John Irons's Blog


Economic News, Data and Analysis

Evaluating NAFTA

This past week marked the three year anniversary of the hotly debated
North America Free Trade Agreement (NAFTA). 
The debate over the agreement began anew with the release of the White
House’s review of the economic impacts of the NAFTA, and the finding that
the pact has had a “modest positive effect” on the economy. The debate
has changed from whether or not the NAFTA will be harmful to whether
or not is was harmful over the past three years. What is missing
from the debate is the following question: By what criteria should we judge
the success of the new policy?

The two sides of the debate have remained unchanged as have most of
the arguments. The proponents claim that NAFTA will create jobs and help
the economy via free trade, while opponents claim that jobs will be lost
to low wage workers in Mexico. The new report seems to have left the primary
debate substantially unaltered – proponents take it as evidence that the
agreement is good for the economy (since 311,000 trade-related jobs associated
with Mexico and Canada were created); and opponents site a swing from a
trade surplus to a trade deficit and a loss in worker bargaining power
as evidence that the economy (or a large subset of it) has been hurt.

There seems to be evidence supporting both sides of the debate. So how
are we to evaluate the net effect of NAFTA. In general, how should we evaluate
the economic effect of a major policy shift? The first necessary step is
to move away from the simple idea that the NAFTA is either “good” or “bad”.
As with any other major policy change there will be those who benefit from
the policy and those that lose.

“Good for the Economy”

When we say that something is “Good for the economy” what are we really
taking about? The net number of Jobs? The gross number of
jobs lost? or gained? The change in economic efficiency/productivity? The
average wage of Americans? The median wage of Mexicans? The total change
in GDP? The change in consumer prices?

Evaluation would be simple if the agreement were able to help (or harm)
everyone. But this is not the case – some benefit from the agreement (e.g.
shareholder and employees of companies that find new consumers in mexico,
and consumers that can purchase cheaper products) and some lose (employees
of companies that move plants to Mexico). Unfortunately, in this case the
economists favorite concept of a Pareto superior policy outcome (a policy
that helps at least one person with out hurting anyone else) does not apply.

Economists and Philosophers have invented a number of criterion with
which to evaluate alternative policies. For example we use the the Utilitarian
or Benthamite criterion where we would “add-up” or average the welfare
of the population and pick the policy which maximizes this sum. Another
possibility is the Rawlsian, or “maxi-min”, objective of maximizing the
welfare of the worst off individuals in the society. Another criteria would
be the equalization of welfare across every member of society, the so called
egalitarian outcome. This objective then runs into the problem of determining
what should in practice be equalized – incomes? opportunity?

Choosing from the criteria above is like asking who would win in a fight
– Batman or Spiderman. The concepts cannot be purely applied due to the
obvious problems of measuring and comparing individuals’ welfare; but we
can frame the debate in terms of who is helped or hurt by the policy rather
than whether or not the policy is “Good for the economy” in an abstract
and imprecise way.

For further reading on social objectives see the following.

Unknown Baseline

Another part of the problem we have in evaluating the effectiveness
of a policy change like NAFTA is that we are not running a controlled experiment.
It we had a economic laboratory we could take two identical North Americas
in 1994 – give one a NAFTA and leave the other one alone. We could then
compare the NAFTA-ized subject with its untouched counterpart to assess
the impact of the policy.

However, such experiments cannot be run and we are only left with one
subject to examine. The economic “baseline” of a NAFTA free North America
is unknown, we only have one set of numbers to use. So when we see some
statistic about, say, the number of jobs lost to NAFTA, we cannot be sure
if they were lost as a result of NAFTA, or whether they would have disappeared
anyway (say to China instead).

The economy is constantly in a state of flux, and it is very tricky
to isolate the impact of a single policy change independent of all the
other stuff going on. Since we do not know precisely what would have happened
with out the policy, even the “facts” of the NAFTA’s policy effects are
not clear cut.

Debate Continues

However the facts are eventually interpreted, it would be beneficial
to the debate to have a clear idea the criteria by which we will judge
the policy to be a success. Right now we have the two sides of the debate
using different welfare criteria to judge the policy – so it should be
no surprise that there is continued debate over the success of the policy.

See Also:

Filed under: International



%d bloggers like this: