The Crumbling Case for NAFTA
Faux, Jeff
ADemocratic member of Congress recently asked me over to his office to discuss the North American Free Trade Agreement (NAFTA). I explained why I thought it was a bad idea. The three members of...
...After fast track was voted for, the smart money in Washington, Mexico City, and Ottawa thought NAFTA was a done deal...
...So now, instead of shipping, say, $10 million worth of components to Smith-Corona in the United States, the components are being shipped to Smith-Corona in Mexico...
...It adds, "Mexican politics is not without its violent side," and refers to claims that 164 members of the opposition PRD party have been murdered since 1988...
...employers with an enormous hammer to hold over its work force...
...The people around him are young, smart, and dedicated to the free market...
...Indeed, NAFTA is a solution in search of a problem...
...The work of Professor Harley Shaiken at the University of California at San Diego and an EPI study by Walter Russell Mead have been particularly useful in dispelling this myth...
...A study by pro-NAFTA economists Gary Hufbauer and Jeffrey Schott of the Institute for International Economics that is widely regarded as the definitive case for the agreement estimates that in the first five years 316,000 jobs will be gained and 145,000 lost, for a net increase of about 170,000 jobs...
...According to Hufbauer and Schott, the "solution," that is, the total "efficiency" benefit to American consumers from NAFTA, comes to $2 billion in a $6 trillion economy...
...trade surplus with Mexico would double, which few people find credible...
...labor force to keep a Harvard man and his cronies in political power in Mexico...
...Not being able to raise a family on the wages paid, workers soon quit, climbed the fences, and crossed the rivers to the United States...
...But this would require a reversal of the Salinas government's economic strategy for luring foreign capital that is the context for the treaty in the first place...
...imports in order to qualify for tariff reduction...
...consumer market not being big enough would be placed far down the list...
...I bequeath % of my estate to the Foundation for the Study of Independent Social Ideas...
...This is a result of assuming that larger markets increase both economies of scale and competition...
...I bequeath $ to the Foundation for the Study of Independent Social Ideas...
...surplus with Mexico is creating jobs is itself dubious...
...This is chillingly reminiscent of the long series of foreign policy disasters — Chaing, Batista, Diem, the Shah of Iran, Noriega —in which Washington placed the United States at risk by betting on one or another charismatic charmer whose supporters had convinced us that he was "our man...
...If ever there was a trivial economic issue, this is it...
...This was no theoretical economist making that statement...
...Other, less quantifiable, potential damages to the American economy have been ignored in the debate...
...International Trade Commission made several unsuccessful tries to come up with estimates of big job gains...
...And it is not the most relevant question...
...Because the costs are so high, they say, this would result in a higher tariff than presently exists...
...Damage done in the Maquila areas of northern Mexico already runs into billions of dollars...
...If one were to survey any group of reasonably informed observers of the U.S...
...workers will move up to higher wage jobs...
...no amendments...
...The Maquiladora program actually increased immigration...
...government, the Business Roundtable, and the largest, most generously supported think tanks and university economics departments in America have devoted time, energy, and money to identifying all of the benefits of NAFTA...
...Here is what the London Economist says: "The ugly truth is that Mr...
...The factories, of course, are being built in order to produce more consumer goods for export to the United States...
...For at least two years, the economic and statistical resources of the U.S...
...Some NAFTA supporters respond that these jobs will be lost anyway, and it is better to lose jobs to Mexico than to Asia, where they buy fewer U.S...
...In any event, the observation that we are already hemorrhaging jobs is hardly an argument for a treatment that will make the situation worse...
...Or two cents per day...
...But the way to approach it is similar to the way the European Community (EC) integrated Spain, Portugal, and Greece...
...NAFTA got another boost when Bill Clinton declared his support for the treaty, which Bush finally signed in December 1992, and promised to make it politically palatable by adding side agreements to extract promises from Mexico to honor minimum labor and environmental standards...
...Statistically speaking, it is nothing...
...One effect of this unexamined assumption about the future has been to reverse the conventional rules of debate...
...Even among many Democrats, there is the feeling that the problem is simply that George Bush was insensitive to the transitory "shortterm" impact on workers and the environment...
...investment, and therefore jobs, moving to Mexico...
...Congressman Gephardt proposes to pay for the damage with a new tax on the increased trade with Mexico...
...But many of its suppliers remained in the United States...
...As Thea Lee of the Economic Policy Institute discovered, the published version of their report omitted several columns from a table in an earlier manuscript that showed a job loss over the very long term from NAFTA...
...But, if anything, NAFTA will undercut a high-skill, high-wage strategy...
...Nor is it in dispute that it lacks free trade unions, an autonomous environmental movement, and an independent judiciary that might challenge that policy...
...The implication is that if we can just ease the short-term pain, the agreement will be a long-term boon for Americans...
...Free trade is one of the most politically correct positions in the ideological mainstream...
...But in order to arrive at this number they had to assume that the current U.S...
...No doubt some jobs that go to Mexico are being diverted from Asia, although again, after two years of intensive search, supporters have come up with no hard evidence that this is the case...
...In some cases, Mexico's labor standards on paper are superior to those in the United States...
...For example, there is the risk of integrating Mexican financial institutions, regulated by a corrupt one-party regime, with an already fragile U.S...
...The theory here is that those who benefit from NAFTA should pay the costs...
...The lobbyists in Washington virtually swoon over these "best and brightest" of all Mexicans...
...But given the fact that Mexico already has a wage advantage over many Asian competitors, and it has obvious locational advantages for the American market, this cannot be a major factor...
...grain exporters...
...q A LEGACY OF IDEAS A bequest of any size can be of lasting benefit to Dissent and help ensure that the ideas and beliefs you hold dear will continue to have a public forum...
...But it is equally, if not more, plausible that we are not seeing the new jobs created by the trade surplus because there aren't many...
...But the more fundamental problem for NAFTA is that its economic case is crumbling...
...Over the last two years I have debated and discussed NAFTA with academics, members of Congress, business and labor leaders, and myriad lobbyists in the pay of the Mexican government...
...He replied that after four and one-half years, productivity in the Mexican facility was equal to that of the U.S...
...But addressing the problems caused by the imbalance between wage and productivity disparities will require more than can be held in a side agreement...
...But the surplus— which has existed for only two years—primarily reflects the importation of U.S...
...banks, security firms, and so on, to buy into Mexican industry...
...government will have to rescue the Mexican economy in order to protect major American banks...
...The congressman frowned...
...First, the NAFTA debate is not about free trade versus protectionism...
...markets...
...In order for the free trade case to work, even in theory, you need some very rigid conditions...
...At the time of the fast-track vote, NAFTA advocates dismissed concern over the seven to one ratio between U.S...
...For more specifics on this or other information on gift planning, feel free to phone or write Dissent, 521 Fifth Avenue, New York, N.Y...
...The Europeans proceeded on the sounder principle that free trade only makes sense when its aim is to bring the workers in the poorer nations to the level of workers in the richer nations...
...This is the fabled long-term benefit that we are told justifies the risks of unemployment, community dislocation, environmental degradation, increased social disruption in Mexico, and the expanded immigration that will inevitably result...
...By Mexico is going to have a crisis with or without Salinas, and with or without NAFTA...
...They also had to assume that although foreign investment to Mexico would grow substantially, none of it would represent investment shifted from the United States, which even fewer people find credible...
...NAFTA supporters gravely warn that Mexico will have an economic crisis if Salinas suffers a defeat...
...Under these circumstances, the idea that somehow we might influence democratic reforms after we have rewarded the regime with permanent economic benefits, which in practical terms we can never take back, flies in the face of everything we know about human nature and politics...
...Today, fewer than 10 percent are in apparel...
...The peso is overvalued, and real estate and financial markets are going through speculative excess...
...And what is the catastrophe if they do...
...After sifting through the evidence for long-term economic gain, one simply cannot come up with a credible economic argument that the benefits are worth the costs and risks...
...The U.S...
...In other words, what would the net benefits be if, for the sake of argument, we accept their unrealistic assumptions...
...Yet even unremitting advocates of free trade, those who also believe that low wages are in fact good for the world economy, have a hard time swallowing the sanctification of Salinas...
...10017 (212) 595-3084...
...Without blinking an eye he said, "One to ten...
...The vast majority of these jobs will be eliminated by NAFTA...
...and Mexican workers and the huge costs of environmental cleanup and protection that will accompany accelerated Mexican industrial development...
...Economic theory tells us that the benefits of free trade will show up in lower prices to the consumer...
...But what if we give the proponents the benefit of all the doubt about free trade and NAFTA...
...On the one hand, we hear continuous reports of U.S...
...This not only includes Japan, Korea, and Taiwan in our own century, but the United States of America, which for the two hundred years prior to the end of World War II was a thoroughly protectionist nation...
...The sensible response to that question is, "Why?,, They reply that Salinas is a "good guy," a reformer...
...Both the New York Times and Business Week recently carried a series of articles from Mexico confirming the increasingly sophisticated skills and processes being employed by Mexican firms exporting to the United States...
