NAFTA contributes to Texas model’s success

International trade has been one of the greatest harbingers of prosperity worldwide. This fact is no different in Texas.

The common components of the Texas model are low taxes, no individual income tax, less regulation, and a reasonable lawsuit climate. This model has led to a robust economy with substantial job creation leading to an unemployment rate that’s been at or below the national average for 102 consecutive months through June 2015.

Another contributing factor to the Texas model’s success is increased international trade after the 1994 North American Free Trade Agreement (NAFTA). Lower trade costs led to industrial diversification to meet the desires of Mexico and Canada contributing to Texas now leading the U.S. in exports for the last 13 consecutive years supporting millions of jobs in small to large firms.

Freer trade helped diversify the state’s economy so it can better cope with oil price fluctuations and other U.S. economic disruptions.

This is the conclusion of a recent article “An Oil-Producing State’s Ability to Cope after a Regional Free Trade Agreement—The Case of Texas and NAFTA” published in The International Trade Journal.

Here is the abstract that provides a quick synopsis:

“This article examines the potential economic effects that the 1994 North American Free Trade Agreement (NAFTA) had on Texas — an oil producing, large border state. We estimate a five-variable vector autoregressive (VAR) model with quarterly data from January 1976 to March 2011 and construct a structural VAR representation by imposing long-run restrictions to identify U.S. aggregate, oil price, and Texas-specific shocks. After comparing responses to these structural shocks before and after NAFTA, our results suggest that NAFTA contributed to Texas’ economy, becoming more resilient to oil price and non-Texas disruptions.”

While there are potential costs associated with joining a regional free trade agreement, the results suggest that the benefits of NAFTA outweigh those costs in Texas, helping the state better cope with external shocks. This research helps explain why Texas’ economy has weathered the substantial drop in oil prices relatively well since July 2014, and likely to be resilient to the more recent decline.

This research should assist policymakers at the federal and state level when deciding whether to support free trade agreements and free trade more broadly. Increasing trade with international companies is another component that should be added to the Texas model, which in this case was supported by NAFTA.

Allowing freer markets to allocate resources with fewer international trade restrictions and pro-growth public policies that have been successful in Texas should be a model for other states and nations.