NAFTA, the Controversy
Stephen W. Hartman
Professor
School of Management
NY institute of Technology
Old Westbury, NY 11568-8000
To cite this Article Hartman, Stephen W.(2011) 'NAFTA, the Controversy', The International Trade
Journal, 25: 1, 5 — 34
To link to this Article: DOI: 10.1080/08853908.2011.532036
URL: http://dx.doi.org/10.1080/08853908.2011.532036
NAFTA, the Controversy, p. 2
Abstract
The 2008 U.S. Presidential election highlighted the controversy that exists
regarding NAFTA. Four of the most vocal criticisms are the loss of U.S. jobs to Mexico,
the loss of the Foreign Direct Investment (FDI) in the U.S., no net income gain for the
average working American, and finally illegal migration from Mexico as a result of
NAFTA. The research did not validate three of these criticisms. However, illegal
migration from Mexico has been an unintended consequence of NAFTA. The data
clearly indicates that strong trade growth occurred between the NAFTA partners, but it
is difficult to prove conclusively the growth occurred only because of NAFTA. Of the
three NAFTA trading partners, Mexico has benefited least from NAFTA as the country is
still witnessing high unemployment, strong income disparities, and weak governance
indicators.
NAFTA, the Controversy, p. 3
NAFTA, the Controversy
The 2008 U.S. Presidential campaign highlighted the controversy surrounding
NAFTA. American Labor, for one, has consistently argued that NAFTA has taken jobs
from working Americans. It has also been argued that NAFTA has made no significant
trade contribution to the United States, Canada or Mexico.
While President Bill Clinton actually signed the trilateral agreement between
Canada, the United States, and Mexico in January 1994, the origin of the idea was
initiated by the preceding two Republican Presidents, Ronald Reagan and George H.
W. Bush (42). When Ronald Reagan first announced his candidacy for President at the
New York Hilton on November 13, 1979 he stated “It may take the next 100 years, but
we can dare to dream that at some future date a map of the world might show the North
American continent as one in which the people's commerce of its three strong countries
flow more freely across their present borders than they do today” (Reagan 1979).1
On October 7, 1992, with four months left in his administration, and one month
prior to the election of Bill Clinton, President George H. W. Bush signed the initiating
NAFTA accord with Canada and Mexico. In a speech he stated:
...today the United States, Mexico, and Canada embark together
on an extraordinary enterprise. We are creating the largest,
richest, and most productive market in the entire world, a trillion
(sic) market of 360 million people that stretches 5,000 miles from
Alaska and the Yukon to the Yucatan Peninsula. NAFTA, the
North American free trade agreement, is an achievement of three
strong and proud nations (Bush 1992).2
The greatest opposition President Clinton experienced in obtaining final approval
of the NAFTA treaty came from his own party, while the Republicans were its greatest
supporters, particularly since the previous two Republican Presidents initiated the
concept.
The primary purpose of NAFTA is to eliminate tariffs between the three signatory
countries of Canada, the United States, and Mexico. The terms of the agreement were
not fully implemented until January 1, 2008. Essentially it eliminated:
…export tariffs in several industries: agriculture has been a major
focus, but tariffs have also been reduced on items like textiles and
NAFTA, the Controversy, p. 4
automobiles. NAFTA also implemented intellectual-property
protections, established dispute-resolution mechanisms, and put
into place regional labor and environmental safeguards, though
some critics now lobby for stronger measures on this front (Teslik
2008). 3
In 1993, United States goods faced an average tariff barrier at the Mexican
border of about 10 percent, five times the 2.07 percent rate that the U.S. imposed on
Mexican goods. With NAFTA, Mexico’s average tariff has fallen to under 2 percent.
NAFTA was preceded by the Canada—U.S. Free Trade Agreement (CUFTA) on
January 1, 1989.
Under this agreement “all agricultural tariffs between the United
States and Canada would be phased out over a 10-year period. In addition, market
access for products was to be improved from both countries (sic) and the use of
subsidies was to be lowered in both countries” (Hughes 2000). 4
Trade
As can be seen from Chart 1 there was a dramatic increase in agricultural
exports and imports to and from Canada and Mexico respectively from 1994 to 2008.
While export and import activity was showing increased activity for both countries from
1990 onward, Canadian exports and imports, particularly exports to the U.S., showed a
rapid increase from 1990 with the passage of CUFTA in 1989. Starting in 1994 with the
passage of NAFTA a dramatic increase in exports and imports became apparent for
both Canada and Mexico.
There was, however, a brief falloff in 1995 of Mexican
exports that coincided with the Mexican devaluation of the peso.
Starting in 2003, marking the resurgence of the American economy after the
recession of 2001, a second major wave of import and export activity began for both
countries where Canadian exports and imports and imports from Mexico surged.
However, exports from the U.S. to Mexico during the 2003 to 2008 period showed
relatively less growth.
NAFTA, the Controversy, p. 5
Chart 1
U.S. Agricultural Export & Imports, by Fiscal Year,
$U.S. Value for Canada and Mexico
$20,000,000,000
$18,000,000,000
$16,000,000,000
$14,000,000,000
$12,000,000,000
CANADA IMPORTS
$10,000,000,000
CANADA EXPORTS
MEXICO IMPORTS
MEXICO EXPORTS
$8,000,000,000
$6,000,000,000
$4,000,000,000
$2,000,000,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$0
Source: Economic Research Service, USDA, updated 11/18/2008.
Agricultural trade increases were a growing component of the trade expansion
with Canada and Mexico. From 1989 to 2004 agricultural trade increased:
over four-fold with Canada and Mexico ..., and hastened the
integration of the North American food and fiber industry. Today,
U.S. agricultural exports to Canada are diverse, led by cattle and
NAFTA, the Controversy, p. 6
feed; U.S. exports to Mexico are more concentrated in a few
commodities, but are also led by animal feed and meat. U.S. farm
imports from Canada are dominated by animals, meat and feed,
while imports from Mexico are mostly fruits and vegetables that
arrive in the United States seasonally (Carter 2005).5
However, agricultural products are a very insignificant percentage of the total
trade with both Canada and Mexico.
