Industry Trade Effects Related to NAFTA
Released: 2003-10-30T00:00:00

Background

The North American Free Trade Agreement (NAFTA), signed by President George Bush onDecember 17, 1992, has been in effect since January 1994. After almost ten years ofimplementation, there is some evidence that NAFTA has achieved many of the trade and economicbenefits that proponents claimed it would bring, although there have been adjustment costs at thesectoral level. Most economists, but not all, believe that trade liberalization promotes overalleconomic growth among trading partners although there are short-term adjustment costs.

A major trade issue in the 107th Congress was whether or not Congress would approve authority for the President to negotiate certain trade agreements and submit the agreements for approval andimplementation under expedited legislative procedures. This authority was formerly called"fast-track authority" and is now called "trade promotion authority" or "TPA". On August 6, 2002,the Trade Act of 2002, which included TPA, was signed into law by the President ( P.L. 107-210 ). (1) As the United States considers free trade initiatives with other Latin American countries, the effectsof NAFTA may provide policymakers some indication of how these initiatives might affect U.S.industries and the overall U.S. economy. In recent years, the United States has taken further stepsto liberalize trade in the Western Hemisphere by entering into trade negotiations for a Free TradeArea of the Americas (FTAA) and a U.S.-Chile Free Trade Agreement (FTA). In addition, theAdministration announced that it will explore a free trade agreement with the countries of CentralAmerica. The U.S.-Chile FTA is close to the final stages of negotiations and FTAA negotiations arescheduled to be completed by January 2005.

On November 20, 1993, Congress approved the NAFTA Implementation Act submitted by President Clinton ( P.L. 103-182 ). To address concerns regarding worker dislocations, Congressincluded two adjustment assistance programs, designed to ease trade-related problems, in theimplementing legislation for NAFTA: the NAFTA Transitional Adjustment Assistance(NAFTA-TAA) Program and the U.S. Community Adjustment and Investment Program (USCAIP). The USCAIP is administered by the North American Development Bank (NADBank). The USCAIPprovides financial assistance to communities with significant job losses due to changes in tradepatterns with Mexico or Canada.

The NAFTA-TAA Program was consolidated with the former Trade Adjustment Assistance (TAA) program under the Trade Act of 2002 ( P.L. 107-210 ) and is now part of a new reformed TAAProgram. The previous NAFTA-TAA program provided assistance, including employment servicesand training, to workers who have lost their jobs due to import competition or production shifts toMexico or Canada. The new reformed TAA program would expand eligibility for workers hurt bya shift in production to certain other countries, and extend benefits to workers previously ineligiblesuch as secondary workers and downstream workers in the case of NAFTA countries. (2)

This report will look at the broad effect of NAFTA on the U.S. economy and the trade-related effects at the industry level. It will also describe the two main adjustment assistance programs. Thereport will analyze, to the extent feasible, the effectiveness of NAFTA trade-related adjustmentassistance programs.

Overall Effects of NAFTA

The overall effect of NAFTA on the U.S. economy has been relatively small, primarily becausetwo-way trade with Mexico amounts to less than three percent of U.S. GDP. Therefore, any changesin trade patterns with Mexico would not be expected to be significant in relation to the overall U.S.economy. In some sectors, however, trade-related effects could be expected to be more significant,especially in those industries that were more exposed to the removal of tariff and non-tariff tradebarriers, such as the textile and apparel, and automotive industries.

Most of the trade-related effects of NAFTA may be attributed to changes in U.S. trade and investment patterns with Mexico. At the time of NAFTA implementation, the U.S.-Canada FreeTrade Agreement already had been in effect for five years and some industries in the United Statesand Canada were already highly integrated. Most tariffs on products traded between the UnitedStates and Canada were zero at the time of NAFTA implementation. In contrast, Mexico hadfollowed an aggressive import-substitution policy for many years prior to NAFTA in which it hadsought to develop certain domestic industries through trade protection. One example is the Mexicanautomotive industry which had been regulated by a series of five decrees issued by the Mexicangovernment between 1962 and 1989. The decrees established import tariffs as high as 25% onautomotive goods and had high restrictions on foreign auto production in Mexico. Under NAFTA,Mexico agreed to eliminate these restrictive trade policies.

In 1997, President Clinton submitted a Congressionally mandated comprehensive assessment of the operation and effects of NAFTA after three years. (3) The report, conducted by the InternationalTrade Commission (ITC), analyzes the actual impact of the first three years of NAFTA on the overallU.S. economy, and on industries particularly affected by the agreement. (4) The report found thatNAFTA had a small positive effect on the overall U.S. economy, but that some industriesexperienced significant changes in the volume of bilateral trade with NAFTA partners. The reportstates that NAFTA's most important effects are not easily measured or observed, and the full effectsof the agreement will take many years to make themselves known. (5) The report is based on databetween 1993 and 1997. Some of the findings include the following:

Data inadequacies at the industry level make it difficult to isolate the effects of NAFTA on absolute trade flows.

U.S. trade with NAFTA partners increased more rapidly than U.S. trade withthe rest of the world.

The share of U.S. exports in the Mexican market increased by a higherpercentage than the share of total foreign imports.

In industries such as autos, chemicals, textiles, and electronics, U.S. companieshave benefitted by achieving synergies across the North American market.

Critics of NAFTA predicted that the agreement would cause industries to move their U.S.production operations to Mexico and that thousands of U.S. jobs would be lost. A recent briefingpaper by the Economic Policy Institute states that NAFTA has eliminated about 766,000 existing orpotential U.S. jobs in the manufacturing industry. (6) One of the reports in the briefing paper maintainsthat the increasing trade deficit with Mexico since NAFTA has caused manufacturing jobs in theUnited States to disappear and that the threat of employers to move production to Mexico helpedundercut workers' bargaining power, resulting in workers being downscaled to lower-paying,less-secure jobs. (7) The report's findings are largelybased on the assumption that the increasing U.S.trade deficit with Mexico is primarily a result of NAFTA. However, while NAFTA may haveaccelerated U.S.-Mexico trade since 1993, there are other important economic factors that havecontributed to the increasing trade deficit with Mexico and that are not fully analyzed in the report. The expansion of the U.S. economy in the 1990s and the Mexican peso devaluation of 1995 havesignificantly influenced trade and investment patterns between the United States and Mexico. Thereport does mention the Mexican peso devaluation effects but does not fully distinguish these effectsfrom those of NAFTA. Another aspect of trade-related impacts is the relationship of trade deficitsto overall employment levels. While NAFTA may be partially responsible for the dislocation ofworkers in some industries, a growing trade deficit with Mexico does not necessarily indicate anincrease in overall unemployment levels. (8)

A report published in Industry Trade and Technology Review provides another perspective on the effects of NAFTA and factors affecting increasing U.S.-Mexico trade. (9) The report states thatonly part of the growth in U.S.-Mexico trade can be attributed directly to the actual provisions ofNAFTA. The report indicates that the increase in U.S. trade with Mexico since 1994 was alsoaffected by currency fluctuations, economic growth in the United States and Mexico, and animproved general business climate in North America. It states that the overall effect of NAFTA onemployment tends to move jobs between sectors rather than to change national employment levels. Part of the report's discussion centers around the economy-wide estimates of employment effectsand mentions the EPI estimate of actual and potential job losses of 766,000 as being the "mostextreme" estimate of job losses in studies that have generated estimates of employment changes dueto NAFTA. (10) The author states that this estimaterelies on an unlikely linkage between jobs and tradedeficits, but even this high an estimate would account for a relatively small percent of total U.S.layoffs, and that, therefore, job "creation" or "losses" are relatively small on an economy-wide basis. The author writes that, while the negative impact on workers has been greater in some industries,the experience of workers displaced by NAFTA would be similar to that of workers displaced forreasons unrelated to trade. (11) The report cites aUSITC (12) study which found that workers that havebeen unemployed as a result of trade liberalization have, in the long run, been re-employed in othersectors.

How Has NAFTA Affected U.S. Industries?

U.S. trade with Mexico and Canada has grown more rapidly than total U.S. trade since 1994,but at the sectoral level, it is difficult to measure the specific effects of NAFTA on specificindustries. The automotive, chemical products, textile, and apparel industries have experienced themost significant changes in trade flows, which may also have affected employment levels in theseindustries. Not all changes in trade and investment patterns since 1994 can be attributed to NAFTAbecause the U.S. economic expansion during the 1990s and the Mexican peso devaluation of 1995also affected trade patterns. This section discusses five major U.S. industries that have high volumesof trade with Mexico and Canada. These industries include the automotive industry, chemicals andallied products, computer equipment, textiles and apparel, and microelectronics. (13)

The expansion of the U.S. economy during the 1990s could be the most important factor to consider in evaluating the trade trends since NAFTA. As the U.S. economy expands, so does thedemand for imports. Part of the growth in imports from Mexico after NAFTA implementation couldhave been due to economic growth in the United States, and not entirely attributable to a reductionin trade barriers. In addition, the peso devaluation of 1995 reduced the purchasing power of theMexican people which likely reduced the demand of Mexico's imports from the United States, atleast in the short term.

Industry Trade Flows

As shown in Table 1, the trade flows by major industry between the United States and NAFTA partners from 1993, the year before NAFTA implementation, and 2002 increased considerably. TheU.S. industries with the highest volume of trade (imports and exports) with Mexico and Canada arethe automotive industry; chemicals and allied products; computer equipment; textiles and apparel;and microelectronics. The automotive industry accounts for about 23% of total trade. Trade in allfour other industry groups accounts for 16% of total trade. Overall trade between the United Statesand NAFTA partners increased from $293 billion in 1993 to $604 billion in 2002, a 106% increase.In 2001, the amount of trade among NAFTA partners dropped for the first time since NAFTA wasimplemented. U.S. total trade with Mexico and Canada decreased from $653.3 billion in 2000 to$603.6 billion in 2001. The total annual U.S. trade deficit with NAFTA partners increased hasincreased steadily since 1993, from $9 billion in 1993 to $87 billion in 2002. (14)

The automotive industry had the highest dollar increase ($72.3 billion) in total U.S. trade. Inpercentage terms, the highest increases were in microelectronics (304%) and in the textiles, apparelindustries (173%). The industries with the highest percentage growth in U.S. imports from Mexicoand Canada were textiles and apparel (238%). In dollar terms, imports in the automotive industryhad the highest increase ($49.6 billion). In exports, chemicals and allied products had the highestpercentage increase (115%), while the automotive industry had the highest dollar increase ($22.8billion).

Table 1. Industry Trade Flows Between the United States and NAFTA Partners: 1993-2002 ($ Billions) 1

1 Nominal U.S. dollars.

2 Figures may not add up due to rounding.

3 Trade volume denotes exports plus imports.

Source: United States International Trade Commission, Interactive Tariff and Trade Data Web http://dataweb.usitc.gov . Compiled by CRS.

Table 2. U.S. Exports: 1993-2002 ($ Billions 1 )

1 Nominal U.S. dollars.

Source: United States International Trade Commission, Interactive Tariff and Trade Data Web http://dataweb.usitc.gov . Compiled by CRS.

The trade data shown in Table 1 reflect U.S. trade with both Canada and Mexico, however most of the changes in U.S. trade patterns occurred with Mexico. The U.S.-Canada FTA had been in effect for a number of years at the time ofNAFTA implementation, and most of the trade barrier reductions affecting theUnited States were those with Mexico. Between 1993 and 2002, the value of U.S.trade with Mexico grew at considerably higher rates than trade with Canada and therest of the world.

U.S. Exports by Country. Since 1993, the value of total U.S. exports to Mexico increased by a much higher rate thanexports to Canada or to the rest of the world. Between 1993 and 2002, U.S. exportsto Mexico increased 118%, while exports to Canada increased 47% (see Table 2). In comparison, total U.S. exports to all countries increased 49%. Microelectronicsexports from the United States increased at a higher rate than U.S. exports from otherindustries. Microelectronics exports to Mexico increased by a higher percentage(304%) than U.S. exports to Canada (-3%), or exports to all countries in this industry(108%). In the textiles and apparel industry, Mexico became a more significantexport market during this time period. In 2002, exports to Mexico accounted for32% of all U.S. exports in textiles and apparel, up from 17% in 1993. In comparison,in 1993, U.S. textile and apparel exports to countries other than Mexico or Canadaaccounted for 64% of all exports, dropping to 50% in 2002.

