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Will, MacPherson / ECONOMY OF WESTERN NEW YORK

particular attention is given to the benefits predicted by classical and new trade theories. This sec- tion also reviews the results of several econometric studies that have attempted to quantify the impact of NAFTA on the United States. We then offer a regional context for the inquiry: Why is WNY worth looking at? Next, we discuss the results of a recent survey of WNY companies that participated in a pilot project on the regional economic impact of NAFTA. The implications of our findings are then discussed. The article concludes with a synopsis of our main results, along with an agenda for future empirical work on the regional impact of NAFTA.

RESEARCH CONTEXT

Conventional wisdom holds that aggregate production and consumption can be maximized by allowing tradable outputs to move freely across international borders. The long-established Heckscher-Ohlin (H-O) theorem frames this proposition in terms of relative costs and factor pro- portions, yielding a textbook model of trade in which nations compete on the basis of comparative advantage (Ohlin, 1933). Although this model is far from perfect (see Atkinson, 1998), variants of the H-O theorem have sometimes been used to recruit political support for regional integration ini- tiatives (Gould, 1998). Borrowing from Viner’s (1950) work on customs unions, trade bloc enthu- siasts have also pointed to the dynamic benefits of market integration, including economies of scale, intensified competition (which can further reduce prices), and technological innovation (driven primarily by heightened competition). Nevertheless, the fact that trade blocs confer prefer- ential status to members contradicts the spirit of free trade initially envisioned by Ohlin (1933), the General Agreement on Tariffs and Trade (1945-1995), and the World Trade Organization. Yet, as Krugman (1993) and several others have observed, trade blocs represent local attempts at liberal- ized commerce at a time when global efforts in the same direction have not been faring too well.

With regard to NAFTA, which was ratified on January 1, 1994, the H-O school of trade policy emerged as a victor in the push for a three-way agreement. Specifically, Mexico was cast as a labor- abundant economy with low wages, Canada was characterized as a resource-oriented economy, and the United States was seen as the capital-abundant nation (well endowed with advanced tech- nology and skilled workers). On the face of it, a better geographic juxtaposition of factor-based complementarities would be hard to find anywhere else in the world. Notwithstanding, the fact that Canada had gained a reputation for world-class exports outside the resource sector well before 1994 (e.g., aerospace) or that Mexico itself was a bigger supplier of capital-intensive exports in 1994 (e.g., oil) than labor-intensive exports (e.g., textiles), the factor-proportions argument was widely broadcast within the United States during the immediate pre-NAFTA period (McConnell & MacPherson, 1994).

Prior to the approval of NAFTA, however, several scholars predicted that the accord would amount to little more than a legally codified framework to guide patterns of commerce that had already gained substantial momentum long before 1994. For instance, Krugman (1993) argued that NAFTA was a U.S. foreign policy imperative rather than an economic necessity, in that helping a friendly neighbor to the south would make more sense than risking a return to the “bad days of U.S.-Mexican relations” (p. 19). In a similar vein, McConnell and MacPherson (1994) argued that NAFTA was designed to remove “irritants” within a system of trade and investment that had already been shaped in the 1980s. Given that the average U.S. tariff on imports from Mexico was only around 4% in 1993, Krugman argued that a phased elimination of tariffs over a 15-year period would not have a significant long-term impact on U.S. industrial employment. Now that NAFTA is almost 8 years old, however, it is perhaps time to reassess the employment debate in terms of outcomes.

As far as the U.S. literature is concerned, employment outcomes have typically been estimated on the basis of two interlinked approaches. The first approach involves a multiplier methodology that relates U.S. export levels to job creation (e.g., Century Foundation, 1997; Gould, 1998; Hufbauer & Schott, 1993; North American Integration and Development Center [NAID], 1996). For example, the U.S. Department of Commerce has long used a multiplier that estimates 20,000 jobs gained for every $1 billion rise in U.S. exports. Over the period 1993 to 1998, WNY’s

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