Industry Trade Effects Related to NAFTA

CRS Report for Congress
Industry Trade Effects
Related to NAFTA
Updated October 30, 2003
M. Angeles Villarreal
Industry Analyst
Resources, Science, and Industry Division


Congressional Research Service ˜ The Library of Congress

Industry Trade Effects Related to NAFTA
Summary
The North American Free Trade Agreement (NAFTA), signed by President
George Bush on December 17, 1992, has been in effect since January 1994. After
eight years of implementation, the full effects of NAFTA on the U.S. economy are
still unclear. There are numerous indications that NAFTA has achieved many of the
trade and economic benefits that proponents claimed it would bring, although there
have been adjustment costs. However, there is not enough evidence to quantify the
impacts on specific U.S. industries. Some studies show that the agreement has had
an overall positive effect on the U.S. economy, but that some industries have
experienced losses. As the United States considers further free trade initiatives with
Latin American countries, the effects of NAFTA may provide policymakers some
indication of how these initiatives might affect U.S. industries and the overall U.S.
economy.
Most of the trade effects related to NAFTA are due to changes in U.S. trade and
investment patterns with Mexico. At the time of NAFTA implementation, the U.S.-
Canada Free Trade Agreement already had been in effect for five years and some
industries in the United States and Canada were already highly integrated. Since
NAFTA, the automotive, textile, and apparel industries have experienced some of the
more significant changes in trade flows, which may also have affected U.S.
employment in these industries. U.S. trade with Mexico has increased considerably
more than U.S. trade with other countries, and Mexico has become a more significant
trading partner with the United States since NAFTA implementation. Consequently,
Mexico’s share of total U.S. trade has increased while that of other countries has
decreased. Some data on U.S. imports suggest that Mexico may be supplying the
U.S. market with goods that may have otherwise been supplied by Asian countries.
Not all changes in trade patterns since 1994, however, can be attributed to
NAFTA because trade was also affected by other unrelated economic factors such as
economic growth in the United States and Mexico, and currency fluctuations. Also,
trade-related job gains and losses since NAFTA may have accelerated trends that
were ongoing prior to NAFTA and may not be totally attributable to the trade
agreement.
To address concerns about worker dislocations related to NAFTA, Congress
included two employment adjustment assistance programs in the implementing
legislation: the NAFTA Transitional Adjustment Assistance (NAFTA-TAA)
Program and the U.S. Community Adjustment and Investment Program (USCAIP).
The NAFTA-TAA program is now part of a new consolidated Trade Adjustment
Assistance (TAA) program passed under the Trade Act of 2002 (P.L. 107-210). The
NAFTA-TAA program provides assistance, such as employment services and
training, to workers who have lost their jobs because of increased import competition
or by production shifts. The USCAIP provides assistance to communities with
significant job losses due to changes in trade patterns with Canada or Mexico. While
the programs have been successful in providing assistance to communities who have
had significant job losses, the overall effectiveness of the programs has been limited.
This report will be updated as events warrant.



Contents
Background ......................................................1
Overall Effects of NAFTA...........................................2
How Has NAFTA Affected U.S. Industries?.............................4
Industry Trade Flows ..........................................5
U.S. Exports by Country....................................8
U.S. Imports by Country....................................8
Impacts on Key Industries......................................10
Textiles and Apparel......................................10
Automotive Industry......................................11
Maquiladora Industry......................................12
Employment .................................................14
NAFTA Adjustment Assistance Programs.............................16
Conclusion ......................................................17
List of Tables
Table 1. Industry Trade Flows Between the United States
and NAFTA Partners: 1993-2002.................................6
Table 2. U.S. Exports: 1993-2002....................................7
Table 3. U.S. Imports: 1993-2002.....................................91
Table 4. U.S. Trade in Textiles and Apparel: 1993 and 2002..............11
Table 5. U.S. Trade in Automotive Industry: 1993 and 2002...............131
Table 6. U.S. Trade in Motor Vehicles by Country: 1993 and 2002.........13
Table 7. NAFTA-TAA Certification by Industry
January 1994 - December 2001..................................15



Industry Trade Effects Related to NAFTA
Background
The North American Free Trade Agreement (NAFTA), signed by President
George Bush on December 17, 1992, has been in effect since January 1994. After
almost ten years of implementation, there is some evidence that NAFTA has
achieved many of the trade and economic benefits that proponents claimed it would
bring, although there have been adjustment costs at the sectoral level. Most
economists, but not all, believe that trade liberalization promotes overall economic
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 and implementation 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 of1

2002, which included TPA, was signed into law by the President (P.L. 107-210).


