The ITC was asked to identify effects of NAFTA, to the extent possible, on trade, wages, employment, productivity, investment, and national output. The ITC was also requested to present a review of literature addressing the effects of NAFTA in its first 3 years, and to identify areas in which inadequate data, the incomplete implementation of NAFTA, or other technical constraints complicate the analysis of NAFTA and its effects. The study conducted quantitative, econometric analyses of over 200 industries to identify NAFTA effects. Separately, the Commission examined industry data on 68 aggregate industry sectors to identify qualitatively any specific effects that would not be covered by the econometric results. The different approaches do not in all cases pick up the same effects of NAFTA on given industries, or find the same relative importance of the effects of NAFTA on the industry compared to other influences. This is to be expected, and is, in fact, an important reason to conduct the two analyses. Together, they give a more complete and balanced picture of NAFTA's effects than would either approach in isolation.
On May 15 and 16, the ITC held a public hearing on this study, and in addition invited written submissions from the public to comment on the subject of the investigation. Over 40 individuals or groupsappeared at the hearing, and over 100 written statements have been presented to the ITC. A summary of the written submissions appears in Appendix D to this report.
NAFTA took effect on January 1, 1994, after nearly a decade of rapidly growing U.S.-Mexican trade ties, and 5 years after the U.S.-Canada Free Trade Agreement (CFTA) entered into force. Three years later most of its tariff provisions are substantially in place, and their effects can be analyzed. NAFTA provided for immediate tariff reductions on 68 percent of U.S. exports to Mexico, and 49 percent of U.S. imports from Mexico. With respect to U.S.-Canada trade, virtually all tariffs on U.S.-Canadian trade have been eliminated as a result of the CFTA and NAFTA.
NAFTA also provides for reductions in nontariff barriers, including import prohibitions, quantitative restrictions, and import licensing requirements. For example, over a 10-year period Mexico will phase out trade and investment restrictions on autos and trucks. Upon implementing NAFTA, the United States immediately eliminated quotas for Mexican textile and apparel products that meet NAFTA rules of origin. Trade in energy is being liberalized. Numerous nontariff barriers on U.S.-Mexico agricultural trade have been replaced by tariff-rate quotas, which are being phased out by 2009. Most such reductions in nontariff barriers are proceeding on schedule.
In addition to reducing traditional trade barriers, NAFTA went beyond any previous trade agreement in obligating the NAFTA countries to establish rules governing the conduct of trade among the NAFTA partners. Nearly all of these "rulemaking" obligations are now in force. They govern such areas as the protection of direct investment, intellectual property, services trade, and government procurement. Furthermore, NAFTA includes dispute settlement provisions aimed at resolving conflicts over trade issues.
Pursuant to the request from USTR, the ITC's analysis of the impact of NAFTA has focused primarily on the effects that can be clearly attributed to specific provisions of the NAFTA. The results of this analysis are discussed in detail below. In general, the ITC found positive, although modest, effects on the U.S. economy after 3 years of the NAFTA. However, based on the hearing testimony and other information collected during the course of this study, it has also become clear that many of the NAFTA's most important effects are not easily quantified or observed, and the full effects of the Agreement will take many more years to make themselves known.
Among the least tangible results of NAFTA are those that might be described as effects on the general business climate in North America. As Richard Heckman, President of U.S. Filter Corporation, testified to the ITC, " New treaty partners and new trade partners tend to go out of their way to do business with each other." Numerous witnesses at the ITC's hearing confirmed that NAFTA had resulted in companies paying new attention to business opportunities within North America.
The ITC also heard testimony to the effect that NAFTA safeguarded U.S. exporters and investors from changes in Mexico's trade policy regime announced in the wake of the 1994 peso crisis. Because of NAFTA commitments, Mexico did not apply to U.S. goods the high tariffs and quotas imposed on certain imports. Thus, U.S. exports to Mexico fell by a smaller margin in the wake of the peso crisis than did exports from Asia and Europe.
