What Did NAFTA Really Do?

Dani Rodrik:

What did NAFTA really do?: Brad De Long has written a lengthy essay that defends NAFTA (and other trade deals) from the charge that they are responsible for the loss of manufacturing jobs in the U.S. I agree with much that he says – in particular with the points that the decline in manufacturing employment has been a long-term process that predates NAFTA and the China shock and that it is driven mainly by the secular trend of labor-saving technological progress. There is no way you can hold NAFTA responsible for employment de-industrialization in the U.S. or expect that a “better” deal with Mexico will bring those jobs back.

At the same time, the essay leaves me frustrated and uneasy. It seems to gloss over the distributional pain of NAFTA and overstate the overall gains.  

So what does the evidence say on these issues? …

A recently published academic study by Lorenzo Caliendo and Fernando Parro uses all the bells-and-whistles of modern trade theory to produce the estimate that these overall gains amount to a “welfare” gain of 0.08% for the U.S. That is, eight-hundredth of 1 percent! … Trade volume impacts were much larger: a doubling of U.S. imports from Mexico.

What is equally interesting is that fully half of the miniscule 0.08% gain for US is not an efficiency gain, but actually a benefit due to terms-of-trade improvement. That is, Caliendo and Parro estimate that the world prices of what the U.S. imports fell relative to what it exports. These are not efficiency gains, but income transfers from other countries (here principally Mexico and Canada). These gains came at the expense of other countries.

A gain, no matter how small, is still a gain. What about the distributional impacts?

The most detailed empirical analysis of the labor-market effects of NAFTA is contained in a paper by John McLaren and Shushanik Hakobyan. They find that the aggregate effects were rather small (in line with other work), but that impacts on directly affected communities were quite severe. It is worth quoting John McLaren at length, from an interview: …

In other words, those high school dropouts who worked in industries protected by tariffs prior to NAFTA experienced reductions in wage growth by as much as 17 percentage points relative to wage growth in unaffected industries. I don’t think anyone can argue that a 17 percentage drop is small. As McLaren and Hakobyan emphasize, these losses were then propagated throughout the localities in which these workers lived.

So here is the overall picture that these academic studies paint for the U.S.: NAFTA produced large changes in trade volumes, tiny efficiency gains overall, and some very significant impacts on adversely affected communities.

The consequences of NAFTA for Mexico are another topic which would require a separate post. Let me just say that the great expectations the country’s policy makers had for NAFTA have not been fulfilled. …

So is Trump deluded on NAFTA’s overall impact on manufacturing jobs? Absolutely, yes.

Was he able to capitalize on the very real losses that this and other trade agreements produced in certain parts of the country in a way that Democrats were unable to? Again, yes.