For Canada Table 1 shows that agricultural
products are not even part of the top ten, whereas Table 2 demonstrates that edible
vegetables make up only 1.46% of total exports to the U.S. from Mexico
However,
from 2002-2007 both Canada and Mexico had strong export growth to the U.S.
Canada’s exports to the U.S. grew 32.7% with petroleum related products and vehicles
respectively making up almost 45% of their exports while Mexican exports grew over
36% to the U.S. during the same period. Mexico’s major exports to the U.S. include
electrical machinery, petroleum products, vehicles, nuclear reactors, and boilers
respectively comprising over 70% of their total exports.
Table 1
Top Ten Imports from Canada to the United States in billions ($USD)
2007
% of
Total all
Total
Categories
Category
%
Change
20022007
($bil.)
313
32.74%
1
MINERAL FUEL, OIL ETC.; BITUMIN SUBST
79
25.15%
62.40%
2
VEHICLES, EXCEPT RAILWAY OR TRAMWAY
60
19.29%
13.27%
3
NUCLEAR REACTORS, BOILERS, MACHINERY
22
7.02%
26.28%
4
11
3.41%
34.30%
5
PLASTICS AND ARTICLES THEREOF
ELECTRIC MACHINERY ETC; SOUND
EQUIP;ETC
10
3.35%
13.63%
6
WOOD AND ARTICLES OF WOOD; CHARCOAL
10
3.12%
-1.62%
7
10
3.08%
3.70%
8
PAPER & PAPERBOARD & ARTICLES
SPECIAL CLASSIFICATION PROVISIONS,
NESOI
9
3.02%
-21.94%
9
ALUMINUM AND ARTICLES THEREOF
9
2.97%
52.18%
NAFTA, the Controversy, p. 7
10
AIRCRAFT, SPACECRAFT, AND PARTS
THEREOF
Source:
TradeStats
Express™
-
6
National
Trade
Data,
2.05%
US
Total
17.96%
All
Merchandise
2007 Exports from Canada
Table 2
Top Ten Mexican Exports to the United States in billions ($USD)
2007
Total All
Categories
% of Total
% Change
($bil.)
Category
2002-2007
Items
211
1
ELECTRIC MACHINERY ETC; ELECTRONIC PTS
55
26.03%
40.40%
2
MINERAL FUEL, OIL ETC.; BITUMIN SUBST;
34
16.16%
64.14%
3
VEHICLES, EXCEPT RAILWAY OR TRAMWAY
34
16.10%
22.34%
4
NUCLEAR REACTORS, BOILERS, MACHINERY
25
11.79%
28.37%
5
OPTIC, PHOTO ETC, MEDIC INSTRMENTS ETC
8
3.59%
29.35%
6
FURNITURE; BEDDING ETC; LAMPS
6
2.69%
19.86%
7
SPECIAL CLASSIFICATION PROVISIONS, NESOI
5
2.47%
19.54%
8
9
EDIBLE VEGETABLES & CERTAIN ROOTS
APPAREL ARTICLES AND ACCESSORIES,
3
3
1.46%
1.33%
41.36%
-60.09%
ARTICLES OF IRON OR STEEL
3
1.31%
38.67%
10
Source:
TradeStats
Express™
2007 Exports from Mexico.
-
National
Trade
Data,
36.09%
US
Total
All
Merchandise
NAFTA, the Controversy, p. 8
Table 3
Top Ten U.S. Exports to Canada in billions ($USD)
2007
Total All
Categorie
s
Percent
of
($bil)
Total
248
Category
54.50%
50
20%
45.20%
42
17%
38.00%
24
10%
40.40%
PLASTICS AND ARTICLES THEREOF
MINERAL FUEL, OIL ETC.; BITUMIN SUBST; MINERAL
WAX
11
4%
50.70%
10
4%
290.30%
8
3%
56.40%
7
SPECIAL CLASSIFICATION PROVISIONS, NESOI
OPTIC, PHOTO ETC, MEDIC OR SURGICAL INSTRMENTS
ETC
8
3%
38.00%
8
ARTICLES OF IRON OR STEEL
6
2%
57.60%
9
1
0
IRON AND STEEL
PAPER & PAPERBOARD & ARTICLES (INC PAPR PULP
ARTL)
6
2%
165.80%
5
2%
37.40%
1
2
3
4
5
6
Items
VEHICLES, EXCEPT RAILWAY OR TRAMWAY, AND
PARTS ETC
NUCLEAR REACTORS, BOILERS, MACHINERY ETC.;
PARTS
ELECTRIC MACHINERY ETC; SOUND EQUIP; TV EQUIP;
PTS
Percent
Change
2002 to
2007
Source: TradeStats Express™ - National Trade Data, US Total All Merchandise 2007 Exports to
Canada.
NAFTA, the Controversy, p. 9
Table 4
Top Ten U.S. Exports to Mexico in billions ($USD)
2007
Percent
of
Total All
Total
Categories
Category
Percent
Change
2002 to
2007
($bil)
Items
ELECTRIC MACHINERY ETC; SOUND EQUIP; TV EQUIP;
PTS
137
1
2 NUCLEAR REACTORS, BOILERS, MACHINERY ETC.; PARTS
3
4
5
6
7
Source:
25
18%
14.00%
21
15%
38.20%
VEHICLES, EXCEPT RAILWAY OR TRAMWAY, AND PARTS
ETC
13
10%
25.50%
PLASTICS AND ARTICLES THEREOF
10
8%
56.80%
MINERAL FUEL, OIL ETC.; BITUMIN SUBST; MINERAL WAX
7
5%
107.20%
ORGANIC CHEMICALS
5
4%
148.70%
SPECIAL CLASSIFICATION PROVISIONS, NESOI
OPTIC, PHOTO ETC, MEDIC OR SURGICAL INSTRMENTS
ETC
5
3%
26.90%
4
3%
11.30%
3
2%
67.30%
3
2%
34.30%
8
9 ARTICLES OF IRON OR STEEL
10
40.00%
PAPER & PAPERBOARD & ARTICLES (INC PAPR PULP
ARTL)
TradeStats
Express™
-
National
Trade
Data,
US
Total
All
Merchandise
2007 Exports to Mexico
Chart 1 and Tables 1 – 4 clearly indicate that a dramatic increase in trade
between the United States, Canada, and Mexico has developed. The question is was
this coincidental or was it the outcome of the NAFTA trade agreement?