Although exports to Mexico have increased significantly since NAFTA, so have imports, and it not known how much of all U.S. exports actually stay in Mexico. Some exports are destined for manufacturing industries in Mexico (see section onmaquiladoras below) where they are processed and exported back to the UnitedStates and/or other countries as finished or semi-finished products. In the textiles andapparel industry, for example, U.S. exports increased considerably, but so did U.S.imports. This probably indicates that part of the increase in U.S. exports may nothave resulted from a higher demand for U.S. products in Mexico, but becauseproduction of goods for U.S. consumption shifted to Mexico, either from the UnitedStates or other regions such as Asia.

U.S. Imports by Country. The value of U.S. imports from Mexico increased faster than total U.S. imports sinceNAFTA implementation. Between 1993 and 2002, U.S. imports from Mexicoincreased by 237%, while imports from Canada increased by 90% and total U.S.imports increased by 100% (see Table 3). The most significant increase occurred inthe computer equipment industry, in which U.S. imports from Mexico increased from$1.74 billion in 1993 to $10.38 billion (497% increase) in 2002. The share of importsin computer equipment from Mexico increased from 3% in 1993 to 13% in 2002,while that from Canada and the rest of the world decreased. This could suggest thatimports from Mexico are displacing imports from other countries. In the automotive,textiles, and apparel industries, imports from Mexico also increased at a higher ratethan imports from other countries. The value of U.S. imports from Mexico in theautomotive industry increased 332%, while U.S. imports in the textiles and apparelindustries increased 253%.

Table 3. U.S. Imports: 1993-2002 ($Billions 1 )

1 Nominal U.S. dollars.

Source: United States International Trade Commission, Interactive Tariff and Trade Data Web http://dataweb.usitc.gov . Compiled by CRS.

Impacts on Key Industries

Some industries that had higher trade restrictions were more sensitive to the removal of tariff and non-tariff barriers, and have experienced increasing tradedeficits since NAFTA was passed. Based on the percentage change in trade patternsand the number of workers applying for TAA certification (see section below), themore highly impacted industries include the textiles, apparel, and automotiveindustries. The trade impacts in these industries are discussed below. In addition,Mexico's maquiladora industry, which is closely linked to U.S. manufacturingindustries, is also discussed.

Textiles and Apparel. The main NAFTA provisions related to textiles and apparel were the elimination of tariffs andquotas for goods coming from Mexico and eliminating Mexican tariffs on U.S.textile and apparel products. To benefit from the free trade provision, goods wererequired to meet the rules of origin provision which assured that apparel products thatwere traded among the three NAFTA partners were made of yarn and fabric madewithin the free trade area. The strict rules of origin provisions were meant to ensurethat U.S. textiles producers would continue to supply U.S. apparel companies thatmoved to Mexico. Without a rules of origin provision, apparel companies wouldhave been able to import low-cost fabrics from Asia and export the final product tothe United States under the free trade provisions.

The average U.S. tariffs in textiles and apparel decreased from 9.1% in 1992 to 1.3% in 1996 (a 7.8 percentage point decrease), while Mexican average tariffsdeclined from 16% in 1992 to 5.3% in 1996 (a 10.7 percentage point decrease). Incomparison, average U.S. tariffs on all Mexican products decreased from 2.07% in1992 to 0.65% in 1996 (a 1.42 percentage point decrease), while average Mexicantariffs on all U.S. products decreased from 10% in 1993 to 2.9% in 1996 (a 7.1percentage point decrease). (15) The elimination ofnon-tariff barriers, such as U.S.import quotas on North American-origin textiles and apparel likely contributed to theincreasing trade deficit in this sector because of the increase in U.S. imports.

