NAFTA

The North American Free Trade Agreement, which took effect January 1, 1994, eliminated most tariffs and many non-tariff barriers between the United States, Canada, and Mexico over a fifteen-year phase-in period. It was accompanied by projections -- from both its proponents and the international economic institutions that endorsed it -- of significant job creation, wage growth, and economic convergence between Mexico and its northern neighbors. Most of these projections proved overly optimistic.

For the United States, NAFTA's employment effects were negative in manufacturing, largely positive in agriculture and services, and negative overall in the short-to-medium run in manufacturing communities. The Economic Policy Institute estimated that NAFTA led to the displacement of approximately 700,000 US jobs between 1993 and 2013, primarily in manufacturing. These were not low-wage jobs -- manufacturing jobs that moved to Mexico paid, on average, significantly above the median US wage, with benefits and in many cases union representation. Their replacement with service-sector employment involved real wage losses for the affected workers.

For Mexico, NAFTA's effects were similarly mixed. Agricultural liberalization devastated Mexican small farmers, who could not compete with heavily subsidized American corn and other commodities. An estimated 1.3 million Mexican agricultural jobs were lost in the decade following NAFTA's implementation, contributing to the migration northward that NAFTA's proponents had promised to reduce. Mexican manufacturing employment grew in the maquiladora sector, but wages remained dramatically below American levels, and the gap narrowed only slowly over subsequent decades.

NAFTA was sold on the promise that higher living standards in Mexico would reduce migration pressure. Mexican real wages in the manufacturing sector were lower, relative to US wages, in 2014 than they were in 1994. The promise was not kept.Adapted from Jeff Faux, The Global Class War (2006)

The political legacy of NAFTA has been perhaps more significant than its economic legacy. It became, over the following two decades, the emblem of trade agreements that served corporations more than workers -- the template against which subsequent agreements (the Central America Free Trade Agreement, the Trans-Pacific Partnership) were measured and found similarly wanting. The failure to address labor standards, environmental enforcement, currency manipulation, and the asymmetry of adjustment costs in NAFTA's design was not an oversight -- it reflected the relative power of corporate and financial interests in the negotiating process versus the interests of workers and communities.

The USMCA (United States-Mexico-Canada Agreement), which replaced NAFTA in 2020, included stronger labor provisions -- most significantly, requirements that a significant fraction of auto content be produced by workers earning at least $16 per hour, which was designed to limit the wage arbitrage that had driven production southward. Whether these provisions will be effectively enforced is a question of regulatory will as much as treaty text.