Create Jobs? Destroy Jobs? What the Research Shows

September 12, 1993|By GILBERT A. LEWTHWAITE

WASHINGTON — Washington. -- Confused about North American Free Trade Agreement? Aren't we all?

Will it help or hurt the U.S. economy? Will it destroy or create jobs?

These are fundamental questions to which there seem to be no clear answers. Those arguing on each side show equal conviction and counter-balancing facts.

Take just one example: The Clinton administration says NAFTA will create 200,000 new jobs over five years. Ross Perot says it will throw more than 5 million existing jobs into jeopardy.

Who's right?

The problem in answering that question is that in assessing the impact of NAFTA, you have to make certain assumptions, such as how much U.S. investment will flow to Mexico. This is crucial to how many U.S. jobs will be lost. Opponents say a lot of investment will head south. Proponents say only a little will go.

With congressional hearings on NAFTA starting this week, we are all about to be deafened by both sides of the argument over the pros and cons of creating the world's largest free trade zone between the United States, Canada and Mexico -- a common market of 365 million consumers with a joint annual output of $6.5 trillion.

It is timely, then, to try to get some basic idea of what it means.

One way to do this is to turn to the Congressional Budget Office, one of this nation's most prestigious economic organizations. It serves Congress, no matter which party is in power. It uses tested and respected methods of analysis, and its projections and estimates are generally regarded as reliable. It recently analyzed no fewer than 38 independent studies of the economic impact of NAFTA by other forecasting groups, before running its own macro-economic simulation.

It has to be said that the outside studies were completed before all the final details of NAFTA were known, but enough of the treaty's broad outlines had already been published to give economists plenty of grist for their mills. They have not stopped grinding, and new studies, like the CBO's, keep being added to what is already almost a library of literature on the treaty.

It also must be said the CBO's assessment has its critics. Economic forecasting is at best an imprecise science -- just look back a few years a projections of the federal deficit! -- and the CBO analysis is accused by proponents of the treaty of understating the likely flow of U.S. investment to Mexico and therefore reduces the negative impact of the treaty, particularly job losses.

The CBO itself points to the difficulty that all NAFTA analysts face in aligning U.S. and Mexican economic data, pre-judging investor sentiment and making appropriate economic assumptions.

In general, the research suggests that NAFTA is not as big a deal for the United States as its proponents would have us believe, or as threatening as its opponents keep telling us.

The CBO study produced this assessment on the key economic elements of NAFTA:

* Overall impact:

NAFTA would produce both winners and losers in the United States, but the total gain of the winners is expected outweigh the total loss of the losers.

Both positive and negative impacts on the United States would be small for three reasons: U.S. trade tariffs and barriers are already low so there would be no great surge in imports from Mexico; their elimination would be phased in slowly on both sides, further reducing the prospect of surges either way; the Mexican economy is only 4 percent the size of the U.S. economy, suggesting that whatever happens it is hardly likely to make much of a dent here.

Conversely, Mexico would stand to gain or lose more because its tariffs and barriers are high and the effects of their reduction would be more dramatic, and the U.S. economy is so much larger. But as the Mexican economy grows, the benefits to the United States are also likely to increase.

"NAFTA might thus be viewed from the U.S. perspective as an agreement to integrate the U.S. and Mexican economies now, when the pain of transition is small and the benefits slightly larger, in order to obtain much larger benefits many years down the road, when the Mexican economy will be much larger," said the CBO in its analysis of the 38 outside studies, adding: "Integrating the two economies after the Mexican economy has grown larger would be more painful than doing it now. The pain and benefit for Mexico would both be large in either case."

* Economic impact:

The U.S. gross domestic product -- the total value of all goods and services produced with the nation's borders -- would be increased by one-quarter of one percent due to implementation of NAFTA over the next 15 years. The increase in Mexican output would be much higher -- from 6 percent to 12 percent over a 20 year period.

* Jobs:

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