Question

One of the arguments against NAFTA is that it hurt organized labor in the US and prevented it from gaining more members. How is this possible? Please elaborate

Answer 1

Before NAFTA, the cost of producing in U.S. is $14, although the cost of producing in Mexico and China will be less but adding the cost of tariff will make it expensive for U.S. to import form both the countries. So, it will produce domestically and not import.

Under NAFTA, the U.S. will import bag packs from Mexico as it will cost less to import from Mexico as compared to producing in U.S or importing from China as tariff will be levied on good imported from China. This is because of preferential treatment given to Mexico and not to China.

Consumers will gain, US government will neither gain nor lose tax revenue as earlier the goods were being produced domestically, Mexico gains.

This is an example of trade diversion because the bags if imported from China, under free trade would have costed less to U.S = $9 than the imports from Mexico = $10. Thus, China is more efficient in producing bag packs.Thus, lower cost imports from outside the union are replaced by higher cost imports from within the union.

Tell me if its correct or not, otherwise I will approach the question from different angle. In this angle, I assumed that U.S. is imposing tariffs of $60 on both Mexico and China before NAFTA due to lack of information in the question.