Economic Gains from Trade Liberalization - NAFTA's Impact

In mid-May 1997, the United States International Trade Commission (USITC) held public hearings as part of its investigation into the economic effects of the North American Free Agreement (NAFTA) over the course of its first three years. The investigation, The Impact of the North American Free Trade Agreement on the U.S. Economy and Industries: A Three Year Review, was requested by the Office of the United States Trade Representative (USTR) as an outgrowth of the still unsettled debate over the benefits and costs of pursuing a free trade agreement with a developing country. Section 512 of the North American Free Trade Agreement Implementation Act requires President Clinton to report to Congress on the operation and effects of NAFTA in the agreement’s first three years. The USITC’s report, released in June 1997, was the main source for the Administration’s final report to Congress, released by the USTR on July 11, 1997. The NAFTA debate and the recent USITC and USTR inquiries have led economists to think carefully about how to measure the economic benefits of free trade agreements. This Chicago Fed Letter reviews economists’ long-established ways of evaluating the gains from trade liberalization and introduces some more recent innovations in the context of NAFTA.