As the debate over “free trade” rages on, all sides inevitably refer back to the deal that revolutionized trade and investment rules: the North American Free Trade Agreement. Now ten years old, NAFTA offers an important lesson for the rest of the world: there is no guaranteed link between trade and investment liberalization and improvements for workers or the environment.
The NAFTA Record
- Increased trade and investment: NAFTA supporters emphasize that total trade among the NAFTA countries has more than doubled between 1993 and 2002, increasing at a rate of $1.2 million per minute. There has also been a doubling of foreign direct investment by NAFTA partners in the three countries, from $136.9 billion in 1993 to $299.2 billion in 2000.
- Disconnect between exports/investment/productivity and wages: Mexico did indeed attract a significant number of jobs in export processing factories. However, despite substantial productivity growth, real wages in manufacturing dropped 13.5 percent between 1994 and 2000, according to the International Monetary Fund.
- Failure on labor rights: Part of the explanation for falling Mexican wages is that NAFTA has failed to protect the rights of workers to fight for their fair share of economic benefits. The agency set up under the NAFTA labor side agreement has proved incapable of holding governments or corporations accountable for worker rights violations. More than 20 complaints have been filed regarding alleged violations in all three NAFTA countries, but in not a single case has the process yielded more than a bit of public exposure to the problem.
- New jobs disappearing: According to the Mexican government, from a high of about 1.3 million in 2000, the country lost more than 230,000 export assembly jobs by the end of 2003. Analysts estimate that as much as 35 percent of these cuts were due to shifts in production to China, where workers make about 60 cents an hour, compared to Mexicoâ€™s average manufacturing wage of about $2. This job flight has raised fears that Mexicoâ€™s strategy of attracting investment by offering low wages is short-sighted.
- Foreign investment offers little benefit for other industries: NAFTA forbids governments from placing requirements on foreign investors that would ensure benefits for the broader economy. For example, Mexico cannot require that investors use a set amount of local content in manufacturing. Hence, only about 3 percent of inputs are Mexican.
- Rural impacts: Under NAFTA, Mexico agreed to a timetable for lifting barriers to U.S. and Canadian agricultural imports. In most years, the Mexican government has allowed even more imports than required, claiming that this would lower consumer food prices. As a result, U.S. corn imports doubled between 1994 and 2000. There are no firm data on how this affected rural livelihoods, but World Bank figures indicate an increase in rural poverty from 79 percent in 1994 to 82 percent in 1998. Mexican industries that use corn did benefit from cheaper prices, but these cost savings were not passed on to consumers due to monopoly pricing of tortillas, a staple food.
- “NAFTAmath” on U.S. jobs: During the NAFTA debate, promoters argued that the deal would lead to a large U.S. trade surplus with both NAFTA partners, and on the basis of this, they projected a net job increase. A widely cited report by the Institute for International Economics, for example, estimated that NAFTA would create 170,000 net jobs. However, instead of a trade surplus, the United States has experienced massive deficits with both Canada and Mexico. Even though U.S. exports to these countries did increase somewhat, the combined U.S. trade deficit with Mexico and Canada went from about $9 billion in 1993 to $87 billion in 2002 â€“ almost a tenfold increase. NAFTA supporters now claim that it is valid to base job impacts solely on exports, without considering the displacement effects of increased imports. Critics, on the other hand, argue that if U.S. consumers switch from buying American to foreign products, this does have a negative effect on U.S. employment.
- NAFTA layoffs: The U.S. Labor Department has certified more than a half million American workers for a retraining program available to those who have lost their jobs because their firm shifted production to Mexico or Canada or was hurt by competition from those countries. This number is just a fraction of total jobs lost because of the programâ€™s narrow qualification criteria.
- Whipsawing: NAFTA has had a detrimental impact on the power of American workers to fight for better wages and working conditions. Cornell University Professor Kate Bronfenbrenner has documented threats by U.S. employers to move to Mexico and other low-wage countries in order to fight unions and restrain wages. She found that the use of such threats in union organizing drives increased from about 50 percent in the early 1990s to 62 percent in 1998 and 68 percent in 1999. Most economists concede that such pressures were a factor in the meager growth of U.S. real wages in the late 1990s, despite near record low unemployment.
- Blackmail in Canada: In Canada, the business community has used NAFTA to push for cuts in social programs, arguing that it was necessary to compete with the United States, which generally offers lower levels of protection. The clearest example of their impact is the scaling back of Canadaâ€™s unemployment insurance. According to a publication of the Canadian Centre for Policy Alternatives, the percentage of unemployed that qualified for this insurance dropped from 87 percent in 1989 to only 39 percent in 2001.
- Environment: Although NAFTA promoters theorized that trade-related economic growth would produce greater environmental spending, research by Kevin Gallagher of Tufts University reveals that such expectations were pure fantasy. Despite steady economic growth, Mexican government investment in environmental protection declined in real terms by about 45 percent between 1994 and 1998. Environmental funding from the North American Development Bank amounted to only about $3 million per year during NAFTAâ€™s first decade. Meanwhile, air pollution from Mexican manufacturing nearly doubled.
- Unprecedented Investor rights: When officials in any of the NAFTA countries attempt to tackle environmental problems through regulation, they face the threat of an expensive lawsuit, thanks to NAFTA protections for foreign investors. For example, investors are allowed to demand compensation for “indirect expropriation,” interpreted to mean any government act that diminishes the value of a foreign investment. Following one such suit, the Mexican government was ordered to pay nearly $17 million to a California firm that was denied a permit from a municipality to operate a hazardous waste treatment facility in an environmentally sensitive location. Similar suits in Canada and the United States have stirred up rancor among state and local government groups that have historically supported free trade agreements.
1. NAFTA: A Decade of Strengthening a Dynamic Relationship, statement of the trade ministers of the United States, Canada, and Mexico (no date), http://www.ustr.gov/regions/whemisphere/nafta2003/brochure-english.pdf.
2. Corbacho, Ana and Gerd Schwartz. “Mexico: Experiences with Pro-Poor Expenditure Policies,” IMF Working Paper, January 2002.
3. INEGI web site (inegi.gob.mx)
4. Arroyo, Alberto. Impacts of the North American Free Trade Agreement in Mexico: Lessons for the Free Trade Area of the Americas Negotiation. (English edition) Philadelphia: American Friends Service Committee, May 2003.
5. Ackerman, Frank, Timothy A. Wise, Kevin P. Gallagher, Luke Ney, and Regina Flores. Free Trade, Corn, and the Environment: Environmental Impacts of US-Mexico Corn Trade Under NAFTA, Global Development and Environment Institute, Working Paper No. 03-06, Tufts University, June 2003.
6. World Bank, Memorandum of the President of the International Bank for Reconstruction and development and the International Finance Corporation to the Executive Directors on a Country Assistance Strategy Progress Report of the World Bank Group for the United Mexican States, Report No. 22147-ME.
7. Bronfenbrenner, Kate. Uneasy Terrain: The Impact of Capital Mobility on Workers, Wages and Union Organizing, Report to the U.S. Trade Deficit Review Commission, September 6, 2000, www.ustdrc.gov
8. Hemispheric Social Alliance. Lessons from NAFTA: The High Cost of “Free Trade.” Ottawa: Canadian Centre for Policy Alternatives, 2003.
9. Gallagher, Kevin, P. NACEC and Environmental Quality: Assessing the Mexican Experience. Greening NAFTA: The Experience and Prospects of the North American Commission for Environmental Cooperation. John Knox and David Market (eds). Palo Alto: Stanford University Press, 2002.
This report was originally issued by the Institute for Policy Studies on December 18, 2003.