PubPol 201. Module 1: International Trade Policy. Class 5 NAFTA and Its Effects

Transcription

1 PubPol 201 Module 1: International Trade Policy Class 5 NAFTA and Its Effects

2 Announcement Quiz: Next Tuesday, Oct 3 In class, 1 st 40 minutes Probably a mix of Multiple choice Very short answer (1-2 sentences) Short essay Some or all will include some choice Lecture 5: NAFTA Effects 2

3 Announcement Review Sessions: This Friday, Sep AM 4-5 PM In Annenberg (here) with Both GSIs Prof. Deardorff We won t present anything, but will answer questions Lecture 5: NAFTA Effects 3

4 Class 5 Outline NAFTA What is NAFTA? What happened before? What happened after? What has happened since? Analyses of NAFTA s effects Lecture 5: NAFTA Effects 4

5 Class 5 Outline NAFTA What is NAFTA? What happened before? What happened after? What has happened since? Analyses of NAFTA s effects Lecture 5: NAFTA Effects 5

6 NAFTA What is it? NAFTA The single worst trade deal ever approved in this country - Donald Trump (during campaign) Lecture 5: NAFTA Effects 6

7 NAFTA What is it? A Free Trade Agreement including US, Canada, and Mexico Zero tariffs on imports from each other Pre-existing tariffs on outside countries Rules of origin Goods cross borders tariff-free only if they originate in the NAFTA countries Originate defined in terms of how much of a good was produced here Example: Autos require 62.5% North American content Lecture 5: NAFTA Effects 7

8 NAFTA What is it? Other provisions Some liberalization in services Foreign investment ISDS in Chapter 11 Gives foreign investors right to dispute policies that reduce profits Decided by 3-person panel, who may make states pay Intellectual property rights Opening of government procurement Governments must let NAFTA suppliers bid Lecture 5: NAFTA Effects 8

9 NAFTA What is it? Also Side Agreements on Labor Environment Lecture 5: NAFTA Effects 9

10 Clicker Question The AFL-CIO, in NAFTA at 20, was critical of several aspects of NAFTA. Which of the following did it NOT criticize? a) ISDS b) Rules of origin c) The side agreement on labor standards d) The side agreement on environment e) None of the above (they criticized all of them) Lecture 5: NAFTA Effects 10

11 Discussion Question How do negative list and positive list approaches differ, and why does the AFL- CIO prefer the latter? Lecture 5: NAFTA Effects 11

12 Class 5 Outline NAFTA What is NAFTA? What happened before? What happened after? What has happened since? Analyses of NAFTA s effects Lecture 5: NAFTA Effects 12

13 NAFTA - History Before NAFTA, US had US-Canada Auto Pact Signed 1965 Free trade between US and Canada in cars and car parts Lecture 5: NAFTA Effects 13

14 NAFTA - History Before NAFTA, US had US-Canada FTA (Free Trade Agreement) 1989 Prompted by US frustration with multilateral negotiations Canadian frustration with US AD and CVD policies Lecture 5: NAFTA Effects 14

15 NAFTA - History Before NAFTA, Mexico had High tariffs, like most developing countries Had begun to reduce them in 1980s Even after reductions, Mexican tariffs were much higher than US tariffs Lecture 5: NAFTA Effects 15

16 NAFTA - History Before NAFTA, US and Mexico had Maquiladora Arrangement Low tariffs on US imports from Mexico of goods processed there from US inputs Initially restricted to border region Lecture 5: NAFTA Effects 16

17 NAFTA - History NAFTA Negotiations Done by Bush (Sr.) administration, Extended US-Canada FTA to include Mexico Agreement was reached under Bush, but was not yet approved by Congress before 1993 Lecture 5: NAFTA Effects 17

18 NAFTA - History NAFTA Debate Became an issue in the 1992 US presidential election, with candidates President George H. W. Bush Bill Clinton Ross Perot Lecture 5: NAFTA Effects 18

19 NAFTA - History NAFTA Debate: Those opposed Labor unions (feared lost jobs and lower wages) Some environmental groups (feared dirty industries moving to Mexico) Ross Perot Feared firms would move to Mexico: Great sucking sound Some Democrats (but not Clinton) Lecture 5: NAFTA Effects 19

20 NAFTA - History NAFTA Debate: Those in favor Bush (Sr.) administration Clinton (Bill) (but with reservations about labor and environment) Most of the business community Most economists (Not all) Lecture 5: NAFTA Effects 20

21 NAFTA - History After Clinton won election Clinton negotiated Side Agreements on Labor and Environment NAFTA was approved (very narrowly) by Congress Nov 1993 Jan 1, 1994: NAFTA took effect Lecture 5: NAFTA Effects 21

22 NAFTA - History The NAFTA vote in Congress: Lecture 5: NAFTA Effects 22

23 Clicker Question Which of the following was NOT in favor of NAFTA? a) Bill Clinton b) George H.W. Bush c) Some economists d) Most Republicans e) Most businesses Lecture 5: NAFTA Effects 23