As the United States considers free trade initiatives with other Latin American
countries, the effects of 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 steps to liberalize trade in the Western
Hemisphere by entering into trade negotiations for a Free Trade Area of the Americas
(FTAA) and a U.S.-Chile Free Trade Agreement (FTA). In addition, the
Administration announced that it will explore a free trade agreement with the
countries of Central America. The U.S.-Chile FTA is close to the final stages of
negotiations and FTAA negotiations are scheduled 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, Congress included two adjustment assistance programs,
designed to ease trade-related problems, in the implementing 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 USCAIP
provides financial assistance to communities with significant job losses due to
changes in trade patterns 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


1 For more information on trade promotion, or fast-track, authority see CRS Issue Brief
IB10084, Trade Promotion Authority (Fast-Track Authority for Trade Agreements):th
Background and Developments in the 107 Congress.

part of a new reformed TAA Program. The previous NAFTA-TAA program
provided assistance, including employment services and training, to workers who
have lost their jobs due to import competition or production shifts to Mexico or
Canada. The new reformed TAA program would expand eligibility for workers hurt
by a shift in production to certain other countries, and extend benefits to workers
previously ineligible such 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. The report will analyze, to the extent feasible, the
effectiveness of NAFTA trade-related adjustment assistance programs.
Overall Effects of NAFTA
The overall effect of NAFTA on the U.S. economy has been relatively small,
primarily because two-way trade with Mexico amounts to less than three percent of
U.S. GDP. Therefore, any changes in 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
trade barriers, 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 Free Trade Agreement already had been in effect for five years and
some industries in the United States and Canada were already highly integrated.
Most tariffs on products traded between the United States and Canada were zero at
the time of NAFTA implementation. In contrast, Mexico had followed an aggressive
import-substitution policy for many years prior to NAFTA in which it had sought to
develop certain domestic industries through trade protection. One example is the
Mexican automotive industry which had been regulated by a series of five decrees
issued by the Mexican government between 1962 and 1989. The decrees established
import tariffs as high as 25% on automotive 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 International Trade Commission (ITC), analyzes the
actual impact of the first three years of NAFTA on the overall U.S. economy, and on


2 For more information see CRS Issue Brief IB10084, p. 10; and CRS Briefing Book
ebtra85, "Trade Adjustment Assistance for Workers," in the CRS Trade Briefing Book, at
[ h t t p : / / www.congr e ss.go v/ br bk/ h t ml / e bt r a 85.ht ml ] .
3 Section 512 of the NAFTA Implementation Act required the President to provide a
comprehensive assessment of the operation and effects of NAFTA to the Congress by July

1, 1997.



industries particularly affected by the agreement.4 The report found that NAFTA had
a small positive effect on the overall U.S. economy, but that some industries
experienced significant changes in the volume of bilateral trade with NAFTA
partners. The report states that NAFTA’s most important effects are not easily
measured or observed, and the full effects of the agreement will take many years to
make themselves known.5 The report is based on data between 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 with the rest of the world.
!The share of U.S. exports in the Mexican market increased by a
higher percentage than the share of total foreign imports.
!In industries such as autos, chemicals, textiles, and electronics, U.S.
companies have 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 briefing paper by the Economic Policy Institute states that NAFTA has
eliminated about 766,000 existing or potential U.S. jobs in the manufacturing
industry.6 One of the reports in the briefing paper maintains that the increasing trade
deficit with Mexico since NAFTA has caused manufacturing jobs in the United
States to disappear and that the threat of employers to move production to Mexico
helped undercut workers’ bargaining power, resulting in workers being downscaled
to lower-paying, less-secure jobs.7 The report’s findings are largely based on the
assumption that the increasing U.S. trade deficit with Mexico is primarily a result of
NAFTA. However, while NAFTA may have accelerated U.S.-Mexico trade since
1993, there are other important economic factors that have contributed 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 have significantly influenced trade and investment patterns between the United
States and Mexico. The report does mention the Mexican peso devaluation effects
but does not fully distinguish these effects from those of NAFTA. Another aspect
of trade-related impacts is the relationship of trade deficits to overall employment
levels. While NAFTA may be partially responsible for the dislocation of workers in


4 United States International Trade Commission, Impact of the North American Free Trade
Agreement on the U.S. Economy and Industries: A Three Year Review, Publication 3045,
July 1997.
5 USITC Report, Executive Summary.
6 Economic Policy Institute Briefing Paper, NAFTA at Seven: Its Impact on Workers in all
Three Nations, 2001.
7 Scott, Robert E., “NAFTA’s Hidden Costs,” in Economic Policy Institute Briefing Paper,
NAFTA at Seven: Its Impact on workers in all Three Nations, 2001.

some industries, a growing trade deficit with Mexico does not necessarily indicate
an increase 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 that only part of the growth in U.S.-Mexico trade can be
attributed directly to the actual provisions of NAFTA. The report indicates that the
increase in U.S. trade with Mexico since 1994 was also affected by currency
fluctuations, economic growth in the United States and Mexico, and an improved
general business climate in North America. It states that the overall effect of NAFTA
on employment 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 effects and mentions the EPI estimate of actual and
potential job losses of 766,000 as being the “most extreme” estimate of job losses in
studies that have generated estimates of employment changes due to NAFTA.10 The
author states that this estimate relies on an unlikely linkage between jobs and trade
deficits, 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 for reasons unrelated to
trade.11 The report cites a USITC12 study which found that workers that have been
unemployed as a result of trade liberalization have, in the long run, been re-employed
in other sectors.
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 specific industries. The automotive, chemical products, textile, and
apparel industries have experienced the most significant changes in trade flows,
which may also have affected employment levels in these industries. Not all changes


