Benefits and Challenges of Trade under NAFTA: The Case of Texas

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1 Benefits and Challenges of Trade under NAFTA: The Case of Texas AUBER Fall Conference Albuquerque New Mexico October 2017 Jesus Cañas Federal Reserve Bank of Dallas The views expressed in this presentation are strictly those of the author.

2 NAFTA s track record Trade and investment Labor market effects Texas in the NAFTA era Overview Border cities: On the front lines of trade Summary 2

3 Average tariffs fell most in Mexico following NAFTA Percent Mexican Tariffs on Imports from the United States 10 U.S. Tariffs on Imports from Mexico SOURCE: Executive Office of the President, Study on the Operation and Effects of the North American Free Trade Agreement, July 1997, p

4 A Historic Agreement Canada and U.S. already had an agreement Adding Mexico broke the mold NAFTA s stated objectives Eliminate barriers to trade & investment Remove tariffs and non-tariff barriers Facilitate cross border movement Resolve disputes 4

5 U.S. trade with NAFTA partners more than doubled since Exports Billions of Dollars % Change Canada Mexico Imports Canada Mexico Total Canada Mexico NOTE: Data is in billions of 2016 U.S. dollars. SOURCE: U.S. Census Bureau. 5

6 Foreign direct investment higher after NAFTA Billions, real 2016 $ Average Annual average Pre-NAFTA pre-nafta Average Annual average NAFTA post-nafta US to Mexico 0.3 Mexico to US 1.5 NOTES: Pre-NAFTA U.S. to Mexico represents years ; Pre-NAFTA Mexico to U.S. represents years Post- NAFTA represents years SOURCE: Bureau of Economic Analysis. 6

7 Aggregate effects of NAFTA tariff reductions Country Volume of Trade Terms of Trade Real Wages Mexico Canada United States SOURCE: Lorenzo Caliendo and Fernando Parro, Estimates of the Trade and Welfare Effects of NAFTA, NBER working paper No ,

8 Aggregate gains mask winners, losers Recent research identifies losers from trade Manufacturing workers, whose industries have been most affected by Mexican imports including along the border experienced substantially lower wage growth than their counterparts in other industries Limitations on the mobility of workers both geographically and across industries appear to be very important SOURCE: Looking for Local Labor Market Effects of NAFTA, by John McLaren and Hakobyan Shushanik, Review of Economics and Statistics, vol. 98, no. 4, October

9 Billions of dollars 250 U.S. Exports Highly Correlated with Intermediate Imports from Mexico Billions of dollars 1, Consumer goods imports from Mexico Intermediate goods imports from Mexico U.S. total exports 1,600 1,400 1,200 1, SOURCES: Bureau of Economic Analysis and Haver Analytics. 0 9

10 Intra-industry trade high within NAFTA: U.S. content highest in imports from Mexico, Canada Percent Mexico Canada Weighted Average (Mex-Can) 32 4 China NOTE: Data is from SOURCE: Robert Koopman, William Powers, Zhi Wang, and Shang-Jin Wei, Give Credit Where Credit is Due, NBER Working Paper No ,

11 U.S. and Mexico business cycle synchronicity Percent, Y/Y Corr: grows post-nafta Corr: Mexico U.S. -20 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 NOTE: Monthly changes in manufacturing component of industrial production. SOURCES: INEGI; Federal Reserve Board. 11

12 Cross-border manufacturing has been able to mitigate some of the impact of economic shocks China s entry to the World Trade Organization in 2002 Great Recession SOURCE: Offshoring and Volatility: Evidence from Mexico s Maquiladora Industry, by Paul R. Bergin, Robert C. Feenstra, and Gordon H. Hanson, American Economic Review, vol. 99, no. 4, 2009, pp

13 U.S. Mexico integrated processes help reduce volatility in U.S. manufacturing Percent, Y/Y China enters WTO Variance = 58.6 Mexico maquiladora employment Variance = 12.7 U.S. manufacturing employment NOTES: Mexico's employment combines maquiladora and IMMEX. Shading is for manufacturing recession and the great recession. SOURCES: Bureau of Labor Statistics and INEGI. 13

14 Texas Trade in NAFTA Era 14

15 Texas exports grow faster in post-nafta period Index, 1988 = 100; real values Texas Pre-NAFTA Post-NAFTA 100 U.S. without Texas SOURCES: WISERTrade; Census Bureau. 15

16 Billions of 2016$ 300 Texas becomes top exporter in Texas California Washington New York Illinois Michigan SOURCES: WISERTRADE; Census Bureau; BLS. 16

17 Texas: Nation s biggest exporter Texas exports reached $247 billion in 2015 California at $163 billion; Washington state $86 billion Census Bureau estimates manufactured goods exports supported an estimated 990,000 jobs in Texas in 2015 Equal to 8.2 percent of total employment 75 percent of U.S. Mexico land trade ($343 billion in 2015) crosses via a Texas port of entry 17