24 Class 5 Outline NAFTA What is NAFTA? What happened before? What happened after? What has happened since? Analyses of NAFTA s effects Lecture 5: NAFTA Effects 24

25 NAFTA - History What happened? Not much, at first Mexico kept peso pegged to the dollar Resisted devaluing peso in run-up to presidential election Assassinations in 1994 included Mar 23: PRI presidential candidate Colosio Lecture 5: NAFTA Effects 25

26 NAFTA - History Peso Crisis (aka Tequila Crisis ) December 20, 1994 (after the election) Crisis hit the foreign exchange market Mexico devalued the peso Devaluation had devastating effects on the Mexican economy Mexico had borrowed in dollars to pay for assets in pesos Devaluation meant that debt was suddenly higher than assets for many Lecture 5: NAFTA Effects 26

27 What Happened: Mexico Reserves Fell at Once NAFTA Mexico Reserves Quarterly Peso Crisis 27 $ billion Lecture 5: NAFTA Effects

28 What Happened: Mexico Peso Dropped One Year After NAFTA Mexico Exchange Rate Quarterly Peso Crisis $/peso Lecture 5: NAFTA Effects 28

29 What Happened: Mexico GDP Fell after Peso Crisis NAFTA Mexico Real GDP 1993=100 Peso Crisis Lecture 5: NAFTA Effects

30 What Happened: Mexico Imports Fell after Crisis; Exports Rose NAFTA Mexico Trade Peso Crisis $ billion Exports Imports 30 Lecture 5: NAFTA Effects

31 What Happened: Mexico Wages Fell Mexico Nominal Wages Quarterly NAFTA 2005 Peso Crisis 31 Index = Lecture 5: NAFTA Effects

32 32 Index =100 What Happened: Mexico Real Wages Plummeted! Mexico Real Wages, Quarterly NAFTA Lecture 5: NAFTA Effects Peso Crisis

33 What Happened: U.S. Unemployment: No effect (or fell) NAFTA US Unemployment Rate Quarterly Peso Crisis Percent 33 Lecture 5: NAFTA Effects

34 What Happened: U.S. Trade: Continued growth NAFTA US Trade Quarterly Peso Crisis $ billion Deficit started to grow more in Exports Imports Current Acct. Lecture 5: NAFTA Effects

35 What Happened: U.S. Real Wage: No Change NAFTA US Real Wage Quarterly Peso Crisis 35 Index = Lecture 5: NAFTA Effects

36 What Happened: Bilateral Trade Grew: More To US than From NAFTA US-Mexico Trade Peso Crisis $ billion Mexico to US US to Mexico 36 Lecture 5: NAFTA Effects

37 Clicker Question Why did the US bilateral trade deficit with Mexico rise after NAFTA? a) The US reduced tariffs more than Mexico b) Mexican exports became cheaper in US $ c) Mexico limited imports of US goods d) Mexico had a comparative advantage Lecture 5: NAFTA Effects 37

38 Class 5 Outline NAFTA What is NAFTA? What happened before? What happened after? What has happened since? Analyses of NAFTA s effects Lecture 5: NAFTA Effects 38

39 What has happened since? US Trade With NAFTA partners has continued to grow US trade deficit grew much larger until 2008 But much of the imports was oil Lecture 5: NAFTA Effects 39

40 40 Lecture 5: NAFTA Effects Source: Congressional Research Service (2015)

41 41 Lecture 5: NAFTA Effects Source: Congressional Research Service (2015)

42 Source: AFL-CIO, NAFTA at 20 Lecture 5: NAFTA Effects 42

43 What Happened in Mexico See Faux: Imports of subsidized grain and other agricultural products undercut Mexico s rural economy and drove over 2 million farmers off the land. Argues for fund for investment in Mexico, in exchange for guarantees for free trade unions, enforceable minimum wages, and an increase in education and other social spending Lecture 5: NAFTA Effects 43

44 Clicker Question According to Jeff Faux, writing in 2008, who had spoken in favor of renegotiating NAFTA? a) Barak Obama b) Hillary Clinton c) Both of them d) Neither of them Lecture 5: NAFTA Effects 44

45 What Happened to Supply Chains Much of the growth of trade within NAFTA has been supply chains Final goods are produced in one country with inputs from another Inputs are in turn produced with inputs from yet another As so forth Supply chains in much of manufacturing now cross the two borders many times Lecture 5: NAFTA Effects 45

46 Lecture 5: NAFTA Effects 46

47 Lecture 5: NAFTA Effects 47

48 Class 5 Outline NAFTA What is NAFTA? What happened before? What happened after? What has happened since? Analyses of NAFTA s effects Lecture 5: NAFTA Effects 48

49 NAFTA Analyses: Before Many studies examined likely effects Some, from both sides of the debate, used spurious analysis to support their views Example: All imports from Mexico are viewed as costing jobs On the positive side, advocates of NAFTA did the same with US exports, presumed to rise a lot because of Mexico s high tariffs Lecture 5: NAFTA Effects 49