8 In the 1990s, the overall U.S. trade deficit increased considerably while the U.S. economy
expanded and full employment levels were attained. While trade deficits in the United
States have not hampered the overall creation of jobs, they do influence the types of jobs
that are created because of the trade-related changes in composition of U.S. output. See
CRS Report 97-985 E, Why the Budget Deficit and the Trade Deficit Haven’t Been Moving
Together; and CRS Report RL30534, America’s Growing Current Account Deficit: Its
Cause and What it Means for the U.S. Economy.
9 Ferrantino, Michael J. “Evidence of Trade, Income, and Employment Effects of NAFTA,”
Industry Trade and Technology Review, December 2001. Industry Trade and Technology
Review is a publication of the USITC, but the views in this article are the author’s, and not
the views of the USITC as a whole or of any individual Commissioner.
10 Ibid, P. 8.
11 Ibid, pp. 1 and 6.
12 See USITC, The Economic Effects of Significant U.S. Import Restraints: Second Update,
Investigation No. 332-325, USITC Publication 3201, May 1999.

in trade and investment patterns since 1994 can be attributed to NAFTA because the
U.S. economic expansion during the 1990s and the Mexican peso devaluation of
1995 also affected trade patterns. This section discusses five major U.S. industries
that have high volumes of trade with Mexico and Canada. These industries include
the automotive industry, chemicals and allied 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 the demand for imports. Part of the growth in imports
from Mexico after NAFTA implementation could have been due to economic growth
in the United States, and not entirely attributable to a reduction in trade barriers. In
addition, the peso devaluation of 1995 reduced the purchasing power of the Mexican
people which likely reduced the demand of Mexico’s imports from the United States,
at least 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. The U.S. industries with the highest volume of trade
(imports and exports) with Mexico and Canada are the 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 all four other industry groups accounts for 16% of total trade. Overall trade
between the United States and 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 was implemented. 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
has increased 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. In percentage terms, the highest increases were in microelectronics
(304%) and in the textiles, apparel industries (173%). The industries with the highest


13 Data from 1997 to 2002, automotive industry category includes motor vehicles and parts
and includes North American Industry Classification System (NAICS) codes 3361, 3362,
3363; chemicals and allied products category includes NAIC code 325; computer equipment
category includes NAIC codes 334111, 334112, 334119, 334418, and 334613; textiles and
apparel category includes NAIC codes 315, 313, and 314; microelectronics category
includes NAIC codes 333295, 334411, 334412, 334413, 334414, 334415, 334416, 334417,
and 334419. Data from 1993 to 1996, automotive industry category includes Standard
Industrial Classification (SIC) codes 3465, 3647, 3691, 3694, 3711, 3713, and 3714;
chemicals and allied products category includes SIC code 28; computer equipment category
includes SIC codes 3571, 3572, 3575, and 3577; textiles and apparel category includes SIC
codes 22 and 23; microelectronics category includes SIC codes 3671, 3672, 3675, 3676,

3677, 3678, and 3679. The NAICS codes replaced SIC codes effective October 1, 2000.


