North American Free Trade Agreement and Employment

Has NAFTA Resulted in Lower Employment in U.s.?

The North American Free Trade Agreement (NAFTA) is a trading block comprising of countries that makes up North America. It mainly comprises of member states Canada, Mexico and the United states. It is claimed to be the largest trading block that exists in the world today. It was started on January 1994 with a basic aim of eliminating majority of the tariffs that hampered trade between countries in this region. Its initial focus was reduction of tariffs on trade commodities in the area of motor vehicles, textiles, computers and agricultural commodities together with protection of intellectual properties on inventions and other kind of works. It also touches cooperation in the areas of environment, labor laws, and others.

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NAFTA had a lot of benefits to the US economy apart from promoting cohesion of the region. It enabled a free trade atmosphere between the member countries. But its overall effects on the job market in the U.S attract different views from different observers.

There are those who feel that it led to reduced job opportunities in the America but there are also those who feel that it led to increased employment in the region. However it has also been argued that different researches uses different dimensions to measure the job effect of the trade agreement hence gives different views on the issue. There are those who measure the job effects based on trade aspects of net imports while there are those who measure it based on the aspect of net exports while some looks very closely into the interrelated effects of the two. (Rotheistein and Robert, 1997)

In its first three years of operation, it is estimated that NAFTA led to a loss of about 394, 835 jobs in the region. This loss was attributed to reduction in net exports in individual countries. In Mexico, reduced export led to a loss of about 227,663 while in Canada there was a loss of an estimated 167,172 jobs. Hence it shows that the trade agreement had job loss effect on the two member states. (Rothstein and Robert, 1997)

Impact of NAFTA on U.S jobs

The effects that NAFTA had on U.S job market can be gauged in terms of trade effects that arose from the agreement. We have already seen that the agreement had a lot of effect on Canada and Mexico in terms of exports which translated to loss of job opportunities. To get an insight of the effects the agreement had on the US job market, it is good to first look closely into details the net effects it had on exports and imports in the US. (Irwin, 2004)

It is recorded that the net export to the member states from the US had decreased since the signing of the agreement. Initially it showed an increased export growth of 31% to Mexico and 24% to Canada in the period between 1993 and 1996. At this time, US had trade surplus of more that $635 million with Mexico but by 1996, this had changed to trade deficit of more than $18.8 billion. This gives us a clear understanding of the effect the agreement had on trade.

Before the agreement, US had a trading deficit of about $16.7 billion which grew to $29.5 billions by 1996. Although earlier figures had indicated that trade agreement had led to increased exports between the US and the member states, the growing trade deficient clearly indicated that the imports from Mexico and Canada did not match the growing exports to these countries. This generated trade deficit which led to loss of many job opportunities. (Weintraub, 2004)

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There was no balance between the exports and import from Mexico and Canada. To look deep into this, it is recorded that exports to Mexico grew created about 158,171 jobs in the US job market. But this was offset by job displacement of about 385,834 jobs created by imports from Mexico. This same trend was replicated in trade with Canada. While exports created 244,309 jobs, imports from Canada led to displacement of more than 411,481 jobs. This shows a net loss of more that 394,835 jobs in the United States. This can be clearly shown in the table below.

US Trade with Mexico and Canada for the period of 1993-1996.

Trade commodity 1993 1996 Job loss or gain
Domestic export $116,970 $100,052 402,481
Imports for consumption 132,582 194,717 -797,315
Net exports -16,106 -48,327 -394,335

Adopted from: EPI analysis of Bureau of Labor Statistics and Census Bureau data.

It has been argued that imports from Mexico have a great effect in displacing jobs form the US manufacturing sector. This can be argued out. With free trade agreements s not enacted, there was increased import of commodities to the US market from Mexico. Mexico has suffered from a depression in 1994, had a pool of cheap labor. This translated to the products from the country which was relatively cheap compared to those produced in the US. The net effect is that there was an effect of deindustrialization in the US manufacturing sector. This had an effect of job loss in the industrial sector and also led to devaluation of the job structure. (Robert, 1996)

Job loss due to the agreement took many dimensions depending on the employment sector. Most job losses were recorded in the manufacturing sector which was most affected by the terms of the agreements. 16% of the US labor force works in the manufacturing sector and surprisingly, it was the sector that was hardest hit by the agreement with over 70% of job changes taking place. In this sector woman makes 35% of the workers in this sector. Demographic job losses due to the agreements indicates that women were most affected recording a job joss of 36% of the total jobs lost due to the agreement. The loss also took a racial perspective with Black and Hispanic recording a 9% and 6% respectively of the job loss.