The three economies linked by NAFTA are driven largely by the economy of the United States, both in terms of its size and its current state of continuing robust growth and consequent strong demand for imports. The size of the U.S. economy makes its output, employment, and investment levels less sensitive than those of its partners to changes in the trade environment. Current rates of growth in U.S. output and employment would tend to absorb many downside effects of NAFTA, but also would provide fewer opportunities for additional growth due to upside effects.
The gross domestic product (GDP) of the United States is 10 times the size of Mexico's or Canada's, and the United States is well into its sixth year of economic expansion. Job creation has remained robust since the institution of NAFTA. The unemployment rate reached about 7.5 percent in 1992, and has been declining since then to the 1996 rate of about 5.4 percent. Distinguishing any effect of NAFTA on these trends would be difficult.
The continued growth of the U.S. economy, particularly compared to those of its trading partners, has caused U.S. consumption of imports to rise and has increased its trade deficit with the world, including with North American trading partners. The United States posted a merchandise trade surplus with Mexico from 1991 through 1994, then fell into a deficit in 1995 and 1996, due principally to the collapse of the peso-dollar exchange rate and the resulting recession in Mexico. The United States has had a consistent merchandise trade deficit with Canada since 1989. The deficit has widened in each year of the current U.S. economic expansion.
Since 1993, total U.S. trade has increased, with NAFTA partners and with the rest of the world (Table ES-1). Imports from Canada and Mexico have grown more rapidly than imports from the rest of the world, as did exports to Mexico when compared to other trading partners, including Canada. Canada and Mexico are the largest and third-largest trading partners of the United States, with Mexico projected to move past Japan to become this country's second-largest trading partner by year end 1997. Nonetheless, U.S. trade with Mexico represents less than 10 percent of total U.S. trade, and trade with Canada represents about 20 percent of total U.S. trade.
The Canadian economy has been generally strong and stable for the past several years. However, unemployment peaked at a rate of over 11 percent in 1992 and eased to just under 10 percent in 1995 and 1996. Canadian GDP declined by almost 2 percent in 1991, but since then has grown at rates ranging from 0.8 to 4.1 percent. Canada's trade with the United States accounted for about 80 percent of Canadian exports in each of the last 3 years, and 66 to 68 percent of Canadian imports. Canada has maintained a growing surplus in its trade with the United States and the world. In 1996, the Canadian bilateral surplus with the United States was $37.2 billion.
During the first NAFTA year, the Mexican GDP grew by 3.5 percent, and inflation was a modest 7 percent. However, serious macroeconomic imbalances led to the devaluation of the peso at the end of 1994, to a subsequent austerity regime, and a serious recession during the second and part of the third NAFTA years. In 1995, GDP declined by 6.9 percent, and the rate of inflation was 35 percent. There were signs of a strong recovery during the third NAFTA year, marked by 4.0 percent growth of the GDP, increasing employment, and declining interest rates.
Following a $18.5 billion trade deficit with the world in 1994, the first NAFTA year, Mexico posted a $7.1 billion global trade surplus in 1995 and a $6.3 billion surplus in 1996. In order to fulfill its NAFTA commitments, Mexico did not increase its overall tariffs on imports from North America following the peso devaluation. Thus, while the 1982 debt crisis in Mexico was accompanied by a 50 percent decline in U.S. exports from 1981 to 1983, the 1994 devaluation witnessed an increase in U.S. exports to Mexico of 11 percent between 1993 and 1995.
NAFTA's tariff provisions protected U.S. exporters from Mexico's decision in 1995 to raise tariffs from 20 to 35 percent on products, such as textiles, apparel, and footwear articles imported from countries with which Mexico did not have free trade agreements. Compared to European and Asian exporters, North American exporters were less adversely affected by shrinking Mexican imports in 1995 and profited more from resurging Mexican imports in 1996.