Total U.S. trade with Mexico in textiles and apparel increased 218% afterNAFTA, while the trade deficit increased 439% (see Table 4). In comparison, U.S.trade in textiles and apparel with all countries increased by 79%, while the tradedeficit increased by 98%. Although the high increase in U.S. imports from Mexicomay have displaced some U.S. workers in this industry, the USITC study suggestedthat NAFTA may have shifted production from Asian countries to North America. The study reports that U.S. imports from NAFTA countries tend to have a higherU.S. content than imports from outside the region, such as China, Hong Kong, andTaiwan. (16) The data in Table 4 shows that totaltrade with Mexico in textiles andapparel increased considerably more than trade with Asia or the world. Thesenumbers could suggest that Mexico may be supplying the U.S. market with goodsthat would have otherwise been supplied by Asian countries. This trend, however,may be changing. After increasing steadily through 2001, Mexico's share of U.S.trade in textiles and apparel decreased slightly in 2002, while that of Asia increasedslightly.

Table 4. U.S. Trade in Textiles and Apparel: 1993 and 2002

1 Dollar figures in this table are in nominal U.S. dollars.

Source: United States International Trade Commission, Interactive Tariff and Trade Data Web http://dataweb.usitc.gov . Compiled by CRS.

Automotive Industry. UnderNAFTA, the United States, Canada, and Mexico agreed to eliminate or reduce mostbarriers to trade and investment in the automotive industry. The NAFTA provisionsrelated to the auto industry include the phased elimination of tariffs, gradual removalof many non-tariff barriers to trade, rules of origin provisions, enhanced protectionof intellectual property rights, less restrictive government procurement practices, andthe elimination of performance requirements on investors from other NAFTAcountries. Because the United States and Canada were already highly integratedfollowing the U.S.-Canada Free Trade Agreement and a U.S.-Canada Auto Pact in1965, most of the impacts of NAFTA relate to trade liberalization with Mexico. Between 1962 and 1989, Mexico had a series of five decrees in the automotive sectorwhich maintained a policy of import substitution by reserving the domesticautomobile market for domestically produced parts and vehicles. The 1989 decreesignificantly relaxed restrictions on foreign auto producers operating in Mexico butstill maintained a number of restrictive measures on Mexican auto trade and foreignproduction in Mexico.

NAFTA established the removal of Mexico's restrictive trade and investment policies. Mexican tariffs on all types of motor vehicles and parts, which were as highas 20% for some goods, were reduced by half in 1999, and are scheduled to becompletely phased out by 2003. In addition, Mexican investment restrictions in theautomotive sector were lowered or removed entirely, which provided an incentive toincrease U.S. investment in Mexico. Mexico lowered its 20% tariff on U.S. lighttrucks to 10% in 1994 and phased it out by 1998. Mexico will completely phase outtariffs on other trucks by 2003.

On motor vehicles, the United States eliminated the 2.5% tariff on Mexican products in 1994. U.S. tariffs on Mexican light trucks were cut from 25% to 10%in 1994 and completely eliminated by 1998. U.S. tariffs on other Mexican trucks of25% are scheduled to be phased out by 2003. In auto parts, the United States phasedout tariffs on most Mexican auto parts in 1994. Most remaining tariffs on auto partswere phased out in 1998, with the remaining one percent to be eliminated by 2003.

As shown in Table 5, U.S. trade in motor vehicles and auto parts increased substantially with NAFTA partners and the rest of the world since NAFTAimplementation. (17) While total U.S. automotiveimports increased considerably,imports from Mexico increased at a much higher rate. U.S. motor vehicle importsfrom Mexico increased from $3.7 billion to $20.9 billion (465%) between 1993 and2002, while imports from Canada increased from $26.7 billion to $41.4 billion(55%), and imports from all countries increased from $63 billion to $132.4 billion(110%). In auto parts, imports from Mexico also increased by a larger percentagethan imports from other countries. This increase caused a sharp rise in the U.S. tradedeficit with Mexico in both motor vehicles and auto parts. The trade deficit withMexico in both vehicles and parts increased from $3.6 billion to $25.7 billion, or617%.

Since NAFTA, Mexico has become a more significant trading partner in the U.S. motor vehicle market. Mexico's share in U.S. total trade in motor vehiclesincreased from 5% to 15%, while the share from Canada and other countriesdecreased (see Table 6). Total U.S. trade from non-NAFTA trading partnersdecreased from 53% to 49%, which could suggest that motor vehicle imports fromMexico are replacing those from other countries. Although motor vehicle importsfrom Mexico have increased significantly since NAFTA, those from other countriesmay have increased at a slower rate than they would have in the absence of NAFTA.

