North American Free Trade Agreement – US

Introduction

Since the idea of a North American Free Trade Agreement (NAFTA) first entered the broader public consciousness in the early 1990s, there has been a remarkable reorientation within business, academic, and political circles in an effort to consider and better understand the nature of the North American relationship. The 1988 free trade agreement between Canada and the United States evoked intense debate and soul searching within Canada and comparatively little interest among Americans; but that situation changed as the horizons broadened to include Mexico and likely extension into other countries of Latin America, beginning with Chile. (Aggrawal, 363-372)

By the early 1990s, Americans, along with Mexicans and Canadians, had fully entered into the dialogue. Remarkably, although perhaps not surprisingly, the nature of the issues raised, anxieties expressed, and ambitions to be realized through a closer trilateral relationship articulated within one country have resonated in the others. Although the alliances of foes and advocates have varied in the three countries, there have also been remarkable similarities. Canadians and Mexicans have tended to be more directly engaged in a debate over models of development and strategies of dealing with their common neighbor than have Americans.

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The NAFTA Debate

The NAFTA agreement touched on such a wide range of issues and areas, including financial services, foreign investment, the auto sector, textiles, agriculture, labor, and the environment in the side agreements that it should not have been surprising that it evoked strong sentiments among a variety of interest groups in the United States and Mexico, although the Mexican public debate was significantly muted by the more closed nature of the political system.

In the United States, the opponents of NAFTA were strange bedfellows: organized and unorganized labor, environmentalists, consumer groups, the protectionist left, and the populist right of Ross Perot, variously denouncing the agreement as a big-business plot to take advantage of low Mexican wages and lax Mexican government enforcement of environmental standards and labor laws. (Andrea, 54-69) On the protagonist side, the administration and its supporters, which included arch-conservative Rush Limbaugh and corporate scion Lee Iacocca, contended that NAFTA would expand American markets, improve environmental and labor issues along the U.S.-Mexican border, and sufficiently improve economic and labor conditions in Mexico to result in a significant reduction in Mexican immigration pressure on the United States. (Peter, 44-56)

The Impact of NAFTA

Given the limitations of time and space, I will touch on a select range of areas in considering the impact of NAFTA to date: industry, labor, immigration, and the environment.  As with other issues, continuity here is more striking than any significant departure from the past. At the time of the conclusion of NAFTA, Mexico was, and remains, the third largest trading partner of the United States after Canada and Japan, although its economy was only five percent the size of the combined American and Canadian economies. In 1992, the United States was the source of approximately seventy percent of Mexican imports and the market for seventy-six percent of its exports. As the result of GATT and general tariff reduction in Mexico, Mexican tariffs on U.S. imported goods by 1992 averaged ten percent in contrast to the one hundred percent that prevailed in 1981. (Gallagher, 43-51)

NAFTA will have no effect on the number of jobs in the United States

NAFTA will have neither a significant negative nor positive impact on the environment

It will produce a small overall gain in U.S. real income

The real wages of skilled workers may decline slightly

For the United States, NAFTA is more a foreign policy than an economic issue.

NAFTA provided for the phasing out of tariffs on apparel and textiles over ten years, with some items to have duty-free access to Mexico immediately. All tariffs on autos and auto parts are to be eliminated over ten years; in agriculture, Mexico and the United States are to phase out fifty-seven percent of trade barriers immediately, ninety-four percent after ten years and one hundred percent after fifteen years.

U.S. and Canadian investors are guaranteed national treatment with the right to seek binding arbitration in international tribunals, although the agreement excludes in this respect the Mexican energy and railway industries, U.S. airline and radio communications, and Canadian cultural industries. (Gilmore, 102-118) In the oil sector, PEMEX is to retain its monopoly over most of the industry, but non-Mexicans will be able to invest in petrochemicals, electricity generation, and coal mines; procurement contracts for PEMEX and Mexico's state electricity commission are also to be opened to foreigners; foreign banks and securities brokers are to have unrestricted access to Mexico by the end of the decade, although there are some restrictions on the sale of policies by U.S. insurers. (Andrea, 54-69)

The agreement also provides for an elimination of most of Mexico's tariff barriers on telecommunications equipment. Basic voice services remain protected but foreign investors are to have access to value-added telephone services.

As a response to the significant political opposition to the original agreement in the United States, there are two side agreements for environmental and labor standards. The former is especially weak, providing for each nation to apply its own environmental standards provided they are established on a scientific basis and with the stipulation that lowering of standards in order to attract foreign investment would be "inappropriate." (Aggrawal, 363-372)

The two commissions established to deal with environmental and labor matters have the power to impose fines and remove trade privileges as a last resort when environmental standards or legislation pertaining to health and labor safety, minimum wages, or child labor are deemed to have been violated. Such fines would be levied on the governments not the private sector violators. (Francesco, 90-97)

Labor. In 2005, Perot contended that the job losses to the United States as a result of NAFTA would be as high as 5.9 million. As The Economist suggested at the time, such a result was not feasible. For there to be a shift of even 2 million-and this is not to suggest that such a loss would be insignificant-Mexico would need a bilateral trade surplus of $100 billion, equal to one-third of its gross domestic product (GDP) in 1973.

