‘The Donald’ keeps banging on about how terrible NAFTA is. Might he be right? (SPOILER: Yep, it’s a turd.)

nafta

Signed in December 1992, the stated objectives of the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico were, namely, to: eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties; promote conditions of fair competition in the free trade area; increase substantially investment opportunities in the territories of the Parties; provide adequate and effective protection and enforcement of intellectual property rights in each Party’s territory; create effective procedures for the implementation and application of the Agreement, for its joint administration and for the resolution of disputes; and establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of the Agreement.[1]

How did they sell it?

As a former running rate of Ronald Reagan—who had used the announcement of his candidacy for President in 1979 to advocate for the economic unification of North America[2]—by 1992, US President George H. W. Bush’s position on trade liberalisation was well known to the American people. In a September address to Congress, he stated:

This historic agreement represents a comprehensive charter to liberalise trade and investment flows on this continent … It will enhance the ability of North American producers to compete in world markets, spur economic growth on the continent, expand employment, and raise living standards.[3]

With the fall of the Soviet Union still fresh in people’s minds, Bush did not hesitate to invoke Cold War rhetoric to promote NAFTA, adding:

Our Nation won the Cold War because of its faith in the abiding power of free people, free markets, and free trade in goods and ideas.[4]

Similarly, with Prime Minister Brian Mulroney’s victory in the so-called ‘free trade election’ of 1988, much of the heavy lifting in terms of selling the public on the virtues of trade agreements had already been done in Canada. During that period, there had been widespread fear that the Canada–US Free Trade Agreement (CUSTA)—a trade deal with a country ten times the size of Canada, both in terms of GDP and population—would inevitably lead to a significant erosion of sovereignty, making Canada the de facto 51st state of the USA.[5] But, by the time of the NAFTA negotiations, nearly four years after CUSTA had come into effect, such fears had yet to materialise.

By contrast, Mexican President Carlos Salinas de Gortari—whose proposal of a Mexican–US trade deal was the catalyst for NAFTA—faced a public far more sceptical of trade liberalisation. Efforts to liberalise Mexican trade had been made throughout the 1980s, but people remained sceptical, as unemployment rates were higher and real wages lower than they had been twelve years prior. This was largely due to the inability of Mexico to attract significant foreign investment from the US, whose businesses were weary of a shift back to Mexican protectionism and hence the nationalisation of their investment dollars.[6] Salinas opted to focus first on selling the deal to the American people, going on tour and telling US audiences unhappy at high levels of immigration that passing NAFTA would reduce it by providing employment for Mexicans in Mexico. Only once the Agreement had been signed did he turn his attention to convincing his own citizens, claiming NAFTA would set Mexico on a course to become a first-world nation.[7]

So, why did they really do it?

Mexico faced the prospect of the West German investment it had previously enjoyed being diverted to former Eastern Bloc countries as Germany focused its attention on the reunification process at the end of the Cold War in 1991. Mexico’s then-Secretary of Commerce and Industry, Jaime Serra Puche, who led the negotiation and implementation of NAFTA, recalls:

The wall in Berlin had just fallen, so people were looking at the Eastern European countries … Salinas came to my room and said, ‘We have to do something. We are not on the map for foreign direct investment. Why don’t we start thinking about this idea of trade with the US?’[8]

Puche lists three economic rationales for the decision. First, the aforementioned need for foreign investment, ‘because [Mexico] did not generate enough domestic savings to support growth’. Second, the Generalised System of Preferences meant that Mexican exports were only tariff-free up to a certain quota, above which tariffs would be applied to the entire amount; therefore, ‘Plants … would close in October because they did not want to lose the preference and they did not want to accumulate inventories’. Third, Mexico had to negotiate, annually or biannually, the quotas for the central agreement; ‘So, exporters could say, “… As I don’t know how the negotiations will go this year, I’d better not invest more”.’[9]

As previously mentioned, free trade with the US had become far less contentious in Canada by the end of 1992. Direct competition from a developing nation, though, had the potential to radically change the dynamic.[10] Mulroney, fearing divestment by US firms seeking cheaper manufacturing costs from their southern neighbours, insisted on Canada’s involvement in negotiations. Not only would this allow Canada to be privy to the terms of the US–Mexican deal, and thus able to raise any objections before its finalisation, it also provided an opportunity to shore up and extend the benefits it had gained from CUSTA.

The United States’ dominant economic standing gave it by far the strongest bargaining position, effectively giving it the ability to dictate the rules in a ‘take-it-or-leave-it’ manner. Furthermore, Bush, despite having obtained trade promotion—or, ‘fast track’—authority for the deal, and notwithstanding the hyperbole in his address to Congress, appeared relatively indifferent to the outcome.[11] A trade deal with Mexico was, after all, the brainchild of Carlos Salinas and Ronald Reagan; the latter of whom ‘clearly viewed CUSTA as a prelude’.[12] Bush could perhaps have been preoccupied with the upcoming election; or, he may have simply recognised that, should the NAFTA negotiations fail, plenty of other countries would be only too happy to accept the United States’ conditions in return for a slice of its market.

And this all sounded like a good idea, why?

A trade deal with the US was undoubtedly the best strategic move for Mexico at the time, although much more protection was needed for its agricultural sector against the large-scale and highly subsidised US farmers.[13] It should perhaps have also removed its constitutional bans on foreign energy ownership to drive investment, even though this might have been politically challenging.[14]

Canada might potentially have been better served by renegotiating CUSTA, instead of entering the trilateral agreement. Not only is it easier to reach an acceptable compromise between two parties than three, but, given the markedly different economies of the US, Canada and Mexico, any one-size-fits-all rules were virtually guaranteed to be inappropriate. As such, Canada stood a better chance of negotiating desirable Chapter 19 antidumping and countervailing duty regulations with the US if it were not lumped in with Mexico.

By adopting a common external tariff, the NAFTA partners could have promoted commerce among themselves and reduced distortions generated by rules of origin. A higher level of cooperation on domestic regulatory standards may have been beneficial, particularly in the area of food safety.[15]

More like WTAFTA, AMIRITE?

Much of what has occurred since NAFTA cannot necessarily be attributed to the agreement. As Hufbauer and Schott note, ‘Trade pacts create opportunities; they don’t guarantee results.’[16] With so many exogenous factors, such as financial crises and the myriad trade deals that have come since, accurately measuring NAFTA’s economic impact is effectively impossible.

The accord certainly helped facilitate investment and trade, and international competition has fuelled increased productivity, but this trend began decades ago and NAFTA’s implementation appears to have done little to alter its trajectory.

Income disparity between the three countries has converged little, if at all, but wealth inequality within each country has expanded dramatically.[17] Mexican manufacturing wages were 11 per cent lower in 2001 than 1994, and considerably lower than prior to Mexico’s free market reforms in 1981. Cheap US corn imports led rural poverty rate to rise from 79% in 1994 to 82% in 1998. Mexican environmental protection spending decreased by 45% between 1994 and 2009, and environmental funding from a trinational commission charged with addressing this concern has amounted to just US$3m a year.[18]

Workers, communities and the environment in all three countries have suffered. This, though, may have come to pass irrespective of NAFTA, due to increased competition from Asia. Mexican manufacturing in particular, notes Varoufakis, has been negatively impacted by China’s startling growth:

Mexico was among the first to suffer from China’s rise. Because it had chosen to invest much energy in becoming a low-wage manufacturer on the periphery of the United States … China’s emergence was a nightmare for Mexican manufacturers.

Cheap Chinese labour and China’s market access to the West (courtesy of World Trade Organisation membership) allows Chinese manufacturers to undercut their Mexican and other Latin American competitors in the manufacture of low-added-value sectors, such as shoes, toys and textiles. This two-pronged effect is causing Latin America to deindustrialize and return to the status of a primary goods producer.[19]

‘Trade’, notes Scott, ‘both creates and destroys jobs.’ Exports lead to increased domestic employment, while imports lead to job displacement. Which is to say that, as imports are substituted for domestically produced goods, production levels supporting domestic jobs falls, displacing existing jobs and precluding new employment.[20] And, obviously, not everybody can run a trade surplus.

Chapter 11 arbitrations in investor–state disputes have severely undermined each state’s ability to regulate foreign direct investment.[21] Since 1994, corporations have used Chapter 11 to challenge land-use, mining, energy, and other laws passed by the governments of all three NAFTA countries. By 2012, more than US$350 million had been paid by Mexico and Canada in investor–state cases, with billions more in claims still pending.[22] Chapter 19 arbitration has likewise proved ineffectual in the face of US Congress.

Some qualitative changes have taken place, most notably in Mexico, as Zakaria notes:

… only three decades ago, Mexico was one of the world’s most anti-American countries … Today, Mexico is transformed, unambiguously allied with the United States … It has become a core component of a closely intertwined North American economy that is the world’s most vibrant regional bloc. Many factors led to this transformation, but NAFTA was chief among them.[23]

However, privatisation has meant that employers have been granted more power to suppress workers. Attempts to unionise are met with state-sanctioned police violence in Mexico, or, in the US, employers’ threats to move operations to Mexico.[24]

Tl;dr

Judged solely on gross domestic product figures—and if we ignore exogenous factors on the three partners’ economies—NAFTA appears to have been an unmitigated success. But, applying this sort of ‘black box’ approach to economic outcomes tells us little about the material realities for the people inside those boxes. If we seek to define NAFTA’s success in terms of living standards, or environmental impact, a different level of analysis is required. And, as we have seen, this finer granularity reveals much less positive results. Or, as Chris Hedges has it:

Screen Shot 2016-09-27 at 4.01.12 PM.png

Chris Hedges & Joe Sacco, Days of Destruction, Days of Revolt, New York, Nation Books, 2012.

Notes

[1] ‘North American Free Trade Agreement Between the Government of the United States of America, the Government of Canada, and the Government of the United Mexican States’, 8–17 December 1992, US–Canada–Mexico, 32 I.L.M. 289, p. 605 et seq. [hereinafter NAFTA], retrieved 13 October 2015 from https://www.nafta-sec-alena.org/Home/Legal-Texts/North-American-Free-Trade-Agreement

[2] The Ronald Reagan Presidential Foundation & Library, ‘Candidacy for Presidency: Ronald Reagan’s announcement of Candidacy for President of U.S. 11/13/79’, YouTube, Online video clip, 16 April 2009, retrieved 9 September 2015 from https://www.youtube.com/watch?v=fAtYMD-H2UY

[3] George Herbert Walker Bush, ‘Communication from the President of the United States transmitting notification of his intent to enter into a North American Free Trade Agreement (NAFTA) with the governments of Mexico and Canada’, NewsBank, 102nd Congress, 2nd session, H.Doc. 392, 18 September 1992, retrieved 7 September 2015 from http://docs.newsbank.com/openurl?ctx_ver=z39.88-2004&rft_id=info:sid/iw.newsbank.com:SERIAL&rft_val_format=info:ofi/fmt:kev:mtx:ctx&rft_dat=132CD718D11FD5B8&svc_dat=Digital:ssetdoc&req_dat=102D23E2B9847C9F

[4] George H. W. Bush, loc. cit.

[5] M. Angeles Villarreal & Ian F. Ferguson, ‘North American Free Trade Agreement (NAFTA)’, Congressional Research Service, Report prepared for Members and Committees of Congress, 16 April 2015, p. 22.

[6] Thomas Oatley, International Political Economy, 5th Edition, Routledge, NY, 2012, p. 39.

[7] David Clark Scott, ‘Salinas Plays It Cool After Big Win on NAFTA’, Christian Science Monitor, 19 November 1993.

[8] Jaime Serra Puche, ‘NAFTA: From Conception to Creation’, in Michael J. Boskin (ed.), NAFTA at 20: The North American Free Trade Agreement’s Achievements and Challenges, Hoover Institution Press, California, 2014, ebook.

[9] Ibid.

[10] The Liberal Party of Canada would go on to oppose NAFTA in their successful 1993 election bid, only to reverse their position days after taking office. Michael H. Wilson, ‘NAFTA: From Conception to Creation’, in Boskin (ed.), NAFTA at 20.

[11] Maxwell A. Cameron & Brian W. Tomlin, The Making of NAFTA: How the Deal Was Done, Cornell University Press, 2002, p. 227.

[12] George P. Shultz, ‘The New North America’, in Boskin (ed.), NAFTA at 20. Bush, unlike his avowedly Friedmanite predecessor, was not in thrall to the Chicago School economists, having famously dismissed the neoliberal rationale behind Reagan’s 1980 tax cuts as ‘voodoo economics’. Bush espoused neoliberal policy only insofar as it was politically advantageous, such as in his 1988 Presidential acceptance speech, in which he urged the public to ‘Read my lips: no new taxes’, after which he promptly raised taxes.