A clear
assessment of the success or failure of NAFTA is complicated by the impact of its
implementation as well as several interrelated economic factors including the overall
rise in international trade during the period 1993 to 2008:
Since NAFTA, intraregional trade has doubled; US FDI in Canada
and Mexico increased even faster. How much NAFTA has
contributed to growth and efficiency is a tough analytical question
that challenges scholars (Hufbauer 2005). 6
However, there are certain yardsticks that can be assessed to help determine the
NAFTA, the Controversy, p. 10
overall impact of NAFTA:
Since 1993, the year before NAFTA came into force, through
2004, US merchandise exports to and imports from Mexico have
increased by 166 and 227 percent, respectively. Total two-way
US-Mexico merchandise trade has grown 227 percent; in contrast,
US trade with non-NAFTA countries increased only 124 percent in
the same period. Likewise, US-Canada trade continued the
robust expansion inspired by the CUSFTA (sic) in 1989. Since
1989, US exports to and imports from Canada rose 140 and 190
percent, respectively; total US-Canada trade roughly kept pace
with trade growth with the rest of the world. Trade with NAFTA
partners in 2004 accounted for 31 percent of total US
merchandise trade, up from 29 and 26 percent in 1993 and 1989,
respectively (Hufbauer 2005). 7
The dramatic increase in trade with NAFTA’s partners does not in and of itself
prove that trade occurred because of NAFTA. However,
estimates using computable general equilibrium and gravity
models of the amount of two-way trade generated due to NAFTA
vary greatly. Depending on the model selected, the trade gains
from NAFTA range from modest (as low as 5 percent of the twoway US-Mexico trade) to very large (greater than 50 percent of
two-way trade). Disentangling the effect of NAFTA on trade from
the other events in the past decade is difficult, but the available
evidence points to a strong positive impact (Hufbauer 2005). 8
Regarding agricultural trade with Mexico, Chart 1 clearly indicates almost a $5
billion trade imbalance with Mexico in 2008 beginning in 1990. The only exception was
the year 2003 where trade was statistically balanced. There are two reasons for the
trade imbalance.
Although U.S. exports have been growing substantially, Mexico’s
economy is still developing and is not sufficiently large to consume higher imports from
the United States. In 2008, for example, Mexico’s GDP was $1.486 trillion, whereas the
American GDP was $14.2 trillion, approximately ten times larger. Secondly, Mexican
farmers have smaller farms and are not nearly as automated as American farmers, and
are, therefore, much less productive than American agriculture.
Table 5 shows the total trade imbalances with Canada and Mexico from 2000 –
2008. Clearly they are growing. As already discussed Canada’s primary exports to the
U.S. consist of petroleum related products and vehicles.
The major imports from
Mexico include electrical machinery, petroleum products, vehicles and related, but on a
NAFTA, the Controversy, p. 11
much smaller scale. In Mexico
Table 5
Total U.S. Trade Imbalances with Canada and Mexico 2000 – 2008
Canada
Mexico
Total Trade bal.
Source:
TradeStats
2000
($ bil)
-51.90
-2.46
-54.36
2001
($ bil)
-52.84
-3.00
-55.85
Express™
-
2002
($ bil)
-48.16
-3.71
-51.88
National
2003
($ bil)
-51.67
-4.06
-55.74
Trade
2004
($ bil)
-66.48
-4.51
-70.99
Data,
US
2005
($ bil)
-78.49
-4.97
-83.46
Total
2006
($ bil)
-71.78
-6.43
-78.21
All
2007
($ bil)
-68.17
-7.46
-75.63
Merchandise
2008 TradeBalance with Canada and Mexico.
the Maquiladora program has generated a high amount of value added trade from
Mexico based on American industry inputs:
Among the most striking industrial phenomena in the wake of the
North American Free Trade Agreement has been the rapid growth
of plants that operate under Mexico's maquiladora program. In its
simplest organizational form, a maquiladora plant imports inputs-typically from the United States--processes them, and then ships
them back to the country of origin, perhaps for more processing.
The maquiladora program permits the inputs and the machinery to
process them to enter Mexico tariff-free. On the goods' return, the
shipper pays duties only on the value added by manufacture in
Mexico (Gruben 2001). 9
The question this raises is whether NAFTA was instrumental in the growth of the
Mexican maquiladoras. Research on the period from the inception of NAFTA in 1994
through 1999 does not support this conclusion:
In response to widespread arguments that Mexican maquiladoras'
rapid growth after NAFTA was a result of NAFTA, I have
performed extensive econometric tests of its effect on
maquiladora employment. The results of these tests are
resoundingly negative. NAFTA did not make maquiladoras grow
faster. Such effect as NAFTA had was negative, not positive,
albeit statistically insignificant. So we cannot say that NAFTA had
any effect on maquiladoras (Gruben 2001).10
In fact, the research essentially demonstrates a positive correlation between the
2008
($ bil)
-74.64
-6.44
-81.08
NAFTA, the Controversy, p. 12
growth of maquiladora trade and the growth of the U.S. economy. This is confirmed
with the slowdown in the U.S. economy that occurred post 911 in the years 2002-2003,
and the subsequent reduction in the U.S. trade imbalance with Mexico during that
period. When the U.S. economy began to recover in 2003, increased imports from
Mexico quickly followed.
