Negotiating A New NAFTA: What And Why This Is Needed

By Preston Whitt

At the end of 1992, the leaders of Canada, the United States, and Mexico signed the North American Free Trade Agreement (NAFTA). Once ratified, it took effect on January 1, 1994. Though its White House proponents hailed NAFTA as a transcendent step towards mutual advancement for the three partner countries, there was significant opposition in each NAFTA nation. As the years since NAFTA’s implementation have passed, many significant flaws in the agreement have come to light. It is clear that a new NAFTA that addresses these flaws is necessary in order to create a more multilaterally beneficial system.

Mexico

In a 2009 “Policy Outlook” issued by the Carnegie Endowment for International Peace, Eduardo Zepeda, Timothy Wise, and Kevin Gallagher highlight the Mexican experience under NAFTA:

Beyond dispute, the agreement brought some important economic successes to Mexico. Its manufacturing and other exports ballooned in real terms (adjusted for inflation), as did foreign direct investment (FDI). International competition spurred advancements in industrial productivity, and Mexico has been able to constrain its macroeconomic policies to control both inflation and its deficit.

Yet, as quickly became a major theme, these benefits were not enough to initiate the drastic economic growth that was originally expected and touted. Total investment remained basically static, as FDI replaced domestic investment; the majority of FDI was used to purchase already established firms and for “production-sharing operations” (value is added to imported products, such as importing chemicals to make plastic, which are then re-exported). Thus, the economic “spill-over” (the economic multiplier of investment) was significantly limited, as were the benefits from increased exports.

The most significant blow to Mexican development since NAFTA’s reign, however, has been in the agricultural sector. While gains in manufacturing and other areas of the formal sector at times have been significant, they have been largely dwarfed by a loss of over 2.3 million jobs in agriculture because of foreign competition, according to the Mexican Instituto Nacional de Estadística y Geografía, and over half of the new jobs that were created did not meet the basic standards when it came to benefits.

Canada

Bruce Campbell treats the Canadian experience in various publications from the Canadian Centre for Policy Alternatives:

Canada also has seen an increase in foreign direct investment; in-flowing FDI has grown for Canada since NAFTA’s implementation. However, its total share of North American FDI has fallen, partly because of the magnitude of out-flowing Canadian FDI. Like Mexico, Canada also has suffered drawbacks because of an increasingly ‘production-shared’ manufacturing sector. While this industrial strategy is designed to result in lower consumer prices, it also significantly weakens any employment benefits resulting from increased exports. As Campbell cites from a Canadian Industry Department study, “the import content of Canadian exports increased to the point where, by 1997, more jobs were being destroyed by imports than created by exports.”

While productivity has increased and overall rates of poverty have decreased in Mexico, Canada has seen the inverse: Canadian productivity has dropped to 82% of U.S. productivity, a rate lower than it was in 1961, and income inequality has increased drastically. Large manufacturing firms have trended towards replacement by smaller firms, and white-collar jobs have been lost to blue-collar employment. In terms of income inequality, the upper echelons of Canadian citizens did increase their income during the NAFTA years, but the bottom 20% experienced a significant shrinkage of income. Canada’s usually competent income tax and transfer system was unable to cope with the changes brought on by NAFTA, and as a result “…overall income inequality increased–for the first time since the 1920s.”

The United States

The US Department of Agriculture enthusiastically believes that NAFTA has been a success. Its website contains numerous documents purporting to dispel supposed myths regarding NAFTA’s negative effects. In one document, it implicitly acknowledges that while agricultural exports to Mexico and Canada increased by $9.5 billion between 1994 and 2005, imports from those countries increased by $11.5 billion in the same period. It claims that this disparity is not significant since “almost all major foreign suppliers saw sharp gains in their sales to the United States since 1994” and “[o]f the…increase in total U.S. agricultural imports from NAFTA countries, only half were in products that are competitive…with U.S. farm production.”

