“I have long contended that NAFTA was perhaps the worst trade deal ever made,” said President Trump at an October 1, 2018 White House ceremony where he touted its proposed replacement, the United States Mexico Canada Agreement (USMCA). A little over 14 months later, we are close to having the USMCA replace the North American Free Trade Agreement. Some people are referring to the USMCA as NAFTA 2.0. When we use such a numbering system for software, the higher the number the better the product. So software 2.0 is presumably better than software 1.0. In this case, though, USMCA is likely inferior to NAFTA. So USMCA could reasonably be labeled NAFTA 0.0.
In some small ways, USMCA is better than NAFTA. But in the main ways in which it differs, it’s worse. Of course, to judge any policy, you need a few criteria. My main criterion for trade agreements, which I share with the vast majority of economists, is: does the agreement move towards, or away from, free trade? On net, the USMCA is a move away.
These are the opening paragraphs of my latest Hoover article, “NAFTA 0.0,” Defining Ideas, December 20, 2019.
Another excerpt:
Despite his claim that NAFTA was so bad for the United States, Donald Trump has never bothered to explain why he thinks that. So let’s try to fill in the blanks. Trump’s statements over the last 30 years suggest that he is what economists call a mercantilist, someone who judges trade to be good if a country exports a lot and imports little. Adam Smith, in his 1776 classic, The Wealth of Nations, refuted mercantilism and economists ever since have bought Smith’s reasoning and added nuance and evidence. More on that shortly. But even if Smith hadn’t refuted mercantilism, NAFTA would have been good even by mercantilist standards. What mercantilists tended to favor was high tariffs on imports to their own country and low tariffs on exports to other countries. So they would have disliked the tariff structure that preceded NAFTA. Mexico’s tariffs on imports from the United States were approximately 10 percent and U.S. tariffs on imports from Mexico were approximately 4 percent. By reducing tariffs in both countries to zero, therefore, NAFTA reduced Mexico’s tariffs on U.S. goods much more than it reduced U.S. tariffs on Mexican goods. Even by mercantilist standards, that’s a win.
Read the whole thing.
READER COMMENTS
Alan Goldhammer
Dec 21 2019 at 8:59am
I remember Ross Perot going on about the original NAFTA in one of the 1992 Presidential debates. “…there will be a giant sucking sound gong south….” was the money quote.
Jon Murphy
Dec 22 2019 at 11:20am
That quote I always use when I lecture on trade in my classes. I then go on to show that NAFTA had no effect on total jobs numbers.
Jon Murphy
Dec 22 2019 at 11:22am
In theory, higher version numbers represent better versions, but that doesn’t always end up being the case. Several higher versions of Windows OS ended up eliminating desired features and breaking other parts of the software.
This new agreement may currently be billed as “NAFTA 2.0,” but it may go down in history as being “NAFTA, Vista Edition”: full of bugs, less user-friendly, and eliminated what people wanted.
David Henderson
Dec 22 2019 at 11:25am
NAFTA, Vista edition. Love it.
TMC
Dec 22 2019 at 1:02pm
A few years ago, probably the 20th anniversary of NAFTA, there was a pretty good analysis the benefits of NAFTA. On the US side, it was pretty much nothing, with a slight benefit for Mexico (comparing with having NAFTA to not). So a lot of hoopla for nothing. Surprising results actually, but I saw no pushback to the claim.
Overall, I side on free trade, so as long as there’s no big negative effects I’m for it.
As for Trump, he cares about the US doing better in the deal rather than fairness. Classic utilitarian.
Jon Murphy
Dec 23 2019 at 12:33pm
Not too surprising. When NAFTA was being debated, economists predicted it would help US GDP only about 0.1% per year, which is about what happened (Paul Krugman talks about this in his book Pop Internationalism. Unfortunately, my edition is not with me right now so I cannot give an exact citation).
It is no surprise that the US benefitted little from NAFTA, both in absolute terms and compared to Mexico. Firstly, standard economic theory predicts that the larger economy benefits relatively less than the relatively small economy from opening trade. Secondly, the US was already quite open when NAFTA was ratified. The marginal reduction of tariffs wouldn’t have garnered a large gain. I like to think of it like this: increasing the amount one exercises by an hour a day will do far more good for the overweight, out of shape person than the person who already goes to the gym every day.
David Henderson
Dec 23 2019 at 12:39pm
Very nicely said, Jon.
Re TMC’s statement:
Au contraire, he’s not a classic utilitarian. He’s a class nationalist mercantilist. If he cares only about the U.S.–and I agree that he does–that makes him a nationalist. If he doesn’t see that USMCA hurts the U.S., he’s a mercantilist.
TMC
Dec 24 2019 at 10:58am
I accept your correct regarding utilitarianism. The part that mostly concerns me is that if the US does not benefit from NAFTA, and Mexico just slightly, what good is free trade? I’m for it because I was always taught there were economic benefits, because I favor freedom of association (don’t tell me who I can buy from or sell to), and the other reasons you mention in your article. But I would expect there to be economic gains too. I think Jon Murphy above waves away the 0% gain too easily. From this perspective it seems we’re still at NAFTA 1.0.
I was going to take issue with your claim of a $16/hr minimum wage. I thought it was an average wage of $16, but it turns out to be at least 45% of jobs must pay $16/hr. So not quite either. Not that I support any wage constraints.
Trump is too worried that low wages will steal US jobs. (I almost wrote American, but a Mexican friend gets annoyed as they are in North America as well.) Anecdotally, I have a friend who is a plant manager who has travelled extensively to Mexico for work, and sees manufacturing in Mexico not worth the trouble. Another friend with family in Mexico has seen their town built up with US businesses just to have most of them move back to the US. I don’t think Trump needs to worry.
Walter Boggs
Dec 23 2019 at 9:39am
I agree with something I heard George Will say years ago: Instead of pursuing serial trade agreements, we should simply declare that our country will henceforth trade freely with all nations. Movement is not progress unless it’s in the right direction.
David Henderson
Dec 23 2019 at 9:54am
I agree with both of your statements.
And trade agreements, although not this one, are typically moves in the right direction.
Comments are closed.