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NAFTA is among the most scrutinized trade deals ever implemented, both because of the size of the North American region it encompasses and because it was a landmark deal that set the framework for much subsequent bilateral and multilateral trade policy throughout the world. Most previous reviews of NAFTA’s impact aimed to inform decisions about further liberalization, based on the assumption that NAFTA would remain intact. This study is the first to review the economic and geostrategic evidence to help from the angle of determining whether NAFTA should be preserved at all.
Since NAFTA was ratified, U.S.-Mexico trade—excluding services and petroleum, which are not addressed by NAFTA—has grown three and a half times faster than U.S. GDP. The United States ran a small trade surplus with Mexico in 1993; today, the U.S.-Mexico trade deficit is America’s second largest. If NAFTA were solely responsible for all that trade, it might appear that renegotiating it to obtain more favorable terms for the United States would have big payoffs, and that repealing it might improve the U.S. deficit.
However, the economic evidence shows that the tariff reductions included in NAFTA did not cause major changes to trade. At best, 25% of current U.S.-Mexico trade is due to NAFTA tariff reductions. Of course, at $125 billion, that is still a substantial sum. Indeed, for segments of certain industries—mostly in agriculture, electronics, and autos—or for particular localities like Texas, adjusting NAFTA tariffs could have a substantive impact. Importantly, though, every study done on the topic has found that NAFTA boosted U.S. exports more than Mexico’s. Hence, as a means for the United States to raise aggregate GDP, boost manufacturing employment, or address the trade deficit, renegotiating NAFTA holds little potential.
The biggest impacts of NAFTA appear to be the hardest to measure. NAFTA locked in reforms in Mexico that had been in process since the 1980s and included tariff reductions and investment climate improvements. Once NAFTA reduced the risk of liberalization being reversed, firms were more willing to invest in order to take advantage of cross-border opportunities. As a result, Mexico has become a manufacturing hub for firms across the globe looking to sell into the U.S. market. Now that Mexico is a familiar location for many multinational firms, its attractiveness to investors no longer depends on NAFTA.
Another important impact of NAFTA derives from the trust dividend that it has produced among all three nations—Canada, the United States, and Mexico. Greater trust has enabled the U.S. to pursue its political, diplomatic, and security interests in its own neighborhood with considerably less resistance than before NAFTA. By consolidating Mexico’s economic position as being complementary to that of Canada and the U.S., and by adding momentum to continue Mexico’s move toward a full democracy, the treaty helped align Mexico’s interests with those of the U.S. and Canada, as opposed to Latin America. Mexico has been increasingly open to collaboration with the U.S. on security issues, especially undocumented migration and organized crime.
This last impact of NAFTA is arguably the most at risk of reversal in the process of reexamining the future of NAFTA. Mexico sits on the cusp of a political turning point, and NAFTA is even more politically fraught in Mexico than in the United States. As the U.S., Mexico, and Canada enter into negotiations over revising NAFTA, the United States should tread carefully. There is room for win-win improvements in the treaty, the details of which lie outside the scope of this paper. However, the gains achievable even through a radical revision of NAFTA are not large.
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