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.
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
Average tariffs fell most in Mexico following NAFTA Percent 12 10.0 Mexican Tariffs on Imports from the United States 10 U.S. Tariffs on Imports from Mexico 8 6 4 2 0 2.1 SOURCE: Executive Office of the President, Study on the Operation and Effects of the North American Free Trade Agreement, July 1997, p. 7. 2.9 1993 1996 0.7 3
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
U.S. trade with NAFTA partners more than doubled since 1993 1993 2016 Exports Billions of Dollars % Change Canada 166.9 266.8 59.9 Mexico 69.1 231.0 234.3 Imports Canada 184.8 278.1 50.5 Mexico 66.3 294.2 343.7 Total Canada 351.7 544.9 54.9 Mexico 135.4 525.2 287.9 NOTE: Data is in billions of 2016 U.S. dollars. SOURCE: U.S. Census Bureau. 5
Foreign direct investment higher after NAFTA Billions, real 2016 $ 9 8 8.4 7 6 5 4 Average Annual average Pre-NAFTA pre-nafta Average Annual average NAFTA post-nafta 3 2 1 0 1.6 US to Mexico 0.3 Mexico to US 1.5 NOTES: Pre-NAFTA U.S. to Mexico represents years 1982-1993; Pre-NAFTA Mexico to U.S. represents years 1987-1993. Post- NAFTA represents years 1994-2015. SOURCE: Bureau of Economic Analysis. 6
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. 18508, 2012. 7
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 2016. 8
Billions of dollars 250 U.S. Exports Highly Correlated with Intermediate Imports from Mexico Billions of dollars 1,800 200 150 100 50 Consumer goods imports from Mexico Intermediate goods imports from Mexico U.S. total exports 1,600 1,400 1,200 1,000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 SOURCES: Bureau of Economic Analysis and Haver Analytics. 0 9
Intra-industry trade high within NAFTA: U.S. content highest in imports from Mexico, Canada Percent 45 40 35 30 25 20 15 10 5 0 40 25 Mexico Canada Weighted Average (Mex-Can) 32 4 China NOTE: Data is from 2004. SOURCE: Robert Koopman, William Powers, Zhi Wang, and Shang-Jin Wei, Give Credit Where Credit is Due, NBER Working Paper No. 16426, 2011. 10
U.S. and Mexico business cycle synchronicity Percent, Y/Y Corr: 0.13 15 10 5 0-5 grows post-nafta Corr: 0.78-10 -15 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
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. 1664 71. 12
U.S. Mexico integrated processes help reduce volatility in U.S. manufacturing Percent, Y/Y China enters WTO 30 20 10 Variance = 58.6 Mexico maquiladora employment 0-10 -20 Variance = 12.7 U.S. manufacturing employment -30 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 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
Texas Trade in NAFTA Era 14
Texas exports grow faster in post-nafta period Index, 1988 = 100; real values 700 600 500 Texas 400 300 200 Pre-NAFTA Post-NAFTA 100 U.S. without Texas 0 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 SOURCES: WISERTrade; Census Bureau. 15
Billions of 2016$ 300 Texas becomes top exporter in 2002 250 200 150 Texas California 100 50 Washington New York Illinois Michigan 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 SOURCES: WISERTRADE; Census Bureau; BLS. 16
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
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 2015. "Other" includes all categories under 2 percent. SOURCE: U.S. Trade Database, Census Bureau. Petroleum & coal products, 11% Transportation equipment, 12% 18
Texas gains jobs, income in NAFTA era Job growth a percentage point higher than nation Over 4 million jobs gained between 1994-2015 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
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
Texas Border Cities: On the Front Lines of Trade 21
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
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
Maquiladora activity boosts employment in Texas border cities Title in here Estimation method: IV El Paso Laredo McAllen Brownsville TOTAL 2.77* 4.62 6.58* 2.21 Construction 0.20 3.19 4.04* 1.29* Manufacturing -1.28 1.02 1.64 0.66 Transportation 5.30* 7.21* 6.63* 4.6* Wholesale 0.43 1.96 4.01* 0.84 Retail 1.31 0.66 3.21* 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
Percent 20 18 16 14 12 10 8 6 4 2 0 13.3 Unemployment rates declined 9.4 along the border after NAFTA 1980-1993 1994-2016 10.8 8.2 14.0 7.5 18.6 Brownsville El Paso Laredo McAllen SOURCE: Bureau of Labor Statistics. 11.6 25
Percent 75 Texas border cities narrowing the income gap with nation (income as a share of U.S. total) 70 65 64.6 67.8 61.9 1990 2015 60 55 50 49.3 48.1 51.1 51.2 55.8 45 40 El Paso Laredo McAllen Brownsville SOURCE: Bureau of Economic Analysis. 26
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
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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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
Still unequal trading partners 2005 U.S. $, PPP adjusted 60,000 50,000 $42,300 40,000 $31,200 30,000 GDP per capita 1994 2015 $38,000 $51,600 20,000 10,000 $12,600 $16,400 0 SOURCE: OECD. Canada Mexico U.S. 31
U.S. volatility is lower in highly integrated sectors Computer and electronic products Percent, Y/Y China enters WTO 30 20 10 VAR = 83.2 Mexico employment 0-10 -20 VAR = 17.4 U.S. employment -30 1991 1995 1999 2003 2007 2011 2015 32
U.S. volatility is lower in highly integrated sectors Transportation Equipment Percent, Y/Y 30 20 10 China enters WTO VAR = 86.9 Mexico employment 0-10 -20 VAR = 27.6 U.S. employment -30 1991 1995 1999 2003 2007 2011 2015 33