Its name and president have changed, but the Peterson Institute for International Economics continues trafficking in bogus defenses of the North American Free Trade Agreement.
Back in 1993, when the organization was called the Institute for International Economics, two of its leading trade economists gave NAFTA’s passage through Congress a major boost by predicting that the agreement would quickly generate big trade surpluses for the United States and 170,000 net new jobs. The forecast was so off – largely because these experts were completely blindsided by the peso crisis – that one of them later confessed, “The lesson for me is to stay away from job forecasting.”
Yet despite the Institute’s dismal record, as a Financial Times op-ed on Monday made clear, “There they go again.” Its author, new Peterson president Adam Posen, blasted NAFTA critics for “irrationally” ignoring the agreement’s great record in increasing employment, demand, and investment in America. Posen goes on to cite research purportedly showing that “on average, for every 100 jobs US manufacturers created in Mexican manufacturing, they added nearly 250 jobs at their larger US home operations, and increased their research and development spending by 3 percent.”
Here, however, is what Posen left out. Since NAFTA went into effect at the beginning of 1994, through last year, the U.S. manufacturing trade balance with Mexico has deteriorated from a $4.24 billion surplus to a $39.12 billion deficit. (These figures count domestic exports and imports for consumption, which don’t include U.S. shipments to Mexico of products originally made overseas, or Mexican manufactures that cross into the United States on the way to final customers elsewhere.)
Since a worsening trade balance reduces U.S. growth (and surely employment) on net, it’s tough to see how the trade and investment flows shaped by NAFTA could be a net winner for the American domestic economy given that performance.
It’s equally difficult to understand how NAFTA-influenced trade and investment could have strengthened domestic manufacturing’s competitiveness. Supporters of bringing Mexico into the existing U.S.-Canada free trade deal claimed that by enabling American manufacturers to send the labor-intensive portions of their businesses to low-wage Mexico, they could reap savings that would help them keep more market share at home and grab more market share overseas.
Yet the quadrupling of the global U.S. manufacturing trade deficit during the NAFTA years, from $121.869 billion to $498.743 billion, points to yet another broken NAFTA promise. And the peso crisis that had been the NAFTA supporters’ main alibi is now 20 years in the rearview mirror.
Posen also needs to explain America’s continuing role as the destination for more than 80 percent of Mexico’s total exports – nearly exactly the same situation as at NAFTA’s launch. The unmistakable message of this crucial statistic is that NAFTA principally enabled U.S. domestic manufacturers not to complement their American workforce with Mexican workers and inputs to supply global markets better, but to replace their U.S. employees and parts and components with counterparts from Mexico to supply the same old U.S. market.
Reinforcing this claim is the apparent reduction in the U.S. content level of imports from Mexico from 40 percent to 30 percent – partly reflecting increased use of Mexican inputs, and partly reflecting NAFTA external tariffs that have been far too low to discourage the use of non-North American inputs in Mexico-based production.
The sharp tone of Posen’s op-ed suggests he knows that the Peterson Institute for International Economics still suffers big NAFTA-related credibility problems. But they won’t be solved if its president keeps forgetting basic economics.