NAFTA: BIG Benefits for U.S. Small Businesses

By SBE Council at 28 February, 2018, 10:37 am

by Raymond J. Keating-

As the negotiations proceed to modernize the North American Free Trade Agreement (NAFTA), it is critical to keep in mind that since NAFTA went into effect in 1994, it has been an overwhelming positive for each party to the agreement – that is, the United States, Canada and Mexico – including for U.S. small businesses.

International Trade and Small Business

First, it is important to keep in mind that international trade is largely about small and mid-sized businesses. In fact, the overwhelming majority of businesses involved in international trade are small firms. For example, as noted in Table 1, 76.2 percent of U.S. exporters have fewer than 20 employees, and 86.7 percent fewer than 50 workers.

Table 1: U.S. Exporters 2015: Percent of Firms by Number of Employees

Data Source: U.S. Census Bureau

The story largely is the same for U.S. importers. As noted in Table 2, 75.2 percent of importers have fewer than 20 workers, and 85.5 percent fewer than 50 workers.

Table 2: U.S. Importers 2015: Percent of Firms by Number of Employees 

Data Source: U.S. Census Bureau

NAFTA: The Growth in Trade

Since free trade accords went into effect with Canada, Mexico and the U.S., export growth from the U.S. to both nations has been strong. The U.S. entered in a free trade agreement with Canada first, taking effect in 1989. From 1988 to 2017, U.S. goods exports to our neighbor to the north increased by 294.3 percent. (Over the same period, inflation (as measured by the GDP price index) increased by 82.8 percent.)

But export growth has been particularly strong with Mexico since NAFTA took effect in 1994. U.S. goods exports to Mexico grew by 484.4 percent from 1993 to 2017. That was more than double the growth in U.S. exports to the world, which registered a 239.5 percent increase over the same period. (Inflation increased by only 56.9 percent over this period.)

Import growth was even more robust. Goods imports from Canada grew by 268.6 percent from 1988 to 2017, and goods imports from Mexico expanded by 686.7 percent from 1993 to 2017.

Reminder: Keep in mind that imports are not economic negatives. To the contrary, growing imports reflect an expanding domestic economy, with imports including consumption products as well as capital goods used by U.S. businesses.

For good measure, many U.S. firms are involved in the importation of goods from other nations. In the end, U.S. consumers and small businesses benefit from the expanded choices and lower costs that come with lower barriers to imports.

NAFTA’s Benefits for Small Business

Given the role that small businesses play in trade, NAFTA clearly has been good news for small businesses.

Again, consider that in 2015, there were 89,106 firms that were exporters to Canada, as well as 59,428 firms exporting to Mexico. In each case, as noted in Table 3, these overwhelmingly are small and mid-sized businesses. For example, 75.4 percent of firms exporting to Canada and 72.7 percent of firms exporting to Mexico have fewer than 50 employees.

Table 3: U.S. Exporters 2015: Percent of Firms by Number of Employees

Data Source: U.S. Census Bureau

For good measure, the growth in the number of U.S. firms exporting to both Canada and Mexico has been dramatic. From 1992 to 2015, there was an 81.4 percent increase in the number of U.S. exporters to Canada and a dramatic 365.5 percent increase in those exporting to Mexico. NAFTA has been a growth engine for small business.

As for imports, in 2015, there were 16,799 U.S. firms that were importers related to Canada, and 15,290 U.S. firms were importers related to Mexico. Again, the vast majority were small and mid-sized businesses, as noted in Table 4. For example, 54.8 percent of Canada importers and 67.5 percent of Mexico importers have fewer than 50 employees.

Table 4: U.S. Importers 2015: Percent of Firms by Number of Employees

Data Source: U.S. Census Bureau

Looking Ahead: Modernizing NAFTA and Expanding Trade

Small businesses and their workforce benefit enormously from reduced governmental barriers to international trade, as do consumers. As negotiations continue on modernizing this agreement, U.S. entrepreneurs, businesses, workers and consumers need to be assured that this effort will not be used to raise barriers to trade, but instead, as SBE Council’s President and CEO Karen Kerrigan recently pointed out, “focus on ways to bolster growth enhancing provisions, namely: lowering costs for businesses and consumers, expanding market access, strengthening intellectual property (IP) protections, and allowing data flow.”

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.