Revoking NAFTA would have consequences across workers, locations in US

April 30, 2019
Contact: Greta Guest gguest@umich.edu

Illustration of NAFTA trade agreement. Illustration credit: Ilma Bilic

ANN ARBOR—Dismantling the North American Free Trade Agreement would not only result in billions of lost trade, but would reduce economic output in the United States by 0.2% and in Canada and Mexico by about 2%, according to a new study.

Andrei Levchenko, professor of economics at the University of Michigan, and colleagues found that the impact on average wages in U.S. industries would range from -2.7% to 2.26%.

“In addition, we found that in those congressional districts that voted more for Trump in 2016 would, on average, experience greater real wage reductions if NAFTA were revoked,” Levchenko said. “The exception to this empirical regularity are congressional districts with a large share of mining and quarrying in employment such as the Texas 11th congressional district or the state of Wyoming.”

Levchenko was joined in the research by Raphael Auer of the Bank for International Settlements in Switzerland and Barthelemy Bonadio, a U-M doctoral student.

With Trump’s protectionist policies and the economic shifts associated with Britain leaving the European Union, the researchers wondered how things might shake out in the global trade network if NAFTA was dismantled and tariffs subsequently rose.

Though proportional changes are smaller in the U.S., it would bear the largest dollar losses from dismantling NAFTA at about $40 billion. Canada is a close second at $37 billion, with Mexico at $22 billion.

The study found that exchange rates also move, with the U.S. dollar appreciating by 2.4% against the Mexican peso and by 1.3% against the Canadian dollar.

The fall in NAFTA trade volume is quite large, with U.S. exports to Canada and Mexico, falling by 37% and 42%, respectively.

States with the largest wage reductions are Wisconsin, Indiana, Iowa, Michigan and Ohio.

“Our results underscore the difficulty of making simple, quick judgments about who gains and loses from trade policy changes in the current global economy,” Levchenko said.

 

More information: