After deliberating in secret for 14 months, negotiators for the United States, Mexico, and Canada finally unveiled a North American Free Trade Agreement (NAFTA) in September. One thing was immediately apparent to both critics and proponents of the agreement: the 2,000 pages of prose and tariff schedules that George Bush presented to Congress do not represent free trade in the classic sense of the phrase.
Rather, the agreement orchestrates trade and investment flows between the three countries with remarkable attention to detail. NAFTA protects the investments and proflts of multinational corporations, while callously disregarding the rights of workers, farmers, small-business owners, and the environment. Within the United States, much of the political debate over NAFTA has focused on Jobs. President Bush attempted to sell the agreement to the American people as a job-creating plan. "Jobs, Jobs, jobs," Carla Hills, Bush's U.S. Trade Representative, intoned dutifully at the Republican Convention, touting the alleged benefits of the deal she had just concluded.
But most Americans were not convinced. Bush's resounding defeat at the polls was a pretty clear indicator that, with unemployment stuck at 7.5 percent, most people were looking for a more plausible jobs bill than a free-trade deal with our still-poor neighbor to the south. A CBS New York Times poll in July found that Americans thought NAFTA was a "bad idea" by a 2-to-l margin. Another poll in September cited by the Los Angeles Times found only 16 percent of the population believed that NAFTA would create Jobs for Americans.
Job Gain or Job Loss? Competing economic studies reveal diametrically opposed visions of the future. NAFTA proponents optimistically predict job, wage, and output gains in all three countries, based on guesstimates of rapid growth, efficiency gains, and expanded exports for everybody. Meanwhile, the critics forecast wage erosion and job losses for Canada and the U.S. with small and unevenly distributed gains for Mexico.
How can reasonable people differ about this question? One of the key areas of dispute is NAFTA's likely impact on the location decisions of firms, i.e. whether it will encourage U.S. and Canadian companies to move production to Mexico in order to take advantage of low wages and lax environmental and workplace regulations. The greater the shift of investment from the United States and Canada to Mexico after the agreement, the greater will be the loss of Jobs in the two northern countries.
Virtually all of the models predicting job gains for the U.S. as a result of NAFTA focus solely on the effect of lower trade barriers, assuming that no shift in investment will take place. Some of the key models, such as those by the Peat-Marwick accounting firm and researchers at the University of Michigan and Tufts, actually assume an increase of investment in Mexico, with no corresponding loss of investment in the United States.
This is equivalent to assuming that Mexican businesses find an extra $25 billion in the middle of Main Street one morning. It is no wonder that the modellers are able to derive positive results for both economies. But these assumptions blatantly misrepresent both the content of the agreement and the dynamic of trade between the U.S. and Mexico.
When the likely shift of investment is correctly taken into account, most models do show net job loss for the United States, on the order of half a million jobs over the next ten years. More disturbing, realistic economic models also show the likelihood of significant wage erosion. Professor Ed Leamer of UCLA predicts a loss of about $1,000 a year for approximately 70 percent of the U.S. workforce - everyone but managers, scientists, and technicians. "Indeed," he writes, "if the reason for the expansion of international commerce is increased access to low-wage unskilled foreign labor it is virtually certain that our low-skilled workers will have their earnings reduced."
Because the agreement locks Mexico into a dead-end development strategy, where the objective is to attract foreign investment by keeping wages low, unions weak, and regulations unenforced, it is unlikely to bring big gains for most Mexican workers. While some new manufacturing jobs will be created by the influx of U.S. investment, these gains will not be anywhere near large enough to employ the almost one million Mexican workers who enter the labor force every year.
Furthermore, the gains in manufacturing employment will be somewhat offset by losses in other sectors, particularly agriculture and small business. By phasing out the subsidies and tariffs on basic grains, the agreement will lead to the displacement of many Mexican small farmers (estimates range from 800,000 to about 2 million). And Mexican small businesses will continue to be driven out of business by cheap imports and by the domestic producüon of multinationals. The Mexican labor market is ill-equipped to handle disruptions of these magnitudes.
Canada has already lost almost 500,000 manufacturing jobs since the Canada-U.S. FTA took effect in 1989- almost a quarter of the manufacturing job base. While not all of those lost jobs can be blamed on the agreement, it is worth remembering that Canada, too, was promised job gains if it ratified the FTA. In the case of Canada, a relatively small wage differential (about 1.17 to 1 as of early 1991) was sufficient to induce hundreds of firms - both American subsidiaries and Canadian companies - to relocate production from Canada to the United States.
According to the New York Times, 87 Canadian firms had moved to Buffalo, N.Y., alone as of the summer of 1991. Lower wages, lower taxes, and cheaper real estate in the United States, combined with "practically unrestricted access" to the Canadian market, apparently offered firms an irresistible temptation to relocate. Of course, the wage differential between Mexico and the United States is vastly greater than that between Canada and the United States, so the potential for investment shifting would appear to be even greater.
Anyone who takes the time to look closely at the NAFTA text will see that a central objective of the negotiations was to facilitate continental corporate mobility, to make it as easy for a U.S. company to operate in Matamoros, Mexico, as it is to operate in Milwaukee - at least insofar as government regulations can do so. In fact, flve out of a total of 22 chapters in the agreement relate to investment - Investment, Financial Services, Competition Policy, Temporary Entry for Business Persons, and Intellectual Property. This is in contrast to labor and environmental standards, which are treated cursorily when addressed at all.
These chapters address a broad range of issues that might concern investors. It is almost as though a few business people sat down and asked, "What are the obstacles that currently might deter us from moving our factories to Mexico?" Then the negotiators systematically set about removing or reducing those obstacles.
What Next? At this point, concerted pressure on the leaders and legislators of all three countries from citlzens' groups can affect the content of the final agreement and whether or not it is implemented in the coming months. The agreement still needs to be ratified by the legislatures of all three countries.
As a bottom line, citizens' groups are insisting that the existing agreement be modified to include labor and environmental standards no weaker than the strongest now in force in North America. These standards must be enforceable through trade sanctions, not simply "encouraged" by an advisory commission.
The agreement should also include a mechanism to generate funding for environmental cleanup and adjustment assistance for displaced workers. Both of these could be costly. As a matter of principle and practicality, the beneficiaries of the agreement should pay the costs associated with implementing it. This could be achieved by a "cross-border transactions fee," along the lines suggested by Rep. Gephardt (D-Missouri). Otherwise, fiscal austerity could squeeze these programs, as has occurred all too often in the past. (Besides, it would be immoral to tax U.S. workers and consumers to clean up the environmental mess a U.S. company made in Mexico when it moved its U.S. production south of the border.)
The restrictions on governments' regulatory powers should be renegotiated to allow governments to act in the best interests of their country, even if that means limiting the mobility of corporations.
And, finally, any renegotiating over NAFTA under President Clinton should be open to real participation from a broad range of citizens' groups, including labor, environmental, farm, and consumer organizations, as should the dispute resolution process. If the coalitions that have formed to fight George Bush's NAFTA aren't satisfied with Bill Clinton's version, then Bill's honeymoon will be short indeed.
A version of this article appears in Dollars & Sense, a monthly economics magazine. time subscriptions are $16.95. Write to Dollars & Sense, One Summer St., Somerville, MA 02143, or call (617) 628-8411.