Think Tank Describes NAFTA Benefits, Peril of Withdrawal

Even as it described the cloudy outlook for the new NAFTA's ratification, a new report from the American Council for Capital Formation's Center for Policy Research says policy makers should ratify the agreement, and not move toward a withdrawal from NAFTA.

The think tank's report notes that overall, the reduction of tariffs from NAFTA boosted U.S. consumers' welfare by 0.1 percent of GDP. As Congress was considering ratifying NAFTA in the early '90s, the International Trade Commission estimated that wages would rise 0.3 percent or less in the U.S. as a result of the free trade deal. The think tank said that was a good projection -- average wages increased by 0.2 to 0.3 percent because of NAFTA.

In 2015 there were 89,106 firms that were exporters to Canada and 59,428 firms exporting to Mexico, the report said, with 75.4 percent of the firms exporting to Canada and 72.7 percent of the firms exporting to Mexico employing fewer than 50 people.

"The [ITC] report rightfully pointed out that the impact on the U.S. would vary from region to region, with border regions benefiting significantly. Certain industries, such as automobiles, apparel, flat glass and major household appliances, were expected to be negatively impacted by the agreement," economist Pinar Cebi Wilber wrote.

For instance, there were 1.2 million auto workers in the U.S. before NAFTA; now there are 900,000. Over the same period, auto industry employment in Mexico went from 900,000 to 3.5 million, the study said. Cars are the top import to the U.S. in the NAFTA region, and auto parts are the top export.

"NAFTA has been crucial for North America to remain competitive in world markets by relocating parts of its auto manufacturing based on the cost advantages of three countries," the think tank said, noting that Germany does the same thing with outsourcing lower-value work to Eastern Europe, and that Japan also sources parts from less developed Asian neighbors.

"With many unknowns at this stage, we can look at existing research on two possible outcomes: What happens if we terminate NAFTA? What is the possible economic impact of USMCA?" The think tank noted the ITC report, which pointed to the benefits of less uncertainty on digital trade. But if NAFTA were terminated, Wilber wrote, "it is unclear what would come next: Would the U.S. and Canada go back to CUSFTA or would that agreement be tabled as well? What tariffs would be applied between member countries?"

Wilber said in auto trade, NAFTA termination would damage the U.S. Citing a Boston Consulting Group study from 2017, she said "withdrawing from NAFTA could cost 20,000 jobs in the automotive sector and another 25,000 to 50,000 jobs in the auto parts manufacturing sector. Termination of NAFTA is also estimated to increase the cost of a vehicle by between $330 and $440 in the United States."