Maquiladora Industry. Mexico's maquiladora industry (18) is closely linked toU.S.-Mexico trade in variouslabor-intensive industries such as textiles and apparel, auto parts, and electronicgoods. NAFTA affected the maquiladora industry in a very significant way. Beginning in 2001, the North American rules of origin determine the duty-free statusfor a given import, replacing the previous special tariff provisions that applied onlyto maquiladora operations. The initial program has ceased to exist and the sametrade rules now apply to all assembly operations in Mexico. (19)

Table 5. U.S. Trade in Automotive Industry: 1993 and 2002 ($ Billions 1 )

1 Nominal U.S. dollars.

Note: Motor Vehicles includes cars, minivans, sport-utilities, light and heavy trucks,other types of motor vehicles designed for the transport of persons, and specialpurpose vehicles not elsewhere classified.

Source: U.S. Census Bureau using U.S. Department of Commerce Office of Automotive Affairs Product Groups.

Table 6. U.S. Trade in Motor Vehicles byCountry: 1993 and 2002

1. Dollar figures in this table are nominal U.S. dollars.

Note: Motor Vehicles includes cars, minivans, sport-utilities, light and heavy trucks, other types of motor vehicles designed for the transport of persons, and specialpurpose vehicles not elsewhere classified.

Source: Compiled by CRS with data from the U.S. Census Bureau using U.S. Department of Commerce Office of Automotive Affairs Product Groups.

Mexico's maquiladora industry has expanded rapidly since NAFTA implementation. The number of plants grew from 1,789 at the end of 1990, to 2,143in 1993 (just before NAFTA) and to 3,703 in 2000. (20) After 2000, the number ofmaquiladoras began to decrease. By April 2003, the number had fallen to 3,240. Some observers have concluded that the correlation in maquiladora growth after 1993is directly due to NAFTA, but in reality it is unclear that maquiladora growth isdirectly related to trade liberalization. Although some provisions in the agreementmay have encouraged maquiladora growth in certain sectors, maquiladora activity isalso influenced by the strength of the U.S. economy and relative wages in Mexico. Maquiladora operations usually increase during periods of economic expansion in theUnited States. A drop in Mexican wages may be an incentive for U.S. companies toshift production to Mexico. (21) Between 1993 and1996, relative wages in Mexicodecreased considerably due to the peso devaluation. Since 1997, however, Mexicanlabor costs have risen 54%. (22) As a result of thehigher labor costs, somemanufacturers have closed their Mexican plants and shifted production to Asiancountries. In 2001, maquiladora employment levels fell for the first time since 1982.Approximately 250,000 jobs were lost and 253 maquiladoras were shut down,partially as a result of higher labor costs, but also because of the slowdown in theU.S. economy. (23)

In textiles and apparel, the maquiladora industry's second largest employer, NAFTA's market opening measures could have been a factor in increasedmaquiladora operations. (24) The agreementeliminated U.S. quotas on textiles whichmay have given U.S. textile firms an incentive to construct maquiladora operationsin Mexico.

Employment

While some U.S. industries may have benefitted from increased demand for U.S. products in Mexico or Canada, creating new jobs, other industries haveexperienced job losses. As mentioned previously, data on the effects of NAFTA isvery limited and the effect on specific U.S. industries is difficult to quantify. Trade-related job gains and losses since NAFTA may have accelerated trends thatwere ongoing prior to NAFTA and may not be totally attributable to the tradeagreement. (25) Quantifying these effects is not easybecause of the other economicfactors that influence trade and employment levels. The devaluation of the Mexicanpeso in 1995 resulted in relatively lower Mexican wages, which may have providedan incentive for U.S. companies to move to lower their production costs. Trade-related employment effects following NAFTA could have also resulted fromthe lowering of trade barriers, and from the economic conditions in Mexico and theUnited States influencing investment decisions and the demand for goods.

