Better Off Without NAFTA, Part 1: Introduction—the US, Trump, and Facts and Fictions about Winners and Losers

Canada, Mexico, and the US: we could argue that any one of these nation-states “lost” because of NAFTA while the others “won”. That is Donald Trump’s position: that the US’ trade partners have “won” from NAFTA, at the expense of the US (which would also validate NAFTA as a “good thing” for both Canada and Mexico). We could argue instead that all three of the member states “won,” even if not to the same identical degree. That would be the position of Justin Trudeau and a great many free traders in politics and academia. The third position, which will be advanced here, is that none of the member nation-states of NAFTA “won,” that is, that the net national benefits have tended towards the neutral or negative side—especially negative for Mexico, less for Canada, and least negative for the US. In other words, when it comes to net capital flows, these have followed a predictable and familiar pattern of core dominance. Trump’s allegation that the US—the single biggest economy in the world with a stranglehold on global finance—became prey to Mexico, is basically false and it inverts reality. However, that does not mean that NAFTA did not generate negative outcomes in particular industries, in specific regions of the US.

Just as one could argue that any one, or all three, of the NAFTA member nations suffered as a result of NAFTA, one could also point to specific sectors and firms within any one of the three economies and show concrete gains both in profit and employment. These two realizations are not irreconcilable, nor do they constitute a paradox. Instead, what the two sides point to is the fact that NAFTA was never created for the benefit of nations as a whole (even if it has been sold that way, for public relations and electioneering purposes). NAFTA’s secret tribunals are designed to protect the rights of investors, and have the power to overturn national laws—that fact alone strongly underscores NAFTA as a structure designed to benefit corporations, not nations.

Thus on the one hand the triumphalism of Justin Trudeau in praising NAFTA is generally correct with reference to specific industries, but is clearly misleading when it comes to Canada as a whole—ironically, his own government’s statements defending NAFTA to US audiences, prove that point. Also, Trump’s myth-making is generally devoid of factual knowledge about the effects of NAFTA on Mexico, or about relations with Canada, but it resonates with areas in the US devastated by NAFTA because these actually exist. Otherwise Trump is known to inflate or invent facts and figures on trade, and to assert deficits exist where there are instead surpluses in the US’ favour.

Trump is stuck in a self-serving “America the victim” mode which inconveniently obscures facts that could have made his case against NAFTA much stronger (for example, that NAFTA was responsible for a massive outflow of agricultural workers from Mexico, who then moved North as if chasing the capital fleeing their country). Trump could have made this argument, that NAFTA boosted “illegal immigration,” but then that would mean he had to know what he was talking about. The point here is to move beyond the dominant propaganda campaigns on either side, even while acknowledging the contents of such propaganda. If the reader’s allegiance is to a particular corporation or economic sector, then what is presented below will sometimes read like “good news”; however, if your affinity is to a national society and its welfare, then there is little to cheer you up about NAFTA whether you are in Mexico, Canada, or the US.

The demise of NAFTA—even if by questionable means and using shoddy arguments—is a long sought outcome, much desired by a wide range of political activists ranging from revolutionaries such as the Zapatistas to conservative populists like Trump, with many socialists and social democrats in between—and at one time even the Liberal Party of Canada, under John Turner, which was viscerally opposed to NAFTA. In the US, the anti-NAFTA position was once that of an apparently mendacious Barack Obama, as it has been the position of Bernie Sanders, and a range of trade unions (even Hillary Clinton once claimed to be against NAFTA). Pinning anti-NAFTA on Trump alone is to give him an undeserved gift, recognizing him as the position’s single author with exclusive ownership, and such a factual misrepresentation constitutes myth-making.

Another question is whether the rise of tariff regimes and the demise of arrangements such as NAFTA are indicative of a new phase of deglobalization, and what that might mean in terms of what comes next. However, that is generally not the concern in this article. Instead I want to focus just on questions of the net benefits/losses brought about since NAFTA came into force, and whether the demise of NAFTA would really represent a significant loss or setback for any of the economies in question.

NAFTA: Between Fact and Fiction

The North American Free Trade Agreement (NAFTA) is a trilateral trade agreement between Canada, United States and Mexico that went into effect on January 1, 1994. NAFTA led to an increase in trade in goods and services between Canada, the US and Mexico, which was approximately $290 billion US in 1993 and rose to more than $1.1 trillion US in 2016 (others put the figure at $1.3 trillion US in 2015, which is also backed by the US Chamber of Commerce) . Since its passage, NAFTA has had an uneven impact across the three member states.

