grow during the early years of NAFTA, but in recent years, it has declined as mobile manufacturers have sought even cheaper labor in Asia. Mexican manufacturing wages fell 21% during the 1990s and poverty worsened.

Wise’s and Gallagher’s findings echo the conclusions of Harvard development specialist Dani Rodrik. Poor countries that turn to trade as a cure for poverty find themselves ensnared in the “mercantilist fallacy”: they can’t all export their way to riches, since one country’s exports are another’s imports. Someone has to buy all this stuff. The United States, with its annual trade deficit approaching $500 billion, is the world’s buyer and its manufacturing industries suffer as a result. But poor countries don’t fare much better. They face increasing competition from low-wage manufacturers in other poor countries, and world markets are now saturated with cheap apparel and electronics, driving prices and wages down.

The result is one thing that almost everybody who studies trade now agrees upon. Whatever else they have wrought—more jobs, fewer jobs, more or less poverty—globalized trade and production coincide with greater inequality both within and between countries. The reasons for this are complex—globalization weakens unions, strengthens multinationals, and increases competition and insecurity all around—but the data are clear. Markets do not distribute wealth equitably.

Ellen Frank teaches economics at Emmanuel College and is a member of the Dollars & Sense collective.

Resources Robert Scott and Jesse Rothstein, "NAFTA and the States: Job Destruction is Widespread," www.epinet.org ; Jeff Faux, "Why U.S. Manufacturing Needs a ÔStrategic Pause in Trade Policy,'" Testimony before the Senate Committee on Commerce, Sciences and Transportation, June 21, 2001; Timothy Wise and Kevin Gallagher, "NAFTA: A Cautionary Tale," FPIF Global Affairs Commentary, 2002; Dani Rodrik, The New Global Economy and Developing Countries: Making Openness Work (Overseas Development Council, 1999).

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