Concerns over NAFTA: Much ado about (nearly) nothing

In 1993, the United States ran a small trade surplus with Mexico. Today, our second-largest trade deficit is with Mexico. U.S.-Mexico trade — exports plus imports — has grown 3.5-times faster than U.S. GDP since NAFTA began in 1994. 

If NAFTA were solely responsible for all the trade growth and the deficit — as the political jousting on trade implies — renegotiating or withdrawing from it could have major consequences, good or bad. Those assumptions are certainly overblown and possibly downright wrong. Here are seven reasons NAFTA gets more credit than is due:

U.S. trade with Mexico is not that big. According to my research, in 1993, exports plus imports from Mexico were 1.1 percent of GDP. By 2015, they combined for 2.8 percent of GDP. Today, the entire U.S.-Mexico trade deficit — not just the portion of the deficit due to NAFTA — amounts to $66 billion or only 6.8 percent of the U.S. global trade deficit of $970 billion.

Supply chain trade inflates volume without changing the amount of final goods traded and consumed. Multiple border crossings means early-stage components get counted multiple times. Totals of only exports, only imports or combined imports and exports exaggerate the value. Intermediate goods, i.e., those not yet completed, constitute a large share of trade: 75 percent of exports to and 40 percent of imports from Mexico. With so much supply chain activity, the true value of U.S.-Mexico trade is undoubtedly smaller than reported.

All international trade ballooned since 1993, not just within NAFTA. Globally, trade grew much faster than GDP from the mid 1980s until this decade. Trade within NAFTA grew faster than with other countries, but not necessarily because of NAFTA. Trade models expect that countries trade more with their neighbors because of lower costs and greater familiarity.  

U.S.-Mexico supply chain trade grew because of other factors. So-called “north–south” supply chains also expanded in Europe and Asia in the post-NAFTA period. Cross-border supplier networks were facilitated worldwide after the Cold War ended as security concerns declined, transportation costs fell and information technology improved.

NAFTA did facilitate supply chain trade. One study found large impacts from tariff reductions because tariffs cascade down the chain. Lower tariffs helped North American supply chains compete, but the data does not show supply-chain trade growing faster than other types.

The December 1994 Peso Crisis shaped trade much more than NAFTA. As the peso and the Mexican economy fell, demand for imports was decimated. Meanwhile U.S. demand for Mexican goods remained strong. In contrast to the strong effect of the crisis, NAFTA shows no impact on the trade deficit in carefully controlled studies. 

The Mexican economy has not grown much faster than the U.S. economy since 1994. As a result, the U.S. trade deficit with Mexico relative to U.S. GDP remained constant and close to zero, dropping by only 0.2 percentage points across 20 years.

Both the U.S. and Mexico began lowering tariffs before NAFTA. Two U.S. International Trade Commission economists noticed that the largest reduction in U.S. tariffs on Mexico relative to those on other countries occurred from 1991 to 1995. After that, U.S. reductions in tariffs for non-NAFTA countries approximately matched NAFTA reductions, so Mexico gained no relative advantage.

Complementing the tariff evidence, one recent study finds that including the general trend of U.S.-Mexico trade starting in 1990 diminishes the measurable impact of NAFTA, suggesting that reforms in Mexico were already propelling bilateral trade.

Mexico’s role as a global manufacturing hub no longer depends on NAFTA. The treaty’s biggest impact came from locking in tariff reductions and Mexican economic reforms begun in the 1980s. Firms wanting to sell in the U.S. then felt safe to make their initial investments. By now, Mexico is a familiar place for global firms to work, almost regardless of changes to NAFTA.

In sum, U.S.-Mexico trade is not very large compared to GDP or the trade deficit and not very dependent on NAFTA. My review of trade research pegs roughly 25 percent of current trade to NAFTA tariff reductions. Neither renegotiating nor cancelling the treaty holds much potential for changing the U.S. economic trajectory.

That is not to deny that changes to NAFTA could impact segments of specific industries — mostly in agriculture, electronics and autos — or certain localities, like Texas. Nonetheless, every study in the review noted above found that NAFTA benefited the U.S. more than Mexico. It may not be worth as much as we think, but it is worth something.  

Note: Trade numbers discussed here exclude services and petroleum products, both which were largely unaffected by NAFTA. 

Russell A. Green, Ph.D., is the Will Clayton fellow for International Economics at Rice University’s Baker Institute for Public Policy. Follow him on Twitter at @RGEcon.

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