It's Time to Fact-Check the NAFTA Claims of Wilbur Ross
Commerce Secretary Wilbur Ross claims that the amount of U.S content in goods from Mexico and Canada has declined since NAFTA went into effect. Time for a fact check: U.S content in goods from its two NAFTA partners has actually more than doubled, because overall trade in goods among the three countries has increased so dramatically. There are more manufacturing components going back and forth among the three countries – and the actual volume produced in the United States is greater than ever.
It’s true that the percentage of U.S. value-added in the goods the United States imports from its two NAFTA partner countries declined between 1995 and 2011. But let’s unpack those numbers: What the secretary fails to mention is that the overall amount of trade in goods among the three countries has increased so much – in fact it has tripled – that the smaller proportion of content produced in the United States equals far more actual value-added.
Imports from Mexico, for example, have increased from $40 billion to about $290 billion. True, the proportion of U.S.-made components in these imports has declined from 26 percent to 16 percent. But which would you rather have, 26 percent of a $40 billion pie ($10 billion), or 16 percent of a $290 billion pie ($46 billion). I’d take the $46 billion and hang the percentage. But if one does prefer to deal with percentages, here is the relevant one: The U.S-originated value-added in its imports from Mexico have actually gone up more than 350 percent since 1995, way more than the rate of inflation.
The story is the same regarding U.S. trade with Canada. The percentage of U.S value-added components in goods has indeed declined from 21 percent to 15 percent, as Ross says. But in sheer volume, the U.S production of components has doubled – to $43.5 billion, compared to about $23 billion in 1995. Again, the percentage of the pie made up of U.S-originated components has declined. But the overall size of the pie has expanded so much that the smaller percentage actually reflects a bigger chunk.
As Ross himself pointed out, the numbers specifically for the automobile industry are similar. U.S. content by percentage has gone down, as he said. But total volume of production has gone up by a much bigger margin – equaling more production than ever in the United States.
The reason for the percentage decline, as Ross himself pointed out, is the fact that Mexico and Canada are outsourcing more production to non-NAFTA countries than in the past. But so is the United States.
It simply makes sense for all three countries to offshore more of their production. That doesn’t lead to a decline in wealth production. In fact, NAFTA has helped the United States retain considerable production that would otherwise have gone to lower-cost economies such as China. Mexican workers generally occupy lower-skilled parts of the manufacturing process, while Americans focus on higher-value added segments. By bringing down overall costs, this division of labor has helped preserve jobs in the United States.
By contributing to the development of cross-border supply chains, NAFTA has helped the U.S auto industry compete with Asian counterparts and maintain its global position, by reducing costs and increasing productivity. The result: North American vehicle exports to the rest of the world have increased by an annual average of 10 percent over the past decade. North America now accounts for roughly 22 percent of global auto industry exports, up from less than 19 percent a decade ago. The pie is much bigger, making the U.S share worth more.
When looking at NAFTA’s value to U.S. manufacturing, the important number is the amount of actual value-added production, not the percentage it constitutes. Because it is increased production that leads to more actual wealth creation and jobs – something that Ross should realize.