14 All trade figures in this report are expressed in nominal U.S. dollars, which are unadjusted
for inflation.

percentage growth in U.S. imports from Mexico and Canada were textiles and
apparel (238%). In dollar terms, imports in the automotive industry had the highest
increase ($49.6 billion). In exports, chemicals and allied products had the highest
percentage increase (115%), while the automotive industry had the highest dollar
increase ($22.8 billion).
Table 1. Industry Trade Flows Between the United States
and NAFTA Partners: 1993-20021
($ Billions)
1993 1995 1997 1999 2001 2002 $ Chang e 2
1993-2002
Automo tive
U.S. Exports$30.5$34.750.353$51.1$50.2$53.2$22.8
U.S. Imports$42.6$56.3$70.1$89.3$89.0$92.1$49.6
Trade Volume3$73.1$91.0$116.2$140.4$139.2$145.4$72.3
Trade Balance($12.1)($21.6)($23.9)($38.1)($38.9)($38.9)($26.8)
Chemicals and Allied Products
U.S. Exports$11.0$13.9$18.7$21.0$23.2$23.7$12.7
U.S. Imports$5.2$7.7$10.8$11.2$13.4$13.5$8.3
Trade Volume3$16.2$21.5$29.5$32.2$36.6$37.2$21.0
Trade Balance$5.8$6.2$7.9$9.8$9.8$10.3$4.4
Computer Equipment
U.S. Exports$9.1$11.9$11.5$12.1$13.3$12.8$3.7
U.S. Imports$5.2$8.8$9.3$12.4$16.0$13.3$8.1
Trade Volume3$14.3$20.7$20.8$24.5$29.3$26.0$11.8
Trade Balance$3.9$3.1$2.2($0.3)($2.7)($0.5)($4.4)
M icroelectronics
U.S. Exports$7.4$12.5$15.0$18.5$18.8$15.5$8.1
U.S. Imports$4.6$6.2$6.8$7.0$6.9$5.5$0.9
Trade Volume3$12.0$18.7$21.8$25.5$25.7$21.0$9.0
Trade Balance$2.8$6.3$8.2$11.5$11.9$10.0$7.2
Textiles and Apparel
U.S. Exports$3.7$5.0$6.5$8.3$8.2$7.8$4.1
U.S. Imports$3.7$5.7$8.7$12.1$12.7$12.5$8.8
Trade Volume3$7.4$10.7$15.2$20.5$20.9$20.3$12.9
Trade Balance$0.1($0.8)($2.2)($3.8)($4.6)($4.7)($4.7)
Total Trade
U.S. Exports$141.8$172.3$221.5$251.0$265.2$258.3$116.5
U.S. Imports$150.9$206.8$253.9$308.0$348.4$345.3$194.5
Trade Volume3$292.7$379.2$475.4$559.0$613.6$603.6$310.9
Trade Balance($9.0)($34.5)($32.4)($57.1)($83.2)($87.0)($78.0)
1 Nominal U.S. dollars.
2 Figures may not add up due to rounding.
3Trade 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: 1993-20021
($ Billions)
U.S. Exports19932002
1993-2002 Industry/Country$Amount% Industry$Amount% Industry
%ChangeTot a l Tot a l
Automotive Industry
Mexico $6.03 13% $12.80 18% 112%
Canada $24.45 53% $40.40 57% 65%
Other Countries$15.5334%$17.3025%11%
T otal $46.01 100% $70.50 100% 53%
Chemicals and Allied Products
Mexico $3.04 7% $8.15 10% 168%
Canada $7.98 18% $15.55 19% 95%
Other Countries$32.4775%$56.8071%75%
T otal $43.49 100% $80.50 100% 85%
Computer Equipment
Mexico $2.80 7% $5.73 14% 105%
Canada $6.34 16% $7.04 17% 11%
Other Countries$23.0059%$28.0069%22%
T otal $39.09 100% $40.77 100% 4%
Microelectronics
Mexico $2.70 9% $10.92 18% 304%
Canada $4.69 16% $4.56 8% -3%
Other Countries$21.5174%$44.7574%108%
T otal $28.90 100% $60.23 100% 108%
Textiles and Apparel
Mexico $1.81 17% $4.94 32% 173%
Canada $1.93 19% $2.86 18% 48%
Other Countries$6.6764%$7.8250%17%
T otal $10.41 100% $15.62 100% 50%
Total U.S. Exports
Mexico $41.64 9% $90.60 13% 118%
Canada $100.19 22% $147.68 21% 47%
Other Countries$323.0069%$454.9866%41%
T otal $464.86 100% $693.26 100% 49%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 of
NAFTA implementation, and most of the trade barrier reductions affecting the
United 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 the
rest 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 than exports to Canada or to the rest of the
world. Between 1993 and 2002, U.S. exports to Mexico increased 118%, while
exports to Canada increased 47% (see Table 2). In comparison, total U.S. exports to
all countries increased 49%. Microelectronics exports from the United States
increased at a higher rate than U.S. exports from other industries. 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 significant export market during this time
period. In 2002, exports to Mexico accounted for 32% 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 Canada accounted 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 on
maquiladoras below) where they are processed and exported back to the United
States and/or other countries as finished or semi-finished products. In the textiles and
apparel 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 not
have resulted from a higher demand for U.S. products in Mexico, but because
production of goods for U.S. consumption shifted to Mexico, either from the United
States 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 since NAFTA implementation. Between 1993 and
2002, U.S. imports from Mexico increased 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 in the 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 imports in 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 that imports from Mexico are displacing
imports from other countries. In the automotive, textiles, and apparel industries,
imports from Mexico also increased at a higher rate than imports from other
countries. The value of U.S. imports from Mexico in the automotive industry
increased 332%, while U.S. imports in the textiles and apparel industries increased

253%.