[13] Monica Campbell & Tyche Hendricks, ‘Mexico’s Corn Farmers See Their Livelihoods Wither Away: Cheap U.S. Produce Pushes Down Prices Under Free-trade Pact’, SFGate, 31 July 2006, retrieved 12 October 2015 from http://www.sfgate.com/news/article/Mexico-s-corn-farmers-see-their-livelihoods-2515188.php

[14] Loren Steffy, ‘Are Mexico’s Oil Reforms Enough to Lure Foreign Investors?’, Forbes, 19 August 2013, retrieved 12 October 2015 from http://www.forbes.com/sites/lorensteffy/2013/08/19/are-mexicos-oil-reforms-enough-to-lure-foreign-investors/

[15] Gary Clyde Hufbauer & Jeffrey J. Schott, ‘NAFTA Revisited’, Policy Options, October 2007, retrieved 15 October 2015 from http://www.piie.com/publications/papers/paper.cfm?ResearchID=898

[16] Ibid.

[17] Robert A. Blecker & Gerardo Esquivel, NAFTA, Trade, and Development, Working Paper 10-03, Center for US–Mexican Studies, the Mexico Institute of the Woodrow Wilson Center, El Colegio de la Frontera Norte, and El Colegio de México, 2010, p. 2.

[18] Sarah Anderson & John Cavanagh, ‘Happily Ever NAFTA? A Bad Idea That Failed’, Foreign Policy, 9 November 2009, retrieved 9 September 2015 from http://foreignpolicy.com/2009/11/09/happily-ever-nafta/

[19] Yanis Varoufakis, The Global Minotaur: America, Europe and the Future of the Global Economy, Zed Books, London, 2015, pp. 186–188.

[20] Robert E. Scott, Heading South: US–Mexico Trade and Job Displacement After NAFTA, Economic Policy Institute briefing paper #308, 3 May 2011, retrieved 14 October 2015 from http://www.epi.org/files/page/-/BriefingPaper308.pdf

[21] Chapter 11 affords a foreign investor the right to take a host country’s government to special international arbitration bodies of the World Bank and the United Nations if it believes the value of its investment has decreased as a result of government action. Despite involving the government, these arbitration procedures are closed to public participation, observation and input. The US has made sure that this provision is written into every of its free trade agreements since. Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Bloomsbury Press, London, 2010, p. 163.

[22] Hufbauer argues forcefully for Chapter 11’s renegotiation in 2003, only to claim in 2007 that its provisions are ‘relatively uncontroversial’ and that the amounts awarded to businesses were ‘a small fraction of the overblown claims of business plaintiffs and a tiny amount compared to three-way FDI within NAFTA, now amounting to almost $900 billion’. Gary C. Hufbauer & Gustavo Vega, ‘Whither NAFTA: A Common Frontier?’, in Peter Andreas and Thomas J. Biersteker (eds.), The Rebordering of North America: Integration and Exclusion in a New Security Context. Routledge, New York and London, 2003; Gary C. Hufbauer & Jeffrey J. Schott, ‘NAFTA Revisited’.

[23] Fareed Zakaria, ‘You Can’t Stop the Trade Machine’, The Washington Post, 14 May 2015, retrieved 8 September 2015 from https://www.washingtonpost.com/opinions/you-cant-stop-the-trade-machine/2015/05/14/208d74a2-fa6e-11e4-a13c-193b1241d51a_story.html

[24] Sarah Anderson & John Cavanagh, ‘Happily Ever NAFTA?’

References

Anderson, S. & Cavanagh, J., ‘Happily Ever NAFTA? A Bad Idea That Failed’, Foreign Policy, 9 November 2009, retrieved 9 September 2015 from http://foreignpolicy.com/2009/11/09/happily-ever-nafta/

Blecker, R. A. & Esquivel, G., NAFTA, Trade, and Development, Working Paper 10-03, Center for US–Mexican Studies, the Mexico Institute of the Woodrow Wilson Center, El Colegio de la Frontera Norte, and El Colegio de México, 2010.

Bush, G. H. W., ‘Communication from the President of the United States transmitting notification of his intent to enter into a North American Free Trade Agreement (NAFTA) with the governments of Mexico and Canada, Pursuant to Section 1103(a)(1) of the Omnibus Trade and Competitiveness Act of 1988’, NewsBank, 102nd Congress, 2nd session, H.Doc. 392, 18 September 1992, retrieved 7 September 2015 from http://docs.newsbank.com/openurl?ctx_ver=z39.88-2004&rft_id=info:sid/iw.newsbank.com:SERIAL&rft_val_format=info:ofi/fmt:kev:mtx:ctx&rft_dat=132CD718D11FD5B8&svc_dat=Digital:ssetdoc&req_dat=102D23E2B9847C9F

Campbell, M. & Hendricks, T., ‘Mexico’s Corn Farmers See Their Livelihoods Wither Away: Cheap U.S. Produce Pushes Down Prices Under Free-trade Pact’, SFGate, 31 July 2006, retrieved 12 October 2015 from http://www.sfgate.com/news/article/Mexico-s-corn-farmers-see-their-livelihoods-2515188.php

Cameron, M. A. & Tomlin, B. W., The Making of NAFTA: How the Deal Was Done, Cornell University Press, 2002.

Castañeda, J. G., ‘NAFTA’s Mixed Record: The View From Mexico’, Foreign Affairs, Vol. 93, No. 1, January/February 2014, pp. 134–141.

Ha-Joon, C., Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Bloomsbury Press, London, 2010.

Hufbauer, G. C. & Schott, J. J., ‘NAFTA Revisited’, Policy Options, October 2007, retrieved 15 October 2015 from http://www.piie.com/publications/papers/paper.cfm?ResearchID=898

Hufbauer, G. C. & Vega, G., ‘Whither NAFTA: A Common Frontier?’, in Peter Andreas and Thomas J. Biersteker (eds.), The Rebordering of North America: Integration and Exclusion in a New Security Context. Routledge, New York and London, 2003.

Krugman, P., ‘The Uncomfortable Truth About NAFTA: It’s Foreign Policy, Stupid’, Foreign Affairs, Nov–Dec 1993, retrieved 7 September 2015 from https://www.foreignaffairs.com/articles/mexico/1993-12-01/uncomfortable-truth-about-nafta-its-foreign-policy-stupid

‘North American Free Trade Agreement Between the Government of the United States of America, the Government of Canada, and the Governement of the United Mexican States’, 8–17 December 1992, US–Canada–Mexico, 32 I.L.M. 289, retrieved 13 October 2015 from https://www.nafta-sec-alena.org/Home/Legal-Texts/North-American-Free-Trade-Agreement

Oatley, T., International Political Economy, 5th Edition, Routledge, NY, 2012.

Puche, J. S., ‘NAFTA: From Conception to Creation’, in Michael J. Boskin (ed.), NAFTA at 20: The North American Free Trade Agreement’s Achievements and Challenges, Hoover Institution Press, California, 2014, ebook.

Ronald Reagan Presidential Foundation & Library, The, ‘Candidacy for Presidency: Ronald Reagan’s announcement of Candidacy for President of U.S. 11/13/79’, YouTube, online video clip, 16 April 2009, retrieved 9 September 2015 from https://www.youtube.com/watch?v=fAtYMD-H2UY

Scott, R. E., Heading South: US–Mexico Trade and Job Displacement After NAFTA, Economic Policy Institute briefing paper #308, 3 May 2011, retrieved 14 October 2015 from http://www.epi.org/files/page/-/BriefingPaper308.pdf

Shultz, G. P., ‘The New North America’, in Michael J. Boskin (ed.), NAFTA at 20: The North American Free Trade Agreement’s Achievements and Challenges, Hoover Institution Press, California, 2014, ebook.

Steffy, L., ‘Are Mexico’s Oil Reforms Enough to Lure Foreign Investors?’, Forbes, 19 August 2013, retrieved 12 October 2015 from http://www.forbes.com/sites/lorensteffy/2013/08/19/are-mexicos-oil-reforms-enough-to-lure-foreign-investors/

Villarreal, M. A. & Ferguson, I. F., ‘North American Free Trade Agreement (NAFTA)’, Congressional Research Service, Report prepared for Members and Committees of Congress, 16 April 2015.

Wilson, M. H., ‘NAFTA: From Conception to Creation’, in Michael J. Boskin (ed.), NAFTA at 20: The North American Free Trade Agreement’s Achievements and Challenges, Hoover Institution Press, California, 2014, ebook.

Zakaria, F., ‘You Can’t Stop the Trade Machine’, The Washington Post, 14 May 2015, retrieved 8 September 2015 from https://www.washingtonpost.com/opinions/you-cant-stop-the-trade-machine/2015/05/14/208d74a2-fa6e-11e4-a13c-193b1241d51a_story.html

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About samquigley

I'm Sam Quigley.
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