Has NAFTA Changed North American Trade?

Typi cally, the debate over NAFTA has focused on jobs. However, to really understand NAFTA's effects on employment or living standards, it is important to first answer the more fundamental question of what effect it has had on trade. The North American Free Trade Agreement has been one of the most hotly debated trade accords in recent history. NAFTA's critics regard the expansion of free trade to a developing country like Mexico as a dangerous precedent. They envision U.S. jobs lost in a flood of goods from a country with an average wage one-fifth that of the United States. Others see NAFTA as a boon to U.S. employment and living standards through greater trade and investment opportunities. 1 These opposing expectations for NAFTA have been largely matters of speculation and based on assessments of other trade accords. But now that NAFTA has been in operation for more than three years, the question is not what the trade accord is likely to do but what it has done. Typically, the debate over NAFTA has focused on jobs. However, to really understand NAFTA's effects on employment or living standards , it is important to first answer the more fundamental question of what effect it has had on trade. Changes in trade patterns caused by a lowering of trade barriers are ultimately the mechanism by which jobs and living standards are influenced. This article examines how NAFTA, since its inception, has affected trade between the United States, Canada, and Mexico, holding constant other important factors that affect trade. Without controlling for these other factors, the effects of NAFTA are difficult to discern, which can lead to wrong or conflicting conclusions about the accord's effects on trade. In the three years since NAFTA's implementation , both its supporters and opponents have used changes in the pattern of trade flows to justify their positions. Supporters have argued that during 1994, the year NAFTA took effect, U.S. trade with Mexico grew nearly 10 percent faster than the average of the previous five years (Figure 1). Opponents claim that any expansion in trade in NAFTA's first year was quickly reversed when expectations about its benefits fell to earth with the 1995 peso crisis. During 1995, U.S. imports from Mexico grew nearly 25 percent, but exports dropped 11 percent. Since Mexico began to recover from its deep recession in late 1995, U.S. exports to Mexico have resumed rapid …