Table 3. U.S. Imports: 1993-2002
($ Billions1)
U.S. Imports199320021993-2002
%C hang e$ A mo unt %I ndus t r y $ A mo unt %I ndus t r y
Indust r y/ Count ry Total Total
Automotive Industry
Mexico $8.34 9% $36.03 19% 332%
Canada $34.26 37% $56.11 30% 64%
Other Countries$48.9253%$94.3951%93%
T otal $91.52 100% $186.53 100% 104%
Chemicals and Allied Products
Mexico $0.78 3% $2.28 3% 192%
Canada $5.17 19% $11.17 13% 116%
Other Countries$21.9779%$70.3284%220%
T otal $27.92 100% $83.77 100% 200%
Computer Equipment
Mexico $1.74 3% $10.38 13% 497%
Canada $3.40 7% $2.89 4% -15%
Other Countries$44.9690%$69.1584%54%
T otal $50.10 100% $82.42 100% 65%
Textiles and Apparel
Mexico $2.57 6% $9.06 12% 253%
Canada $1.11 3% $3.41 4% 207%
Other Countries$38.2191%$65.3984%71%
T otal $41.89 100% $77.86 100% 86%
Microelectronics
Mexico $2.29 7% $3.48 8% 52%
Canada $2.35 8% $1.98 5% -16%
Other Countries$6.9122%$37.3687%441%
T otal $31.33 100% $42.82 100% 37%
Total U.S. Imports
Mexico $39.93 7% $134.73 12% 237%
Canada $110.92 19% $210.59 18% 90%
Other Countries$429.6274%$818.2370%90%
T otal $580.47 100% $1,163.55 100% 100%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 trade
deficits since NAFTA was passed. Based on the percentage change in trade patterns
and the number of workers applying for TAA certification (see section below), the
more highly impacted industries include the textiles, apparel, and automotive
industries. The trade impacts in these industries are discussed below. In addition,
Mexico’s maquiladora industry, which is closely linked to U.S. manufacturing
industries, is also discussed.
Textiles and Apparel. The main NAFTA provisions related to textiles and
apparel were the elimination of tariffs and quotas for goods coming from Mexico and
eliminating Mexican tariffs on U.S. textile and apparel products. To benefit from the
free trade provision, goods were required to meet the rules of origin provision which
assured that apparel products that were traded among the three NAFTA partners were
made of yarn and fabric made within the free trade area. The strict rules of origin
provisions were meant to ensure that U.S. textiles producers would continue to
supply U.S. apparel companies that moved to Mexico. Without a rules of origin
provision, apparel companies would have been able to import low-cost fabrics from
Asia and export the final product to the 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 tariffs
declined from 16% in 1992 to 5.3% in 1996 (a 10.7 percentage point decrease). In
comparison, average U.S. tariffs on all Mexican products decreased from 2.07% in
1992 to 0.65% in 1996 (a 1.42 percentage point decrease), while average Mexican
tariffs on all U.S. products decreased from 10% in 1993 to 2.9% in 1996 (a 7.1
percentage point decrease).15 The elimination of non-tariff barriers, such as U.S.
import quotas on North American-origin textiles and apparel likely contributed to the
increasing 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% after
NAFTA, 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 trade
deficit increased by 98%. Although the high increase in U.S. imports from Mexico
may have displaced some U.S. workers in this industry, the USITC study suggested
that 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 higher
U.S. content than imports from outside the region, such as China, Hong Kong, and
Taiwan.16 The data in Table 4 shows that total trade with Mexico in textiles and
apparel increased considerably more than trade with Asia or the world. These
numbers could suggest that Mexico may be supplying the U.S. market with goods
that 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.


15 USITC Report, pp. ii and 32.
16 Ibid, p. 82.

trade in textiles and apparel decreased slightly in 2002, while that of Asia increased
slightly.
Table 4. U.S. Trade in Textiles and Apparel:
1993 and 2002
19932002% Change
Co unt ry 1993-2002
To t a l % Tr a d e To t a l % Tr a d e To t a l Tr a d e
Tr a d e Wo rld Bal. Tr a d e Wo rld Bal. Tr a d e Bal.
( $ B ill.) Sha re ( $ B ill.) ( $ B ill.) Sha re ( $ B ill.)
Mexico $4.4 8 % ($0.76) $14.0 15% ($4.1) 218% 439%
Asia $29.0 55% ($25.78) $44.0 47% ($41.3) 52% 60%
To t a l $52.3 -- ($31.48) $93.5 -- ($62.2) 79% 98%
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. Under NAFTA, the United States, Canada, and
Mexico agreed to eliminate or reduce most barriers to trade and investment in the
automotive industry. The NAFTA provisions related to the auto industry include the
phased elimination of tariffs, gradual removal of many non-tariff barriers to trade,
rules of origin provisions, enhanced protection of intellectual property rights, less
restrictive government procurement practices, and the elimination of performance
requirements on investors from other NAFTA countries. Because the United States
and Canada were already highly integrated following the U.S.-Canada Free Trade
Agreement and a U.S.-Canada Auto Pact in 1965, 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 sector which maintained a policy of import
substitution by reserving the domestic automobile market for domestically produced
parts and vehicles. The 1989 decree significantly relaxed restrictions on foreign auto
producers operating in Mexico but still maintained a number of restrictive measures
on Mexican auto trade and foreign production 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 high
as 20% for some goods, were reduced by half in 1999, and are scheduled to be
completely phased out by 2003. In addition, Mexican investment restrictions in the
automotive sector were lowered or removed entirely, which provided an incentive to
increase U.S. investment in Mexico. Mexico lowered its 20% tariff on U.S. light
trucks to 10% in 1994 and phased it out by 1998. Mexico will completely phase out
tariffs 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 of

25% are scheduled to be phased out by 2003. In auto parts, the United States phased



out tariffs on most Mexican auto parts in 1994. Most remaining tariffs on auto parts
were 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 NAFTA
implementation.17 While total U.S. automotive imports increased considerably,
imports from Mexico increased at a much higher rate. U.S. motor vehicle imports
from Mexico increased from $3.7 billion to $20.9 billion (465%) between 1993 and
2002, 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 percentage
than imports from other countries. This increase caused a sharp rise in the U.S. trade
deficit with Mexico in both motor vehicles and auto parts. The trade deficit with
Mexico in both vehicles and parts increased from $3.6 billion to $25.7 billion, or

617%.


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 vehicles
increased from 5% to 15%, while the share from Canada and other countries
decreased (see Table 6). Total U.S. trade from non-NAFTA trading partners
decreased from 53% to 49%, which could suggest that motor vehicle imports from
Mexico are replacing those from other countries. Although motor vehicle imports
from Mexico have increased significantly since NAFTA, those from other countries
may have increased at a slower rate than they would have in the absence of NAFTA.
Maquiladora Industry. Mexico’s maquiladora industry18 is closely linked to
U.S.-Mexico trade in various labor-intensive industries such as textiles and apparel,
auto parts, and electronic goods. NAFTA affected the maquiladora industry in a very
significant way. Beginning in 2001, the North American rules of origin determine
the duty-free status for a given import, replacing the previous special tariff provisions
that applied only to maquiladora operations. The initial program has ceased to exist
and the same trade rules now apply to all assembly operations in Mexico.19


17 The automotive trade figures in Table 5 differ from those listed in previous tables because
they come from different data sources. Table 5 breaks automotive products into two major
categories, motor vehicles and auto parts, and, for this reason was compiled from a different
data source.
18 Mexico’s maquiladora program was established in the 1960s by the Mexican government,
allowing foreign-owned businesses to set up assembly plants in Mexico to produce for
export. Maquiladoras could import intermediate materials duty-free with the condition that
a percentage of the final product be exported.
19 Vargas, Lucinda, “NAFTA, the U.S. Economy, and Maquiladoras,” El Paso Business
Frontier, 2001.

Table 5. U.S. Trade in Automotive Industry: 1993 and 20021
($ Billions)
Co unt ry / 1993 2002 %Change
Categoryin TradeExportsImportsBalanceExportImportsBalance
Deficit
Ca na da
Motor Vehicles$8.2$26.7($18.5)$15.9$41.4($25.5)38%
Auto Parts$18.2$10.3$7.9$28.0$17.2$10.8--
Total $26.4 $37.0 ($10.6) $43.9 $58.6 ($14.7) 39%
Mexico
Motor Vehicles$0.2$3.7($3.6)$3.9$20.9($17.0)377%
Auto Parts$7.3$7.4($0.1)$11.3$20.1($8.8)8670%
Total $7.5 $11.1 ($3.6) $15.3 $41.0 ($25.7) 617%
All Countries
Motor Vehicles$18.9$63.0($44.1)$27.8$132.4($104.6)137%
Auto Parts$33.4$38.3($4.9)$50.1$69.1($19.0)287%
Total$52.3$101.3($49.0)$77.9$201.5($123.6)152%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 special purpose 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 by Country:
1993 and 2002
1993 2002 %Change
Co unt ry 1993-2002
To t a l % Tr a d e To t a l % Tr a d e To t a l Tr a d e
Tr a d e Wo rld Bal. Tr a d e Wo rld Bal. Tr a d e Deficit
( $ B ill.) Sha re ( $ B ill.) ( $ B ill.) Sha re ( $ B ill.)
Ca na da $34.9 43% ($18.5) $57.3 36% ($25.5) 64% 38%
Mexico $3.9 5 % ($3.6) $24.8 15% ($17.0) 536% 372%
Other $43.153%($22.0)$78.149%($62.1)81%182%
To t a l $81.9 -- ($44.1) $160.2 -- ($104.6) 96% 137%
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 special purpose 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 2,143
in 1993 (just before NAFTA) and to 3,703 in 2000.20 After 2000, the number of
maquiladoras began to decrease. By April 2003, the number had fallen to 3,240.
Some observers have concluded that the correlation in maquiladora growth after 1993
is directly due to NAFTA, but in reality it is unclear that maquiladora growth is
directly related to trade liberalization. Although some provisions in the agreement
may have encouraged maquiladora growth in certain sectors, maquiladora activity is
also influenced by the strength of the U.S. economy and relative wages in Mexico.
Maquiladora operations usually increase during periods of economic expansion in the
United States. A drop in Mexican wages may be an incentive for U.S. companies to
shift production to Mexico.21 Between 1993 and 1996, relative wages in Mexico
decreased considerably due to the peso devaluation. Since 1997, however, Mexican
labor costs have risen 54%.22 As a result of the higher labor costs, some
manufacturers have closed their Mexican plants and shifted production to Asian
countries. 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 the
U.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 increased
maquiladora operations.24 The agreement eliminated U.S. quotas on textiles which
may have given U.S. textile firms an incentive to construct maquiladora operations
in 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 have
experienced job losses. As mentioned previously, data on the effects of NAFTA is
very 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 that were
ongoing prior to NAFTA and may not be totally attributable to the trade agreement.25
Quantifying these effects is not easy because of the other economic factors that
influence trade and employment levels. The devaluation of the Mexican peso in