Absolute Percentage
change change,
Trade flow/supplier 1993 1994 1995 1996 1993-96 1993-96
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Value (million dollars) Percent
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U.S. trade:
U.S. imports from:
World . . . . . . . .574,863 657,885 739,660 790,470 215,607 37.5
Mexico. . . . . . . . 38,668 48,605 61,721 74,179 35,511 91.8
Canada. . . . . . . .110,482 128,753 144,882 156,299 45,817 41.5
All others. . . . . .425,713 480,526 533,057 559,992 134,279 31.5
U.S. exports to:
World . . . . . . . .439,295 481,887 546,465 582,137 142,842 32.5
Mexico. . . . . . . . 40,265 49,136 44,881 54,686 14,420 35.8
Canada. . . . . . . . 91,866 103,643 113,261 119,123 27,257 29.7
All others. . . . . .307,164 329,108 388,323 408,328 101,165 32.9
Percent of Total
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U.S. trade:
U.S. imports from:
World . . . . . . . . 100.00 100.00 100.00 100.00
Mexico. . . . . . . . 6.73 7.39 8.34 9.38
Canada. . . . . . . . 19.22 19.57 19.58 19.77
All others. . . . . . 74.05 73.04 72.07 70.84
U.S. exports to:
World . . . . . . . . 100.00 100.00 100.00 100.00
Mexico. . . . . . . . 9.17 10.20 8.21 9.39
Canada. . . . . . . . 20.91 21.51 20.73 20.46
All others. . . . . . 69.92 68.30 71.06 70.14
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Source: Compiled by the staff of the U.S. International Trade Commission
The ITC was requested to analyze empirically the aggregate effects of NAFTA on the U.S. economy, including GDP, total manufacturing employment and earnings, and investment, independent of the many other factors affecting the U.S. economy since NAFTA's inception. The challenges the ITC faced in measuring NAFTA's impact to date were several.
Perhaps most problematic for conducting an empirical assessment is the short timeframe during whichNAFTA has been in effect and the data constraints thus presented. Trade, expenditure, and output data, commonly used measures for assessing economic impact, are not available in sufficient quantity to allow the volume of observable phenomena on which economists seek to rely.
Moreover, the difference in the size of the NAFTA partners' economies, and their divergent economic performances during these 3 NAFTA years, also complicates the analysis. Not only does the sheer size of the U.S. economy dominate its partners, the U.S. rate of economic growth and its employment levels during this period have exceeded both those of Mexico and Canada. Because of its size, the United States is also less sensitive to shocks to its economy, such as entry into force of a multilateral trade agreement.
Finally, the effort to isolate the effects of NAFTA from any effects of other economic occurrences since the start of NAFTA in January 1994 is difficult. The sharp devaluation of the Mexican peso and that country's resulting recession is widely acknowledged to have been a dominant factor in U.S.-Mexico trade flows. Also, the World Trade Organization (WTO) Agreements entered into force in January 1995. The WTO Agreements liberalized trade in goods and services among its members, reducing the value of the preferences received among NAFTA partners.
Despite these complicating factors, the ITC estimated that NAFTA has had, on balance, positive, although modest, effects on the U.S. economy and individual industry sectors.
Aggregate Effects of NAFTA
GDP, aggregate employment, and investment
The ITC found no effects of NAFTA on either GDP levels or growth rates in the United States, in large part due to the limited time period in which NAFTA has been in effect and the size of the U.S. economy compared to Mexico and Canada. Aggregate domestic employment effects of NAFTA were also not discernible, which was not an unexpected result considering the state of almost full employment prevailing in the United States during the duration of NAFTA. Finally, the ITC found no effects of NAFTA on aggregate investment.
Aggregate trade
Looking at more direct effects of NAFTA on the U.S. economy, the study found that NAFTA has significantly affected the levels of U.S. trade with Mexico. No significant effects of NAFTA on aggregate trade with Canada were found.
Results from the aggregate analysis indicate that the volume of U.S. imports from Mexico increased by 1.0 percent in 1994 as a result of NAFTA. In addition, the volume of U.S. imports from Mexico are estimated to be 5.7 and 6.4 percent higher in 1995 and 1996, respectively, than they would have been absent the Agreement. Similarly, the results indicate that, as a result of NAFTA, the volume of U.S. exports to Mexico increased by 1.3 percent in 1994 and by 3.8 and 3.2 percent in 1995 and 1996, respectively. In 1994, the only year in which NAFTA was in place and the peso devaluation does not confound the estimates, the implied increase in the volume of U.S. exports to Mexico outpaced the increased volume of U.S. imports from Mexico.
