Question

Has the United States gained or lost from NAFTA?

Limit the analysis within the context of monopolistic competition and adjustment costs.

Answer 1

The North American Free Trade Agreement (NAFTA) is a pact eliminating most trade barriers between the U.S., Canada, and Mexico that went into effect on January 1, 1994. Some of its provisions were implemented immediately; others were staggered over the following 15 years.

U.S. President Donald Trump railed against it during his campaign, promising to renegotiate the deal and "tear it up" if the U.S. couldn't get its desired concessions. According to U.S. Trade Representative, the administration's goal is to "stop the bleeding" from trade deficits, factory closures, and job losses by pushing for tougher labor and environmental protections in Mexico.

Progress has been made on a number of issues under review in the talks like telecommunications, pharmaceuticals, chemicals, digital trade, and anti-corruption provisions but the way that the origin of automobile content is measured has emerged as a sticking point, as the U.S. fears an influx of Chinese auto parts. The talks are further complicated by a World Trade Organization case Canada brought against the U.S. in December.

Accomplishment in US from NAFTA:

Economic Growth

From 1993 to 2015, the U.S.'s real per-capita gross domestic product (GDP) grew 39.3% to $51,638 (2010 USD). Canada's per-capita GDP grew 40.3% to $50,001, and Mexico's grew 24.1% to $9,511. It means that Mexico's output per person has grown more slowly than that of Canada or the U.S., despite the fact that it was barely a fifth of its neighbors' to begin with.

Effects:

Prices

An important point that often gets lost in assessments of NAFTA's impacts is its effects on prices. The Consumer Price Index (CPI), a measure of inflation based on a basket of goods and services, rose by 65.6% from December 1993 to December 2016, according to the Bureau of Labor Statistics (BLS). During the same period, however, apparel prices fell 7.5%. Still, the decline in garment prices is no easier to pin directly on NAFTA than the decline in garment manufacturing.

Because people with lower incomes spend a larger portion of their earnings on clothes and other goods that are cheaper to import than to produce domestically, they would probably suffer the most from a turn towards protectionism just as many of them did from trade liberalization. According to a 2015 study by, the average real income loss from completely shutting off trade would be 4% for the highest-earning 10% of the U.S. population, but 69% for the poorest 10%.

Growth

If NAFTA had any net effect on the overall economy, it was barely perceptible. A 2003 report by the Congressional Budget Office concluded that the deal "increased annual U.S. GDP, but by a very small amount – probably no more than a few billion dollars, or a few hundredths of a percent." The CRS cited that report in 2015, suggesting it hadn't come to a different conclusion.

NAFTA displays the classic free-trade quandary: diffuse benefits with concentrated costs. While the economy as a whole may have seen a slight boost, certain sectors and communities experienced profound disruption. A town in the Southeast loses hundreds of jobs when a textile mill closes, but hundreds of thousands of people find their clothes marginally cheaper. Depending on how you quantify it, the overall economic gain is probably greater but barely perceptible at the individual level; the overall economic loss is small in the grand scheme of things, but devastating for those it affects directly.