20 Gruben, William C. and Sherry L. Kiser, NAFTA and Maquiladoras, Federal Reserve
Bank of Dallas, June 2001.
21 Ibid.
22 Moody, John, “Mexico’s Rising Labor Costs Drive Canon, Other Companies Away,”
Bloomberg News (on-line), April 2001.
23 Ibid.
24 Vargas, p. 4.
25 CRS Report 98-783 E. NAFTA: Estimates of Job Effects and Industry Trade Trends after

5 ½ Years.



1995 resulted in relatively lower Mexican wages, which may have provided an
incentive for U.S. companies to move to lower their production costs. Trade-related
employment effects following NAFTA could have also resulted from the lowering
of trade barriers, and from the economic conditions in Mexico and the United 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 it
provided data on the estimated number of workers covered by certification. The
number of certified workers is not the same as the number of jobs lost due to
NAFTA, but it provides some indication of the adjustment costs of NAFTA.26 Table
7 presents the number of workers certified by the NAFTA-TAA Program between
January 1994 and December 2001. The industry with the highest number of
NAFTA-TAA certified jobs is textiles and apparel with 34% of total NAFTA-TAA
certification, followed by the automotive industry with 6% of NAFTA-TAA total
certification. NAFTA-TAA certification figures may overestimate job losses among
certified 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 certified
workers actually collect NAFTA-TAA benefits. Certified workers may not have
actually lost their jobs, may have found another job, or may not have collected
benefits for other reasons.27
Table 7. NAFTA-TAA Certification by Industry
January 1994 - December 2001
Affected% of
Industry Workers Tot a l
Textiles and Apparel139,29834%
Automotive Industry26,8406%
Microelectronics 16,806 4%
Electrical Equipment12,6803%
Chemicals and Allied Products6,0861%
Computer Equipment6,1591%
All Industries415,371100%
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 codes 3671, 3672, 3675, 3676, 3677, 3678,
and 3679; electrical equipment includes SIC codes 3511, 3612, 3613, 3621,
and 3625; chemicals and allied products includes SIC code 28; and computer
equipment includes SIC codes 3571, 3572, 3575, and 3577.
Source: U.S. Department of Labor Office of Trade Adjustment Assistance.
Compiled by CRS.


26 CRS Report RS20229, p. 6.
27 CRS Report 98-782 E, NAFTA: Estimated U.S. Job “Gains” and “Losses” by State Over

5 ½ Years, pp. 2-3.



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 the
Economic Policy Institute (EPI) study discussed earlier in this report. The EPI study
estimates about 766,000 “existing or potential” job losses as a result of NAFTA. As
discussed 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 factors
affecting trade and employment. Therefore, the actual number of job losses due to
NAFTA is probably lower than the EPI estimate and may lie in a range between the
number of NAFTA-TAA certifications and the EPI figure.
NAFTA Adjustment Assistance Programs
The NAFTA-TAA program provided assistance to workers who have lost their
jobs because of increased import competition from Mexico or Canada or because of
production 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 been
threatened with job loss due to import competition or production shifts to Mexico or
Canada.28 In the 107th Congress, legislation was passed to authorize TAA as a single
program without the separate NAFTA-TAA program through FY2007. President
Bush proposed in his FY2003 budget to extend the TAA and NAFTA-TAA programs
and to include total funding of $462 million for both programs, representing an
increase of $46 million over FY2002 funding levels of $416 million.29
From the program’s inception in January 1994 through December 2001, 415,371
workers were covered by certification. The NAFTA-TAA worker assistance includes
employment services, training, trade readjustment allowances, and job search and
relocation allowances. The benefits are administered by the state employment
security agencies under contract with the Department of Labor. As part of the
employment services, certified workers can receive counseling, testing and placement
services, and supportive services. Another form of assistance is cash allowances.
Certified workers may be eligible to receive cash benefits, called trade readjustment
allowances (TRA).
Another program connected with the passage of NAFTA that provides
assistance to communities with significant job losses due to changes in trade patterns
with Canada or Mexico is the USCAIP, which is administered for the United States
government by the Los Angeles Office of the NADBank. The NADBank, and its
sister organization, the Border Environment Cooperation Commission (BECC), were
created under a binational side agreement to NAFTA to address environmental
infrastructure problems along the U.S.-Mexico border. The USCAIP is administered
by the NADBank for the U.S. government. As of September 2001, the program had
made three direct loans totaling $2.18 million and helped fund 563 loans worth


28 See CRS Report RS21078, Trade Adjustment Assistance for Workers: Legislation in the

107th Congress.


