NAFTA: The effects of Free Trade in North America

Modified from a lesson on http://www.econedlink.org/lessons/index.cfm?lesson=EM50.

You will turn in anything that is in BOLD to Coach Waggoner

Introduction:

NAFTA, the North American Free Trade Agreement, went into effect on January 1, 1994. The Agreement phases out most tariffs between the United States, Canada, and Mexico. Tariffs, which are taxes on imports, increase the price of foreign goods and thereby benefit domestic producers. The participants in NAFTA agreed to reduce tariffs by 50 percent immediately and to reduce them to zero over the following 15 years. Industries suffering the most because of the increased competition from foreign goods would be given extra time to adjust to the elimination of tariffs on their foreign competitors' products.

Economists are generally in agreement that free trade benefits both parties involved in the exchange. Their argument rests on the principle of comparative advantage. An individual or country may be more efficient in producing all goods. However, both parties benefit if each individual or country specializes in producing goods in which it is relatively efficient and voluntarily trades for those goods in which others produce more efficiently.

The theoretical argument for free trade is persuasive. Nevertheless, many people object to the removal of trade barriers because they believe free trade will have a negative impact on employment and income. Others contend that the net benefits of free trade are positive and that tariffs protect the inefficient to the detriment of the country as a whole.

The debate in the United States on NAFTA centers on potential job losses because of competition with Mexico. Specifically, individuals such as Reform Party founder Ross Perot and presidential candidate Patrick Buchanan argue that lower wages in Mexico will result in United States businesses moving to Mexico. This would mean job losses in the United States. Others counter that although wages are higher in the United States, so is worker productivity. The net result in most industries is that costs in the United States are lower than in Mexico.

The effect of NAFTA on the United States economy can be determined only by a look at the data. We must see what has happened to trade since the Agreement took effect and attempt to draw conclusions about its effects.

Process:

A Look at the Data:

The effects of NAFTA on United States trade with its North American trading partners begins with examining macroeconomic data. Subsequently, we look at disaggregated or micro economic data, i.e., data at the industry and state level. Finally, an examination of employment data will give clues with respect to the impact of NAFTA on the United States economy.

The International Trade Administration in the Department of Commerce gathers and publishes data on foreign trade. The data can be found at their website:
http://www.ita.doc.gov/td/industry/otea/submenu1.html

Click on "U. S. Foreign Trade Highlights." Once they get into the foreign trade highlights, students should click on "U. S. Aggregate Foreign Trade Data, 2003 & Prior Years." The tables in this section contain data on United States trade with foreign countries. Examine the data in the various tables, do the suggested exercises, and answer the following questions.

1. Which countries are our three top trading partners (see Table 9)?

2. Construct one table and/or one graph showing the dollar volume of trade with Canada, Mexico, and Japan from 1997 through 2003. Construct similar tables and/or graphs for the dollar volume of exports (see Table 10), imports (see Table 11).  What do the data show?

3. According to the data, it is tough to determine whether jobs have been lost to Mexico.  Go to U.S. Commodity Trade With Top 80 Trading Partners, 1999-03. Scroll down the country list on this page until you find "Mexico." Select three industries: one high tech, low tech, and the apparel industry (which has been losing jobs to foreign countries for years). Use the data from 1999-2003 to construct the tables or graphs similar to those constructed in the previous exercises.

Go to http://www.econedlink.org/lessons/index.cfm?lesson=EM50 and answer the questions in the first box.  Print your answers when it tells you to.

4. Go to http://ese.export.gov/SCRIPTS/hsrun.exe/Distributed/ITA2003_STATES/MapXtreme.htx;start=HS_WORLDnewMap This section contains data on state exports to foreign countries. Select three states you would like to profile. Select those states at the left of the page.  Write down the figures of export from those states to Mexico from 1999-2003. 

Answer the questions in the second box on the page http://www.econedlink.org/lessons/index.cfm?lesson=EM50.  Print your answers when it tells you to.

Conclusion:

The debate on NAFTA, and United States foreign trade in general, usually centers on the potential negative effects of imports on the economy. It is relatively easy to identify who is harmed, because imports displace workers in industries where the comparative advantage lies elsewhere. At the same time, others benefit. Firms whose exports increase clearly benefit. Consumers get the same or higher quality products at lower costs. Are these gains costless? No; some firms lose sales and some individuals lose their jobs. Is protecting firms or industries that are likely to lose costless? No; we lose the gains from trade, and those who would have benefited because they could have increased exports never get the chance to do so.

Final Question:  How has NAFTA affected trade between the United States, Mexico and Canada since 1999?  Give at least three ways.

Turn in to Coach Waggoner: Charts/Graphs, answers to the questions in the process section, & printouts.