Chapter_8_International_Trade_Agreements

We turn now to an analysis that compares the long run

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We turn now to an analysis that compares the long-run gains to consumers in the U.S. from expanded product varieties against the short-run adjustment costs caused by the exit of firms and the resulting unemployment.
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Expansion of Variety to the United States Gains and Adjustment Costs for the United States under NAFTA TABLE 6-3 Mexico’s Export Variety to the United States, 1990–2001 (%) This table shows the extent of variety in Mexican exports to the United States, by industry. From 1990 to 2001, export variety grew in every industry, as U.S. tariffs were reduced due to NAFTA. All figures are percentages. The North American Free Trade Agreement
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Adjustment Costs in the United States Gains and Adjustment Costs for the United States under NAFTA One way to measure the temporary unemployment as firms exit is to look at the claims under the U.S. Trade Adjustment Assistance (TAA) provisions. The TAA program offers assistance to workers in manufacturing who lose their jobs because of import competition. From 1994–2002, about 525,000 workers, or about 58,000 per year, lost their jobs and were certified as adversely affected by trade under the NAFTA-TAA program. The annual number of workers displaced in manufacturing was 4 million or 444,000 workers per year. The NAFTA layoffs of 58,000 workers would correspond to about 13% of total displacement—this is a substantial amount. The North American Free Trade Agreement
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Adjustment Costs in the United States Gains and Adjustment Costs for the United States under NAFTA How can we measure the loss of wages of the displaced workers? About 2/3 of workers laid off in manufacturing are re-employed within three years. Let’s suppose then that the average length of unemployment for laid off workers is 3 years. If the average yearly earnings for manufacturing workers was $31,000 in 2000, then: Each displaced worker lost $93,000 in wages. This amounts to $5.4 billion per year during the first nine years of NAFTA. The North American Free Trade Agreement
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Adjustment Costs in the United States Gains and Adjustment Costs for the United States under NAFTA The estimated private costs of $5.4 billion are nearly equal to the average welfare gains of $5.5 billion. However, we must keep in mind that the gains continue to grow over time and the job losses are only temporary, and fall over time. Unfortunately, in 2002 the NAFTA-TAA program was consolidated with the general TAA program, so there is no further data we can use which is specific to NAFTA. We know that under the consolidated program, there are still some limitations in addressing the needs of laid-off workers due to trade competition. The North American Free Trade Agreement
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