Protectionism vs. trade liberalisation - NAFTA´s impact on the US labour market
- This bachelor’s thesis analyses the impact on the US labour market from the North American Free Trade Agreement (NAFTA), and the protectionist policies advocated by Donald Trump. Protectionism generally leads to deadweight costs, diminishing welfare, despite its intentions to the contrary. Free trade is generally preferable to protectionism, as it boosts productivity and welfare, even though it causes adjustment costs. NAFTA is a free trade agreement which has liberalised, and thereby boosted, trade and investment between the three signatories.
Since trade liberalisation has an effect on labour, NAFTA’s implementation was controversial in the United States. Nonetheless, studies conducted before 1994 indicated that NAFTA’s impact on the US labour market would be small. Since the agreement’s inception, the United States has faced a decline in manufacturing employment and rising income inequality. However, an analysis of NAFTA’s influence on US employment, wages, and income inequality demonstrates that the impact on these has, on average, been small. Less skilled labour is often cited as having been negatively affected by NAFTA. However, other factors such as trade with China and technological innovation have made a more significant contribution. NAFTA has not been the main driver of changes in the labour market, and protectionism is not a means by which a rise in employment can be achieved. Therefore, implementing protectionist policies is not an appropriate way to handle the loss of US manufacturing employment, and rising income inequality. Reinstating trade barriers could, in fact, lead to a greater loss of employment in the US as well as a reduction in welfare. Therefore, other measures should be considered. The US government should develop further functional mechanisms to facilitate the redistribution of wealth amongst society. Likewise, adjustment assistance programmes should be extended to ease the negative consequences of labour market changes, introduced through trade or technology.