Snapshot for November 5, 2003.

U.S. NAFTA trade deficit surging again

Since the U.S. entered into the North American Free Trade Agreement (NAFTA) with Mexico and Canada, the trade deficit with these countries has grown rapidly (see chart below). U.S. firms moved plants to Mexico and Canada to take advantage of lower wages and new rules providing unheard of levels of protection for foreign investors. The combined U.S. trade balance with the other two NAFTA countries (the difference between U.S. exports and imports) was a small, stable deficit prior to NAFTA. Since NAFTA that combined deficit has grown rapidly. U.S. imports have been growing more rapidly than exports, so the trade deficit has expanded. When the growth of this deficit eased in 2002, some claimed that U.S. trade with China and other lower-wage countries was displacing NAFTA trade. Contrary to this view, the U.S. NAFTA deficit has increased 12.2% so far this year, evidence that deficits with Mexico and Canada are a continuing drag on U.S. growth and job creation.

Exports, which expand domestic production, increase the number of U.S. industrial jobs, while imports, which replace goods that could have been produced in the United States, eliminate jobs. The rise in the U.S. deficit with Canada and Mexico from 1993 to 2000 displaced production supported by 766,000 U.S. jobs. Most of those jobs would have been high-wage positions in manufacturing industries. The sustained growth of this deficit suggests that NAFTA continues to eliminate more jobs in the United States, which worsens the current economic downturn.

Further study of NAFTA by researchers in Canada and Mexico has shown that workers in all three countries have been hurt, but for different reasons. In Mexico, real wages have fallen sharply and there has been a sharp drop in the number of people holding regular jobs in paid positions. Many workers have been shifted into subsistence-level work in the “informal sector,” frequently unpaid work in family retail trade or restaurant businesses. In Canada, a decade of heightened competition with the U.S. is eroding social investment in public spending on education, health care, unemployment compensation, and a wide range of other public services. This experience suggests that workers have good reasons to be concerned as we enter NAFTA’s second decade.

This week’s Snapshot was written by EPI Economist Robert E. Scott.

Check out the archive for past Economic Snapshots.