18 Texas exports to Mexico quite diverse Food & kindred Oil & gas, 3% Fabricated products, metal 3% products, 4% Misc. manufactured goods, 2% Primary metal mfg., 4% Plastics & rubber products, 4% Computers and electronics, 26% Machinery, ex. electrical, 6% Other, 7% Electrical equipment, 8% Chemicals, 10% NOTES: Data from "Other" includes all categories under 2 percent. SOURCE: U.S. Trade Database, Census Bureau. Petroleum & coal products, 11% Transportation equipment, 12% 18

19 Texas gains jobs, income in NAFTA era Job growth a percentage point higher than nation Over 4 million jobs gained between Per capita income growth faster than the nation Rose from $30,000 to $47,000 Household income has caught up to the nation ($56,000) 19

20 Texas gains jobs, income in NAFTA era Unique attributes helped state adjust and diversify Key sea and land ports, geographic proximity to Mexico Central location in US Relatively low taxes, light regulation, low cost of living Open, flexible labor markets 20

21 Texas Border Cities: On the Front Lines of Trade 21

22 Costs of opening up to trade 50,000 Texas jobs lost due to NAFTA, according to BLS More than 45 percent of Texas job losses were concentrated along the Texas Mexico border El Paso textile and apparel industry Trade Adjustment Assistance (TAA) Low educational levels and limited English proficiency Levi-Strauss (3,369 displaced workers) 22

23 Displaced workers concentrated along the border Foreign firms hiring more than offsets jobs lost El Paso (19,000) Dallas (10,000) El Paso (19,000) Dallas (134,000) Austin (3,000) Austin (29,000) Houston (1,000) Houston (178,000) San Antonio (2,000) San Antonio (22,000) McAllen (1,000) McAllen (8,000) Brownsville (3,000) Brownsville (4,000) 23

24 Maquiladora activity boosts employment in Texas border cities Title in here Estimation method: IV El Paso Laredo McAllen Brownsville TOTAL 2.77* * 2.21 Construction * 1.29* Manufacturing Transportation 5.30* 7.21* 6.63* 4.6* Wholesale * 0.84 Retail * 1.34* FIRE 2.12* 8.23* 4.63* 0.64 Services 1.84* 5.93* 7.38* 3.89* NOTES: This table shows elasticity estimates. That is the table shows the percentage increase in local employment from a 10 percent increase in maquiladora production for each Texas Border Cities. * indicates significant at the 10% level. SOURCE: J. Cañas, R. Coronado, R. Gilmer, E. Saucedo (2011) The Impact of Maquiladoras on U.S. Border Cities, Federal Reserve Bank of Dallas, working paper. 24

25 Percent Unemployment rates declined 9.4 along the border after NAFTA Brownsville El Paso Laredo McAllen SOURCE: Bureau of Labor Statistics

26 Percent 75 Texas border cities narrowing the income gap with nation (income as a share of U.S. total) El Paso Laredo McAllen Brownsville SOURCE: Bureau of Economic Analysis. 26

27 Texas borders with the rich north of Mexico Northern Per capita income: $12,627 Informal labor: 43% of LF Poverty rate: 30% North-central Per capita income: $8,777 Informal labor: 57% of LF Poverty rate: 43% Central Per capita income: $10,415 Informal labor: 63% of LF Poverty rate: 49% Southern Per capita income: $6,597 Informal labor: 69% of LF Poverty rate: 57% 27

28 Texas: a winner from globalization Ability to adjust, diversify and grow Border cities overcame initial job losses Found new paths to growth Taking advantage of trade-inspired opportunities Useful case study Summary What attributes and strategies may help trade-impacted communities transition to the next level of economic development Programs to identify and assist displaced workers 28

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30 What will be in the new NAFTA? According to U.S. Trade Representative, NAFTA will not be repealed but renegotiated Modernized to include digital and services trade, new standards Intellectual property rights, regulatory prices, state-owned enterprises, small and medium enterprises Customs procedures, rules of origin, sanitary measures, environment & labor issues Other: update migration accord (TN visa) 30

31 Still unequal trading partners 2005 U.S. $, PPP adjusted 60,000 50,000 $42,300 40,000 $31,200 30,000 GDP per capita $38,000 $51,600 20,000 10,000 $12,600 $16,400 0 SOURCE: OECD. Canada Mexico U.S. 31

32 U.S. volatility is lower in highly integrated sectors Computer and electronic products Percent, Y/Y China enters WTO VAR = 83.2 Mexico employment VAR = 17.4 U.S. employment

33 U.S. volatility is lower in highly integrated sectors Transportation Equipment Percent, Y/Y China enters WTO VAR = 86.9 Mexico employment VAR = 27.6 U.S. employment