Industry trade
Econometric analysis of nearly 200 industries, accounting for over 85 percent of trade between the United States and its NAFTA partners, offers some conclusive industry-specific effects of NAFTA. The criteria applied were conservative, requiring "affected industries" to show statistically significant changes in trade in each of the 3 NAFTA years.
The ITC's estimates found that NAFTA has resulted in significant changes in the volume of bilateral trade for a modest number of industries. However, for most industries analyzed, there has been no consistent discernible impact of NAFTA on changes in the volume of bilateral trade between the United States and its NAFTA partners. With respect to U.S.-Mexico trade, U.S. exports to Mexico increased significantly due to NAFTA in 13 industries. No industries showed decreased exports to Mexico because of NAFTA. U.S. imports from Mexico increased significantly in 16 industries, while decreasing significantly in 7 industries. With respect to U.S.-Canada trade, U.S. exports to Canada increased significantly due to NAFTA in 10 industries, while decreasing significantly in 8 industries. U.S. imports from Canada increased significantly in 13 industries, while decreasing significantly in 8 industries. These results are shown in Table ES-2.
Number of industries (1)
Not
Significantly Significantly Significantly
Increase Decrease Affected
--------------------------------------------------------------
U.S. exports to 10 0 78
Mexico
U.S. imports from 16 7 92
Mexico
U.S. exports to 10 8 95
Canada
U.S. imports from 13 8 94
Canada
Share of aggregate bilateral trade (2)
--------------------------------------------------------------
Not
Significantly Significantly Significantly
Increase Decrease Affected
--------------------------------------------------------------
U.S. exports to 8.67% 0.00% 43.88%
Mexico
U.S. imports from 14.54% 1.02% 36.84%
Mexico
U.S. exports to 3.01% 4.99% 35.04%
Canada
U.S. imports from 1.95% 0.77% 53.99%
Canada
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Notes to table:
1 Number of 4-digit SIC sectors found to satisfy the criteria of statistically significant
increasing, decreasing, or unaffected trade flows in each of the 3 NAFTA years.
2 Percentages represent the share of aggregate bilateral trade flow between the United States
and its NAFTA partner for the sectors that were judged to have statistically significant
increasing, decreasing, and unaffected trade flows.
Labor
Although the ITC did not find any significant overall effects on aggregate employment or earnings, econometric analysis of labor market data at the industry level indicates that 29 of the 120 manufacturing industries analyzed experienced some NAFTA-related change in hourly earnings or hours worked as shown by the binary variable analysis. In addition, 7 industries showed employment effects that are adversely sensitive to lower prices for imports from Mexico, meaning that a reduction in import prices, due either to NAFTA or other causes, may cause job displacement. Four industries showed a positive relationship to import prices, such that decreases in import prices may raise the employment level in related U.S. industries. This may be due to market complementarities between imports and domestic production in certain industries, or perhaps to enhanced productivity due to imports. The remaining industries show no evident relationship between employment and import prices.
Productivity
No direct analysis of productivity changes due to NAFTA was possible, due to a lack of data. However, indirect evidence on productivity effects of the Agreement indicates that for those industries experiencing particularly strong import competition, productivity may have been enhanced since NAFTA. In general, the effects that were estimated were relatively modest: in certain sectors where imports were increasing, a 1-percent increase in the market share of total imports was associated with a 0.2-percent increase in labor productivity. Therefore, to the extent that NAFTA induced total imports to increase (i.e., overall trade creation) in those sectors experiencing substantial market penetration over the period 1993-96, the results of this analysis imply that U.S. manufacturing labor productivity likely increased.
For 59 of 68 sectors analyzed by the ITC, NAFTA was determined to have had a negligible effect. The trade-weighted average rates of duty on U.S. imports from Mexico were relatively low prior to the implementation of NAFTA because of low most-favored-nation (MFN) rates, Generalized System of Preferences (GSP) eligibility, or duty-free treatment on the U.S. content of imports from Mexico's maquiladora industry. With regard to U.S.-Canada trade, the removal of many tariff and nontariff barriers had already taken place under the CFTA. Consequently, the effects of NAFTA tariff reductions in many sectors were largely negligible.