50 NAFTA Analyses: Before Best academic studies (including our Michigan Model ) predicted Positive, but very small, benefit to the US Negligible disruption of US labor markets Positive, somewhat larger, benefit to Mexico Significant disruption in some Mexican markets, especially agriculture Nobody predicted Peso Crisis Lecture 5: NAFTA Effects 50

51 NAFTA Analyses: Before Reasons for small predicted effects on US US MFN tariffs were already very low Much trade with Mexico was already at even lower tariffs, under Maquiladora system US trade with Mexico was big, but not all that big, compared to size of US economy Lecture 5: NAFTA Effects 51

52 NAFTA Analyses: Before The Main Issue that Raised Concern Mexican wages were only about 1/10 of US wages Seemed obvious to many (e.g., Ross Perot) that employers would move to Mexico Answer Mexican wages were low for a reason: low productivity If this had not been true, jobs would already have moved, given our already low tariffs Lecture 5: NAFTA Effects 52

53 NAFTA Analyses: Before Benefits expected from NAFTA (see Brown) usual gains from trade tightening the distribution of income within Mexico, upward convergence in the Mexican standard of living toward the U.S. level, reduced Mexican labor migration, adoption of cleaner production processes in Mexico, Were they achieved? Yes No No No Maybe efficiency and scale gains from vertical and Yes horizontal industrial integration in North America. And the US labor market was not expected to be No? impacted. Lecture 5: NAFTA Effects 53

54 NAFTA Analyses: Before Did studies done before NAFTA get it right? Not really AFL-CIO compared what happened to trade to predictions in a study by Hufbauer and Schott Lecture 5: NAFTA Effects 54

55 From: AFL-CIO, NAFTA at 20 Lecture 5: NAFTA Effects 55

56 From: AFL-CIO, NAFTA at 20 Lecture 5: NAFTA Effects 56

57 NAFTA Analyses: After Caliendo and Parro (2015) Updated earlier studies with more recent analytical tools Found welfare benefits for US and Mexico but loss for Canada Lecture 5: NAFTA Effects 57

58 Country Welfare effects from NAFTA s tariff reductions Welfare Total Terms of Trade Volume of Trade Real Wages Mexico 1.31% 0.41% 1.72% 1.72% Canada 0.06% 0.11% 0.04% 0.32% U.S. 0.08% 0.04% 0.04% 0.11% 58 Source: Caliendo and Parro (2015), Table 2 Lecture 5: NAFTA Effects

59 NAFTA Analyses: After Posen (2014) For every 100 jobs US manufacturers created in Mexican manufacturing, they added nearly 250 jobs at their larger US home operations Unemployment in US was actually lower after NAFTA than before (until the 2008 financial crisis) Critics say NAFTA cost 45,000 jobs a year. That may be true But this is only 0.1% of normal job turnover in the US, where 4m-6m workers leave or lose jobs per month) Lecture 5: NAFTA Effects 59

60 NAFTA Analyses: After Hakobyan and McLaren (2016) They look for effects on local labor markets, where industries and/or communities were vulnerable to large tariff cuts against Mexico They find Substantial variation across localities Lecture 5: NAFTA Effects 60

61 61 Source: Hakobyan and McLaren (2016) Lecture 5: NAFTA Effects

62 62 Lecture 5: NAFTA Effects Source: Hakobyan and McLaren (2016)

63 (Consistent Public-Use Microdata Areas) 63 Lecture 5: NAFTA Effects Source: Hakobyan and McLaren (2016)

64 NAFTA Analyses: After Hakobyan and McLaren (2016) The fact that both the location and the industry effects hit blue-collar workers, especially high school dropouts, but not college graduates suggests the possibility that the costs of moving or of switching industries are larger for less educated workers, so that more educated workers can adjust more easily and arbitrage wage differences away. Lecture 5: NAFTA Effects 64

65 NAFTA Analyses: After Hakobyan and McLaren (2016) even workers in a nontraded industry waiting on tables in a diner, for example saw a sharp reduction in wages if they were in a vulnerable location that lost its protection quickly. Lecture 5: NAFTA Effects 65

66 NAFTA Analyses: After Disruption of some industries and localities Was expected May have been larger than expected Has not been dealt with adequately by TAA Nonetheless was still small But provides easy ammunition for critics Lecture 5: NAFTA Effects 66

67 Clicker Question If you could have voted for or against NAFTA in 1993, how would you have voted; and if you could vote now on the US leaving NAFTA, how would you vote? a) 1993 yes; 2017 yes b) 1993 no; 2017 yes c) 1993 yes; 2017 no d) 1993 no; 2017 no My answer, but yours may differ. Lecture 5: NAFTA Effects 67

68 Discussion Question How could the US experience with the NAFTA have been made better? What about the Mexican experience? Lecture 5: NAFTA Effects 68