Markets
Cheat Sheet: NAFTA’s Mixed Track Record Since 1994
NAFTA’s Mixed Track Record
Cheat sheet sums up the results of North American trade since 1994
The Chart of the Week is a weekly Visual Capitalist feature on Fridays.
On January 1, 1994, the North American Free Trade Agreement (NAFTA) officially came into effect, virtually eliminating all tariffs and trade restrictions between the United States, Canada, and Mexico.
Bill Clinton, who lobbied extensively to get the deal done, said it would encourage other nations to work towards a broader world-trade pact. “NAFTA means jobs. American jobs, and good-paying American jobs,” said Clinton, as he signed the document, “If I didn’t believe that, I wouldn’t support this agreement.”
Ross Perot had a contrary perspective. Lobbying heavily against the agreement, he noted that if it was ratified, Americans would hear a giant “sucking sound” as jobs went south of the border to Mexico.
It’s a Complicated World
Fast forward 20 years, and NAFTA is a hot-button issue again. Donald Trump has said he is working on “renegotiating” the agreement, and many Americans are sympathetic to this course of action.
However, coming to a decisive viewpoint on NAFTA’s success or failure can be difficult to achieve. Over two decades, the economic and political landscape has changed. China has risen and created a surplus of cheap labor, technology has changed massively, and central banks have kept the spigots on with QE and ultra-low interest rates. Deciphering what results have been the direct cause of NAFTA – and what is simply the result of a fast-changing world – is not quite straightforward.
In today’s chart, we break down a variety of metrics on the U.S., Canada, and Mexico to give a “before” and “after” story. The result is a mixed bag, but it will at least paint a picture of how the nations have fared comparatively since the agreement came into effect in 1994.
NAFTA: A Mixed Track Record
On the plus side, NAFTA created the world’s largest free trade area of 450 million people, where trade between the three members quadrupled from $297 billion to $1.14 trillion during the period of 1993-2015.
Further, the agreement likely had the effect of lowering prices for consumers, especially for food, automobiles, clothing, and electronics. It also reduced U.S. reliance on oil from OPEC. In 1994, the United States got 59% of its oil imports from OPEC, but that number is reduced to 44% today as trade with Canada has ramped up. Canada is now the #1 source of foreign oil in the United States.
NAFTA has also unequivocally led to the movement of auto jobs. While the amount of autos manufactured in North America has increased from 12.5 million (1990) to 18.1 million (2016), the share of that production has shifted.
North American Auto Production by Share
Year | Canada | Mexico | USA | Total Car/Trucks Produced in North America |
---|---|---|---|---|
1990 | 16% | 6% | 78% | 12.5 million |
2007 | 17% | 13% | 70% | 15.4 million |
2016 | 13% | 20% | 67% | 18.1 million |
Mexico now produces 20% of all vehicles in North America – and U.S./Canadian shares have shifted down accordingly over the years. The ultimate result is the destruction of hundreds of thousands of jobs in both Michigan and Ontario, Canada.
As a final note, we also looked at comparing macroeconomic indicators from 1980-1993 (“Pre-NAFTA”) with those from 1994-2016 (“Post-NAFTA”).
For the U.S. in particular, here’s what has changed:
Metric | Pre-NAFTA (1980-1993) | Post-NAFTA (1994-2016) | Change |
---|---|---|---|
Avg. Real GDP Growth | 2.8% | 2.5% | -0.3% |
Avg. Unemployment Rate | 7.1% | 5.9% | -1.2% |
Annual Growth in Exports | 5.7% | 4.9% | -0.9% |
Annual Growth in GDP per Capita (PPP) | 5.9% | 3.3% | -2.6% |
Average Gini Coefficient (Inequality) | 34.2 | 37.4 | 3.2 |
This is not intended to be a comprehensive analysis, but it gives a snapshot of what has changed since NAFTA was ratified.
Markets
Beyond Big Names: The Case for Small- and Mid-Cap Stocks
Small- and mid-cap stocks have historically outperformed large caps. What are the opportunities and risks to consider?
Beyond Big Names: The Case for Small- and Mid-Cap Stocks
Over the last 35 years, small- and mid-cap stocks have outperformed large caps, making them an attractive choice for investors.
According to data from Yahoo Finance, from February 1989 to February 2024, large-cap stocks returned +1,664% versus +2,062% for small caps and +3,176% for mid caps. Â
This graphic, sponsored by New York Life Investments, explores their return potential along with the risks to consider.
Higher Historical Returns
If you made a $100 investment in baskets of small-, mid-, and large-cap stocks in February 1989, what would each grouping be worth today?
Small Caps | Mid Caps | Large Caps | |
---|---|---|---|
Starting value (February 1989) | $100 | $100 | $100 |
Ending value (February 2024) | $2,162 | $3,276 | $1,764 |
Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Mid caps delivered the strongest performance since 1989, generating 86% more than large caps.
This superior historical track record is likely the result of the unique position mid-cap companies find themselves in. Mid-cap firms have generally successfully navigated early stage growth and are typically well-funded relative to small caps. And yet they are more dynamic and nimble than large-cap companies, allowing them to respond quicker to the market cycle.
Small caps also outperformed over this timeframe. They earned 23% more than large caps.Â
Higher Volatility
However, higher historical returns of small- and mid-cap stocks came with increased risk. They both endured greater volatility than large caps.Â
Small Caps | Mid Caps | Large Caps | |
---|---|---|---|
Total Volatility | 18.9% | 17.4% | 14.8% |
Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Small-cap companies are typically earlier in their life cycle and tend to have thinner financial cushions to withstand periods of loss relative to large caps. As a result, they are usually the most volatile group followed by mid caps. Large-cap companies, as more mature and established players, exhibit the most stability in their stock prices.
Investing in small caps and mid caps requires a higher risk tolerance to withstand their price swings. For investors with longer time horizons who are capable of enduring higher risk, current market pricing strengthens the case for stocks of smaller companies.
Attractive Valuations
Large-cap stocks have historically high valuations, with their forward price-to-earnings ratio (P/E ratio) trading above their 10-year average, according to analysis conducted by FactSet.
Conversely, the forward P/E ratios of small- and mid-cap stocks seem to be presenting a compelling entry point.Â
Small Caps/Large Caps | Mid Caps/Large Caps | |
---|---|---|
Relative Forward P/E Ratios | 0.71 | 0.75 |
Discount | 29% | 25% |
Source: Yardeni Research (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Looking at both groups’ relative forward P/E ratios (small-cap P/E ratio divided by large-cap P/E ratio, and mid-cap P/E ratio divided by large-cap P/E ratio), small and mid caps are trading at their steepest discounts versus large caps since the early 2000s.
Discovering Small- and Mid-Cap Stocks
Growth-oriented investors looking to add equity exposure could consider incorporating small and mid caps into their portfolios.
With superior historical returns and relatively attractive valuations, small- and mid-cap stocks present a compelling opportunity for investors capable of tolerating greater volatility.
Explore more insights from New York Life Investments
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