Factors having a greater effect on U.S.-Mexico trade were the rationalization of production within industries in North America (particularly between the United States and Canada) and the peso devaluation which reduced Mexico's demand for U.S. exports in 1995. At the same time, U.S. imports increased because of expanded use of assembly plants in Mexico as both U.S. and Asian companies responded to lower labor costs in Mexico.
The ITC's analysis of individual industries and groups indicates that NAFTA had a significant effect on the increase in U.S. trade in 9 of 68 sectors, including grains and oilseeds, raw cotton, textile mill products, apparel, women's footwear, leather tanning and finishing, household appliances, motor vehicles, and motor vehicle parts. Important findings include the following:
Agriculture
Grains -- Mexican tariff reductions on grains, and the conversion of import licensing to a tariff-rate quota, were largely responsible for the increased U.S. exports of grains to Mexico. In spite of increased exports due to NAFTA, employment on U.S. farms continued a long-term decline. Cotton -- The growth in U.S. exports of raw cotton to Mexico partly reflected increased Mexican demand for the fiber used in the production of textile mill products (such as fabrics) for shipment to the United States under NAFTA. Data on changes in employment were not available, nor were investment data other than acreage planted in cotton, which increased by 24.6 percent between 1993 and 1996.
Manufactured Products
Apparel -- Increased U.S. apparel imports from Mexico were primarily due to NAFTA provisions that enable duty-free and quota-free entry for apparel (and other made-up textile goods) assembled in Mexico wholly from fabric that was both formed and cut in the United States; the increase likely came at the expense of imports from Asian and Caribbean Basin Initiative countries. Employment in U.S. apparel manufacturing has declined since NAFTA, most likely reflecting in part a shift of some operations to Mexico.
Textiles -- NAFTA rules of origin stimulated demand in both Mexico and Canada for fabrics produced by U.S. textile mills to make apparel for the U.S. market. Job losses, possibly attributable to increased imports, have been at least partly offset by gains due to increased exports.
Women's footwear -- Increases in women's footwear imports from Mexico, mostly under production-sharing provisions, largely reflected uncertainty over MFN renewal for China, as well as preferential U.S. tariffs under NAFTA. U.S. employment decreased from 1993 to 1996.
Appliances -- Some leading U.S. appliance producers chose to expand production in Mexico to supply the growing Latin American market, with increased U.S. imports from Mexico reflecting rationalized production. Changes in Mexican investment laws made it attractive to expand U.S.-Mexican joint ventures producing household appliances, and changes in the Maquiladora Decree enabled a phased-in increase in shipments from maquiladoras to the Mexican domestic market. Since employment grew in this sector, it is difficult to qualitatively discern a negative employment effect.
Vehicles -- U.S. exports of motor vehicles to Mexico increased as a result of NAFTA-related reductions in trade balancing requirements and tariffs. NAFTA has had a positive effect on the increase in industry employment.
Vehicle parts -- The sustained growth of the U.S. and Canadian motor vehicle markets, and investments in new plants and capacity, have supported employment growth in the U.S. auto parts industry. U.S. imports of motor vehicle parts from Mexico rose in part because of NAFTA rules of origin requirements and a more liberalized foreign investment climate.
Leather -- The increase in U.S. exports of leather (principally for use in motor vehicle seats) resulted, in part, from NAFTA changes in rules of origin related to motor vehicle export performance requirements and changes in Mexico's Maquiladora Decree that allowed shipments of car seats and/or car seat covers directly from maquiladora operations to vehicle assembly plants in Mexico. Employment in the leather tanning and finishing industry has declined despite increased exports as a result of the cyclical nature of the cattle/beef industry, closures in the face of environmental standards, and relocation of some facilities to low wage-rate countries.
Services
The effects of NAFTA on U.S. services trade are believed to be negligible. Data on services industries are available only through the second year of NAFTA implementation (1995), and largely reflect the effects of the peso devaluation on Mexico's economy. The effect of NAFTA on U.S. investment is believed to be negligible in nearly all service industries, except in financial services, where it is regarded as significant. NAFTA has raised foreign investment ceilings, thereby facilitating greater investment by U.S. banking and security firms in Mexico.