The TAA program provides assistance to workers who have lost their jobs because of trade-related impacts (see section below on NAFTA assistance programs). Workers who are eligible to receive TAA benefits receive certification from the U.S.Department of Labor. One aspect of the previous NAFTA-TAA program is that itprovided data on the estimated number of workers covered by certification. Thenumber of certified workers is not the same as the number of jobs lost due toNAFTA, but it provides some indication of the adjustment costs of NAFTA. (26) Table7 presents the number of workers certified by the NAFTA-TAA Program betweenJanuary 1994 and December 2001. The industry with the highest number ofNAFTA-TAA certified jobs is textiles and apparel with 34% of total NAFTA-TAAcertification, followed by the automotive industry with 6% of NAFTA-TAA totalcertification. NAFTA-TAA certification figures may overestimate job losses amongcertified workers because not all certified workers may have actually lost their jobs. Data from the Department of Labor suggest that as few as 20 - 30% of certifiedworkers actually collect NAFTA-TAA benefits. Certified workers may not haveactually lost their jobs, may have found another job, or may not have collectedbenefits for other reasons. (27)

Table 7. NAFTA-TAA Certification by Industry January 1994 - December 2001

Note: Textiles and apparel include SIC codes 22 and 23,automotive industry includes SIC codes 3465, 3647, 3691, 3694,3711, 3713, and 3714; microelectronics includes SIC codes3671, 3672, 3675, 3676, 3677, 3678, and 3679; electricalequipment includes SIC codes 3511, 3612, 3613, 3621, and3625; chemicals and allied products includes SIC code 28; andcomputer equipment includes SIC codes 3571, 3572, 3575, and3577.

Source: U.S. Department of Labor Office of Trade Adjustment Assistance. Compiled by CRS.

The number of certified workers under the NAFTA-TAA program (415,371 workers) is considerably lower than the estimated number of job losses cited by theEconomic Policy Institute (EPI) study discussed earlier in this report. The EPI studyestimates about 766,000 "existing or potential" job losses as a result of NAFTA. Asdiscussed earlier, however, the EPI estimate is largely based on the increasing U.S.trade deficit with Mexico and does not take into account other economic factorsaffecting trade and employment. Therefore, the actual number of job losses due toNAFTA is probably lower than the EPI estimate and may lie in a range between thenumber of NAFTA-TAA certifications and the EPI figure.

NAFTA Adjustment Assistance Programs

The NAFTA-TAA program provided assistance to workers who have lost theirjobs because of increased import competition from Mexico or Canada or because ofproduction shifts to Mexico or Canada. Workers receiving benefits had to be certified by the U.S. Secretary of the Labor as having lost their jobs, or have beenthreatened with job loss due to import competition or production shifts to Mexico orCanada. (28) In the 107th Congress,legislation was passed to authorize TAA as a singleprogram without the separate NAFTA-TAA program through FY2007. PresidentBush proposed in his FY2003 budget to extend the TAA and NAFTA-TAA programsand to include total funding of $462 million for both programs, representing anincrease of $46 million over FY2002 funding levels of $416 million.

From the program's inception in January 1994 through December 2001, 415,371 workers were covered by certification. The NAFTA-TAA worker assistance includesemployment services, training, trade readjustment allowances, and job search andrelocation allowances. The benefits are administered by the state employmentsecurity agencies under contract with the Department of Labor. As part of theemployment services, certified workers can receive counseling, testing and placementservices, and supportive services. Another form of assistance is cash allowances. Certified workers may be eligible to receive cash benefits, called trade readjustmentallowances (TRA).

Another program connected with the passage of NAFTA that provides assistance to communities with significant job losses due to changes in trade patternswith Canada or Mexico is the USCAIP, which is administered for the United Statesgovernment by the Los Angeles Office of the NADBank. The NADBank, and itssister organization, the Border Environment Cooperation Commission (BECC), werecreated under a binational side agreement to NAFTA to address environmentalinfrastructure problems along the U.S.-Mexico border. The USCAIP is administeredby the NADBank for the U.S. government. As of September 2001, the program hadmade three direct loans totaling $2.18 million and helped fund 563 loans worth$377.6 million through the Federal Agency Program. (29) The program works primarilythrough the loan programs of the Small Business Administration and the U.S.Department of Agriculture, but also has a grants office that provides communitygrants on a competitive basis. It may provide direct financing in cases whereconventional sources of financing are not available. The program offers credit to newor expanded businesses in communities for commercial projects that create newprivate sector jobs. The program combines efforts of the NADBank with certainFederal agencies, local financial institutions, and financial intermediaries to helpcommunities meet financing needs for business opportunities. (30)

