Testimony to the US House of Representatives Committee on Ways and Means Subcommittee on Trade – Enforcement of Labor Obligations in the US-Mexico-Canada Trade Agreement

Editor’s Note: Below is an excerpt of testimony submitted by Sandra Polaski to the United States of Representatives Committee on Ways and Means Subcommittee on Trade in May 2019 regarding the US-Mexico-Canada Trade Agreement.

Official estimates of the impact of the US-Mexico-Canada Trade Agreement (USMCA) on US employment and wages suggest that there will be only a trivial impact after the agreement is fully implemented. For example, the US International Trade Commission (ITC) projects a one-time addition of 176,000 jobs, an increase to total employment of 0.12 percent—a small fraction of one percent—after six years. This one-time addition is about the same as the number of jobs that are created by the US economy in a typical single month. According to the ITC, about 70 percent of the new jobs would be in the service sector and would go to workers with less than a college education–meaning that most of the new jobs are likely to be low-paid. The report estimates that U.S. wages would increase on average by about a quarter of one percent (0.27 percent) after six years— an almost imperceptibly small seven cents per hour based on the current average hourly wage of $27.70. Slightly larger wage increases would go to higher educated workers than to workers without college degrees, increasing inequality. A study of USMCA published by the International Monetary Fund (IMF) using a somewhat different model estimates that Canada and Mexico would each have a very slight welfare gain while the US would have a slight decline and that the overall effects on the three countries’ gross domestic product (GDP) would be negligible.

These modest estimates are credible, given that the overall, economy-wide impact of NAFTA has been similarly small to date. Studies by US congressional researchers have concluded that the effect of the agreement on overall US GDP was “probably no more than a few billion dollars, or a few hundredths of a percent”—according to a 2003 report by the Congressional Budget Office. A study prepared by the Congressional Research Service as the U.S. began to re-negotiate NAFTA in 2017 concluded that the “net overall effect of NAFTA on the US economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of US GDP. However, there were worker and firm adjustment costs as the three countries adjusted to more open trade and investment.”

It is precisely because trade creates winners and losers, something long recognized by trade economists, that the original NAFTA remains so controversial. NAFTA was the first trade agreement that eliminated tariffs between relatively high-wage economies (the US and Canada). and a low-wage developing country (Mexico). Mainstream trade theory predicts that in such a situation the wages of workers in the higher wage countries will decline while those for similarly skilled workers in the lower wage country will increase. Further, NAFTA and subsequent US free trade agreements created new protections for cross-border investment, along with robust mechanisms for investors to assert claims against governments. Combined with guaranteed access back into the lucrative US market for the goods produced by those investments these protections created strong incentives for firms to move their operations to low-wage countries. Thus, beyond the winners and losers among sectors and workers directly affected by adjustment to trade, these agreements created a shift in the broader bargaining power of investors (capital) compared to labor’s bargaining power. Investors moved production to Mexico and other low-wage countries or threatened to leave in order to depress wage demands by workers in the US.

While it has traditionally been difficult to measure the actual impact of trade agreements on employment and wages due to the multiple factors affecting labor markets, new research methods and better data have more recently produced robust estimates of these effects. For example, a study that looks at the regional and local wage effects of NAFTA in the US by measuring each industry’s vulnerability to Mexican imports and each locality’s dependence on vulnerable industries finds that wage growth was dramatically lower for blue collar workers in the most affected industries and localities, with spillover negative effects on service sector workers in those localities as well. At a time of increasing inequality in the US, with particularly harsh effects in some regions, the impact of NAFTA continues to be felt and raises important questions about the potential effects of the USMCA.