The presidential election exposed deep fissures in the country over whether NAFTA and other free trade agreements benefit the United States or have accelerated job losses. With the election of Donald Trump, we now face the possibility of renegotiating NAFTA and other trade agreements.
If you didn’t know better, you would have guessed from the presidential campaign that NAFTA was a bilateral trade agreement between the United States and Mexico. Almost entirely absent was any discussion of the dynamic economic relationship between the United States and Canada — the single largest bilateral trading relationship in the world, approaching three quarters of a trillion dollars and supporting almost two million jobs. With extensive cross-border investment and travel, the US-Canada relationship is characterized by more far-reaching interdependencies than the European Union — even pre-Brexit.
The frame through which NAFTA has been viewed misses the big picture. NAFTA did not simply expand trade between the three North American countries; it has created an integrated North American economy — one that is much better positioned to compete in the global economy as a result.
The automotive industry is a case in point. Prior to NAFTA, the automotive sector in North America was uncompetitive globally. Under NAFTA, the North American automotive industry has rebounded. An almost seamless supply chain has emerged across the United States, Canada, and Mexico. Importantly, NAFTA has created opportunities for Canada and the United States to strategically utilize lower wage rates in Mexico to compete with products from low-wage Asian tigers. For example, when Ford recently decided to shift production of low-margin compact cars to Mexico, it allowed a US plant to produce high-end trucks and SUVs at no loss of American jobs. In fact, automotive jobs in the United States have grown by more than 200,000 since the end of the Great Recession, according to the Economic Policy Institute.
Nonetheless, the US share of all North American automotive jobs has declined. There is no consensus among economists as to whether NAFTA has caused a net gain or loss of U.S. jobs, although the majority of economists see a slight net benefit from the treaty. However, there is also no assurance that jobs lost to Mexico as a result of NAFTA would have been retained in the US. As a number of economists have argued, underlying competitive factors would have driven many of these jobs to China or elsewhere.
And not all trade deficits are created equal. There is a world of difference between losing jobs to Mexico and China. As a result of the integrated North American economy forged by NAFTA, 40 percent of the value of goods exported by Mexico to the US is composed of US inputs or value-add. The comparable figure for Chinese exports to the US is 4 percent.
The unevenness of trade agreements, however, is very real. Trade boosts overall GDP while redistributing the increased income to capital and highly educated workers at the expense of low-skilled workers in the United States. The anger we saw voiced in the presidential election was real. In this post-election period, Congress and the president must focus on providing increased funding for worker training and compensation for workers displaced by lower trade barriers. To walk away from NAFTA would be a huge mistake for all three countries.
The global economy is being rewired by the development of ever more complex and integrated global supply chains that have cemented economic interdependence. The United States needs to embrace — not back away from — expanded bilateral and regional trade agreements to secure access to more efficient global supply chains and foreign markets as well as to provide real protection for US intellectual property. But the United States also needs do more to support workers who will inevitably be displaced by globalization – or else we will continue to witness the erosion of the political foundation of expanded trade and increased economic growth.Elmore Alexander is dean of the Louis M. Ricciardi College of Business at Bridgewater State University.