I will warn you off the bat that there is no answer to the question “is free trade good for Maine.” The impact of free trade agreements is a hotly debated topic in academia as well as politics. Coming to any definitive conclusion on the matter is complicated by the fact that the effects of any one trade agreement are inevitably overshadowed by larger economic trends, both in the U.S. and globally. For example, the time period following the North American Free Trade Agreement’s implementation in 1994 also saw an explosion in trade with China and the rise of the Internet, either one of which outweighed the effects of NAFTA on its own.
At the ground level, it’s easy for free trade to get a bad rap since the cost of a friend or family member losing their job at a plant that relocated to Mexico is much simpler to identify than the benefit of a 5% decrease in the cost of tomatoes. Nevertheless, sentiment at a national level on the general idea of free trade is positive, if apparently contradictory. A majority of the American people think that free trade agreements are a good thing, but most also think that they lead to job losses, lower wages, and a slower economy (notably, the younger and wealthier a person is, the more likely they support free trade). Again, how trade agreements actually impact any of these economic indicators is unsettled.
All this is to say that free trade is a messy topic. But it is still worth exploring how that mess applies to Maine.
Before getting into the details of NAFTA’s impacts, here’s a quick rundown of what it is. NAFTA is a treaty between the U.S., Canada, and Mexico designed to facilitate easy trade between the three countries, primarily by eliminating tariffs (taxes) on imports from each other. It came into effect on January 1st, 1994, with many tariffs being immediately lifted and most remaining trade barriers on goods, services, and investment being lifted within 10 to 15 years. Canada and Mexico had long been the U.S’s largest trading partners until China passed Mexico in 2006 and Canada just last year. Trade with the NAFTA countries, particularly Mexico, increased substantially after NAFTA came into effect, although there is debate over whether that would have occurred anyways. Some noticeable results were increases in manufacturing in Mexico, increases in cross-border investment and ownership, and a spreading out of supply chains, i.e. companies having different components of their business in different countries.
While international exports and imports only amount to 4.5% and 6.5% of Maine’s GDP, respectively, there are some key industries that are disproportionately affected by that trade, namely agriculture and timber. As it applies to Maine, NAFTA primarily had an affect via its provisions regarding Canada, since Maine does a lot of business with our northern neighbor but very little with Mexico. A little over 50% of exports and imports go to and come from Canada, while only around 2% goes to and from Mexico. The amount of crossborder investment and ownership is also much higher with Canada. Since 1993, the year before NAFTA’s enactment, Maine’s exports to Canada and Mexico have increased about 2.3 times, adjusting for inflation. Imports from Canada increased from about $1 billion in 1993 to $4.7 billion in 2004, and are now down to about $2 billion. After electric power, the top three Canadian industries exporting to Maine as of 2014 are pulp mills, refined oil products, and seafood. The top three Maine industries exporting to Canada are the timber industries (specifically logging, paper mills, and sawmills), oil and gas, and seafood. That the industries are the same on either side is not particularly surprising given how businesses spread operations across borders after NAFTA. For instance, a Canadian company could own a logging operation in Maine that brings the timber across the border to a pulp mill in Quebec, which then ships its fiberboard back across the border to a Maine paper mill.
By no coincidence, wood industries are often discussed as the sectors of Maine’s economy most affected by NAFTA. As I wrote about previously, Maine’s wood industries have shrunk substantially over the past twenty years, and it’s likely that increased trade with Canada played some role, although not nearly as large as China’s. The wood products industry (excluding pulp and paper) increased exports to Canada 118% between 1992 and 2002, while imports increased 319%. For the pulp and paper industry, the numbers were 66% and 17%.
The large increase in imports for the wood products industry seems like a clear sign of how Maine businesses were edged out, but the true effect is ambiguous. A straightforward calculation of net job number changes from the increase in imports and exports shows that Maine’s wood products industry would have lost 615 jobs over that period. That’s unfortunate, but not devastating, and pales in comparison to the tens of thousands that have been lost in the industry in total. Things are further complicated by the fact that many of the imports were not finished products, but was timber for use in Maine’s sawmills and prefab home industry. Those were businesses that actually benefitted from seeing the lower-cost wood supplies imported from Canada. In the pulp and paper industry, about 730 jobs had been lost by 2002 from the increased competition. But there was also increased investment by Canadian companies into Maine paper mills, so the ultimate effects were again uncertain. I should note that all of this does not factor in the decades-old dispute over various Canadian subsidies of their wood industries, which NAFTA did not solve and continues today.
The impact on agriculture came largely from food processing plant shifts. In the potato industry, a couple processors closed their Maine operations and moved them to Canada, while McCain, a Canadian company, opened up a sizable operation in Aroostook. Lobster was affected as well, which came to the forefront when prices were extremely low in the late 2000s and early 2010s. The lobster industry had integrated a fair amount across the border, something Canadian lobstermen did not take kindly to in 2012. They blockaded shipments of Maine lobster to Canadian processing plants, thinking their business was being undercut. Between 35% and 50% of Maine lobster goes to Canada for processing, trade which NAFTA facilitates. With Maine’s lobster catch increasing from about 30 million pounds in 1993 to 123 million pounds in 2014, there’s no doubt that Canada is receiving a lot more Maine lobster than they used to. Lobster is Maine’s largest export by far, at almost $350 million in 2014, and having a relatively open market in Canada helps keep that number high.
One way to attempt to see the impact of NAFTA on employment in Maine is to look at federal Trade Adjustment Assistance numbers. TAA is a program that offers help to people who lose their jobs because of foreign competition by offering payments in addition to regular unemployment insurance and providing support for job training and searching services. Businesses can also get support for hiring consultants to make their operations more competitive with foreign imports. Workers apply to the Department of Labor, which then analyzes the market and the specific closing business’s situation to determine whether or not it was foreign competition that led to the closure, thereby making the workers eligible for TAA. They do not always say yes, as workers at the Old Town mill found out in 2014 (workers at the Jay mill that closed in 2015 were more fortunate). It is more difficult to attribute specific TAA claims to NAFTA now, but the Planning Matters study cited above found that 4,372 workers had received TAA due to NAFTA between 1994 and 2003, about .6% of the total labor force at the time. It is hard to know what jobs may have been supported or created because of NAFTA. But the agreement had a clear negative impact for those 4,372 Mainers. A potentially wider-ranging effect would have been downward pressure on wages due to foreign competition—a common concern with free trade—but, as you should expect by now, no one knows for sure what impact NAFTA really had. Some argue that it caused U.S. wages to go up, and some just the opposite.
There are other details of NAFTA’s impact that could be parsed out here, but the trend should be clear by now. NAFTA certainly did have an effect, as many businesses owners and workers could attest. But the cumulative influence on Maine’s economy is impossible to know for sure. This is a lesson worth keeping in mind as the U.S readies to join a much larger trade agreement, the Trans-Pacific Partnership, in the near future (something that will likely be the subject of a future post). Whenever you hear someone give a definitive answer on whether free trade is good or bad for the economy, know that even the best academics on the subject can’t agree on a verdict.
If anyone is looking for a more detailed look at NAFTA’s initial effect on Maine, I would recommend reading the 2003 report by Planning Decisions, a Maine consulting firm, that I mention and link to in a few places. The report was done at the request of the state legislature. It’s as dry as any report on the details of international trade, but it is not too jargony, so is relatively easy to understand.
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