The North American Free Trade Agreement: Comparisons with Southern EC Enlargement

There is considerable interest in ascertaining the economic consequences of creating a North American Free Trade Agreement (NAFTA) by including Mexico in the U.S.-Canada FTA which was created in 1989. The NAFTA would be unique in that never before have nations with such divergent levels of per capita income agreed to eliminate their trade barriers. The economic rationale for such an agreement derives from the standard conclusions of international trade theory which show that free trade promotes economic efficiency and growth. In the United States, however, there is concern that such an agreement would further promote intersectoral specialization based on factor intensities and this would produce, by way of Stopler-Samuelson effects, falling real wages for unskilled labor. This is a particularly sensitive issue in the United States since the absolute real income of unskilled workers has been declining since the early 1980s. Numerous studies, such as those by Abowd and Freeman (1991), Borjas, Freeman and Katz (1991) and Wood (1991), attribute a significant proportion of this decline to increased trade. In addition, a NAFTA may create transitional adjustment pressures in many low-wage labor-intensive industries. Thus the primary groups in the United States that are likely to be harmed by NAFTA are the same groups that have already experienced a significant reduction in their real incomes and are now near the bottom of the economic ladder.