Labor Issues
The number of American jobs created or lost because of NAFTA is a hot button
issue. Those on the side of labor claim that “growing trade deficits with Mexico and
Canada have displaced production that supported 1,015,291 U.S. jobs since NAFTA
took effect in 1994” (Scott 2006).
11
However, the United States Trade Representative
takes a much more optimistic view
Fourteen years ago, Ross Perot raised fear and apprehension
with the specter of “a great sucking sound.” I remember him
brandishing a piece of paper declaring 11.9 million jobs would
head south because of the North American Free Trade
Agreement. Instead we have created millions of new jobs in the
United States with a nearly 200 percent increase in trade with
Mexico (Portman 2006). 12
Additionally, Portman goes on to cite an analysis performed by the President’s
Council of Economic Advisers (CEA) demonstrating “that our U.S. job market is indeed
flexible – about 15 million jobs were lost last year and about 17 million jobs were
gained. Interestingly, though, they only attribute 2 to 3% of that job dislocation to trade”
(Portman 2006).
13
Incidentally, that would include all international trade including
WTO, NAFTA, other trade agreements, as well as individual countries.
While there definitely has been job dislocation that has occurred since NAFTA’s
implementation, as well as other trade agreements, total U.S. employment has
increased by 23 million jobs from 1994 to 2008. Thus, the charge that NAFTA “imports
displaced (U.S. – comment added) domestic production that would support 2 million
jobs” (Scott 2006). 14 lacks support.
An approach that does shed light on the employment effect of
NAFTA, the Controversy, p. 13
NAFTA is to consider what happened to foreign direct investment
(FDI). If U.S. firms were moving jobs to Mexico, they would have
to build factories in Mexico which would increase FDI. According
to the OECD, the ratio of FDI into the U.S. to FDI into Mexico in
the first year of NAFTA (1994) was 4.5 (OECD, 1999). In 1999,
the last year for which data are available, this ratio equaled 23.4.
Thus FDI into the U.S. has increased far more rapidly than FDI
into Mexico, implying that the jobs created by investment flows
into the U.S. far exceed the jobs lost due to capital flows into
Mexico (Thorbecke 2002).15
Table 6 shows that FDI in the United States increased 50.02% from $1.4 to $2.1
trillion from 2003 to 2007. In the same time period FDI in Mexico increased 25% from
approximately $20 to $27 billion from 2003 to 2007, while Canada’s FDI increased
24.7% from $360 to $447 billion from 2003 to 2006.16 Thus, FDI increased substantially
greater in the U.S. than either in Canada or Mexico, and is substantially greater in total
amount than either of its NAFTA trading partners. The charge that FDI in the United
States will fall after NAFTA is simply not true, and in fact, has shown strong growth.
Table 6
Foreign Direct Investment in the United States
(Dollar amount in millions)
Direct investment position on a historical-cost basis
2003
Total
1,395,159
2007 % Change
2,093,049
50.02%
Source: Bureau of Economic Analysis, Foreign Direct Investment in the United States,
http://www.bea.gov/international/fdi-ctry.htm
From Mexico’s perspective a more troubling note is that there has been an actual
decline in Mexican manufacturing employment:
…related in part to import competition and perhaps also to the
substitution of foreign inputs in assembly operations. About 30
percent of the jobs that were created in maquiladoras (export
assembly plants) in the 1990s have since disappeared. Many of
NAFTA, the Controversy, p. 14
these operations were relocated to lower-wage countries in Asia,
particularly China (Polaski 2004). 17
Table 7 shows Earnings of Production or Nonsupervisory Workers on Private
U.S. Nonfarm Payrolls in constant 1982 dollars. The charge there has been no net gain
in income for the average working American is simply not true. There has been an
increase, albeit small, between the years 1994 to 2008. The data shows there has
been a 12.3% increase, amounting to $31.67 in constant 1982 dollars, in weekly
earnings during the period for the average U.S. production or nonsupervisory Worker on
private nonfarm payrolls.
Table 7
Earnings of U.S. Production or Nonsupervisory Workers on
Private Nonfarm Payrolls
Weekly Earnings
(Constant 1982 Dollars)
Dec., 2008
$287.65
Dec., 1994
$255.98
Increase
$31.67
% Change
12.37%
Source: Interpolated from Earnings of production or
nonsupervisory workers on private nonfarm payrolls in current and
constant dollars by industry, Bureau of Labor Statistics, 1994 and
2008.
The situation for Mexican workers; however, is much bleaker:
Real wages for most Mexicans today are lower than when NAFTA
took effect. This stunning setback in wages is mainly attributable
to the peso crisis of 1994–1995. However, during the NAFTA
period, productivity growth has not translated into wage growth, as
it did in earlier periods in Mexico. Mexican wages are also
diverging from, rather than converging with, U.S. wages (Polaski
2004). 18
In fact, Harley Shaiken, chairman of the Center for Latin American
NAFTA, the Controversy, p. 15
Studies at the University of California, Berkeley states “a new
phenomenon has grown up under Nafta — high-productivity
poverty” (Malkin 2009).19
An equally serious reality exists for rural farmers in Mexico where American
agricultural imports displaced many Mexican farmers who were not as automated as
and thus less productive than American agriculture. American agricultural production is
too competitive for the average Mexican farmer:
U.S. farm subsidies have rendered obsolete Mexican farming, and
millions of farmers have lost their livelihoods. In Oaxaca and
Michoacan states, two of Mexico's poorest -- agriculturally
dependent with large numbers of indigenous peoples, with literacy
rates trailing the national average -- entire towns and villages
have been abandoned by the able-bodied in search of work
(Nevaer 2006). 20
On a more positive note; however, while Canadian manufacturing employment
initially dropped after the passage of CUFTA in 1989,
After about five years, the losses stopped and export
manufacturing began to grow again.
A decade after the
enactment of CUFTA, manufacturing employment recovered to
the levels seen before the trade pact and has continued to grow
modestly since then (Polaski 2004).21
Of the three parties to the NAFTA treaty, Canada has in fact shown the most
relative growth:
Canada’s GDP has grown at a faster rate than either Mexico’s or
the United States’ since 1994. Between 1994 and 2003, Canada’s
economy showed average annual growth rates of 3.6 percent,
compared to 3.3 percent in the United States and 2.7 percent in
Mexico. Canadian employment levels have also shown steady
gains in recent years, with overall employment rising from 14.9
million to 15.7 million in the early 2000s (Teslik 2008). 22
Income Inequality
Another charge against NAFTA is that it has increased income inequality in the
United States. This is a more difficult question. In the U.S. data based on individual tax
returns to determine income disparities are clouded by a series of tax changes that
NAFTA, the Controversy, p. 16
have taken place prior to and during the period that NAFTA was in place.
The many changes in U.S. tax rules since 1980 have made a
dramatic difference in what is reported as income on individual tax
returns. One result is that it is misleading, if not meaningless, to
compare income reported on tax returns in the 1970s and 1980s
with data reported in recent years.
Aside from changes in taxpayer reporting due to changes in the
tax laws, there is no clear evidence of a significant and sustained
increase in the inequality of U.S. incomes, wages, consumption,
or wealth since the late 1980s (Reynolds 2007) 23
Thus, the allegation that NAFTA has caused increasing income inequality in the
U.S. is unproven. However, Mexico has experienced a significant increase in income
inequality:
Income inequality has been on the rise in Mexico since NAFTA
took effect, reversing a brief declining trend in the early 1990s.
Compared to the period before NAFTA, the top 10 percent of
households have increased their share of national income, while
the other 90 percent have lost income share or seen no change.
Regional inequality within Mexico has also increased, reversing a
long-term trend toward convergence in regional incomes (Polaski
2004). 24
Canada has had a more benign experience with income inequality, and NAFTA
does not appear to have been a significant factor in income inequality in the country.
Immigration
Another hot button issue is the matter of illegal Mexican immigration into the
United States. One of the original arguments for the passage of NAFTA was that the
lowering of tariffs between the three member nations would provide sufficient economic
stimulus to the Mexican economy that there would be no need for its nationals to cross
into the U.S. to seek employment. However, the number of illegal immigrants has only
continued to rise since the passage of NAFTA.
An argument can be constructed that the rise in illegal immigration from Mexico
to the United States is an unintended consequence of NAFTA. The fact that Mexican
farmers have not been able to compete with American agriculture caused the loss of a
NAFTA, the Controversy, p. 17
livelihood for a significant segment of its population resulting in a strong motivation to
migrate to the United States in search of a better life:
Ironically, one might argue that illegal migration is the only thing
saving Mexico from the ravages of NAFTA.
Illegal migration serves as an important safety valve. In the past
10 years, Mexico's working-age population has expanded by
about 1 million per year, but the number of jobs has expanded by
only half as much, according to a Carnegie study. The annual
exodus of 500,000 to 1 million Mexicans reduces labor unrest
inside the country.
Migration serves another even more important function: national
financial safety net. In 2005, Mexicans in the United States
remitted some $20 billion home, about 3 percent of Mexico's
national income, according to a March story by Knight Ridder's
Washington bureau (Morris 2006).25
A similar scenario happened with manufacturing jobs in Mexico.
… Mexican manufacturers, once protected by tariffs on a host of
products, were driven out of business as less expensive, higher
quality merchandise flowed into the country. Later, China, with its
even-cheaper labor, added to the pressure, luring away
manufacturers and jobs.
Indeed, despite the influx of foreign-owned factories, total
manufacturing employment in Mexico declined to 3.5 million by
2004 from a high of 4.1 million in 2000, according to a calculation
of Robert A. Blecker, an American University economist.
As relatively well-paying jobs disappeared, Mexico’s average
wage for production workers, already low, fell further behind the
average hourly pay of production workers in the United States,
and Mexicans responded by migrating (Uchitelle 2007). 26
It is rather clear that as long as Mexican workers are unemployed,
underemployed, or underpaid that the U.S., however reluctant, becomes their only
safety net. Despite initial Mexican promises to invest heavily in their infrastructure,
(Uchitelle 2007)
27
little has been done.
According to the CIA’s World Factbook
Mexico’s “Per capita income is one-fourth that of the US,” and “income distribution
remains highly unequal”(CIA undated).28 Obviously more work has to be done here.
NAFTA, the Controversy, p. 18
The headlines point out that the situation is becoming grave because of the
rampant narcotic violence that is being perpetrated by Mexican drug cartels. In fact
President Obama met with Mexican President Felipe Calderon April 16th and 17th in
2009. President Obama pledged “a new era of cooperation and partnership” between
the United States and Mexico” (Stolberg 2009).29 The initial thrust of the meeting was
the rising drug violence on both sides of the border, but hopefully progress will be made
in considering the severe economic pressure on the poorest of its people that has been
an unwelcome side effect of NAFTA. At the very least open dialogue between the two
countries is clearly essential to plan for an improved Mexican economy that would in
turn benefit the United States in terms of reducing illegal migration as well as putting a
lid on drug violence on both sides of the border.
The Obama Administration and NAFTA
On March 18th, 2009 the American omnibus appropriations bill eliminated support
for a pilot ground transportation program initiated in 2007 by the Bush administration.
The purpose of the Bush pilot program was to allow a limited number of Mexican ground
transportation companies to bring Mexican products into the United States while also
permitting an equally limited number of American carriers to bring U.S. goods into
Mexico.
The primary public objection to permitting Mexican vehicles to transport
Mexican merchandise into the United States was that they did not meet American truck
vehicle standards, and thus posed a safety issue on the highway. However:
The 27 Mexican carriers in the pilot program compiled an
impressive safety record in 2008, judging by the rate at which
randomly stopped vehicles received an "out-of-service"
designation -- meaning they did not comply with all safety
regulations -- from DOT inspectors. Whereas all U.S. carriers had
a vehicle "out-of-service" rate of 21.6%, all Mexican carriers had a
rate of 20.7% and Mexican carriers in the pilot program had a rate
of 7.3% (O’Grady 2009).30
Undoubtedly there is a political element here. Candidate Obama campaigned as
a protectionist, solicited, and received the support of organized labor.
