Back to NAFTA and after: Introduction

NAFTA and after

Slouching towards the Free Trade Area of the Americas

by Peter Costantini

Seattle—January 1, 1999

After five years, the North American Free Trade Agreement (NAFTA) is keeping a low profile in a world spooked by the destructive power of torrential capital flows and more cautious about the benefits of untrammeled trade and investment. NAFTA's parade has been rained on repeatedly: first by rebellion and political assassinations in Mexico, then by the 1994 crash of the Mexican peso, and most recently by the meltdown of East Asian and Russian economies.

Even as Mexico drags itself out of the catastrophic recession that followed devaluation, the U.S. continues to run deep trade deficits with it and with Canada. Opponents of the accord claim serious job losses and lowered wages as a result. The problem, counter free-trade boosters, is that the benefits of the agreement have been masked by unfavorable conditions. This fall, reflecting NAFTA's unpopularity with the U.S. public, Congress rejected President Bill Clinton's request for fast-track negotiating authority in future trade agreements for the second year running.

Despite the setback, negotiations for a Free Trade Area of the Americas (FTAA) concluded a low-key first round this October in Miami. The FTAA would create a free-trade zone stretching from Alaska to Tierra del Fuego by 2005. "It is extremely important that the countries of the Western Hemisphere demonstrate a commitment to maintaining our region's momentum toward more open markets and prosperity for our people," said U.S. Trade Representative Charlene Barshefsky.

According to one poll, however, two-thirds of U.S. citizens oppose expanding NAFTA to other Latin American countries. "You can't sustain political support among people in a democracy for policies that are so one-sidedly pro-business, pro-investment, pro-multinational executives," said Lance Compa, former research director for NAFTA's labor commission. "The social dimension in NAFTA is very meager, it's got to be greatly strengthened. I hope that the FTAA negotiations will be an opportunity to do that. Other countries involved probably have some good ideas themselves on how to frame a social dimension in trade."

In the wake of the Russian and East Asian crashes, Mexico has not escaped the turbulence. Reduced demand and falling prices for its critical petroleum exports have slowed the Mexican economy and forced deep budget cuts. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) predicted that Mexico's current-account deficit would increase by more than one-third for the year. The peso, which stood at 3.1 to the dollar at the end of 1993, has fallen from 7.9 at the end of 1997 to 10.0 in early December. Forecasts of 1998 inflation have risen from 12 to 18 percent.

"To the extent that financial liberalization continues, phenomena such as the Dragon Effect or the Vodka Effect will continue hurting our economies badly," said Mexican labor leader Berta Luján. "It's increasingly obvious that these crises in one place have repercussions in the rest of the world. And in the countries of the South, which have fewer defenses or protections and much weaker economies, they hit us more brutally."

Interview with Luján: English | español

If the International Monetary Fund-led bailout of Brazil fails to ease its economic distress, nervous investors fear that Mexico could be the next "emerging market" to submerge. Yet from Washington's perspective, as a senior U.S. trade official put it, "Mexico is helping to soften some of the pain that is occurring on the global export picture for the United States, and clearly that is in part due to the NAFTA."

Overall, trade between the U.S. and Mexico increased by 93 percent during NAFTA's first four years. The upswing continued by 12 percent in the past year, as Mexico surpassed Japan to become the United States' second-largest trading partner after Canada. A study by the University of California at Los Angeles, though, termed the accord's effects "negligible," attributing more influence to the broad economic liberalization that Mexico began on its own in the mid-80s. Debates continue to simmer over jobs gained and lost and effects on wages and prices.

Accompanying story on trade controversies.

Statistics aside, U.S. public opinion has given NAFTA a resounding thumbs down. Large majorities in several polls said that NAFTA has hurt ordinary citizens more than it's helped them, and has benefited mainly multinational corporations. Fortune magazine reported that 66 percent of export managers of small businesses feel that NAFTA "hasn't amounted to a hill of beans."

