In the public debate over ratification of the NAFTA, Ross Perot said he heard a "giant sucking sound" from US. Jobs headed South because of low wage rates in Mexico. Using theory of competitive advantage, are Perot's fears valid?

Alfonso Llanes, Master Degree in International Development

Answered just now

The North American Free Trade Agreement (NAFTA), took effect on January 1, 1994. It called for the phasing out all restrictions on trade and investment flows among the United States, Canada, and Mexico over 10 years (with a few of the most sensitive restrictions to be eliminated over 15 years). The United States and Canada were well into removing trade barriers between themselves, so the main new feature of NAFTA was the removal of the barriers between Mexico and those two countries.

Almost twenty five years later, most artificial impediments to trade and investment between the United States and Mexico have been dismantled. In 2001, 87 percent of imports from Mexico entered the United States duty free. The average duty on the remainder was only 1.4 percent, for an overall average tariff rate of 0.2 percent, down from 2.1 percent in 1993. The overall average Mexican tariff rate in 2001 was only 1.3 percent, down from 12 percent in 1993. Enough time has passed and enough of NAFTA’s trade and investment liberalization has been implemented that any substantial effects of the agreement should be evident by now.

A Congressional Budget Office Report States the following facts:

• U.S. trade with Mexico was growing for many years before NAFTA went into effect, and it would have continued to do so with or without the agreement. That growth dwarfs the effects of NAFTA.

• NAFTA has increased both U.S. exports to and imports from Mexico by a growing amount each year. Those increases are small, and consequently, their effects on employment are also small.

• The expanded trade resulting from NAFTA has raised the United States’ gross domestic product very slightly. (The effect on Mexican GDP has also been positive and probably similar in magnitude. Because the Mexican economy is much smaller than the U.S. economy, however, that effect represents a much larger percentage increase for the Mexican economy.)

The ongoing debate since the 1994 inception of the North American Free Trade Agreement (NAFTA) with Canada and Mexico has two opposing conclusions: NAFTA's proponents believe that more jobs were ultimately created in the USA. Opponents see the agreements as having been costly to well-paying American jobs.