What have we seen 17 years later? By 2010, nearly 700,000 jobs have been lost or displaced by a trade deficit of nearly $100 billion.
And now we’re talking about a new trade agreement?
President Obama, congressional leaders and other administration officials have recently made nearly identical confident claims about export growth and job creation under the proposed U.S.-Korea Free Trade Agreement (KORUS FTA). That agreement will likely result in growing U.S. trade deficits and job displacement.
NAFTA: Effects on U.S. Trade
NAFTA eliminated or phased out most tariffs and non-tariff trade barriers between Canada, Mexico and the United States. The NAFTA treaty, a 2,000-page document, covered trade and regulations in a wide range of industries. In effect, it became North America’s economic constitution.
NAFTA proponents—and these included Gary Hufbauer and Jeffrey Schott of the Peterson Institute for International Economics—argued that the most important economic effects of the treaty would result from its tariff reductions, which would increase trade flows between member countries. They claimed that because tariff barriers were higher in Mexico than in the United States prior to NAFTA, U.S. exports to Mexico would grow much more rapidly than U.S. imports from Mexico after the agreement took effect.
Hufbauer and Schott were optimistic. They estimated that NAFTA would create about 170,000 net new U.S. jobs in the “foreseeable future.” Confidence was based on projections of “a U.S. merchandise trade surplus with Mexico of $7 billion to $9 billion annually throughout the 1990s and perhaps $9 billion to $12 billion annually in the following decade.”
It only takes a quick comparison of forecast and actual trade data to show they were completely wrong in their projections (see Figure A).
In 1993, the year before NAFTA took effect, the United States enjoyed a small trade surplus with Mexico and, in the preceding decade, it had maintained a roughly balanced trade with its southern neighbor. By 2010, U.S. exports to Mexico totaled $131.6 billion, but imports were $228.8 billion, resulting in a $97.2 billion U.S. trade deficit with Mexico in that year (again, reference Figure A).
NAFTA Aftermath: Worsened US/Mexico Trade Balance
NAFTA’s most important achievement was that it made Mexico a much safer and more attractive location for businesses to outsource U.S. production. NAFTA’s investment provisions created new and improved safeguards for foreign investors, and greatly reduced the cost of doing business in Mexico.
Because it also provided a large, nearby pool of low-wage workers, foreign direct investment (FDI) in Mexico soared after NAFTA took effect. Between 1980 and 1993, FDI averaged only one-percent of gross domestic product in Mexico. From 1994, when NAFTA took effect, until 2007, it nearly tripled, to 2.9 percent of GDP (see Figure B). Those investments (most of them by U.S.-based multinational corporations) fueled a flood of outsourcing to Mexico. As a result, the growth of imports from Mexico increased from nine percent in the 1980–93 era to 11.7 percent in the post-NAFTA period (1994-2010).
The growth of exports to Mexico also increased, but much less, rising from 7.7 percent (pre-NAFTA) to 8.3 percent (post-NAFTA). The relatively slow export growth was caused, in part, by stagnant wages that limited Mexico’s demand for U.S. goods. U.S. exports of parts, supplies, and components used in export-oriented factories (so-called tourist exports) initially increased but leveled off as Mexican supply chains (such as parts, engine, and stamping plants in the automotive sector) deepened and expanded.
Since U.S. imports from Mexico grew much more rapidly than exports to Mexico after NAFTA, the trade deficit grew rapidly (reference Figure A). Growing trade deficits usually result in trade-related job displacement and job losses.
U.S.-Mexico Trade Deficits: Employment impact
The United States had a small $1.6 billion trade surplus with Mexico in 1993, the year before NAFTA took effect, which supported 29,400 U.S. jobs. By 1997, the United States had developed a $16.6 billion trade deficit with Mexico, which increased to $97.2 billion in 2010. Between 1997 and 2010, the U.S. trade deficit with Mexico increased $6.2 billion or 14.6 percent per year.
I estimated the impact of trade on employment by calculating the labor content of the trade balance – the difference between exports and imports. For example, each $1 billion in U.S. auto parts exported to Mexico supports U.S. jobs, but each $1 billion in autos and trucks imported from Mexico displaces the workers who would have been making them in the United States. On balance, the net employment effect of trade flows is determined by changes in the trade balance. Growing trade deficits usually result in job displacement. In 2010, the U.S. trade deficits with Mexico peaked at $97.2 billion displacing a total of 682,900 U.S. jobs.
Jobs Displacement: By Industry, State and Congressional District
Most of the jobs displaced by trade with Mexico in 2010 were in manufacturing industries (415,000 jobs; that is, 60.8 percent of the total jobs displaced).
