NAFTA: Economic Effects on the United States After Eight Years

The North American Free Trade Agreement (NAFTA) among the United States, Canada and Mexico went into effect on January 1, 1994.It is the first trade agreement the United States has entered into with a geographically-close developing country and has raised concerns about its economic effect, particularly on U.S. communities and workers.Since the mid-1980s, when Mexico began reducing trade restrictions, the U.S. and Mexican economies have become more highly integrated.This is evidenced by the rapid growth in U.S. merchandise trade with Mexico, which is now 12% of all U.S. trade (up from 8% in 1993 and 6% in 1988) and especially by the growth of intra-industry and intra-firm trade.This growing integration has, by reducing costs, made the U.S. economy (and particularly the Mexican economy) more productive and globally competitive.Greater integration of the U.S. and Mexican economies probably would have occurred without the NAFTA, but the NAFTA, by improving business confidence in Mexico, may have accelerated the process.The U.S. foreign direct investment position in Mexico grew more rapidly before 1994 than after, probably in anticipation of NAFTA.Although growing significantly, U.S. foreign direct investment in Mexico is still relatively small, accounting for 2.8% of all U.S. foreign direct investment abroad in 2000.U.S. flows of direct investment to Mexico of $3.5 billion in 2000 are also very small compared with U.S. domestic investment in U.S. plant and equipment of $1,362 billion.It is estimated that NAFTA caused job dislocation for about 415,000 workers between January 1, 1994 and December 31, 2001, about 34% of whom were in the textile and apparel industry and 5% in the automotive industry.The number of U.S. workers dislocated by NAFTA over eight years is less than 1% of the 134.3 million U.S. workers employed in 2001.Nevertheless, a study published in August 2001 by the U.S. General Accounting Office of six communities who were hard-hit by job dislocation from NAFTA illustrates the need for improving the skills and job opportunities of dislocated workers.Generally, dislocated workers had less education than the U.S. workforce as a whole and many had limited English language skills.These case studies suggest that, in the past, trade adjustment assistance programs did not meet the needs of the workers in these communities.The Trade Act of 2002 includes provisions that may improve the effectiveness of trade adjustment assistance.Overall, the NAFTA has had a relatively small effect on the U.S. economy.Future free trade agreements between the United States and other countries, which are not major U.S. trading partners and are geographically further away, will likely have an even smaller effect on the U.S. economy.

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