The USCAIP reports that assistance loans have accounted for the creation or retention of 12,779 jobs. (31) However, the actualeffect of the program may not beknown. According to a U.S. General Accounting Office (GAO) report, the USCAIPdoes not have a monitoring system in place to measure the program outcomes. Thereport states that the data in the records maintained by the USCAIP are based onprojections by businesses when applying for program financing and are not verified. GAO stated that federal financing programs similar to the USCAIP that assistspecific sectors or firms largely shift employment among sectors in the economyrather than raise the overall level of employment. (32)

Although the overall effects of NAFTA have been small but positive, some communities have had economic difficulties due to local plant closures. A numberof communities have experienced a high number of trade-related layoffs and, whilesome have had time to absorb the losses, others have not. The NAFTA-TAAprogram provided assistance for these communities, but there have beenimplementation challenges. A GAO study on community adjustment assistancereported the experiences of six trade-impacted communities. The study found thatthe trade adjustment assistance was limited and that all the communities had reportedstructural problems that impeded effective service delivery. Low educational levelsamong unemployed workers was a major factor in being able to implement effectivetraining benefits. Another problem was the lack of data on program outcomes toevaluate efficacy. The study stated that there were no simple answers to communityrecovery, even when assistance funds were available. (33)

Conclusion

After almost ten years of implementation, the full effects of NAFTA on the U.S.economy are still unclear. Proponents of NAFTA claim that the agreement hasincreased U.S. trade with Mexico and Canada, and benefitted the U.S. economy. They believe that NAFTA has had a positive impact on U.S. trade and investmentwith Canada and Mexico, and that NAFTA has increased U.S. exports to Canada andMexico. (34) Critics of NAFTA argue that hundredsof thousands of U.S. jobs havebeen lost because of the agreement. NAFTA critics generally base their argumentson the increasing trade deficit with Mexico, stating that increasing U.S. imports fromMexico have caused plant closures and job losses in the United States.

An examination of available data and studies related to NAFTA shows that the effects of NAFTA are not clear-cut. First, it is difficult to isolate the effects ofNAFTA because of other variables affecting trade and investment such as economicgrowth and exchange rates, both of which affect consumer spending and the demandfor imports, foreign investment, employment levels, and relative wages. Second,some of the market opening measures in Mexico that resulted from NAFTA werealready taking place prior to the agreement and NAFTA may have only acceleratedthe process. Although the effects of NAFTA may not be easily measured, the tradetrends following the agreement may give some overall indication of how the marketresponded to the new trade rules. Trade between the United States and Mexicoexpanded considerably after NAFTA. While trade expansion has benefitted theoverall U.S. economy in terms of improved production processes, and the increasedavailability of better goods and services for U.S. consumers at lower cost, there alsohave been job losses associated with NAFTA. The two U.S. workforce sectors thathave been adversely affected are the textiles and apparel industry and the automotiveindustry.

The trade effects of NAFTA are of significance because of the possibilities of a U.S. trade agreements with Chile and also the Free Trade Area of the Americasinitiative. NAFTA may provide an indication of how further trade integration in theWestern Hemisphere would affect U.S. industries. One of the key concerns facingpolicymakers in developing trade policy initiatives is the labor issue and how toaddress the problem of worker dislocation in industries adversely affected by trade. (35) Two NAFTA-related programs that were created to provide assistance to workers andcommunities affected by trade with Mexico or Canada, the NAFTA-TAA programand the USCAIP program, have been beneficial but also have limitations. Accordingto one GAO study, NAFTA-TAA training assistance has not always been effective,especially in cases of workers with low educational levels. The study found thatthere were no simple answers to community recovery even when assistance wasavailable. Another GAO report stated that the effectiveness of the USCAIP programis not known because of the lack of a measuring mechanism to evaluate programoutcomes.