The loss also took another dimension in terms of education. Due to opening up of the borders between the states, there was proliferation of cheap labor from other states to the United States and especially from Mexico. This had an effect of reducing the net pay for jobs and also led to displacement of jobs especially for casual jobs. It is to be understood that half of the US work force comprise of workers without college education especially in the manufacturing sector. The proliferation of cheap labor had an effect of displacement of about 60% of all job losses in the US manufacturing sector. This indicates that 60% of the job losses recorded comprised of less skilled workers.

But the effects were also felt in the high wage jobs. There was job value loss in the US market corresponding with job loss in the manufacturing sector. Although requiring less skill, industrial jobs in the United States are highly paying compared to other sectors. There was a downward trend of the wage structure with majority of highly paid workers slipping to lower levels of the payment structure. There was an estimated loss of 23% of jobs in the high paying job structure while the low paying job wage structure represented 32% of the job loss due the agreement. Let us look at the following table which exemplifies job loss in the US job market.

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The Impact of NAFTAA on Employment in the US for the period of 1993-1996.

Job changes due to net exports Percentage job change Share of labor force in whole economy Share of labor force in manufacturing
Total -395 100% 100% 100%
Men -253 64% 53% 65%
Women -141 36% 47% 35%
White -316 80% 80% 81%
Black -37 9% 10% 9%
Hispanic -23 6% 5% 6%
Other -19 5% 5% 5%
College -56 14% 19% 14%
Non college -339 86% 81% 86%
Wage Bracket1
(High) -92 23% 21% 25%
(Medium) -178 45% 43% 48%
(Low) -125 32% 36% 28%
Agriculture -38 10% 3%
Manufacturing -283 72% 16%
Services -69 18% 55%
Other -4 1% 26%

Adopted form: EPI analysis of Bureau of Labor Statistics and Census Bureau data.

Apparently it has been argued that there is a rising trend in unemployment in the United States which is largely attributed to the growing trade deficit between United States and to the countries in the world with NAFTA contributing a large trade deficit to the nation. According of Bernstein (2001), the unemployment rate has started to bite especially in the manufacturing sector which has further lost more tht 759,000 jobs since 1998. This loss has apparently been attribute to NAFTA which as we have seen have devastating effects on this sector.

The growing trade deficit between US and NAFTA member has undermined the initial intention of improving trade between the states. Although recording improved exports to these states, the impact of import on the US economy need to be re-evaluated and new rules set for the agreement. The trade seems to favor Canada and Mexico more than the United States. Since its inception it is recorded that Mexico and Canada have recorded an export growth of 147% and 66% respectively to the United States. Inversely imports by US from these countries have grown to 248% and 79% respectively. With these figures and the rising rates of unemployment in the US, there is an urgent need to look into the terms and provisions of the agreement once again.

However after looking into details all the above, it can be concluded that NAFTA have had adverse effects on the job market of the US. Regardless of the parameter used in determining the effect, there is evidence that it has hurt the US manufacturing sector leading to loss of job opportunity. This is a good call to the policy makers to go back to the drawing board and negotiate for new terms regarding the importation of manufactured products and labor laws especially between US and Mexico.

References

Bernstein, J. (2001). Jobs Picture. Washington D.C: Economic Policy Institute.

Irwin, D. A. (2004): Free trade under fire. Princeton University press.

Robert, S. (1996). North American Trade After NAFTA: Rising Deficits, Disappearing Jobs. Washington, D. C.: Economic Policy Institute.

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Rothstein, J. and Robert, E. S. (1997): NAFTA and the States: Job Destruction is Widespread. Issue Brief. Washington, D. C.: Economic Policy Institute.

U.S Department of Labor (1996): Employment outlook: 1994-2005 – Macroeconomic Data, Demand Time Series and Input Output Tables. Washington, D.C.: US Department of Labor.

Weintraub, S. (2004): NAFTA’s impact on North America: The First Decade. Washington: CSIS Press.

Footnotes

Wage brackets based on 1979 wage distribution: High (<$19 hourly), Medium ($8.83-19.08), Low (<$8.83).

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