...For example, there are some hundred thousand apparel workers in Los Angeles, most of them minorities or immigrants...
...As their economic case disappears, supporters are in the end left with one final desperate argument for NAFTA...
...But on the question of NAFTA, the media have decided that it is up to the critics to prove the negative case...
...These include the costs of dealing with dislocated U.S...
...From this they argued that firms were not moving to Mexico for low wages, but to take advantage of the tiny Mexican consumer market...
...economy that NAFTA will fix, and how NAFTA will fix it...
...This means that Congress only gets to vote "yes" or "no" when the final treaty is submitted...
...One condition is full, permanent employment on both sides of the border...
...In effect, the increased exports simply represent a cross-border shift in the markets for U.S...
...For example, the Mexican minimum wage in export industries would have to be raised to reflect true productivity differences, child-labor 314 • DISSENT laws would have to be strengthened, and an entirely new system of environmental regulation developed...
...Still, in the spring of 1991, Bush, with the aid of the Democratic leadership, won congressional approval for putting NAFTA on a "fast track...
...NAFTA supporters are outraged...
...These bubbles will burst as soon as the NAFTA issue is resolved...
...and Mexican wages as unworthy of serious discussion...
...The two-thousand page document Bush signed is largely an investment agreement designed to protect American investors...
...After combing through all of the economic models on this point, it found that the highest estimate of a potential NAFTA contribution to employment in the United States was eight one-hundredths of one percent...
...facility and shifted its manufacture of typewriters to Mexico...
...It is also admitted that the damage to incomes and jobs will be concentrated on those who are least able to adjust—workers in the bottom two-thirds of the family income distribution...
...This creates the possibility that when the next debt crisis hits, the U.S...
...Given this line-up, the opposition of labor and a few environmental groups could be ignored as Special Interest Protectionism...
...Here is where it gets interesting...
...The trade statistics jump by $10 million and economists claim that 200 new jobs are being created...
...2. You can leave a specific percentage of your estate...
...The reason even the supporters can't find long-run job benefits for the United States in this agreement is that the current trade surplus 310 • DISSENT with Mexico cannot last...
...The way to send that signal to all three nations is to say no to NAFTA...
...Actually, the assumption that the current U.S...
...polls showed that most Americans did not know about the proposal, but when it was explained, they thought it was a bad idea...
...But the most interesting thing about this study was what was not in it...
...Given that every conceivable industry that might hire these displaced people is itself undergoing a shift south of the border, taking with them the demand for skills at the next rung up the ladder, the notion that retraining is the answer for those who will be unemployed is a cruel hoax...
...First, there is the assertion that NAFTA will in the long run create many more U.S...
...Well, everyone knows," goes the typical claim, "that free trade always creates benefits for both sides and that protectionism is bound to fail...
...Currently, the United States has a trade deficit with Mexico in practically every major category of consumer goods, including autos and consumer electronics...
...Since it is traditionally assumed that an increase in a trade surplus results in net job creation for the exporting country, pro-NAFTA economists assert that the United States is already gaining jobs from trade with Mexico...
...But in fact, the increase in foreign exports has been matched by a decrease in domestic shipments...
...workers because Mexican workers will take jobs at the lower end of the skill ladder while U.S...
...SUMMER • 1993 • 315...
...The real long-term problem is that just the threat to go to Mexico is already providing U.S...
...And Professor Ed Leamer of the University of California, a well-known advocate of free trade, concludes from his research that the effect of NAFTA will be an average wage loss of $1,000 per worker for 70 percent of the labor force...
...After distributing the specific bequests listed above (to others in your will), I leave the remainder of my estate to the Foundation for the Study of Independent Social Ideas...
...Economic theory, they insisted, says that low wages always reflect low productivity...
...If a vote on Bush's treaty were held today, it would probably not pass the House of Representatives...
...It drew workers to the border areas (where most of Mexico's growth will continue to occur because it is close to U.S...
...Rather, it will encourage American firms to seek a low-wage solution to the challenge of global competition...
...Thus, even in the unlikely event that Salinas would agree to drastically raised standards, he—and we and the Canadians—would have to agree to place the enforcement powers in the hands of an independent trinational commission that would have power to investigate, judge, and assess penalties, including trade sanctions against offending firms and industries...
...These problems have been dismissed by NAFTA supporters with the assertion that "In the long run, most people will be better off...
...Historically, U.S...
...The only problem was the electorate...
...But in more cases than not, the major industrial nations of the world developed their economies behind high walls of protection...
