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The North American Free Trade Agreement (NAFTA) passed Congress amidst contentious debate in 1993. Detractors argued that it would produce an exodus of jobs while proponents argued that it would create jobs. We examine the economic effects of NAFTA. The evidence indicates that while the employment effects have been small, NAFTA has caused an explosion of trade. This increase in exports and imports has multiplied gains from trade. In addition NAFTA helped Mexico recover quickly from the 1994-1995 peso crisis and provided a political anchor for Mexico's attempts to privatize, deregulate, and liberalize. The resulting growth and stability in Mexico have benefitted the U.S., which shares a 2,000 mile border with Mexico.
I. Introduction
The North American Free Trade Agreement (NAFTA) sparked virulent debate before Congress ratified it in 1993. Labor unions and populist politicians claimed that NAFTA would cost millions of American jobs. Business leaders and others countered that NAFTA would produce millions of American jobs. The original debate generated intense heat; we seek to shed light on how NAFTA has affected the economy over the last eight years.
While the evidence indicates that NAFTA has had little effect on U.S. employment, it also shows that NAFTA has produced several benefits. The agreement contributed to an explosion of exports and imports between the U.S. and Mexico, producing gains from trade as specified by the theory of comparative advantage. It also helped Mexico weather the peso crisis of 1994-1995. During the 1981-1982 crisis, Mexico raised tariffs on U.S. goods to 100 percent and imposed non-tariff barriers. During the 1994-1995 crisis, in contrast, Mexico continued to lower tariffs with the U.S. according to NAFTA stipulations. The resulting open borders with the U.S. contributed to Mexico's rapid recovery. In addition NAFTA served as the political anchor behind recent attempts to privatize, deregulate, and liberalize the Mexican economy. The economic freedom and openness that has emerged has made Mexico's economy one of the strongest in Latin America. The stability and prosperity in Mexico in turn benefit the U.S. since the two countries share a 2,000 mile border.
Section II outlines the legal changes mandated by NAFTA. Section III reviews the predictions that Ross Perot, mainstream economists, and others made concerning NAFTA. Section IV considers the effects of...