Before we look at the three states individually, let’s consider what economists tout as the high watermark of economic progress, and that is the growth of GDP per capita—this graph from the World Bank shows GDP per capita growth since NAFTA went into effect, with reference to Canada, the US, and Mexico:

Far from the huge success that economists and politicians promised about NAFTA, the effect on GDP has been marginal at best in the cases of Canada and the US, whereas Mexico’s GDP per capita has virtually flat-lined. Let’s turn now to each of the three NAFTA member nations, starting in Part 1 with the US.

The US and NAFTA: Costs, Benefits, and Trump’s Myth-Making

Leading US experts in economics had predicted that NAFTA would boost US exports to Mexico and Canada, and massively increase employment in the US— 283 economists, including 10 Nobel laureates, signed a statement to that effect, in support of US President Bill Clinton’s decision to approve NAFTA. The first problem in determining the actual effects of NAFTA, is disentangling those effects of NAFTA from the effects of other factors, such as trade with China, increased automation, and increased global trade overall.

Jobs

US president Bill Clinton, who brought NAFTA into effect, promised NAFTA would create 200,000 new jobs a year, for five years. Instead, NAFTA has destroyed more than 851,700 American jobs while the US goods and services trade deficit with NAFTA has skyrocketed from very little to more than $116 billion US in 2007. The US lost 28% of its factory jobs since NAFTA came into effect, falling to 12.2 million jobs from 17.1 million. The following graphs shows that decline, occurring in the years since NAFTA took effect:

What is difficult to determine is whether all of those job losses occurred solely because of NAFTA, just because they happened in the years since 1993, with a drop actually occurring after China joined the WTO in 2001. However, the converse of that is one can also not argue that NAFTA boosted the number of manufacturing jobs—since it did little on that front. However, the US Chamber of Commerce maintains that six million US jobs depend on NAFTA. The picture becomes less clear when we consider that while 200,000 US jobs are lost annually due to rising imports from Mexico (the figures leave out Canada, inexplicably), almost the same number of new jobs are generated by exports to Mexico (others hold that NAFTA-related job losses have ranged from 60,000 to 190,000 annually). Then the best one could say about NAFTA, is that in terms of the US and Mexico, its impact on employment has been neutral.

It is easier to isolate NAFTA’s effects when it comes to specific industries, such as the textile industry. With reference to garment manufacturing, total US employment in the sector has declined by nearly 85% since NAFTA was signed. Since 2001, due to NAFTA plus a range of other US free trade treaties with various Asian nations, nearly 60,000 factories in the US have shut down, and more than 4.8 million relatively well-paid manufacturing jobs have disappeared.

Isolating NAFTA’s effects is also made easier by focusing on specific regions in the US, dominated by industries that have declined after NAFTA-related imports gained greater access. Michigan for example, a key industrial state, and one that plays an important role in the election of US presidents (it recently went to Trump, after being held for many years by Democrats), seemed to suffer acutely. The Labor Department’s Trade Adjustment Assistance (TAA) program certifies that more than 161,000 Michigan jobs have been lost due to offshoring or imports since NAFTA. And these numbers significantly undercount the full impact since the Labor Department only covers some of the jobs lost to trade. Michigan lost nearly 300,000 manufacturing jobs since 2000, though not all because of NAFTA:

US Trade with Mexico and Canada: Inflated Values

While the US trade balance with Mexico is usually spoken of as being negative, this is disputed by some economists. For example, a large portion of what the US imports from its NAFTA partners is in fact value added to items exported from the US to begin with: “twenty-five cents out of every dollar of goods that are imported from Canada to the U.S. is actually ‘Made in USA’ content, as are 40 cents out of every dollar for goods imported into the U.S. from Mexico”. A report from the Wilson Center made this point: “A full 40% of the content in U.S. imports from Mexico is actually produced in the United States (See page 17 of the report). This means that forty cents of every dollar spent on imports from Mexico comes back to the U.S.” Not taking that into account tends to inflate the value of imports.

