NAFTA-Action Report

__"Has NAFTA Changed North American Trade?" by David M. Gould, in Economic Review (First Quarter, 1998), Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, Texas 75265–5906.__

Debate about the North American Free Trade Agreement (NAFTA) usually focuses on how many jobs it has sent speeding down to Mexico, where the average wage is onefifth that in the United States. But the more basic question, argues Gould, an economist at the Federal Reserve Bank of Dallas, concerns the agreement’s effect on the total volume of trade. That is what ultimately determines the impact on American employment and living standards.

In 1994, the year the accord took effect, U.S. trade with Mexico grew nearly 10 percent. But with the 1995 peso crisis, U.S. imports from Mexico increased nearly 25 percent and exports dropped 11 percent. U.S. exports have since resumed their rapid growth.

But this sort of superficial look at the ups and downs of U.S.-Mexico trade is misleading, Gould says. Factors other than NAFTA—such as changes in national income, exchange rates, and trade with other countries—also influence commerce. Trying to control for those other factors, he calculates that NAFTA hiked

U.S. exports an average of about 16 percentage points a year between 1994 and 1996, for a cumulative benefit of about $21 billion. The agreement also appears to have increased U.S. imports, he says, though this is far from certain.

Shouldn’t Americans hope that trade agreements boost exports and cut imports, thus presumably expanding jobs at home?

No, says Gould. Increases in exports and industries that do not. That increases nationimports both shift resources to industries that al prosperity. "By this criterion," the econoreflect a nation’s "comparative advantage" mist concludes, "NAFTA has been a success (i.e., the ones it is better at) and away from for the United States and Mexico."