Martin's Textile Case - Nafta

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NAFTA is a trilateral free trade agreement among the United States, Mexico and Canada; which came into force in January 1994. In 1992, and on the eve of the deal, John Martin, CEO of a USA-based textile company, has to come to a really tough decision: move production to Mexico or wait for an imminent bankruptcy. Martin, as the vast majority of the US population did not understand how this agreement could beneficiate the country at all. Opponents of NAFTA would argue that the treaty should not be adopted because of the negative impact it would have on employment in the United States, particularly in industries such as textiles, a labor intensive industry in which the price of labor is crucial. Free trade with Mexico, a much cheaper labor country, would mean that US production could no longer be competitive and many plants would have to close. They were already facing heavy competition with Asia, but now without any tariffs to Mexico, the situation could become worse. The problem with these statements is that they misrepresent the real effects of trade on the U.S. economy: trade both creates and destroys jobs. Although there have been job losses in the US textile industry, defenders of NAFTA argue that there have been net benefits to the US economy in the form of lower clothing prices and an increase in exports from fabric and yarn producer. Trade has been created as a result of NAFTA. This is at the heart of the competitive advantage theory and Ricardo’s thoughts. The gains from trade are being captured by US consumers and by producers in certain sectors. As always, the establishment of a free trade area creates winners and losers, but advocates argue that the gains easily outweigh the losses. Apart from this, NAFTA has also protected the American economy versus Asian markets. Mexico has overtaken China as the number one apparel supplier. Today, most U.S apparel is made in Mexico but with yarn and fabric from the U.S (unlike Asian clothing imports).

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