NAFTA, which went into effect on January 1, 1994, was intended to facilitate trade and investment throughout North America. It incorporates features such as the elimination of tariff and nontariff barriers. NAFTA also supports the objective of locking in Mexico’s self-initiated, market-oriented reforms. By removing barriers to the efficient allocation of economic resources, NAFTA was projected to generate overall, long-run economic gains for member countries—modest for the United States and Canada, and greater for Mexico. For the United States, this is due to the relatively small size of Mexico’s economy and because many Mexican exports to the United States were already subject to low or no duties. Under NAFTA, intra-industry trade and coproduction of goods across the borders were expected to increase, enhancing specialization and raising productivity. Although a substantial majority of economic studies concluded that only modest economic and employment effects were likely, NAFTA generated a heated public debate before the agreement’s passage by Congress in 1993. NAFTA critics asserted that up to 1 million U.S. jobs would be lost, while the President projected that the agreement would generate 200,000 U.S. jobs. NAFTA also included procedures first to avoid, and then to resolve, disputes between parties to the agreement. Separately, the three NAFTA countries negotiated and entered into two supplemental agreements designed to facilitate cooperation on environment and labor matters among the three countries. Before I get into the specifics of these topics, I will summarize our main points. The impact of NAFTA on the U.S. economy cannot be directly ascertained since changes in trade and investment also reflect other influencing factors. The results of economic analyses of NAFTA’s impact on U.S. gross domestic product (GDP) are consistent with the pre-NAFTA long-run projections described by the ITC. In contrast, estimates of the agreement’s impact on aggregate employment are widely divergent. Differences in the studies’ assumptions and methodologies account for this divergence. Since NAFTA’s first round of tariff reductions went into effect in 1994, total U.S. merchandise trade (exports plus imports) with Canada and Mexico has increased from an annual average of $269 billion (1991-93) to an annual average of $384 billion (1994-96). (See apps. I-III.) A significant factor influencing trade was the severe 1994-95 Mexican financial crisis.This growth in total trade has been accompanied by an increase in the U.S. merchandise trade deficit with its NAFTA partners, from $8.6 billion to $34 billion, as import growth outpaced export growth. U.S. investment in Mexico has grown since NAFTA’s implementation. From 1994 to 1996, the United States had an annual average of $3.1 billion in foreign direct investment to Mexico, compared to $2 billion from 1991 to 1993. Mr. Chairman, let me now summarize the findings from three major reports on NAFTA’s impact: (1) the in-depth June 1997 ITC study of NAFTA;(2) the President’s July 1997 report on the operations and effect of NAFTA;and (3) a June 1997 study by some of the major critics of NAFTA. The June 1997 ITC assessment of NAFTA impacts represents the most comprehensive research effort we identified to date. Using an econometric approach, ITC sought to separate other trade-influencing factors, particularly Mexico’s financial crisis, from NAFTA’s impact on the U.S. economy as a whole, and on nearly 200 industrial sectors of the U.S. economy. In addition, the ITC assessment included a qualitative review of 68 aggregated sectors. Based on all of its analysis, ITC concluded that NAFTA had a modest positive effect on the U.S. economy during its first 3 years of operation. ITC was unable to quantify a discernible effect on U.S. GDP, aggregate investment, or aggregate employment that can be attributed to NAFTA during its first 3 years. ITC concluded that NAFTA has significantly affected the aggregate levels of U.S. trade with Mexico, but not with Canada. In its sectoral analyses, ITC found changes in trade, employment, and earnings that were due to NAFTA in a limited number of sectors. Among the nearly 200 sectors whose trade ITC modeled, U.S. exports to Mexico increased significantly in 13 sectors due to NAFTA, while no sector showed decreased exports to Mexico due to NAFTA. U.S. imports from Mexico increased significantly in 16 sectors after the effects of other influencing factors were taken into account, while U.S. imports from Mexico decreased significantly in 7 sectors due to NAFTA. In an econometric analysis of 120 industrial sectors, ITC found that 29 industries had changes in hourly earnings and employment levels. Among these 29 sectors, hours worked most often increased due to NAFTA, while hourly earnings were more often found to decrease. In their qualitative sectoral analysis, ITC