SYNOPSIS:

NOAH ADAMS, Host: There have been a lot of claims made during the debate about NAFTA - jobs would be lost, jobs would be gained. But Massachusetts Institute of Technology Economics Professor Paul Krugman says the real reason for adopting NAFTA doesn't have much to do with the economy.

PAUL KRUGMAN, Prof. of Economics, Mass. Institute of Technology: Both sides in the debate over NAFTA are playing fast and loose with the facts. NAFTA's opponents are much more dishonest than its supporters. The opponents are telling malicious whoppers, while the supporters are only telling little white lies. Still, almost nobody has been willing to face the uncomfortable truth, which is that NAFTA will have virtually no effect on the U.S. economy, good or bad. Many Americans have been terrified by the predictions of NAFTA opponents like Ross Perot, who warns that there will be a great sucking sound as jobs draining away to Mexico. But there won't. After all, the trade barriers that NAFTA will dismantle weren't much to start with. The average U.S. tariff on manufactured imports from Mexico is only 4 percent. In other words, any U.S. firm that wants to move production to Mexico or to other countries where wages are much lower, like China, can already do so, while paying what amounts to only a nominal fee to ship its output home. Do you really believe that a 4 percent tariff is all that stands between us and that great sucking sound? On the other hand, claims that NAFTA will create hundreds of thousands of jobs are also far-fetched. Mexico's economy is only 1/20th as big as ours, and its markets are already pretty open to our products. The average Mexican tariff is only 10 percent. Sure, NAFTA will help our exports, but don't expect anything dramatic. From the U.S. point of view, then, NAFTA means removing some already very low hurdles, which are little more than nuisance barriers, to trade with an economy that is far too small to be important either as a market or as a competitor. It stands to reason that both the costs and the benefits will be very small. All serious studies of the effects of NAFTA, by which I mean studies whose authors weren't paid to come up with pre-determined conclusions, find that the benefits to the U.S. will be larger than the costs. But these net benefits are no more than a few tenths of 1 percent of income. Less than the U.S. economy spends on health care every week. So why bother with an unpopular agreement that yields such small benefits? The answer, which nobody in Washington wants to admit, is that NAFTA isn't really about economics, it's about foreign policy. Only a few years ago, many experts worried seriously that a Mexico battered by economic hard times would become a radicalized national security nightmare. Instead, we now have a pro-American, pro-market neighbor that's even inching its way toward real democracy. But suppose we that we reject NAFTA? Then we will have slammed the door in the face of a Mexico that is doing everything we have always said Mexico should do - open its markets, and reform its politics. This is virtually asking for a return to the bad old days of U.S.-Mexican relations, to a southern neighbor that is alienated, or even hostile. So if NAFTA is approved, don't worry. You'll never notice the difference. If it isn't approved, it will be a disaster, but the disaster will be political, not economic.

ADAMS: Paul Krugman, a professor of economics at the Massachusetts Institute of Technology.

Originally broadcast, 11.5.93