...After NAFTA, the threat to go to Mexico if workers don't give in on this or that collective bargaining issue will have substantially more credibility...
...We have by far the largest consumer market in the world, and foreigners who come here marvel at the high level of retail competition in the United States...
...But how much pain and suffering is it worth to the bottom two-thirds of the U.S...
...Another is no mobility of capital between the countries...
...The overvalued peso reflects the Mexican government's desire to keep luxury imports inexpensive for its upper classes...
...Thus, over the long haul NAFTA is the opposite of a high-skill, high-wage strategy...
...Unannounced, we went to a Sanyo plant that makes television parts and assembles television sets for shipment to the United States...
...Salinas and his band of bright technocrats, adored though they are by the great and good on the international conference circuit, wield power courtesy of PRI fixers and worse in the countryside...
...The problem goes beyond standards...
...before these countries could come in, they had to get rid of dictatorship and to build permanent credible democratic institutions...
...How many jobs will actually flee to Mexico is anyone's guess...
...The imbalance between wages and productivity also undermines the simplistic notion that U.S...
...What follows are the major claims they have made, and why they do not hold up...
...jobs will be lost, SUMMER • 1993 • 309 community tax revenue shrunk, wages reduced, and environmental standards undercut...
...Editorialists and reporters, educated in the simplicities of Economics 101, were overwhelmingly for it...
...The lesson is clear: under current conditions in Mexico, if you stimulate low-wage employment in industries that export to the U.S...
...Our legal name is the Foundation for the Study of Independent Social Ideas...
...goods...
...On the other hand, the trade statistics show a surplus of exports to Mexico over imports...
...Twenty years ago the vast majority of Maquiladoras were "cutandsew" apparel operations...
...Can Bill Clinton fix this treaty with side agreements...
...Ironically, it now looks as though the only hope for the agreement lies in the political argument reflected in the congressman's comment...
...and Mexican wages is SUMMER • 1993 • 311 enormous, the gap in productivity is small— and in a growing number of industries, labor productivity in Mexico is equal to or, in some cases, higher than in the United States...
...a breaking up of the power of the oligarchy that runs the Partido Revolucionario Institucional...
...It takes an extraordinary belief in spontaneous political transformation to bet the economic future of millions of Americans on that proposition...
...One of the authors later said they dropped the table from the book because there wasn't enough room...
...Most NAFTA supporters acknowledge that U.S...
...The three members of his staff who were there agreed with me...
...3. You can leave the remainder of your estate...
...it is the political question asked by our friend the Congressman, "We have to do something for Salinas, don't we...
...workers who lose jobs from imports do not go up the ladder to better jobs...
...We ask you to consider one of the following options: 1. You can leave a specific amount or a particular asset...
...border...
...Clinton has promised to negotiate supplemental language to NAFTA that would assure all three countries abide by certain minimum labor and environmental standards and protection against a sudden unexpected surge in imports...
...And Small Business would, as usual, betray its own interests by following the leadership of its social superiors in Corporate America...
...Normally, advocates of change have the burden of proof...
...The intellectual rewards for their efforts are embarrassingly meager...
...Reversing the strategy would, in turn, require a virtual revolution in Mexico's political system...
...Having lost the argument on the facts, NAFTA supporters retreat to the generalizations of abstract theory...
...financial system...
...origin...
...A few weeks ago I accompanied Majority Leader Richard Gephardt and some other members of Congress on a trip to the Maquila area in Tijuana, Mexico, which is south of San Diego...
...The EC insisted that political reform come first...
...The surplus is the single empirical "fact" that can be used in support of NAFTA...
...It is obvious that neither condition has been met in the North American case...
...It ignored studies showing losses of five-hundred thousand to almost a million jobs...
...The same claim was made thirty years ago for the Maquila agreement...
...But as more and more Americans learned about NAFTA, the opposition increased...
...market, you will stimulate immigration...
...The result will be to move even more intermediate processes to Mexico and to reduce even further the wage levels and job opportunities in the United States, particularly for people in the lower end of the income scale who have a difficult time finding any job...
...Academics and think-tankers, financed by multinational business and the Mexican government, could be counted on to provide a chorus of assent...
...It is also obvious that Salinas and the PRI are depending on NAFTA to secure their power for decades to come...
...NAFTA makes it much easier for U.S...
...Nor that we can never have economic integration among the three nations of North America...
...Moreover, NAFTA is likely to result in massive unemployment of poor farmers in the Mexican countryside who will not be able to compete with U.S...
...NAFTA will eliminate the requirement that these companies buy U.S...
...The argument is specious...
...The economic case for NAFTA rests on an assertion that the long-term benefits of increased trade will overcome the costs of "short-term" dislocation...
...It was the only piece of evidence cited by Bill Clinton when he endorsed the agreement in October 1992...
...They fall down the ladder, or off the ladder to unemployment...
...None of this means that the United States should wash its hands of Mexico's economic troubles...
...Then, at some unspecified time in the future, he vaguely promises that he and the PRI will turn their attention to democracy...
...It is not an economic argument...
...Well," he said, "You may be right about the economics, but we have to do something for [Mexican president] Salinas, don't we...
...The broadened industrial base of Mexico now exports to the United States a vast array of increasingly sophisticated products made with increasingly sophisticated skills There are over two thousand factories operating in Mexico under the Maquiladora arrangement—in which tariffs on Mexican goods being imported to the United States are eliminated according to the extent that their value is made up of components and raw materials of U.S...
...However, growing domestic political resistance is beginning to force its advocates to explain what is wrong in the U.S...
...Another reason the surplus won't last is that the Mexican peso is now overvalued, which is making U.S...
...For example, last year, Smith-Corona shut down its last U.S...
...There is a bit of an economic mystery here...
...In contrast, Salinas has insisted that economic reform must come first...
...plant...
...After the next election, the peso will likely be devalued, which will help Mexican exports and hurt ours...
...The point that is missed by pro-NAFTA liberals who hold this view is that where labor is cheap to hire, it is cheap to train...
...You don't change behavior by rewarding it...
...goods...
...At best, history is ambivalent on this point...
...Except for Americans who have bet on Salinas, it won't cause a ripple in the real economy of the United States, and investment will continue to flow to Mexico because labor will remain cheap...
...Salinas and the PRI may lose face...
...This claim seems to fit with Bill Clinton's economic vision of a "high skill, high wage" America...
...It is no accident that in 312 • DISSENT Mexico and Canada, as well as the United States, real wages for workers have been falling as free markets are expanding...
...The second claim for NAFTA is that free trade will eventually create higher wage jobs for U.S...
...But if they are right, it is more evidence that the costs of NAFTA exceed the benefits...
...jobs than it will destroy...
...But they are not enforced...
...Once there, workers got jobs at wages kept low as a result of collusion between an authoritarian government, captive unions, and business associations...
...SUMMER • 1993 • 313 economy, the problem of the U.S...
...This would, of course, negate the whole effort to eliminate trade barriers...
...The media and policy elite still dismiss this as a product of people ignorant of economics and swayed by jingoism...
...Next question: "What is the ratio of entry wages in your plant versus entry wages in the United States plant...
...Certainly, if the benefits were there, the supporters would have found them...
...And then there is the question of the costs of adjustment...
...No doubt ignorance and jingoism exist among the people...
...This works out to $8 a year for the average American...
...But evidence from the real world now clearly shows that while the gap between U.S...
...It's just that somehow these job increases don't make news...
...Electronics, furniture, chemicals, auto engines, and a vast array of other goods are now being produced under this agreement by firms employing more than five hundred thousand workers...
...We asked the manager of that plant, who is also an international vice president of Sanyo, how labor productivity in his plant compared with that in the sister Sanyo plant in the United States...
...There is no longer any credible argument that NAFTA will reduce, much less stop, illegal immigration from Mexico...
...They will flee to the cities, and to the U.S...
...It's unlikely...
...This is the man who runs the plant in Tijuana and signs the checks...
...The experience shows conclusively that Mexican workers can be trained to make these products using state-of-the-art equipment organized in quality circles, teamwork production, and other high-performance management techniques...
...Next, there is the assertion that NAFTA will slow immigration...
...In some cases and under certain controlled conditions, such as the integration of Western Europe, freer trade has been beneficial...
...machinery, equipment, and other capital goods that are being installed in new factories...
...Second, the assertion that history vindicates free trade is wrong...
...There have been no new jobs...
...exports cheaper in Mexico and Mexican imports more expensive here...
...This number is smaller than the statistical margin of error in the Gross Domestic Product...
...From the time that the idea of a North American Free Trade Agreement between Mexico, Canada, and the United States was first seriously put forward by George Bush and his corporate allies, the Washington policy and media elite assumed that the economic case for the agreement was solid...
...workers can adjust to displacement from lowwage Mexican labor by being retrained...
...Difficult as it is for most of us to judge these charges, it is not in dispute that Mexico is a one-party dictatorship, which, driven by the international debt crisis, has embarked upon an economic policy of squeezing its work force to attract international capital...
Vol. 40 • July 1993 • No. 3
