The Uncomfortable Truth about NAFTA: It's Foreign Policy, Stupid

Paul Krugman

From Foreign Affairs, November/December 1993

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Summary:  To the United States, the labor and environmental costs of NAFTA would be minimal and the economic benefits real, but small. The trade agreement is really about helping a friendly and important neighbor in its yet uncompleted economic and political reform.

The debate over the proposed North American Free Trade Agreement has taken on an astonishing salience in American politics. Not since the Smoot-Hawley tariff has trade legislation produced such a bitter polarization of opinion.

The intensity of this debate cannot be understood in terms of the real content or likely consequences of the agreement, nor is the debate's outcome likely to turn on any serious examination of the evidence. It is as hopeless to try to argue with many of NAFTA's opponents as it would have been to try to convince William Jennings Bryan's followers that free silver was not the answer to farmers' problems.

Indeed, the parallel is quite close. The populism of the 1890s represented a desperate attempt to defend agricultural America against deep economic forces that were changing it into an industrial nation. The choice of a monetary standard had very little to do with the real problems of the farm sector; a burst of inflation might have given some highly indebted farmers a brief respite, but it would have done nothing to reverse or even materially slow the industrializing trend.

Nonetheless, the opposition between free silver and the gold standard was an easily understood symbol-"you shall not crucify this country on a cross of gold" was the nineteenth-century equivalent of a sound bite. And so the almost irrelevant demand for free silver became the core of the populist agenda.

Similarly, the hard-core opposition to NAFTA is rooted in a modern populism that desperately wants to defend industrial America against the forces that are transforming us into a service economy. International trade in general, and trade with Mexico in particular, have very little to do with those forces; clinging to the four percent average tariff the United States currently levies on imports of manufactures from Mexico might save a few low-wage industrial jobs for a little while, but it would do almost nothing to stop or even slow the long-run trends that are the real concern of NAFTA's opponents.

It is an unfortunate fact of politics, however, that bad arguments tend to drive out good. With NAFTA's opponents resorting to simplistic but politically effective rhetoric, the agreement's supporters have responded in kind if not in degree. In the glowing picture now presented by NAFTA advocates inside and outside the administration, the agreement will create hundreds of thousands of high-paying jobs, do wonders for U.S. competitiveness, and assure the prosperity of North America as a whole. This picture is not as grossly false as that painted by NAFTA's opponents, but it does considerably glamorize the reality.

The truth about NAFTA may be summarized in five propositions:

? NAFTA will have no effect on the number of jobs in the United States;

? NAFTA will not hurt and may help the environment;

? NAFTA will, however, produce only a small gain in overall U.S. real income;

? NAFTA will also probably lead to a slight fall in the real wages of unskilled U.S. workers;

? For the United ...

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