Why Trump is Wrong About NAFTA

In the recent US Presidential debate, candidate Donald Trump said, "NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country".

For context, NAFTA, the “North American Free Trade Agreement” is a trade deal between America, Canada and Mexico, signed in 1993 by President Bill Clinton that eliminates practically all taxes on goods traded between the three nations. 

Trump has been blaming NAFTA for demolishing America’s manufacturing sector. Let’s examine his claim.

1. Trump is factually right in that US’s Merchandise Trade Deficit with Mexico has grown substantially since the signing of NAFTA. Per US government data (link here), the US had a Surplus of $1.35 Bn in the trade of goods with Mexico (services not included) in 1994, while today (first 10 months of calendar 2016) the US has a nominal Deficit of $53 Bn in the trade of goods with Mexico. Admittedly this is large increase.

That said, to conclude that this ballooning of the Merchandise Trade deficit is all due to NAFTA, is far from the truth. One has to take into account how much of this increase is due to the loss of jobs/manufacturing to Mexico and other countries that have lower wages. This unstoppable, global trend would have increased America’s Merchandise Trade Deficit with Mexico whether NAFTA had been signed or not. 

2. It’s true that manufacturing jobs in the US have fallen dramatically over the past couple of decades. Per data from the US Bureau of Labor Statistics (see chart below), workers in the manufacturing sector have dropped from 17.2 Million in Dec 1994 to 12.3 Million in Sep 2016 i.e. almost 30%! That said, the adoption of technology is responsible for a significant portion of these eliminated jobs. Trade or not, the troubling reality is, that while increasing productivity and making products cheaper, technology has killed jobs. For those interested in exploring this subject further, David Rotman’s article “How Technology is Destroying Jobs” in the MIT Technology Review (link here) is a great read. 

All Employees (seasonally adjusted) in the US Manufacturing Sector (in thousands) 

Source: US Bureau of Labor Statistics 

3. While imports from Mexico have increased faster that exports to Mexico, exports have increased by a substantial amount as well since the signing of NAFTA. This has created jobs in the US. According to the U.S. Chamber of Commerce, 6 million U.S. jobs depend on U.S. trade with Mexico, which has been greatly enhanced by NAFTA. Overall, many experts estimate that NAFTA has had “a modest positive” impact on the US economy. 

Bottom-line: 

Trump’s claim about NAFTA destroying US manufacturing exposes a lack of understanding of the forces of global trade. Or maybe he understands these forces, but is banking on the fact that common Americans don’t. Imports from Mexico would have grown anyway, whether NAFTA was signed or not. Jobs would have been lost anyway due to movement of manufacturing to low cost locations like China whether NAFTA was signed or not. Infact, it is the pressure created from low-cost goods produced in low cost nations that has caused US manufacturing to move to Mexico. This would have happened regardless of NAFTA. 

While NAFTA has certainly hurt some American workers (I do sympathise with them) and the government needs to do more to protect the American worker, blaming trade agreements hugely oversimplifies the problem. NAFTA is not the evil that Trump has painted it out to be.