NAFTA and the TPP: A Comparison

As far as regional trade agreements are concerned, the upcoming Trans-Pacific Partnership (TPP) is constantly being compared to the North American Free Trade Agreement (NAFTA). United States citizens in particular are concerned as to whether free trade is actually beneficial to the U.S. economy and its workers. When NAFTA entered into force in 1994, tariffs were cut and laws were changed in order to allow free trade between the U.S., Canada, and Mexico. While many proponents of the agreement believe that NAFTA has stimulated the economies of these countries, others believe that the framework for the agreement can serve as a warning of what could potentially go wrong with the TPP. 

Those in favor of NAFTA fervently argue that the agreement allowed goods and money to cross borders, and thus create new businesses, jobs, and wealth for everyone involved. Similarly, by creating the TPP, the broad goal is to establish a trade bloc that covers around 40% of the world economy. It is also hoped that removing trade barriers will persuade other countries to eventually join the partnership as well. The TPP is expected to lower trade and investment barriers, like NAFTA, that will enable competitive firms to move into new markets, increase the wages of hired workers, cut costs, and also improve the quality of goods and services available. NAFTA is said to be responsible for boosting farm imports for Mexico and Canada, creating a trade surplus in services, and lowering oil prices for all three countries. This elimination of the tariffs is also said to have contributed to the 7.3% increase in U.S. economic output.

However, critics of the agreement believe that even though new jobs were created by NAFTA, they were much less desirable and did not pay as well as the jobs lost. And this is partially true. Some jobs, mainly in manufacturing, were lost, but many argue that the jobs created were economically more significant and beneficial to all three economies involved. In a report conducted by Peterson Institute for International Economics, Gary Hufbauer and Jeffrey Schott estimated that the U.S. gained 100,000 jobs per year thanks to the increased North American trade from 1993-2003, but these may not all have been due to NAFTA. What had been a small trade surplus in the United States turned into a combined trade deficit of $177 billion as more goods from Mexico and Canada crossed the borders. Still, about 2.2 million American workers have received federal money or job retraining since 1974 and a Washington-based consumer advocacy group believes that 1 million jobs in total were lost.  

So how significant is this believed job loss? Despite the number of manufacturing workers falling from 15 million to 13 million this century, factories have still managed to function at well more than 85% output. Improved technology allowed industry to continue to be productive even though some jobs were lost. According to the U.S. Bureau of Labor Statistics, about two-thirds of displaced workers who were rehired in 2012 experienced some form of a wage reduction, many of them accepting pay cuts higher than 20%. In summary, the American middle class began to shrink and income inequality increased. 

Despite some of the setbacks experienced by the U.S., Mexico in particular has benefited greatly from the agreement. The country is estimated to be the world’s 13th largest economy and foreign direct investment induced by NAFTA increased 70% in Mexico in 1994. Canada also reaped numerous benefits from U.S. investment in automotive production, increases in exports of oil, agricultural products, and mineral and mining products. U.S. investment also provided the country with higher paying jobs in the automotive, agriculture, energy, and aerospace industries, allowing the Canadian middle class to increase along with the level of secondary education. Although there were downfalls to the agreement, there is no doubt that millions also benefited. Do you think that the TPP will unfold in a manner similar to NAFTA, and if so will it benefit or harm the members of the agreement? Comment below and let us know what you think!