Should-Read: Mary E. Burfisher, Sherman Robinson, and Karen Thierfelder: The Impact of NAFTA on the United States

Should-Read: This is still the best thing on the gross and net effects of NAFTA. Read it!

Mary E. Burfisher, Sherman Robinson, and Karen Thierfelder: : The Impact of NAFTA on the United States: “The mainstream forecasts during the NAFTA debate were basically correct…” http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.15.1.125

…NAFTA has had relatively small positive effects on the U.S. economy and relatively large positive effects on Mexico. The only blemish marring this otherwise exemplary use of economic analysis in a policy debate was the occasional use of mercantilist arguments that attempted to infer the effect of trade liberalization by applying simple multipliers to projected bilateral trade balances. Such methods are inappropriate for the analysis of the benefits and costs of trade liberalization, and were criticized during the debate….

A debate over the effects of removing trade distortions should not discuss the aggregate trade balance. Regional trade liberalization primarily affects resource allocation, production, and trade patterns. While regional trade agreements may affect bilateral trade balances, a country’s aggregate trade balance is determined primarily in asset markets. The only way a regional trade agreement can affect a country’s aggregate trade balance is if it signals a country’s commitment to an open development strategy and therefore raises investor confidence. In this
context, NAFTA probably affected Mexico’s aggregate trade balance and helped ameliorate the effect of the peso crisis on capital flows. However, there is no discernible effect of NAFTA on the U.S. aggregate trade balance….

Realizing benefits from any trade agreement (or indeed, from any technological change) necessarily involves shifting resources across sectors, which in turn will involve adjustment costs, especially for labor. While the amount of adjustment required under NAFTA was small relative to normal labor turnover, the Clinton administration anticipated labor dislocation and extended Trade Adjustment Assistance. Globalization appears to be speeding structural changes in many economies, and there is clearly scope for developing policies that facilitate and smooth the adjustment process….

Free trade agreements can accelerate domestic reforms of policies that distort prices… can serve as a building block towards multilateral liberalization…