With experts and policymakers questioning the wisdom of government efforts to suppress exports of crude oil and liquefied natural gas, we are once more having a public debate on the merits of international trade.
Two decades ago the issue was the North American Free Trade Agreement (NAFTA). Many will recall the subject was highly contentious and figured prominently in the 1992 presidential campaign, with Ross Perot warning of the “giant sucking sound” of American jobs heading south as a result of what he deemed unfair trade deals.
So what actually happened? Quite the opposite.
Economist Gary Clyde Hufbauer of the Peterson Institute for International Economics has made an important contribution to the discussion of trade with publication of a recent paper entitled NAFTA at 20: Misleading Charges and Positive Achievements.
Overstated claims … but real benefits nonetheless
Hufbauer notes the claims for and against the historic trade pact two decades ago, and concludes that many on both sides were overblown. President Clinton’s assertions about immediate, large-scale American job creation were too optimistic, he states, while Perot’s warning of nearly 6 million lost American jobs proved wildly wrong.
However, Hufbauer shows that NAFTA provided a significant overall economic benefit to all three nations:
As a rough rule of thumb, for advanced nations, like Canada and the United States, an agreement that promotes an additional $1 billion of two-way trade increases GDP by $200 million. For an emerging country, like Mexico, the payoff ratio is higher: An additional $1 billion of two-way trade probably increases GDP by $500 million. Based on these rules of thumb, the United States is $127 billion richer each year thanks to “extra” trade growth, Canada is $50 billion richer, and Mexico is $170 billion richer.
Stronger relations the biggest payoff
Interestingly, Hufbauer notes that the largest payoff “was the creation of a new foundation for U.S.-Mexican relations” that could reverse decades of hostility and antagonism. That is profoundly good news and helps give perspective to the emerging “North American Energy Colossus.”
For centuries, we have known that increased trade flows strengthen nations and promote economic growth. However, our political discourse – both 20 years ago as well as today – shows that not everybody understands these economic truths. So it’s important once more to see quantitative confirmation of the ideas that Adam Smith and others have laid out.