The World Cup starts today and for the first time in over 30 years it is being held in North America. Not only is this exciting news for football fans, it should also be of interest to free trade enthusiasts, as the last time it was held there the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico came into force.
The negotiations and enactment of NAFTA were mired in controversy and were bitterly opposed by mainly those on the left of politics as politicians, NGOs, and trade unions raised concerns about its potential impact on the environment and labour standards. NAFTA was controversial and consequential, but it was also a remarkable achievement.
NAFTA actually created more jobs for Americans than it destroyed
The most immediate and unambiguous success of NAFTA was the sheer scale of trade it unlocked. Given that it was a Free Trade Agreement, this sounds obvious, but regional trade among the three countries grew from approximately $290 billion in 1993 to more than $1.1 trillion by 2016. This represents a near-fourfold increase that outpaced US trade growth with the rest of the world. By 2019, total trilateral trade had reached $1.23 trillion, with the United States exporting $549bn in goods to Canada and Mexico combined, making them America’s top two export markets.
For context, US merchandise exports to Mexico alone increased by 166% between 1993 and 2004, while two-way US-Mexico trade grew by 227% over the same period (compared with just 124% growth in US trade with non-NAFTA countries).The US manufacturing sector was a major beneficiary: exports of manufactured goods to Canada and Mexico rose from $127bn in 1993 to $525bn in 2019. Canada’s exports to its NAFTA partners grew by 104% over the agreement’s first decade.
NAFTA also had an impact on jobs. The pact has long been held up by those on the right as a destroyer of American jobs and Donald Trump’s promise to scrap it is arguably one of the reasons why he became President in 2016. However, the data tells a different story.
Approximately 14 million US jobs depend on trade with Canada and Mexico combined. Crucially, the export-related jobs that NAFTA helped create are demonstrably better-paid than those displaced: American firms engaged in exporting pay wages roughly 15% to 20% higher than non-exporting manufacturers.
Moreover, rather than being a destroyer of American jobs, NAFTA actually created more jobs for Americans than it destroyed. For example, around 200,000 export-related jobs were created annually under NAFTA, with only around 15,000 jobs per year were lost on a net basis due to rising imports from Mexico.
As for wages, American workers in export-oriented industries fared very well as exporting firms pay a wage premium of 15% or more above the manufacturing average, the shift in employment toward export industries was broadly positive for American wage levels. It is estimated that NAFTA’s contribution to expanded trade left the United States approximately $127bn richer each year, leading to higher real incomes. Canada saw similar gains thanks to NAFTA.
For Mexican workers, NAFTA’s record on wages is more mixed. However, manufacturing and industrial sectors showed genuine gains, particularly in northern Mexico. The World Bank’s comprehensive assessment concluded that NAFTA ‘likely had positive impacts on the number and quality of jobs’ in Mexico and helped Mexican manufacturers adapt to US technological innovations more quickly than would otherwise have been possible. It also created formal-sector employment with access to social security and benefits, an improvement over the informal work many Mexicans had previously relied on.
One of NAFTA’s clearest and most consequential achievements was its transformation of the North American investment landscape. By providing legal certainty, transparent dispute resolution, and non-discriminatory treatment for investors, the agreement made the region dramatically more attractive for long-term capital commitment.
US foreign direct investment in Mexico grew from $15bn in 1993 to more than $100bn by 2016. Canada’s FDI in the United States expanded from $69.9bn in 1993 to $352.9bn by 2015. Mexico, in turn, significantly increased its investment in the United States.
The pact was eventually ripped up by Donald Trump in his first term and replaced with USMCA. It is still too early to assess its impact – not least of all as it has also been ripped up by President Trump – but in areas where it modernised trade such as the digital chapter, it clearly did have a positive economic impact.
The negotiations, enactment and ultimate demise of NAFTA shows us that although free trade does create some losers, it creates far more winners. It increases living standards, boosts FDI, improves wages, and creates jobs. Rather than ripping up trade agreements and erecting barriers as President Trump is so fond of doing, governments should be striking more trade agreements while ensuring there are measures in place to assist those at risk of losing out.
The UK government would do well to remember this. Brexit gave the country the opportunity to run its own trade policy for the first time in decades. In the immediate aftermath of leaving the EU, the UK was somewhat of an international outlier in its ambitions to reform the WTO and sign new FTAs.
I am pleased that the Labour Government has continued down this path by finalising an FTA with India and another with the Gulf Cooperation Council. What is more, in the age of Trump it has demonstrated the benefits of having an independent trade policy by being able to move quickly and strike bespoke deals. Unfortunately, it risks jettisoning this with calls from leading Labour figures to rejoin the EU’s Custom Union. Moreover, it has already foolishly embraced protectionism by giving more power to the Trade Remedies Authority while slapping deeply damaging tariffs on steel.
Countries become rich, their businesses boom and their people thrive when they open their markets and embrace free trade. The UK and its future prosperity depends on embracing free trade and this means retaining an independent trade policy, striking new trade deals, and working to reform the global trading system.
Free trade – and football – began in Britain. It’s time for them both to come home.
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