Leaving NAFTA Will Immediately Cost 1.8 Million American Jobs

This article first appeared on the American Enterprise Institute site.

Below is the Executive Summary of a new research study " Terminating NAFTA: The National and State-by-State Impacts on Jobs, Exports and Output " prepared by Trade Partnership Worldwide for the Business Roundtable.

Using a methodology that enables us to capture the full impacts (both positive and negative; direct and indirect) across the U.S. and international economies, we find that a termination of the North American Free Trade Agreement (NAFTA) would have significant net negative impacts on the U.S. economy and U.S. employment, particularly over the immediate years after termination.

Termination would re-impose high costs of tariffs on U.S. exports and imports, which would reduce the competitiveness of U.S. businesses both domestically and abroad. U.S. exports would drop, both to Canada and Mexico and globally, as U.S. output becomes more expensive and therefore U.S. businesses would be less competitive in these markets.

Foreign purchasers would shift away from U.S. goods and services in favor of lower-cost goods and services made in other international markets, particularly those made in Asia.

These efficiency losses and trade shifts would have an impact on U.S. production of both goods and services, and thus also on U.S. employment. We estimate that, if NAFTA is terminated and most-favored nation (MFN) duties are re-imposed for U.S. trade with Canada and Mexico, the level of U.S. real output would fall 0.6 percent below levels that would prevail if NAFTA were in effect in each of the first one to five years after termination.

Lower output means less employment after all the gains and losses are tallied: on balance 1.8 million workers would immediately lose their jobs in the first year with full termination and the return of MFN tariffs (see map above of job losses by state and table of job losses by industry).

While the focus of our study is the short- to medium-term, we also examine the national impacts of terminating NAFTA over the longer term (i.e., 10 years and after). Terminating NAFTA would have negative impacts on jobs, exports and output even after new supply chains are formed. In this longer run, we estimate that U.S. GDP would remain depressed by over 0.2 percent, permanently.

A construction worker carries a steel rod at the foundation of the Freedom Tower at the former World Trade Center site September 4, 2008 in New York City. Spencer Platt/Getty

And here's the paper's conclusion:

Terminating NAFTA would be expensive to the United States by any measure.

When the impacts are assessed using a framework that considers all of the ways in which the U.S. economy interacts, both domestically and internationally, terminating NAFTA has negative consequences that ripple throughout the economy. Those costs would be especially large in the first one to five years after NAFTA is terminated.

But even over the longer term, the costs remain high and are significant. In short, terminating NAFTA would permanently reduce U.S. economic output, exports and employment.

Terminating NAFTA would prove to be a "win" for leading trading partners outside the NAFTA region. As supply chains shift to take advantage of relatively lower-cost production opportunities in non-NAFTA countries, those economies would grow faster and, with that growth, expand employment.

And here's a statement from Joshua Bolten, President and CEO of Business Roundtable:

Terminating NAFTA would permanently reduce U.S. employment, exports, and economic output, while benefiting our economic competitors at the expense of American workers and businesses. We urge the Administration to take into account the potential damage of withdrawing from NAFTA, and to focus instead on modernizing the agreement so that it remains a cornerstone of American prosperity.

Related: Dartmouth economist and Tuck School dean Matt Slaughter's Wall Street Journal op-ed on Monday " Leaving Nafta Would Cost $50 Billion a Year " (see excerpt below) and his study " How Withdrawing from NAFTA Would Damage the U.S. Economy."

NAFTA has helped America's small businesses, too. In 2014, more than 125,000 small businesses exported $136 billion to Canada or Mexico. That is 25% of all U.S. small-business exports.

Not only has NAFTA increased the size of American workers' paychecks, it has helped them stretch those paychecks further. American consumers have saved $10.5 billion a year from lower tariffs under NAFTA, with most of the benefits going to households with annual incomes below $70,000.

Mark J. Perry is a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus.