North America After NAFTA
Recent talks over NAFTA have made little progress in creating a new agreement that ensures its longevity for years to come. This threat to longevity creates a particular problem for Mexico. ImpactEcon, an economic consulting firm based in Colorado, estimates that Mexico will lose around 1 million low-skilled jobs as a result of the loss of NAFTA. This relates quite interestingly with our latest class discussion, and using the bucket diagram to display labor movements across countries.
If there is a loss of jobs totaling one million low-skilled workers in Mexico, this would cause a massive shift inward of the bucket diagram, which would lead to a massive increase in wages for those still employed. However, the loss in the returns to capital would be greater than the gains to the workers.
These seems to promote the principles that Trump emphasized in his campaign about securing better standings for workers. However, this overall loss on the returns to capital leads to a net negative effect on the economy as a whole. So while it will seemingly help workers in the short run, in the long run this will not be maintained.
This shift will eventually lead to a greater amount of immigrant workers trying to enter the United States from Mexico. With the border wall having made little progress as of now, this influx of immigrants to the United States will eventually reduce the wages back to lower levels. The benefits to the workers will not be maintained in the long run, and the losses to capital will still outweigh the benefits to workers in the United States.
This loss of return to capital will reduce the benefit of investing in these business areas, and it will likely be seen for companies who previously had work in Mexico, will attempt to ship their business to other labor-abundant nations that the United States has favorable trade agreements with.
The problem with NAFTA are based in political arguments more than the economical pros and cons of the agreement. It seems to be in the best interest of the United States to continue to seek a NAFTA-like trade agreement with both Canada and Mexico. The benefits are too large to ignore. The demands from the common worker to bring back those jobs from Mexico are not feasible in the real world. While it seems to make sense that these jobs would come back to the United States, the fact is the United States is not low-skilled labor abundant. Instead companies who have operated in Mexico will instead shift their business to other more heavily low-skilled labor abundant countries.
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It is no doubt that Mexico would take the biggest hit if NAFTA were to collapse, they would lose jobs and GDP would plummet. Less workers means less capitol and therefore less to export. US wouldn't purchase as many of their exports if prices rise due to tariffs, although, it would heavily contribute to their fall in GDP. With "the wall" going up there be an abundance of unemployment with nowhere for them to go. This could cause many other problems for Mexico, like a rise in crime and drug trafficking. If NAFTA is terminated, it will be in all three countries best interest to form some type of agreement so that trade relations are not ruined.
ReplyDeleteThe “problems” with NAFTA are definitely political as opposed to economical. The United States – a capital abundant country – would only see less-skilled workers benefit (and only in the short run) from trade restrictions with Mexico. Yes, factor price equalization may cause some US wages to fall but both countries would see aggregate gains from trade in form of capital returns, if capital were to be reinvested in Mexico.
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