This is
particularly true with the Teamsters which represent a large percentage of organized
NAFTA, the Controversy, p. 19
truck drivers.
Was this payback on the part of the Obama administration to the
Teamsters for their support?
In 1995 President Clinton imposed a similar ban on Mexican trucking access to
the U.S. At that time Mexico appealed the ruling and NAFTA established a five member
arbitration panel to consider the American action. In the year 2001 the panel ruled
against the U.S., and said Mexican truckers should have access to the U.S.
In any event, on March 18th, one week after the omnibus appropriation bill was
passed, Mexico put a 10-20% tariff on 90 U.S. products being exported to Mexico.
Arturo Sarukhan, Mexico’s ambassador to the United States, stated:
… free and fair trade hit another red light this past week. The U.S.
Congress, which has now killed a modest and highly successful
U.S.-Mexico trucking demonstration program, has sadly left my
government no choice but to impose countermeasures after years
of restraint and goodwill (Sarukhan 2009).31
However, by March 16th, four days after President Obama signed the omnibus
appropriations bill into law, the White House issued a statement stating:
The president has tasked the Department of Transportation to
work with the U.S. trade representative and the Department of
State, along with leaders in Congress and Mexican officials, to
propose legislation creating a new trucking project that will meet
the legitimate concerns of Congress and our NAFTA
commitments (Pulizzi 2009). 32
In short this was a pyrrhic victory for organized labor. The precedent of the 2001
NAFTA arbitration panel will not be easily overcome, and the borders will be reopened
to the truckers.
However, president Obama can state that he did his best to honor his
commitments to organized labor in this issue, but was overwhelmed by the realities of
the support for NAFTA, and the retaliatory effects that arbitrary trade decisions can
cause.
Governance Indicators
The World Bank collects Worldwide Governance Indicators (WGI) for 212 nations
throughout the world over the period 1996-2007.
dimensions of governance:
These indicators include six
NAFTA, the Controversy, p. 20
Voice and Accountability
Political Stability and Absence of Violence
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption (World Bank Group 2008)33
Nations are given a governance score that ranges from -2.5 to +2.5 to rank them on the
six governance indicators.
Chart 2 shows Governance Indicators for the U.S., Canada, and Mexico 2007.
The chart clearly shows that the U.S. and Canada have positive values for all of the
indicators with Canada achieving the highest scores in all areas. Government
effectiveness, regulatory quality, rule of law, and control of corruption were particularly
strong for both the United States and Canada. However, Mexico has low positive scores
for some indicators, and negative scores for political stability and absence of violence,
rule of law, and control of corruption.
Mexico has a long way to go to emerge as an effective government and play a
strong role in its own economic development. This is crucial in assisting its people to
achieve a satisfactory life style with the requisites of sufficient personal income,
education, and health. The results of the governance indicators show that Mexico is
weak exactly where it needs to be strong to become a vibrant democratic nation.
NAFTA, the Controversy, p. 21
Chart 2
Governance Indicators U.S., Canada, and Mexico 2007
2.5
2
1.5
1
0.5
0
-0.5
-1
Governance Score (-2.5 to +2.5)
Source: The World Bank Group, Governance Matters 2008, Worldwide Governance Indicators, 19962007.
Free Trade Area of the Americas (FTAA)
At the 1994 Miami Summit of the Americas the concept of a hemispheric
integration of nations called the Free Trade Area of the Americas (FTAA) was
conceived. Originally scheduled to be completed by 2005, the effort is presently on
NAFTA, the Controversy, p. 22
hold. While many negotiation efforts transpired, little material progress occurred.
Numerous events limited forward progress.
The World Trade Organization’s
(WTO) 1999 Trade Ministerial conference in Seattle collapsed in the fall of 1999.
Additionally, President Clinton was unable to obtain fast-track authority in the Congress
(prevents amendments) to move forward the FTAA.
In 2001 newly elected President Bush obtained fast-tract authority (renamed
Trade Promotion Authority, or TPA) to initiate a new multilateral round of trade policies
at the 4th Ministerial WTO Conference in Doha, Qatar, from November 9 to 13, 2001.
However, the Doha round also faced the same intense opposition experienced in the
Seattle meeting. Little was accomplished. Indeed the WTO was brought to the point of
collapse because of intense opposition to America’s resistance to allow patent
exemptions that would have permitted the Less Developed Countries (LDCs) to have
cheaper drugs:
Dick Cheney, the US vice-president, last night blocked a global
deal to provide cheap drugs to poor countries, following intense
lobbying of the White House by America's pharmaceutical giants.
Faced with furious opposition from all the other 140 members of
the World Trade Organisation, the US refused to relax global
patent laws which keep the price of drugs beyond reach of most
developing countries.
Talks at the WTO's Geneva headquarters collapsed last night
after the White House ruled out a deal which would have
permitted a full range of life-saving drugs to be imported into
Africa, Asia and Latin America at cut-price costs.
"The United States has announced it cannot join the consensus,"
the Brazilian negotiator, Antonio de Aguiar Patriota, said (Elliot
2002). 34
Not achieving any notable success at the Doha round, the Bush administration
rolled out the competitive negotiations strategy which permitted the U.S. to launch a
“series of bilateral negotiations with a broad geographical range of countries”
(Zabludovsky 2007).
35
This was intended to overturn the so-called single-undertaking
limitation of the FTAA principle agreed to at the 1998 San Jose, Costa Rica FTAA
meeting that essentially permitted individual members to veto trade agreements they
opposed. The incentive for the U.S. with this new initiative was that it would no longer
NAFTA, the Controversy, p. 23
be necessary to wait for a full collective consensus on the FTAA to be developed before
trade agreements could be established. However, it also reduced the need for the
individual Latin American Countries (LAC) to establish the FTAA at all. The year 2005
came and went, and no FTAA agreement was established.