Gary Hufbauer and Jeffrey Schott of the Washington Institute for International Economics estimated, on the contrary, that NAFTA would generate a net increase of 171,000 jobs in the United States and that combined U.S. and Mexican GDP would ultimately increase by $15 billion a year. Yet another study, this one by the Economic Policy Institute in Washington, predicted that the net loss of U.S. jobs to Mexico would be 490,000. (Andrea, 54-69) Such wildly diverse predictions and analyses, even if one discounts Perot's, suggest the inexact nature of economic forecasting as well as its ideological biases.

Yet one also has to keep in mind that differences of 200,000 are not considered significant, since seasonally adjusted statistics employment numbers shift up and down by that magnitude on a month-to-month basis. There also seems to be a general consensus among economists, including the Chicago school, that open markets and deregulation lead to social and economic dislocation. The left and the right simply and fundamentally differ over what one does to correct that dislocation. (Peter, 44-56)

Advocates of NAFTA countered critics on the issue of differential wage scales with the argument that firms would not relocate simply because Mexican wages are eight times lower than those for U.S. workers. If one considers that wages comprise only fifteen percent of production costs, that the cost of relocation, including potentially increased transportation costs, training of a new labor force and the lower level of productivity among Mexican workers, and fringe benefits including housing allowances and Christmas bonuses normally equal to one month's wages, the wage differential is significantly reduced as a factor determining capital location.

As well, as productivity increases in Mexico, wages will also rise, which will also occur in the higher technology areas of employment, as for instance in the highly productive Ford plant in Hermosillo, Baja California. (Francesco, 90-97)

Further, and perhaps most significantly, it could be argued that under the provisions of the maquiladora operations that had been in place for three decades, there had been more than ample opportunity to test the thesis that employment and investment would be diverted to Mexico. U.S. organized labor could identify only 96,000 pre-NAFTA jobs that had shifted to Mexico in the previous decade, and several of the firms involved-Smith Corona typewriters and Zenith televisions- would have either moved to Southeast Asia or gone out of business if they had not shifted operations to Mexico.

In one of the sectors where Mexico enjoyed a clear comparative advantage over the United States-beet sugar production-Clinton acceded to pressures from U.S. interests to include a protective provision in NAFTA. (Gallagher, 43-51)

In another sector-apparel manufacturing- where Mexico also enjoys considerable comparative advantage, it is anticipated that although there will certainly be short-term and possibly significant job losses to Mexico; in the long term, improved economic conditions in Mexico, rising wages, and increased consumer spending capacity will level the playing field between the two countries.

The data on job losses and job creation tied to NAFTA are not very favorable to date. U.S. Department of Labor statistics suggest that the job loss in the United States has been slight. (Gilmore, 102-118) In the twenty months following the implementation of the agreement, 68,482 workers had applied for a special NAFTA program of federal retraining assistance while losing their jobs; 38,148 had been accepted under the plan, which requires proof that the job loss is trade-related although not necessarily specifically caused by NAFTA. Those applying for assistance represented some 457 firms located in forty-six states, including Allied Signal, Sara Lee, Smith Corona, Averred Battery, Zenith, and Proctor and Gamble, all of which had belonged to a pro-NAFTA lobby. (Andrea, 54-69)

Department as well as American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) officials agreed that in northern California in particular the impact seemed to have been especially light. Only one firm, Plantronics, a designer and manufacturer of telephone headsets, had by 1995 laid off 60 of 300 workers at its Santa Cruz plant and moved their positions to Mexico.

The marginal NAFTA impact on industries such as Plantronics appears to be linked to the fact the region's high-tech; white-collar industries are less susceptible to low-wage Mexican competition than other industries elsewhere in the United States. Nonetheless, this perception of a failure of NAFTA to increase U.S. exports and export-related jobs led the anti-NAFTA consumer advocacy group Public Citizen to claim without hard evidence 300,000 NAFTA-related job losses.

This argument received support from Congressional critics of NAFTA. (Francesco, 90-97) Ohio Democratic Representative Marcy Kaptur, for instance, joined with others to form a bipartisan House group with plans to introduce a NAFTA Benchmarks Bill to suspend NAFTA and set quantifiable limits on the trade deficit, job losses, and currency rates that would trigger an automatic suspension of the trade agreement. Certainly, Mexico has increased its exports to the United States as well as its proportional share of U.S. imports; but, this would have occurred without NAFTA with the Mexican peso devaluation in the same way that a low Canadian dollar continues to stimulate Canadian exports.

Immigration. It may be inappropriate to attempt at this early stage to examine what has been happening with Mexican migration pressures on the U.S. border during the two years NAFTA has been in effect, since the crisis in the Mexican economy has greatly exacerbated the problem. Nonetheless, it is useful to examine, briefly, the patterns in this area.

