Clashing Over Commerce: A History of US Trade Policy (Markets and Governments in Economic History)

by Douglas A. Irwin

What was the economic impact of NAFTA? For all the fears about a “giant sucking sound,” the United States experienced an exceptionally strong labor market in the mid- to late-1990s. The unemployment rate fell to less than 4 percent by late 2000, manufacturing employment held steady, and wages rose even for less-skilled workers. Imports did not cause a pronounced increase in worker displacement. While NAFTA accelerated the decline in apparel employment, studies showed that the agreement did not have a major impact on either net employment or gross job flows in other trade-affected industries.47 Later studies found that NAFTA had a substantial impact on trade but modest effects on prices and welfare.48 NAFTA promoted rapid growth in bilateral trade, and the North American economy became more integrated. While critics focused on the growth of imports from Mexico, about 40 percent of the value of those imports consisted of US-made intermediate goods and components, although this suggested the loss of some labor-intensive assembly jobs. In all, NAFTA did not exacerbate or ameliorate many of the existing problems facing the two economies. In retrospect, Hufbauer and Schott (2005, 4) point out that “much of what was promised from NAFTA could never be achieved solely through a free trade deal; much of what has occurred since NAFTA was ratified cannot be attributed to policy changes that the trade pact mandated.”