However a scramble soon began where all of the LAC began negotiating treaties
with each other as well as the U.S., and the FTAA was essentially put on the back
burner. In fact, “Mexico, the United States, Chile, Guatemala, Honduras, El Salvador,
Nicaragua, and Canada have in one way or another established FTAs among
themselves, amounting to twelve free trade zones in all” (Zabludovsky 2007).
36
In fact,
as of 2004 Mexico had 42 FTA trade partners.
The real question is whether FTA trade partners are supportive of the domestic
economy of a nation. In terms of the three NAFTA trading partners Mexico has the
lowest GDP at $14,200 as of 2008 (see Table 8).
However, in terms of the LAC
Mexico’s GDP is the second highest only exceeded by Chile at $14,900.37 Therefore, it
may not be appropriate to argue that the numerous bilateral as well as multilateral FTAs
are not having a positive impact on Mexico’s economy, particularly since its economy is
so much smaller than that of either Canada or the United States.
Table 8
2008 Per Capita GDP for Canada, Mexico and the United States
(Current U.S. Dollars)
Canada
39,300
Mexico
14,200
United States
47,000
Source: CIA, The World Factbook, Country Listing.
Conclusion
The evidence supporting NAFTA is strong, but not without controversy. There is
no question that trade between the three NAFTA national partners has increased
enormously.
Would there have been an increase in trade between them without
NAFTA? Based on the general increase in trade throughout the world, in part because
NAFTA, the Controversy, p. 24
of the WTO trade agreement and other trade agreements, there is little question that a
substantive trade increase would have occurred even if NAFTA had never been
implemented; however, while it is true that it is difficult to reach a clear conclusion about
the effect of NAFTA on trade, the evidence does point to the conclusion that NAFTA
has been instrumental in increasing overall trade between the member nations. The
enormous reduction and elimination of tariffs between the three trading partners has
been a very strong incentive to increase trade.
Regarding the growth of the Maquiladoras in Mexico, research has determined
that NAFTA had little effect on their overall growth, and that the more important variable
has been the growth of the U.S. economy, particularly after the year 2003.
Labor data shows a mixed picture.
Despite Ross Perot’s fear that “a great
sucking sound” would be heard as American jobs headed to Mexico, the reality is total
U.S. employment has increased by 23 million jobs from 1994 to 2008. Furthermore FDI
in the United States has increased far more than FDI in Mexico with its attendant job
creation for the U.S.
Thus, there is little hard data to show that NAFTA has created
long term job loss in the U.S.
Canada has also fared well. Canada’s GDP has increased faster than either of
the other NAFTA members.
Additionally Canada’s unemployment rate has steadily
declined until 2008 with the onset of the recession of 2008.
However, Mexico is a totally different story. Wages have not grown for Mexican
workers, and American agricultural imports have displaced many Mexican farmers who
are not competitive with low cost imported U.S. agricultural goods. This has had a
particularly hard impact on two of Mexico’s poorest states, Oaxaca and Michoaca,
where many farmers have lost their livelihoods.
The impact of NAFTA is made even clearer when looking at income inequality.
While the primary criticism of NAFTA is that it has increased income inequality in the
United States, the charge cannot be proved simply because there have been so many
changes made to the American tax code over the years, that it would be totally
misleading to try and compare income reported on tax returns. Additionally, for Canada
NAFTA apparently has not been a significant factor in income inequality.
Once again, however, Mexico’s story is different. The top 10 percent of the
NAFTA, the Controversy, p. 25
population has gained income while the other 90 percent has lost income. Additionally,
regional income inequality has also increased.
Another major concern with Mexico from the perspective of the United States has
been illegal immigration.
The reality is that illegal immigration from Mexico is an
unintended consequence of NAFTA.
As a result of the loss of manufacturing and
agrarian employment, illegal migration to the United States can be viewed as the only
logical choice for poor Mexicans who have no other viable options.
Finally the Obama administration approved eliminating support for a pilot ground
transportation program initially approved by the Bush administration for allowing open
access for Mexican trucks transporting goods into the United States. This resulted in
Mexico placing a 10 – 20% tariff on 90 separate American items being exported to the
country. The net result is a flare-up in American/Mexican international relations.
The failure to implement the FTAA has resulted in numerous bilateral FTA
agreements for the members of NAFTA, and Mexico in particular. While Mexico’s per
capita GDP is low compared to that of Canada and the United States, it’s second
highest in the LAC.
Therefore the take away on NAFTA, 15 years after its passage and
implementation, is that it has been successful in promoting trade between the three
signatory nations.
Secondly, of the three national members, only Canada and the
United States have clearly benefited. There is little evidence to support any of the
American critics in terms of the alleged damages to the U.S. economy.
Mexico,
however, has suffered both in terms of increased unemployment, a lowered standard of
living, and increased wage disparity although its GDP is the second highest in the LAC.
The question is can anything be done to rectify the situation? Compared to the
United States, Mexico is an emerging nation that lacks vital infrastructure, an
acceptable personal income level, and a strong educational level of achievement.
Additionally it has a serious drug trafficking issue with the United States and all of the
concomitant issues resulting from such commerce.
It is essential for Mexico to have a strong proactive government to develop
policies that will help the nation turn the corner towards developing a vibrant economy
at the local level. However, this is a bit of a Catch 22 situation. Without having a strong
NAFTA, the Controversy, p. 26
proactive government, economic development will be difficult, and vice versa. Certainly
it is essential for the United States to develop strong relations with Mexico to help it
solve its own internal problems. A strong dialogue is required here.
Mexico is the keystone in order for NAFTA to achieve complete success and
eliminate the controversy.
