October 18, 2017
Trade deals are usually thought to increase productivity by allowing countries to benefit from comparative advantage, where each country concentrates on the areas where it is relatively more efficient. For this reason, it is striking that a study on the impact of reversing NAFTA that was cited in an NYT article found that the United States, Canada, and Mexico would all see an increase in productivity if NAFTA was reversed.
While both the article and the study highlighted the number of jobs that would be lost if NAFTA were repealed, the study actually projects that GDP would fall by a considerably smaller percentage for each of the three countries. In the case of the United States, the study projects a loss of 255,000 jobs or 0.17 percent of total employment. However, GDP is projected to fall by just 0.08 percent. This implies a gain in productivity of 0.09 percentage points.
Canada is projected to lose 125,000 jobs or 0.69 percent of total employment. However, its GDP is only projected to drop by 0.48 percent, implying a productivity gain of approximately 0.21 percent. Mexico turns out to be the big winner, with its employment falling by 951,000 or 1.82 percent, while GDP only drops by 0.87 percent, implying a productivity gain of approximately 0.95 percent.
This gain in productivity is presumably associated with higher wages, since we expect workers to be paid in accordance with their productivity. In principle, governments could tax away a portion of these wage gains and redistribute them to the unemployed to ensure that everyone gains, making the reversal of NAFTA a win-win for all involved.
No, I don’t take these projections seriously, but the NYT apparently wants us to. So, if we buy what the NYT is selling, we should believe that we could get a modest boost to productivity if we just did away with NAFTA altogether.