US Trade with Canada: Fictitious Deficits

With reference to Canada, the US has tended to benefit from a trade surplus—Canada usually runs a deficit, unless oil prices are very high. The Office of the US Trade Representative acknowledges this fact, pointing out on its website that US exports of goods and services to Canada were $341.2 billion US, while imports were less at $332.8 billion US. Canada, which compared to the US is 1/10th its size in terms of population, with fewer people than California—is the US’ single largest goods export market. Canada is also the US’ third largest supplier of import goods. In addition, Canada also invests more in the US than the other way around: US foreign direct investment in Canada amounted to $363.9 billion US in 2016, while Canadian investment in the US in the same year totalled $371.5 billion US. The latter is a monumental figure when one takes into account the fact that the size of the Canadian economy is dwarfed by the US: the US has a GDP of approximately $20 trillion US compared to $1.5 trillion US for the GDP of Canada. For the US to invest a proportional amount in Canada, the figure would have to be $4.9 trillion US; Canada is investing about a quarter of its GDP in the US.

While Donald Trump and various US state governors have accused Canada of “unfairly” restricting access to the Canadian dairy market, the fact of the matter is that the US currently runs a $400 million dairy surplus with Canada. The US also has a $2 billion surplus in its steel trade with Canada—despite the recent complaints that motivated Trump to impose tariffs. When we factor in iron, the US “exported $4.35 billion worth of iron and steel mill products to Canada in 2017 against $3.69 billion worth of Canadian imports”. For the US to be treated “fairly,” how much more of a surplus would it need?

Donald Trump has admitted to making up “facts” about the US trade position with Canada, confessing he did not know what the numbers were. After Justin Trudeau correctly denied that Canada ran a trade surplus with the US, in a phone call Trump replied, “Wrong, Justin, you do”. However, Trump later boasted to a crowd: “I didn’t even know…I had no idea”. Trump insisted on repeating this falsehood on Twitter:

Trump’s trade representative in the NAFTA talks, Robert Lighthizer, has also repeated the fiction that Canada has a whopping $87 billion surplus in trade with the US, when the US government’s own Department of Commerce (Bureau of Economic Analysis) shows that Canada runs an $8 billion deficit. For the US to be treated “fairly,” how much more of a deficit does Canada need to run?

Damning Assessments

In 2000, after NAFTA had been in existence for only seven years, the Economic Policy Institute was already able to publish a striking tally of all the job losses suffered by the US since the advent of NAFTA. Among the outcomes listed were the following:

  • All 50 states and the District of Columbia have experienced a net loss of jobs under NAFTA, with the US losing 766,030 actual and potential jobs between 1993 and 2000.
  • The US manufacturing sector lost 544,750 jobs (72% of all jobs lost) between 1993 and 2000.
  • Overall, the states with the most job losses are: California (82,354 jobs lost), Michigan (46,817 jobs), New York (46,210 jobs), Texas (41,067 jobs), and Ohio (37,694 jobs).

The EPI’s conclusion then was equally damning:

“A review of NAFTA at its seven-year mark shows that the results are mixed and the agreement’s benefits somewhat dubious. A large and growing body of research has shown that NAFTA has also contributed to rising income inequality, suppressed real wages for production workers, weakened collective bargaining powers and ability to organize unions, and reduced fringe benefits. Trade was expected to increase the wages of the workers producing exports, but growing trade deficits have meant that the number of workers hurt by imports has exceeded the number who have benefited through increased exports”.

In 2014, at the 20-year mark for NAFTA’s existence, a report from Public Citizen painted an even grimmer picture:

“The data show that NAFTA proponents’ projections of broad economic benefits from the deal have failed to materialize. Instead, millions have suffered job loss, wage stagnation, and economic instability from NAFTA. Scores of environmental, health and other public interest policies have been challenged. Consumer safeguards, including key food safety protections, have been rolled back. And NAFTA supporters’ warnings about the chaos that would engulf Mexico, and a new wave of migration from Mexico, if NAFTA was not implemented have indeed come to pass, but ironically because of the devastation of many Mexicans’ livelihoods occurring, in part, because NAFTA was implemented”.

The report lists specific outcomes—some of which are quoted here:

  • Rather than creating the promised hundreds of thousands of U.S. jobs, NAFTA has contributed to an enormous new U.S. trade deficit with Mexico and Canada [for a contrary view, see above], which had already equated to an estimated net loss of one million U.S. jobs by 2004. This figure, calculated by the Economic Policy Institute (EPI), includes the net balance between jobs created and jobs lost. Much of the job erosion stems from the decisions of  U.S. firms to embrace NAFTA’s new foreign investor privileges and relocate production to Mexico to take advantage of its lower wages and weaker environmental standards. EPI calculates that the ballooning trade deficit with Mexico alone destroyed about seven hundred thousand net U.S. jobs between NAFTA’s implementation and 2010. This toll has likely grown since 2010, as the non-oil U.S. trade deficit with Mexico has risen further.
  • NAFTA has contributed to downward pressure on U.S. wages and growth in U.S. income inequality.
  • According to the U.S. Bureau of Labor Statistics, two out of every three displaced manufacturing workers who were rehired in 2012 experienced a wage reduction, most of them taking a pay cut of greater than 20 percent.
  • Despite a 239 percent rise in food imports from Canada and Mexico under NAFTA, the average nominal price of food in the United States has jumped 67 percent since the deal went into effect.
  • U.S. manufacturing and services exports to Mexico and Canada grew slower after NAFTA took effect.
  • The reductions in consumer goods prices that have materialized have not been sufficient to offset the losses to middle-class wages under NAFTA. U.S. workers without college degrees (6 percent of the workforce) have likely lost an amount equal to 12.2 percent of their wages under NAFTA-style trade even after accounting for the benefits of cheaper goods.
  • Scores of NAFTA countries’ environmental and health laws have been challenged in foreign tribunals through the controversial ‘investor-state’ system. More than $360 million in compensation to investors has been extracted from NAFTA governments via investor-state tribunal challenges against toxics bans, land-use rules, water and forestry policies and more. More than $12.4 billion are currently pending in such claims. These claims include foreign investor challenges of medicine patent policies, a fracking moratorium and a renewable energy program.

The Trump Factor

We already saw above that Donald Trump can resort to spinning fictions—which does not help his cause, whatever it may actually be. He claims to support free trade, but says it must be fair. He has taken particular aim at TPP (but appears not to have read the text of the draft agreement), and he has railed against NAFTA. Making up “facts” about NAFTA, and being found out easily, might lead some to become more sceptical about all his other trade “facts,” which does not help the anti-NAFTA cause, especially when there is so much concrete evidence damning it that one does not need to resort to exaggeration, let alone fiction.

There is a bigger problem with Trump, apart from his obvious insincerity, ambivalence, and opportunism. For Trump, there must be no sign of any gain on the other side—any gain of theirs is a loss for the US. Thus he especially resents any production occurring in Mexico, but then doesn’t want poor Mexicans coming across the border—“remain poor, remain in Mexico,” this seems to be what Trump is essentially telling Mexicans. Trump’s approach to trade thus has more in common with neocolonialism and plunder than it does with peaceful economic relations. Trump’s notion of a trade war betrays his militaristic approach to trade, which like war means one side gets wiped out, and the winning side dominates.

What Trump is playing with is something that resonates from the top to the bottom of US society: playing the victim. Trump thus speaks for “the American victim,” that eternally innocent martyr who has known only unrequited generosity. What Trump does at an international level is to mirror the victim culture that has taken hold in domestic social relations. Why? Organized and calculated victimhood is a means of coercively negotiating greater access, of gaining more privileges and rewards than others, and thus achieving dominance over others.

Trump’s victimology externalizes the source of US problems, deliberately misplacing the target. He thus blames poor Mexicans, or China, but does not talk about how automation means domestic protection will not lead to many more new jobs. Trump almost never finds fault with income inequality, nor will he admit that that the very rich do not produce jobs (“small businesses” produce the majority), because that is simply not their mission. Trump frequently likes to give vent to his victimology, which is one of his unrecognized trademarks—here are some of his comments on Canada:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”—Donald J. Trump (@realDonaldTrump), 2:50 AM, March 2, 2018

“The United States has been taken advantage of for many decades on trade. Those days are over. Earlier today, this message was conveyed to Prime Minister Justin Trudeau of Canada: The United State (sic) will agree to a fair deal, or there will be no deal at all”.—Donald Trump, May 31, 2018.

“Canada has treated our Agricultural business and Farmers very poorly for a very long period of time. Highly restrictive on Trade! They must open their markets and take down their trade barriers! They report a really high surplus on trade with us. Do Timber & Lumber in U.S.?”—Donald Trump (@realDonaldTrump), 6:18 AM, June 1, 2018.

So what are the benefits of Trump’s positioning, from a perspective of those critical of neoliberal globalization, and the US’ dominant position as the policeman of that system? Trump has withdrawn from the Paris climate change accord, the Iran nuclear agreement, and he withdrew from the TPP; he has heaped sanctions on European companies for doing business with Russia, and now promises to do the same with European companies investing in Iran; Turkey—a key NATO member—has drifted away from the US orbit, going as far as withdrawing its ambassador from Washington, buying weapons from Russia, and threatening violence against US forces in Syria; the Philippines, under Rodrigo Duterte, is taking unprecedented moves to lessen its dependency on the US and diversify its external relations, while emphasizing its sovereignty against US interests. Trump has sanctioned and tariffed his way into a unique position of international isolation, and now the counter-tariffs from Canada, Mexico, the EU, and China, amount to sanctions being applied against the US. Trump may be wrong on many levels about NAFTA, but the damage done to it by him may be salutary. At the very least what Trump is doing—without saying so—is proving to the world that the US is not in fact “the indispensable nation”.

Trump’s NAFTA-related tariffs cannot be easily challenged either. Challenging the US at the World Trade Organization (WTO) can backfire in one of two ways: if the US wins, then any nation can cite “national security” as free license to impose tariffs; or if the US loses, it may then leave the WTO, effectively gutting it. This shows the lopsided power balance that tilts heavily in the favour of the US, the same US Trump would have Americans believe is a victim. Trump’s tariffs on Canada and Mexico have already seriously interrupted NAFTA negotiations, if not suspending them, and they limit the chances of any further Canadian or Mexican concessions. Justin Trudeau confirmed as much when he said at a news conference that Trump scuttled what Trudeau thought was a nearly completed NAFTA deal by demanding, via Mike Pence, that Canada sign onto a five-year “sunset clause” before Trump would even agree to with him. Trudeau refused, there was no meeting, but this account has been contradicted by Pence. An editorial in Toronto’s The Star summed up the situation: “At this point it’s clear that the Trump administration has made a remarkable hash of the NAFTA talks. It has presented Canada and Mexico with a series of unacceptable demands that served only to stiffen spines in both countries”.

Will the recently imposed protectionist measures boost domestic industry in the US, specifically the steel and aluminum industries? The tariffs will likely mean there will be a rise in prices of inputs, which forces a rise in prices of finished goods, and that increases inflation. It is very hard to revive dormant or dead steel mills, and when dormant ones come back into production they tend to hire fewer people thanks to automation. A rise in prices is also effectively a cut in real wages, and this undermines the effects, if any, of Trump’s tax cuts. However, we might suspect that the tariffs are being used as a way for Trump to pay for his tax cuts. As for steel: “The American industry is performing fairly full-out, so you can’t automatically assume you’re going to find another producer to ramp up an existing steel furnace that’s been sitting idle. Steel prices will start rising significantly,” according to Peter Warrian, a steel industry expert and senior research fellow at the Munk School of Global Affairs at the University of Toronto. Warrian also pointed out that, “if you shut it all off and end NAFTA, there will be a direct loss of about 37,000 American jobs, which is not exactly what Trump is telling his base—and there’s indirect jobs on top of that”.

When this series of three articles is complete, one facet that that should not be missed is the fact that NAFTA has been particularly beneficial to US corporate interests. The trade agreement also served as an effective means to siphon capital from Canada, while destroying competing agricultural industries in Mexico. On a national level, NAFTA’s effects have either been insignificantly beneficial, almost neutral, or very harmful, depending on the country in question. There is little doubt that the US, however, which entered into NAFTA as a much stronger power than either of its two “partners” (one, to the north, is little bigger than a US state, and the other is a third world nation), meant that it tended to dominate as a result of NAFTA. The loss of NAFTA may thus end up being of greater significance to the US’ geopolitical power and to the revenues of its transnational capitalist class, than it would be to either Canada or Mexico which generally did better before NAFTA.

See:
Better Off Without NAFTA, Part 2: Canada—Localized Profit, but a Net Outflow of Capital
and
Better Off Without NAFTA, Part 3: Mexico—Armed Rebellion, Mass Migration, Flat GDP

3 thoughts on “Better Off Without NAFTA, Part 1: Introduction—the US, Trump, and Facts and Fictions about Winners and Losers

  1. Thanks for looking at trade from both sides. I am not sure the of the best way to evaluate who has benefited the most from NAFTA. On a personal front I can now get thin tasty asparagus from Mexico when it isn’t available locally. I really do prefer the thin stalk asparagus over the thick stuff available later in the year locally. I recall that many countries had currency issues during the last 30 years.

    https://www.colorado.edu/Economics/courses/econ2020/6550/readings/Mexico-currency.html
    .
    The 80’s were not kind to the Peso. I wasn’t aware that their inflation rate hit 159% in 1987!

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