How Much Restructuring Are We Talking?

The Pittsburgh Post-Gazette has a well-timed Editorial. Thus far in the campaign, the Democratic rhetoric has been devoted to discrediting free trade and the "restructuring" of our agreements with other countries. In Ohio, it became quite clear that the primary was about who could better demonstrate their opposition of NAFTA. It was a defining moment in the campaign. When you contrast this with the rhetoric of John McCain, it's obvious that free-trade will be an important issue in the fall, particularly in the northeastern battleground states like Pennsylvania and Ohio. Pennsylvania's economy has progressed more than Ohio's as its unemployment rate (4.9%) looks better than Ohio's (5.7%) and Pennsylvania hasn't been as adversely affected from the mortgage crisis as Ohioans have been.

In tough economic times, low hanging political fruit is offered as a quick fix and presents something to rally around. NAFTA presents a fruit on that tree, and there will be temptation to substitute the sound policy of NAFTA for votes on election day.

The Congressional Budget Office (CBO) examined the effect of NAFTA on trade with Mexico. Since trade with Canada was already heavily liberalized before NAFTA, trade with Mexico provides an accurate measure. First, the report estimated that:

NAFTA increased U.S. exports to Mexico by 2.2 percent ($1.1 billion) in 1994—an effect that rose gradually, reaching 11.3 percent ($10.3 billion) in 2001. Similarly, the agreement boosted imports from Mexico by amounts that rose from 1.9 percent ($0.9 billion) in 1994 to 7.7 percent ($9.4 billion) in 2001.

More important than import/exports is how the trade agreement has affected U.S. GDP. The CBO analysis concluded that:

...estimates from CBO’s model leads to the conclusion that NAFTA has increased U.S. GDP, but by a very small amount—probably no more than a few billion dollars, or a few hundredths of a percent.

Even by this measure, NAFTA still produces a net gain. Certainly, there have been jobs and industries more affected, either in a negative or positive manner, than other professions because of this agreement. However, those jobs lost in the short-term will be replaced. As the world grows more globalized, it is imperative that our economy doesn't operate within isolation. America must advance and stay connected so that we can continue to compete on the international stage. It's dishonest and doing a disservice to our economic future to blame economic problems on NAFTA and free trade.

It's worrisome that as our country looks to move forward, the Democrats are looking to tie our country's hands. The Democrats may be able to use this issue to their advantage in November, but that in now way indicates it's a good policy for our future.