However, this free-market boosterism has not entirely borne the promised benefits. Robert Scott, in a briefing paper for the Economic Policy Institute, addresses the “high price of free trade”:

As previously discussed, promoting FDI was to be a primary focus for NAFTA, and in this area it succeeded – Mexico saw an increase of 124 billion USD, and Canada drew in 202 billion USD more over the initial NAFTA years. However, the job creation in these countries overall turned out to be a negative process because of the inherent limits in the complexion of the jobs created. Unfortunately for the United States, the jobs it lost to cheaper NAFTA-partner firms were not replaced–another clear theme in NAFTA’s eventual impacts. More U.S. jobs were lost through NAFTA than were gained between 1993 and 2002. These types of job losses, as seen in Canada, have significantly contributed to inequality among the American work-base; the types of jobs lost (mostly cheap labor and manufacturing) most seriously affect the lower and middle socio-economic strata.

Conclusions

Clearly, a free trade agreement between Mexico, Canada, and the United States has the potential to benefit the citizens of the three countries. Overall, however, NAFTA’s impact on them over the past two decades has been essentially a failure. In building a replacement, several important factors must be considered in order to translate NAFTA into a success.

Primarily, a New NAFTA (or NNAFTA) must allow individual governments to enact policies to address the inevitable and usually severe effects of economic liberalizations like free trade agreements, in order to ameliorate the trade agreement’s impact. Any large-scale trade treaty will cause an equally large-scale domestic economic restructuring, and domestic governments must have some power to influence this restructuring. For NNAFTA, the Carnegie “Policy Outlook” by Zepeda et. al has delivered excellent recommendations. They point to the success of China’s trade agreements; Beijing has been able to maintain its ability to formulate policies that direct FDI into domestic industrial growth. Their recent economic hyper-success should prove that such an ability obviously merits inclusion in NNAFTA. In creating NAFTA, it seems the governments of the three nations voluntarily renounced almost all of the macroeconomic power they had over their individual economies. Though Bruce Campbell states “[a]t its core, NAFTA is about shifting the power in the economy from governments and workers to corporations”, even this may be an overly optimistic view. The largest corporation is only a fraction of the total economy, so the abstention of the three NAFTA governments results in the power being not transferred, but dissolved.

Additionally, and just as importantly, labor and environmental regulations must be standardized. The creation of common minimum wage, safety, and welfare/benefits criteria would help prevent the destructively chaotic industrial redistribution that has caused Ratner and Scott’s hemispheric “race to the bottom”. Environmentally, the damage suffered during the reign of the NAFTA period has been slightly less severe, but no less telling. Zepeda, Wise, and Gallagher explain, however, that this is not because of firms fleeing to Mexico as a “pollution haven”, but is instead “due to a weakening of the commitment to environmental protection”. Still, Gallagher is quick to point out that “[t]he Mexican government estimates the cost of environmental degradation at 10% of GDP annually.”

American Benefits from NNAFTA

In the buildup to the United States presidential elections in 2008, NAFTA played a significant role in both major political parties’ platforms. While Senator McCain defended NAFTA as an American economic stimulant, then-Senator Obama called for the reopening of NAFTA for negotiation on the major issues of environmental and labor rights protection. But as the second anniversary of President Obama’s election is now approaching, NAFTA has yet to make its way to the point in the President’s singular, mono-issue style. As the U.S. economy continues to shed jobs and stutter in its recovery, successfully organizing a NNAFTA (New NAFTA) could significantly help both the economy and Obama’s political prospects in upcoming elections. More than just improving the American jobs outlook, seemingly the most pressing American political issue, a better and more equitable NAFTA would help resolve another political quagmire plaguing the U.S. – immigration reform. As Zepeda, Wise, and Gallagher aptly put it, “one of the paradoxes of NAFTA…is that Mexico now ’exports’ more people than ever.” For most of these displaced immigrants, their quest for jobs ends in the United States, which, if the recent panic-driven attacks on the 14th Amendment are any indication, is acknowledged as a “big” problem requiring an almost visionary agenda.

Thus, by improving NAFTA, the Obama administration could set the stage for two huge political triumphs–as well as help improve the lives of average North Americans. It is to be hoped that revising NAFTA will soon make its way back into the political arena of discussion and debate.

This analysis was prepared by COHA Research Associate Preston Whitt

COHA

COHA

COHA, or Council on Hemispheric Affairs, was founded in 1975, the Council on Hemispheric Affairs (COHA), a nonprofit, tax-exempt independent research and information organization, was established to promote the common interests of the hemisphere, raise the visibility of regional affairs and increase the importance of the inter-American relationship, as well as encourage the formulation of rational and constructive U.S. policies towards Latin America.

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