Pro-NAFTA groups were adamant that an improved Mexican economy was the only long-term solution to high levels of Mexican migration-legal or illegal-to the United States, and I see no basis to reject that analysis. The fact remains that in the relatively short period since NAFTA was implemented there has been no easing of pressure on border points in the southwest. Nonetheless, I would stress that it is impossible to attribute this situation to NAFTA per se, at the same time that in the short term at least NAFTA has not in itself significantly alleviated the migration problem.

That is a long-term issue, driven by cultural, economic, and political considerations, which will only be corrected if a relative degree of equilibrium is achieved on both sides of the border. (Gallagher, 43-51) At present, that is not even a fantasy let alone a realistic economic goal, and even if the economic situation were corrected, such issues as family reunification with the large indigenous Mexican-American population in the southwestern United States will work to encourage ongoing migration into the area.

Environmental Issues. Environmental protection was a critical factor in obtaining congressional approval of the agreement in the U.S. Congress; yet one must recognize that it was and remains a side issue beside the main objectives of NAFTA, which are trade and investment liberalization. Hence, it is rather misleading to attempt to measure the success or failure of NAFTA in terms of the successes or failures of that side agreement.

Nonetheless, what I believe has happened over the past several years is that analysts have begun to take a far more holistic approach to the understanding of international trade questions, much in the same way that analysts in strategic studies have gone far beyond their traditional weapon-counting approach to the discipline by taking into consideration a range of other factors that now are seen to threaten national security, including environmental degradation, poverty, and human migration. (Francesco, 90-97)

Mexico's economic crisis has seriously undermined its capacity at the federal, state, and local levels to fund environmental clean-up and regulation of industries. Hence, although there has been notable new private investment in Mexican maquiladoras, there has been no significant investment in the infrastructure in the areas where those firms operate. There is little value in detailing here the level of environmental degradation that continues to characterize industrial Mexico.

Such pollution is clearly not the direct result of NAFTA, but it is the result of a political and economic philosophy that attempts to separate trade matters from the quality of the environment in which we live and which places a premium on open markets, privatization, and deregulation. (Andrea, 54-69) There has admittedly been more attention to environment, labor standards, and culture in recent years than there was at the outset of the debate over the U.S.-Canada trade agreement, primarily because of the impact that labor and environmental groups have had on the political agenda in the United States; but it is questionable that the relatively weak institutions established to deal with environmental and labor issues will be radical in their approaches. In the longer term, all societies will pay a very high price indeed if those issues are not effectively addressed.

Conclusion

NAFTA has not simply failed to provide some of its promised benefits, but it has led instead to unemployment, environmental devastation, and serious health problems.  The few beneficiaries have been corporations who benefit from deregulation that reduces their costs and the free market that they largely control.  The North American Free Trade Agreement has proved a failure and at the very least must be revised in order to compensate for the damages that have occurred.

As long as economic motives are behind any legislation, people and the environment will unfortunately always be expendable. To return to the main issue raised in this paper, the impact of NAFTA in its first two years the evidence remains preliminary. A combination of factors led to a dramatic increase in Mexican exports to the United States after NAFTA and a substantial shift in the favorable balance of trade away from the United States. As long as prices and the costs of production in Mexico remain low, proximity to the United States will likely serve to perpetuate that pattern.

Mexican export opportunities will also provide continuing incentive for foreign investment in Mexican agriculture and manufacturing, as well as financial institutions. To date, the anticipated liberalization of investment in the extractive resource sector in Mexico has not been fully realized, especially in petroleum, and the continued significance and power of PEMEX in Mexican political culture suggests that any dramatic change in the petroleum investment environment is unlikely to come soon. At the same time, the decades of a highly protectionist Mexican economic policy are in the past, and there are no signs of a return to the import substitution model. In the United States, there is more volatility on the politics of trade and trade policy.

Works Cited

Aggrawal, R. and Kyaw, N.A. “Equity market integration in the NAFTA region: evidence from unit root and cointegration tests”, International Review of Financial Analysis 4, 2004: 363-372

Andrea Bjorklund et al. “Investment Disputes Under NAFTA (Ring-bound)” Kluwer Law International; Lslf edition, 2006: 54-69

Francesco Duina, “The Social Construction of Free Trade: The European Union, NAFTA, and Mercosur” Princeton University Press, 2005: 90-97

Gallagher, Kevin “Free Trade and the Environment: Mexico, NAFTA, and Beyond”. Stanford University Press, 2004: 43-51

Gilmore, C.G. and McManus, G.M. “The impact of NAFTA on the integration of the Canadian, Mexican, and U.S. equity markets”, Research in Global Strategic Management 10, 2004: 102-118

Peter Hakim “The Future of North American Integration: Beyond NAFTA”. University of British Columbia Press, 2005: 44-56

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