Part 1. Introducing NAFTA

A SERIES ON NAFTA TURNING 25

 

NAFTA towers over America's other trade agreements in terms of its sheer size. The agreement, which liberalizes trade between the US, Canada, and Mexico, governs roughly 29 percent of America's total trade. In fact, the $1.1 trillion of NAFTA trade conducted in 2017 is about ten times more than America’s next largest deal (South Korea).

NAFTA's size is part of what makes it controversial. For opponents of free trade, NAFTA accelerated the decline of American manufacturing. For over 20 years, NAFTA has been criticized for allowing companies to "offshore" millions of jobs.

Critics of the agreement also argue that NAFTA encouraged unauthorized immigration, diminished labor rights, and led to environmental degradation.

The following series of short discussions brings some data to bear on these issues.

Before getting into more specific concerns, the information below provides some basic facts about America’s trade relations with its NAFTA partners.

 

NAFTA led to a significant expansion in trilateral trade flows. Total imports from Canada and Mexico tripled since 1995, up from $206 billion to $623 billion in 2017. Exports from the US to its NAFTA partners more than doubled over the same period.

The total amount of trade conducted among NAFTA members now exceeds $1 trillion. That's a significant portion of total global trade, not just US trade.

 
 

The previous graph shows that America's trade with NAFTA members continues to grow.

However, the share of total US trade accounted for by NAFTA has remained relatively constant over time. This is because trade with China, South Korea, and Europe also grew at similar rates during this period.

 
 

The United States trades in many of the same broad product categories with both Canada and Mexico. This includes cars, electrical machinery, and mineral fuels. 

However, there are some obvious differences based on each country's comparative advantages. The US imports large volumes of fruits and vegetables from Mexico while it imports wood from Canada. (Not coincidentally, lumber was the target of one of President Trump's first tariff hikes back in 2017.) 

Note, the star next to some entries means that the same HS chapter also appears on America's list of top 10 exports to that country. That's because a huge portion of NAFTA trade (about 40%) is intra-industry.

The classic example is cars, which contain parts that cross borders multiple times before they hit the showroom floor.

 
 

One common critique is that NAFTA contributed to America's deepening trade deficit.

It's certainly true that the US imports more than it exports to both Canada and Mexico. However, the magnitude of those gaps varies.

The deficit with Canada recently returned to mid-nineties levels. America's recent annual deficit with Canada averaged a modest $14.5 billion from 2015-2017.

Mexico is a different story. The deficit with Mexico has grown nearly five-fold, climbing from $15.8 billion in 1995 to $70.9 billion in 2017.

Of course, not everyone agrees that trade deficits are a problem. However, for critics of free trade, rise widening gap with Mexico is worrisome and provides ammunition when taking aim at NAFTA.

 
 

NAFTA isn't just about trade. It's also about promoting investment. US foreign direct investment has increased in both Mexico and Canada over the last 25 years. 

Patterns in FDI flows between Canada and the US are broadly similar. In fact, Canadian investment caught up to US levels in 2015, and surpassed them the last two years. 

The gap is much wider between the US and Mexico. 

 
NAFTA at 25Jeffrey Kucik