Side agreements on labor and the environment, added by the Clinton administration under public pressure, are widely viewed by both supporters and opponents as toothless. Seventy-three percent of respondents to one U.S. poll agreed that in the future "labor and environmental issues should be negotiated as part of trade agreements," not on the side.

Accompanying story on labor side agreement.
Accompanying story on environmental side agreement.

In Mexico, a poll by the newspaper Reforma concluded that 67 percent of Mexicans believe their country has had little or no success with NAFTA. Despite a resumption of growth of gross domestic product, Mexican wages remain far below their pre-NAFTA level. The percentage of the population in extreme poverty increased from 32 percent to 51 percent from 1994 to 1997.

NAFTA's culpability in the peso devaluation and Mexico's ensuing 17 percent economic contraction is still bitterly contested. "Membership in NAFTA did not keep Mexico from running into the crisis of 1994," observed Guy Pfeffermann, chief economist at the International Finance Corporation, a branch of the World Bank. "One way to look at this crisis is as an unavoidable adjustment of the real exchange rate to massive new competition from the United States and Canada. Still, in the medium and longer-term, membership in NAFTA enhances Mexico's policy credibility by reducing the scope for discretion."

For trade unionist Luján, however, the treaty strengthened an economic model that benefited a few and hurt many. "The government's promises turned into big myths," she said. "All the economic indicators tell of a deterioration in living conditions. In the end, NAFTA did not help to pull Mexico out of the crisis, nor to raise living standards for the Mexican people."

Although Canada, like Mexico, has registered strong trade surpluses with the U.S., Canadians, too, have suffered under the free-trade regimen. In the first three years after entering into the U.S.-Canada Free Trade Agreement in 1989, unemployment rose nearly four percentage points. Although now dropping, it remains high at 8.0 percent, yet social spending to ease the pain has been slashed under competitive pressures.

If many North Americans are voicing reservations about the dominant model of free trade, increasing numbers of Latin Americans have also become wary of rushing into a pact with the giant to the north. Chile, once promised membership in NAFTA by the U.S., has been jilted and left to seek other partners by the failure of Clinton administration salesmanship.

Within FTAA negotiations, Washington's grip on the process may be slipping. Although the Clinton administration reportedly wanted to make Miami the permanent site of FTAA talks, a proposal to rotate between Miami, Panama and Mexico was adopted. And the U.S. will have to share the chairing of the final phase of negotiations with Brazil.

Quantitatively, the U.S. is still the 800-pound gorilla, hosting three-fourths of the Hemisphere's economic activity. Exports to the FTAA countries account for 45% of total U.S. exports, with exports to Latin America nearly doubling in the past five years.

But Washington's history of arrogance on issues like the Helms-Burton sanctions against Cuba and its political paralysis on trade has pushed some Latin American countries to diversify their trade options. Many are signing bilateral and regional trade agreements among themselves, and some officials suggest deferring integration with the U.S. until their economies have adjusted to and been strengthened by these regional pacts.

An important new center of gravity is Mercosur, the trade association of Brazil, Argentina, Chile, Uruguay, Paraguay and Bolivia. With 80 percent of South America's gross domestic product, Mercosur trades 48 percent more with Europe than with the U.S.

With its shiny new Euro, Europe has become another attractive trade partner for Latin American countries. It also represents a more moderate model of economic integration. The European Union took a more gradualist approach to integrating its poorer member countries than NAFTA, investing substantial amounts of transitional aid in them.

In the wake of the economic disasters in Asia and Russia, the "Washington Consensus" and free-market orthodoxy are being questioned even in the rarefied air of finance ministries and the World Bank. Yet none other than Fidel Castro, while criticizing the hegemony of neoliberalism over the global economy, has observed: "Shouting 'down with globalization' is like shouting 'down with the law of gravity.'"

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Peter Costantini writes about Latin America, labor and technology issues for MSNBC News, Inter Press Service, and other news outlets. An edited version of this piece went out on the IPS newswire on December 20, 1998.