Computer and electronic parts (150,300 jobs; 22 percent of the 682,900 displaced jobs) and motor vehicles and parts (108,000 jobs; 15.8 percent of the total) were the manufacturing industries hardest hit by growing bilateral trade deficits.
More jobs were created in Mexico (30,400) by the growth of net exports of autos and auto parts to the United States in 2010 than were created in the entire U.S. auto industry in the same period, which added only 25,700 jobs between December 2009 and December 2010. The 30,400 jobs displaced in autos and parts in 2010 constitute more than one-quarter of all jobs displaced by the growth of trade deficits with Mexico between 2007 and 2010 (116,400 jobs).
The 682,900 jobs displaced as of 2010 were distributed across all 50 states, the District of Columbia, and Puerto Rico. The 10 hardest-hit states (i.e., jobs displaced as a share of total state employment) were Michigan (43,600 jobs lost, or one percent), Indiana (24,400, or 0.8 percent), Kentucky (12,100, or 0.6 percent), Ohio (34,900, or 0.6 percent), Tennessee (16,400, or 0.6 percent), New Hampshire (4,000, or 0.6 percent), Illinois (34,700, or 0.6 percent), Alabama (11,100, or 0.6 percent), Massachusetts (17,100, or 0.5 percent), and Texas (55,600, or 0.5 percent). All of this is revealed in Figure C.
The states with the most jobs displaced were California (86,500 jobs), Texas (55,600), Michigan (43,600), Ohio (34,900), Illinois (34,700), New York (34,300), Florida (28,800), Pennsylvania (26,300), Indiana (24,400), and North Carolina (18,900).
The hardest-hit congressional districts, as a share of total employment, had large numbers of workers displaced by manufacturing trade, especially in autos, auto bodies, and parts, and in computer and electronic parts production. Half of the top 20 hardest-hit districts were in Michigan, followed by four in California, three in Indiana, two in Ohio and one in Texas.
NAFTA and KORUS FTA Compared
Mexico and South Korea are different countries, but there are striking similarities in U.S. trading patterns with both. The United States has maintained a significant trade deficit with South Korea for the past decade; in 2010 the largest deficits were in computer and electronic parts ($11.8 billion), and in autos and parts ($9.4 billion). The largest U.S. trade deficits with Mexico were in these same two industries.
There are also substantial differences between Mexico and South Korea. Wages in Mexico are much lower. South Korea’s industrial structure is dominated by mammoth industrial conglomerates (“chaebols”) and groups such as the Hyundai group, which manufactures Hyundai and Kia brand vehicles. Hyundai is rapidly expanding assembly of vehicles in the United States, but the vast majority of the parts used in these units are imported. Hyundai opened a second U.S. assembly plant in 2010, and recently announced plans for a third plant in Canada. The share of auto parts in the U.S. vehicle and parts trade deficit with South Korea increased from 17 percent in 2009 to 30 percent in 2010, reflecting the rapid growth of parts imports for Hyundai’s U.S. assembly plants.
The United States and South Korea agreed to modify the original KORUS agreement in December 2010. However, most of the changes, according to Schott, won’t make much of a difference in terms of the agreement’s economic impact.
In 2010, I estimated that growing U.S.–Korea trade deficits are likely to displace an additional 159,000 U.S. jobs in the first seven years after the agreement takes effect. Based on Schott’s analysis, and the additional data reviewed here, that estimate is likely to be conservative. Like NAFTA, the KORUS FTA is likely to result in growing U.S. trade deficits and job displacement, especially in the motor vehicles and parts and the computer and electronics parts industries.
One Final Furtive Look Around
The growing U.S. trade deficit with Mexico has displaced a large number of jobs in the United States and is a significant contributor to the current crisis in U.S. manufacturing, which has lost nearly six million jobs since 1998. U.S. trade with Mexico in 2010 cost 682,900 U.S. jobs, and three-fifths of the jobs displaced (415,000) were in the manufacturing sector.
NAFTA proponents claimed that falling tariffs would generate rapidly growing exports and a sustained and growing trade surplus with Mexico. In fact, the United States has experienced steadily growing trade deficits with Mexico. Despite this experience, proponents of the U.S.-Korea Free Trade Agreement have claimed that growing exports will support 70,000 U.S. jobs. The job displacement that arose from U.S. trade deficits with Mexico after NAFTA took effect provides powerful evidence that the KORUS FTA is likely to lead to growing U.S. trade deficits and job displacement.
Robert E. Scott is senior international economist with the Economic Policy Institute (EPI). Based in Washington, D.C., EPI is a non-profit think tank created in 1986 to foster discussion about economic policy, especially as it relates to the interests of low- and middle-income wage earners. Scott has conducted in-depth research and written numerous articles about the costs of free trade.