NAFTA, the Controversy, p. 27
Endnotes
1
Ronald Reagan, “Intent to Run for President,” (Simi Valley, California: Ronald Reagan
Presidential Foundation and Library – Speeches, November 13, 1979).
2
George H. W. Bush, Remarks at the Initialing Ceremony for the North American Free Trade
Agreement in San Antonio, Texas, October 7, 1992 (George Bush Presidential Library and Museum,
Public Papers). http://bushlibrary.tamu.edu/research/public_papers.php?id=4934&year=1992&month=10.
3
Lee Hudson Teslik, “NAFTA’s Economic Impact” (Council on Foreign Relations, March 21,
2008). http://www.cfr.org/publication/15790/.
4
Harlan Hughes, Professor Emeritus, North Dakota State University. Paper presented at
Challenges In Agricultural Trade Under CUSTA Trade Conference, Fargo, North Dakota October 25-26,
2000, pg. 1.
5
Colin Carter, Philip Martin and Alix Peterson Zwane, “Trade and North American Agriculture:
Assessing NAFTA at 12,” Vol. 9, No. 2, Update Agricultural and Resource Economics (Nov/Dec 2005).
6
Gary Clyde Hufbauer and Jeffrey J. Schott, NAFTA Revisited: Achievements and Challenges
October (Washington, DC: Peterson Institute for International Economics, 2005), p. 2.
7
8
9
Ibid, p. 18.
Ibid, pp. 18-19.
William C. Gruben, “Was NAFTA behind Mexico's high maquiladora growth? - Statistical Data
Included,” (Economic & Financial Review , July, 2001).
10
Ibid.
11
Robert E. Scott, Carlos Salas, and Bruce Campbell, “Revisiting NAFTA, Still Not Working for
North American Workers,” Economic Policy Institute (September 28, 2006), Briefing Paper #173, p. 4.
12
U.S. Trade Representative Rob Portman, “The Imperative for Rebuilding the Consensus for
Trade,” Chicago Council on Foreign Relations (May 19, 2006), p. 5.
13
Ibid., p. 4.
14
Scott, op. cit., p. 3.
15
Willem Thorbecke and Christian Eigen-Zucchi, “Did NAFTA Cause a ‘Giant Sucking Sound’?,”
George Mason University, Fairfax, VA 22030, JOURNAL OF LABOR RESEARCH, (2002), pp. 652-653.
16
Mexican FDI data is from FDI.net, Multilateral Investment Guarantee Agency, World Bank
Group, http://www.fdi.net/country/sub_index.cfm?countrynum=132 , and the Canadian FDI data is
interpolated from Witiger.com, FDI in Canada, Foreign Direct Investment in Canada,
http://www.witiger.com/internationalbusiness/FDIinCanada.htm .
17
Sandra Polaski, “Jobs, Wages, and Household Income,” NAFTA’s Promise and Reality, Mexico
for the Hemipshere, Carnegie Endowment for International Peace, Washington, D.C., 2004, p. 12.
18
Polaski, op. cit.
19
Elisabeth Malkin, “NAFTA’S Promise, Unfulfilled,” The New York Times (March 23, 2009).
20
Louis Nevaer, “Nafta's Failures Fuel Mexican Illegal Immigration,” New America Media, News
Analysis, (September 15, 2006).
21
Polaski, op. cit.
22
Teslik, op. cit.
23
Alan Reynolds, “Has U.S. Income Inequality Really Increased?,” Policy Analysis, no. 586
(January 9, 2007), pgs., 20, 22.
24
Polaski, op. cit., p. 13.
25
David Morris, “Business Forum: NAFTA helped increase flow of illegal immigrants,” Star
Tribune (May 7, 2006).
26
Louis Uchitelle, “NAFTA Should Have Stopped Illegal Immigration, Right?,” The Nation, The
New York Times (February 18, 2007).
27
Ibid. Many Mexican officials in the government of President Carlos Salinas de Gortari assured
the Clinton administration that large infrastructure investments would occur once NAFTA was passed. “It
just did not happen.”
28
CIA,
The
World
Factbook,
https://www.cia.gov/library/publications/the-worldfactbook/print/mx.html.
NAFTA, the Controversy, p. 28
29
Sheryl Gay Stolberg. “In Mexico, Obama Seeks Curbs on Arms Sales,” The New York Times
(April
16,
2009).
http://www.nytimes.com/2009/04/17/world/americas/17prexy.html?_r=1&scp=1&sq=obama%20calderon
%20april%2016th%202009%20meeting&st=cse. Accessed November 18, 2010.
30
Mary Anastasia O'Grady, “Washington Starts Another Trade War,” The Wall Street Journal
(March 16, 2009).
31 Arturo Sarukhan, “Congress Doesn’t Respect NAFTA,” The Wall Street Journal (March 18,
2009).
32 Henry J. Pulizzi, “White House Seeks to Avert Trade War Over Mexican Trucks,” The Wall
Street
Journal
/
Blogs,
Washington
Wire
(March
16,
2009).
http://blogs.wsj.com/washwire/2009/03/16/white-house-seeks-to-avert-trade-war-over-mexicantrucks/?KEYWORDS=+White+House+Seeks+to+Avert+Trade+War+Over+Mexican+Trucks.
Accessed
November 18 2010.
33
The World Bank Group, Governance Matters 2008, Worldwide Governance Indicators, 19962007. http://info.worldbank.org/governance/wgi/index.asp. Accessed November 18, 2010.
34
Larry Elliott and Charlotte Denny, “US wrecks cheap drugs deal,” The Guardian (December 21,
2002). http://www.guardian.co.uk/world/2002/dec/21/usa.aids.
35
Jaime Zabludovsky and Sergio Gomez Lora, Beyond the FTAA, Requiem or Revival?
chapter in The Promise of North American Integration, Isabel Studer and Carol Wise, eds.,
Washington, D.C. Brookings Institution Press 2007, p. 92.
36
Ibid., p. 98.
37
CIA, Op. Cit.
NAFTA, the Controversy, p. 29
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