Back to NAFTA and after: Introduction

NAFTA and after

Lies, damn lies and trade statistics

by Peter Costantini

Seattle—January 1, 1999

The labyrinthine intricacies of the North American Free Trade Agreement (NAFTA) make even policy wonks' eyes glaze over. For ordinary citizens, it's a daunting challenge to untangle the Gordian knots of causality amid the skeins of statistics and spin. Yet here and there, threads of consensus and snarls of controversy do emerge from the welter.

From the long view, a few trends are clear. Trade is increasing within the Hemisphere. As a percentage of total global commerce, though, it has only recently returned to 1970 levels and remains well below those of 1950. Fifty-five percent of the Hemisphere's trade is between its own countries.

The most dynamic area is Latin America, whose imports grew by 21.5 percent in 1996, against a global average of nine percent. For the U.S., exports to the rest of the Americas account for 45% of total exports, and exports to Latin America have almost doubled in the last five years. Over the first eight months of 1998, although the Asian crisis dragged down U.S. exports to the rest of the world by more than three percent, exports to Latin America increased by over 10 percent.

Evaluating the effects of all this trade, though, poses some intrinsic problems. For example, the benefits of lower prices from increased competition are dispersed among multitudes of consumers, while job losses tend to concentrate the pain in certain industries and localities. The most widely cited economic statistics don't necessarily capture what economists call "negative externalities," such as the costs of social dislocation and environmental damages.

Separating out the effects of one agreement from long-term trends can be difficult, too. "There are larger forces at work than NAFTA," said Lance Compa, former research director for NAFTA's labor commission. "It was an attempt by investors and executives to lock in tendencies that were already underway. Mexico was already liberalizing its economy and dropping tariffs and inviting in foreign investment."

"We've always been closely connected to Mexico, which had virtually a one-way free-trade agreement," observed a senior U.S. trade official. The accord lowers Mexican tariffs, he said, and "locks open market access, which governments may try to close in a financial crisis."

Trade balances and jobs

One key area of disagreement is the meaning of trade balances. A trade deficit results when a country's exports are greater than its imports. Despite the sharp growth of trade volume, U.S. trade deficits of $16.4 billion with Canada and $14.5 billion with Mexico persisted in 1997. The projected 1998 shortfall with Mexico remains at roughly the same level.

How such imbalances affect countries' economic health, however, is controversial. Orthodox economic theory holds that trade is generally beneficial regardless of deficits and surpluses, which merely reflect differing comparative advantages among countries.

During the U.S. debate over the passage of NAFTA, two pro-NAFTA economists proposed a multiplier of roughly 20,000 new jobs per $1 billion in trade surplus, apparently assuming that U.S. exports would skyrocket. When the peso crisis threw Mexico into recession and the U.S. trade balance with it into deficit, NAFTA opponents seized on the figure and projected U.S. job losses in the hundreds of thousands.

The ratio was probably not valid to begin with, according to Compa. Still, he said, "The Clinton and Bush administrations deserve [the rhetorical tit-for-tat] because they put out this bogus formula about x billion dollars creating x thousand jobs, and now the tables are being turned."

Regardless of the exact numbers, layoffs have indisputably caused hardships for many workers. In the U.S., nearly 150,000 workers had been certified as eligible for NAFTA's Transitional Adjustment Assistance Program by the end of 1997. Yet less than five percent of them received any benefits under the program. According to one study, laid-off U.S. workers ended up with significantly lower average pay when they did find a new job.

Wages and dislocation

Beyond those who have lost jobs, the influence NAFTA has exerted on wages remains controversial. Opponents of the treaty argue that employers' threats to move south and actual moves depress wages in some industries. Supporters counter that many higher-paying manufacturing jobs would leave the U.S. and Canada in any case, but without NAFTA would go to Asia.

While the loss of manufacturing jobs is a long-term trend in the U.S., runaway shops may be increasing under the treaty. A study for the NAFTA labor commission found that when faced with union organizing efforts, over half of the surveyed companies threatened to close their plants. Furthermore, in those shops that did unionize, 15 percent of the employers did in fact close down at least part of their operations, three times rate of closure in the late 1980s.

According to Kate Bronfenbrenner of Cornell University, the study's author, "NAFTA has created a climate that has emboldened employers to more aggressively threaten to close, or actually close their plants to avoid unionization."

In the Mexican countryside, NAFTA has accelerated the exodus of campesinos (peasant farmers) to the cities and corporate farms of northern Mexico and the U.S. Overwhelmed by the influx of cheap, subsidized U.S. corn allowed by NAFTA, many of Mexico's 2.7 million corn farmers are leaving their lands.

One Mexican farmer told a researcher: "If the U.S. sends subsidized corn into Mexico, send it in trains with benches to bring back the Mexican farmers who will need jobs." Another said that competition with U.S. farms "probably means the end of our communities."

Foreign investment

NAFTA is not just about trade: some of its most important provisions cover foreign investment. Mexico had already captured 38% of foreign direct investment (FDI) by businesses in Latin America for the first half of the 90s. Since then, NAFTA and the devaluation of the peso have helped FDI in Mexico to remain healthy, although Brazil surpassed it as the top Latin American recipient in 1997. FDI is often viewed as more desirable for developing countries than paper investments in stocks and bonds, which can be withdrawn rapidly in times of uncertainty.

Much of the foreign investment, however, has gone to maquiladoras, tax-free assembly plants that import components and re-export the finished product. Forty percent of Mexico's total exports are now sales by maquiladoras. But these factories do little to help to develop domestic industry or markets. According to labor analyst Harley Shaiken, roughly two-thirds of U.S. exports to Mexico are "industrial tourists" that are merely assembled and re-exported to the U.S..

NAFTA and the peso

The question of NAFTA's role in the 1994 crash of the Mexican peso continues to be a hot-button issue. Global Trade Watch, a Washington NGO, has suggested that the artificially high peso reduced inflation, thus helping to pass NAFTA in the U.S. Congress and to influence the 1994 Mexican presidential elections. Mexico's export-led growth strategy based on NAFTA, the organization said in a report, required a weak peso to make Mexican exports more competitive and to attract foreign investment.

Sidney Weintraub, political economist at the Center for Strategic and International Studies in Washington strongly disagreed. "NAFTA had nothing to do with Mexico's collapse," he said. "Its current account deficit and balance of payments [problem] in '94 wasn't with the U.S., it was mostly with Europe and Japan." A senior U.S. trade official, too, rejected any link between NAFTA and the peso crisis: "There were simply mistakes made in how they managed their exchange-rate process and their fiscal and monetary policies."

The accord was, in fact, only one component of the broad economic liberalization of North American economies over the past decade.

Yet indisputably, living standards of most Mexicans were devastated by the crisis and have yet to recover fully. Although manufacturing productivity was up over 12 percent from 1994 to 1996, hourly wages adjusted for inflation dropped 27% and remain low. Interest rates over 30 percent have left a wreckage of lost homes and bankrupt businesses. Even now the crisis continues to inflict damage: the ruling party is proposing that Mexican taxpayers pay for $US 55 billion of bad bank loans from the crash.

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Peter Costantini writes about Latin America, labor and technology issues for MSNBC News, Inter Press Service, and other news outlets.