29 See CRS Briefing Book ebtra85, "Trade Adjustment Assistance for Workers," in the CRS
Trade Briefing Book, at [http://www.congress.gov/brbk/html/ebtra85.html].

$377.6 million through the Federal Agency Program.30 The program works primarily
through the loan programs of the Small Business Administration and the U.S.
Department of Agriculture, but also has a grants office that provides community
grants on a competitive basis. It may provide direct financing in cases where
conventional sources of financing are not available. The program offers credit to new
or expanded businesses in communities for commercial projects that create new
private sector jobs. The program combines efforts of the NADBank with certain
Federal agencies, local financial institutions, and financial intermediaries to help
communities meet financing needs for business opportunities.31
The USCAIP reports that assistance loans have accounted for the creation or
retention of 12,779 jobs.32 However, the actual effect of the program may not be
known. According to a U.S. General Accounting Office (GAO) report, the USCAIP
does not have a monitoring system in place to measure the program outcomes. The
report states that the data in the records maintained by the USCAIP are based on
projections by businesses when applying for program financing and are not verified.
GAO stated that federal financing programs similar to the USCAIP that assist
specific sectors or firms largely shift employment among sectors in the economy
rather than raise the overall level of employment.33
Although the overall effects of NAFTA have been small but positive, some
communities have had economic difficulties due to local plant closures. A number
of communities have experienced a high number of trade-related layoffs and, while
some have had time to absorb the losses, others have not. The NAFTA-TAA
program provided assistance for these communities, but there have been
implementation challenges. A GAO study on community adjustment assistance
reported the experiences of six trade-impacted communities. The study found that
the trade adjustment assistance was limited and that all the communities had reported
structural problems that impeded effective service delivery. Low educational levels
among unemployed workers was a major factor in being able to implement effective
training benefits. Another problem was the lack of data on program outcomes to
evaluate efficacy. The study stated that there were no simple answers to community
recovery, even when assistance funds were available.34
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 has


30 Border Environment Cooperation Commission and North American Development Bank.
Joint Status Report, September 30, 2001, p. 10.
31 For more information, see the USCAIP website: [http://www.nadbank-caip.org].
32 Border Environment Cooperation Commission and North American Development Bank,
p. 10.
33 U.S. General Accounting Office, Trade Adjustment Assistance: Opportunities to Improve
the Community Adjustment and Investment Program, September 2000.
34 U.S. General Accounting Office, Trade Adjustment Assistance: Experiences of Six Trade-
Impacted Communities, August 2001.

increased 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 investment
with Canada and Mexico, and that NAFTA has increased U.S. exports to Canada and
Mexico.35 Critics of NAFTA argue that hundreds of thousands of U.S. jobs have
been lost because of the agreement. NAFTA critics generally base their arguments
on the increasing trade deficit with Mexico, stating that increasing U.S. imports from
Mexico 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 of
NAFTA because of other variables affecting trade and investment such as economic
growth and exchange rates, both of which affect consumer spending and the demand
for imports, foreign investment, employment levels, and relative wages. Second,
some of the market opening measures in Mexico that resulted from NAFTA were
already taking place prior to the agreement and NAFTA may have only accelerated
the process. Although the effects of NAFTA may not be easily measured, the trade
trends following the agreement may give some overall indication of how the market
responded to the new trade rules. Trade between the United States and Mexico
expanded considerably after NAFTA. While trade expansion has benefitted the
overall U.S. economy in terms of improved production processes, and the increased
availability of better goods and services for U.S. consumers at lower cost, there also
have been job losses associated with NAFTA. The two U.S. workforce sectors that
have been adversely affected are the textiles and apparel industry and the automotive
industry.
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 Americas
initiative. NAFTA may provide an indication of how further trade integration in the
Western Hemisphere would affect U.S. industries. One of the key concerns facing
policymakers in developing trade policy initiatives is the labor issue and how to
address the problem of worker dislocation in industries adversely affected by trade.36
Two NAFTA-related programs that were created to provide assistance to workers and
communities affected by trade with Mexico or Canada, the NAFTA-TAA program
and the USCAIP program, have been beneficial but also have limitations. According
to one GAO study, NAFTA-TAA training assistance has not always been effective,
especially in cases of workers with low educational levels. The study found that
there were no simple answers to community recovery even when assistance was
available. Another GAO report stated that the effectiveness of the USCAIP program
is not known because of the lack of a measuring mechanism to evaluate program
outcomes.


35 See Council of the Americas and the U.S. Council of the Mexico-U.S. Business
Committee, NAFTA at Five Years, prepared by the Trade Partnership, Washington, D.C.,
January 1999.
36 For more information on and labor issues and trade adjustment assistance for firms see
CRS Report RL31178, Trade Promotion Authority (Fast-Track): Labor Issues (Including
H.R. 3005 and H.R. 3019); and CRS Report RS20210, Trade Adjustment Assistance for
Firms: Economic, Program, and Policy Issues.