The North American Free Trade Agreement (NAFTA), if not aware, is an agreement signed by the United States, Canada, and Mexico to eliminate trade barriers among the three countries. NAFTA came into being on January 1, 1994, and since then, U.S. trade with its North American neighbors has grown more than three times than U.S. trade with other nations.
These days, critics often argue about the NAFTA cons or the negative effects of NAFTA that have impacted harshly on the U.S. economy, leading to the job losses and wage suppression. NAFTA’s major cons include a trade deficit with NAFTA partners Canada and Mexico, job losses, and income inequality.
The U.S. trade deficit raised as the companies moved their production to Mexico because of lower wages and the weaker environmental standards over there. The U.S.-Mexico trade balance jumped from $1.7 billion U.S. surplus in 1993 to a $54.0-billion deficit by 2014. Economists reported that the rise in imports led to the loss of about 600,000 jobs over two decades.
Much of the workforce considers NAFTA’s impact responsible for the U.S. jobs cut, prominently in the manufacturing sector. Since 1994, the U.S. auto sector has lost around 350,000 jobs, while Mexican auto sector employment has increased from 120,000 to 550,000 workers. Two of every three displaced manufacturing workers who were rehired in 2012 observed a reduction of more than 20% in their wages, as per the data of the U.S. Bureau of Labor Statistics.
Workers from the manufacturing sectors who lost their jobs went into low-skilled sectors, such as hospitality and food services. These sectors also experienced a fall in their wages because of NAFTA, resulting in income inequality.
NAFTA Cons: Suppressed the Wages of the U.S. Workers
NAFTA’s impact on U.S. workers was devastating as it led to about 600,000 job losses as the production moved to Mexico. Most of the losses were observed in the manufacturing sectors, impacting states like California, Texas, and Michigan. There were a few job gains too, but they were in lower-paying occupations like the service and retail sectors. Some corporate managers have threatened U.S. workers to accept lower wages and benefits by suggesting that they would move the company to Mexico otherwise.
Some companies have even loaded their machinery into the truck, saying that they were bound for Mexico. Union organization efforts were also let down, saying, “If you vote in a union, we will move south of the border.”
NAFTA also affected the Mexican agricultural and small business sectors. Several million Mexican workers and their families were dislocated, which increased the number of undocumented workers within the U.S. labor market. This increased the pressure on U.S wages in already lower paying sector of less-skilled labor. Thus, NAFTA lowered wages and the benefits of U.S workers.
NAFTA Cons: Caused Trade Deficit of $74.0 Billion with Mexico and Canada
The U.S trade deficit with its NAFTA partner, Canada, is $11.0 billion, which is only two percent of the total Canadian trade of $545.0 billion. The United States exports $267.0 billion to Canada and imports $278.0 billion. The most abundant export categories include automobiles and parts, petroleum products, industrial machinery, and equipment. The largest import consists of crude oil and gas from Canada’s abundant shale oil fields.
The U.S. trade deficit with Mexico is $63.0 billion. The United States exports $231.0 billion to Mexico and imports $294.0 billion. The exports include auto parts and petroleum products, while the import consists of auto parts as well, in addition to cars and trucks.
The shift from surplus to deficit is not at all good for the U.S. economy. NAFTA was formed to eliminate tariffs and duties on trade among the three countries and to give easy and equal access to each other’s market. The U.S. firms took advantage of this situation to utilize lower-cost labor and Mexico’s environmental policies to profit. Low labor costs adds to lower prices and higher profits alike.
A lower price is good for consumers, shareholders, and top management, but bad for the workers as it directly impacts their wages. This led to many job losses and wage suppression in the U.S. Now, if NAFTA is eliminated, it would produce more domestic jobs, but expensive goods for Americans. More export means more jobs and more wages, but what’s the use if the trade deficit equals the cost of export growth.
NAFTA cons are a political target for the U.S. government to tackle. President Donald Trump’s administration has plans to reduce the U.S.-Mexico trade deficit by implementing certain measures. Let’s hope for the best.
“NAFTA’s Economic Impact,” Council on Foreign Relations, October 4, 2017.
“Nafta Lowered Wages, as It Was Supposed to Do,” The New York Times, December 5, 2013.
“NAFTA’s Impact on U.S. Workers,” Economic Policy Institute, December 9, 2013.
“U.S. Trade Deficit by Country: Current Statistics and Issues,” The Balance, December 06, 2017.
“NAFTA blew up the U.S. trade deficit with Mexico,” Axios, January 26.
“U.S. makes lower trade deficit top priority in NAFTA talks,” Reuters, July 18, 2017.