The Impact of NAFTA on the United States

T he U.S. Congress approved the North American Free Trade Agreement(NAFTA) after an intense political debate. Opponents voiced a number ofconcerns, focusing on the impact of the agreement on U.S. labor markets. Often these arguments took on a mercantilist tone, with NAFTA opponents argu-ing that imports from Mexico—accompanied by surging capital flows to Mexico— would destroy jobs in the United States. Other concerns were more subtle and related to the effect trade liberalization in Mexican agriculture would have on labor market transitions in Mexico and unskilled labor emigration to the United States. For example, there was concern that Mexico’s traditional anti-poverty policies for rural labor, which accounted for approximately 25 percent of the labor force in the early 1990s, were partially supported by trade restrictions. The anticipated expan-sion of U.S. grain exports to Mexico under NAFTA raised concerns that Mexico’s rural labor market would collapse, leading to a surge of migration of unskilled workers to the United States. On the other side, NAFTA supporters argued that trade liberalization would create gains from increased trade based on comparative advantage. They pointed out that cheaper imports from Mexico helped U.S. consumers (in purchases of final goods) and producers (in purchases of intermediate goods). In the long run, as Mexico’s economy grew and demanded more goods and services, there would be an expanding market for U.S. exports. Furthermore, they argued that the agree-ment would have a relatively small impact on the U.S. economy since Mexico accounted for a small share of U.S. trade and the U.S. average tariffs against Mexic