industry experts found that employment declined due to NAFTA in 2 out of 68 sectors: the apparel and women’s non-athletic footwear sectors. While some effort was made to address productivity impacts, ITC was unable to evaluate the direct impact of NAFTA on labor productivity in the various sectors due to data constraints. However, the indirect evidence examined by ITC suggested a positive impact on U.S. productivity in certain industries. The President’s report on NAFTA presents the findings of recent studies that estimate the agreement’s impact. These include a commissioned DRI analysis and research published by the Federal Reserve Bank of Dallas.Both studies isolate the effect of the Mexican financial crisis from NAFTA’s effect on bilateral U.S.-Mexico trade flows. In contrast to the ITC effort that modeled the employment impact of NAFTA, the President’s report uses a simple job-multiplier analysis that assumes about 13,000 jobs are supported for every $1 billion in increased exports. The Federal Reserve study modeled the impact of NAFTA on U.S. bilateral trade with Mexico. They found that NAFTA has on average boosted export growth by about 7 percentage points each year since implementation, for a cumulative expansion of exports of about $5 billion through 1995. U.S. import growth from Mexico on average has been about 2 percentage points greater each year, for a cumulative impact of about $1.8 billion in additional imports. The DRI assessment found larger trade effects than the Federal Reserve study. The DRI study used a model of the Mexican economy to evaluate NAFTA’s impact on bilateral trade with the United States, but excluded the petroleum sector. It found that in 1996, NAFTA increased U.S. exports to Mexico by $12 billion and imports from Mexico by $5 billion. The estimated trade impacts were then applied to a DRI macroeconomic model of the U.S. economy to simulate their impact on U.S. GDP and investment. According to the President’s report, DRI estimates that NAFTA contributed $13 billion to U.S. real income and $5 billion to business investment in 1996, controlling for the impact of Mexico’s financial crisis. The President’s report uses the export estimates from the two studies to compute NAFTA’s impact on job creation. The President’s report estimates that NAFTA export expansion supported between 90,000 and 160,000 jobs in 1996. The President’s report did not compute any employment impact from increased imports from Mexico. The Economic Policy Institute (EPI) prepared an assessment of NAFTA that also used a job-multiplier analysis. This assessment was included in the consolidated critique of NAFTA. However, the EPI analysis differed from the President’s report in several notable respects. First, EPI did not separate the impact of Mexico’s financial crisis from NAFTA’s effects on trade flows.Secondly, to compute job losses from NAFTA, EPI applied the export job multiplier to the increase in imports rather than just to exports as done in the President’s report. Also, EPI included changes in U.S.-Canadian bilateral trade in its assessment of NAFTA. The critique concluded that the increased U.S. trade deficit with Mexico and Canada on balance has cost the United States 420,208 jobs since 1993. It states that the move to a $16.2 billion U.S. bilateral trade deficit with Mexico in 1996 from a bilateral surplus of $1.7 billion in 1993 cost the United States 250,710 of these jobs. The critique also notes that the real wages of U.S. blue-collar workers has declined for almost 2 decades and suggests that imports from low-wage countries such as Mexico are an especially important cause of increasing wage inequality. The benefits of trade agreements are widely dispersed, and the costs or dislocation effects are more concentrated. In recognition of the anticipated dislocation of some workers, the NAFTA Implementation Act established the NAFTA-TAA program in 1994. The program was designed to assist workers in companies affected by U.S. imports from Mexico or Canada or by shifts in U.S. production to either of those countries. The program is authorized to continue until September 30, 1998. NAFTA-TAA benefits include basic readjustment services; employment services; training; job search allowances; relocation allowances; and the feature that most distinguishes the program from basic unemployment insurance, income support for up to 52 weeks after exhaustion of unemployment insurance when enrolled in training. As of September 4, 1997, NAFTA-TAA certifications (verification of potential job losses since NAFTA’s implementation) have been issued for 1,206 worker groups in firms located in 48 states. Department of Labor statistics indicate that 142,884 workers have been certified as eligible for NAFTA-TAA benefits due to (1) increased imports from Canada or Mexico or (2) a shift in U.S. production to Canada or Mexico.