Factoid:US Trade Under NAFTA

In February, The Council on Foreign Relations had a light piece on the Economic Impact of NAFTA. I say light because they just touched on some of the issues but it was a pretty fair overview of NAFTA and the differing opinions on its economic impacts.

However, they included a graphic from the Congressional Research Service report of NAFTA from 2013 that I had forgotten about.

Note that in the graph the dark purple (?) bars represent US exports to Mexico and Canada, and the light  blue bars represent US imports from the two countries. The red line below zero tracks the US trade deficit with Mexico and Canada which is the difference between the dark and light bars in each year on the graph. The story I see in this graph is that US trade with NAFTA partners has been steadily growing and has tripled since the treaty went into effect. The trade deficit expanded from 2000-2007 but has shrunk considerably since the Great Recession.

If one just tracks the trade deficit between the US and NAFTA partners (the red lie), things look bleak. The deficit grew through 2008,, and, though it is much smaller now, it is still fairly large. But looking just at the red line ignores what the purple and blue bars tell us. The purple bars in particular (US exports) tell US that the flow of US goods to Mexico and Canada has tripled since NAFTA went into effect. This suggests that a lot of jobs were added in industries in which the US has a comparative advantage.

Of course, it is often argued that more jobs were lost than were added due to the growing trade deficit. Indeed, unions are adamant that NAFTA has been disaster for US workers. But does this argument make any sense if we look at US unemployment during the same period.The FRED graph below shows the Civilian Unemployment rate in the US from 1993 to 2012.

Note that in the first seven years of NAFTA, the US unemployment rate was shrinking towards an all time low of 4%. The recession in 2001 bumped it up but resumed its downward trend, getting to about 4.5% before the Great Recession sent it skyrocketing. Yet prior to the Great Recession, the trade deficit with NAFTA partners was growing and hit its peak (actually a 3 year flat spot) from 2006-2007, a period when unemployment was below 5%.

Note also that the decrease in the NAFTA trade deficit coincides with much higher levels of unemployment i the US. You might say that this is because of the slow recovery fro the Great Recession, but that's my point. US unemployment (and with it wages) are driven mainly by economic conditions in the US. While international trade is a part of those economic condition, it is a small part and certainly doesn't set the trends in the economy.