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How do U.S. trade agreements, such as NAFTA and USMCA, impact the trade deficit?
Executive Summary
U.S. trade agreements such as NAFTA and its replacement, the USMCA, have coincided with sharply increased North American trade flows but have not been the primary driver of the overall U.S. trade deficit; scholarly and government analyses find modest GDP gains from the agreements while macroeconomic forces largely determine deficit size [1] [2]. Studies and advocacy groups attribute job and sectoral disruption—especially in manufacturing and some agricultural subsectors—to NAFTA-era adjustments and increased imports from Canada and Mexico, while other analyses emphasize that the agreements expanded two‑way trade and delivered modest net gains to output and exports [3] [4] [5]. Recent reports through 2025 show the combined goods deficit with Canada and Mexico has grown since 2017 and that agricultural deficits have surged in 2024, indicating trade agreements interact with broader policy, investment and currency trends to influence deficits [6] [7].
1. Why trade rose sharply — and why deficits grew with partners
NAFTA and later USMCA coincided with a large expansion of two‑way trade between the U.S., Canada, and Mexico: total trade rose from the low hundreds of billions in the early 1990s to over a trillion dollars by the 2010s, reflecting reduced tariffs, integrated supply chains, and increased cross‑border investment [4] [1]. The merchandise trade deficit with Canada and Mexico increased substantially in absolute terms, with figures cited such as a rise from $9.9 billion in 1993 to $134.3 billion in 2015 and combined deficits reportedly reaching $220 billion by 2023; these shifts reflect expanded imports of manufactured and agricultural goods as production fragmented across borders, not a simple transfer caused uniquely by the agreements [3] [6]. Analysts warn that interpreting raw deficit growth without accounting for rising trade volumes and domestic macro conditions leads to misleading conclusions about causation [2].
2. Who gained and who lost — jobs, wages and sectors
Evidence shows heterogeneous effects across workers and industries: some studies and advocacy groups attribute substantial manufacturing job losses and wage pressure to NAFTA-era trade patterns, estimating large cumulative job displacements and long‑run wage stagnation for affected workers [3]. Government and academic reviews present a more mixed picture: NAFTA produced modest net GDP gains and expanded agricultural exports to Canada and Mexico, while also imposing adjustment costs on firms and workers that required time and policy responses [1] [4]. The USMCA aimed to address some distributional concerns—labor rules and content requirements—but continued deficits and sectoral strain, for example in U.S. livestock and specialty crops relative to grains and oilseeds, show trade rules do not eliminate sector-specific competitive pressures [7] [4].
3. Economic mechanics: why FTAs don’t fully explain national deficits
Multiple rigorous analyses conclude that national trade deficits are driven primarily by macroeconomic factors—saving and investment balances, fiscal deficits, and exchange rates—rather than by free trade agreements alone [2]. Studies find FTA partners account for a growing share of U.S. imports but not a persistent rise in the share of overall U.S. merchandise deficits; excluding oil imports, trade balances with many partners look markedly different, underscoring commodity composition effects [2]. This explains why the U.S. can run a large deficit with integrated partners even as bilateral trade and GDP outcomes improve: higher imports can reflect complementary supply chains and consumer demand powered by domestic macro conditions, not simply unfair trade concessions [8] [4].
4. Recent data: USMCA years and 2024–2025 developments
Post‑USMCA reporting shows the combined goods deficit with Canada and Mexico more than doubled after 2017, hitting large levels in 2023, and agricultural deficits surged to record highs in 2024, with notable deficits vis‑à‑vis Mexico and Canada [6] [7]. Policy disputes and tariff actions continue to shape bilateral flows, and an upcoming 2026 USMCA review could reopen areas such as dairy, digital taxes, and energy—showing that trade rules remain malleable and politically contested [9]. Analysts who forecast economic harm from tariffs point to large GDP and inflation costs for Canada and Mexico under hypothetical tariff scenarios, illustrating the broader economic risks of escalatory trade policies [9].
5. What’s missing from the debate and the policy implications
Public debate often frames trade agreements as the sole culprit for deficits and job losses, but the literature shows a more complex story where agreements reshape comparative advantage while macro policy determines net external balances [2] [4]. Policymakers seeking to address deficits should combine trade policy tweaks—targeted rules, enforcement and adjustment assistance—with fiscal, industrial and exchange‑rate strategies, rather than relying on renegotiation alone. Observers on different sides of the issue carry clear agendas: labor and domestic industry advocates emphasize job and sectoral losses [3] [7], while trade economists and national treasuries stress macroeconomic drivers and the gains from deeper integration [1] [8].