US-Mexico-Canada Agreement

Why the big push for NAFTA if the promised gains were so modest and uncertain?

Some of the explanation centers on the indirect benefits the United States could expect to derive from the Mexican prosperity predicted to result from its recent liberalization–if NAFTA could make it permanent. Even if NAFTA created no net trade increases but only shifted some labor-intensive American imports from Asian to Mexican sources, the trade diversion would benefit the United States, which would gain more from growth in Mexico than growth elsewhere. For example, about half of Mexico’s export earnings during the 1980s went to repay foreign debt, much of it to American banks. Development in Mexico might also help to stem the tide of immigration that is increasingly politically divisive, particularly in the American Southwest. Because nearly 70 percent of Mexico’s trade was with the United States–and because Mexico seemed likely to run a trade deficit for years to come–Mexican prosperity promised to improve the U.S. balance of trade. As it happened, by the end of the 1990s U.S. dominance of Mexico’s trade had grown to nearly 80 percent, in part because Mexico raised its tariffs against the products of other nations while it was lowering the rate charged to U.S. goods, giving American products about a 10 percentage point average tariff advantage.

This discriminatory move perfectly illustrates regional integration as a trade policy that is liberal on the inside and mercantilist on the outside. However, while U.S. exports to Mexico increased, imports from Mexico grew much more rapidly, so Mexico has become the fourth largest source of U.S. trade deficits, after Japan, China, and Canada.

The United States was also interested in several specific sectors even though their aggregate effects might not be large. By opening the Canadian energy sector to American investment, for example, NAFTA enhanced U.S. energy security, demonstrating that regional integration can secure a classic mercantilist objective by expanding the borders of a self-sufficient area. Domains such as financial services and intellectual property represent growth sectors in the global economy in which the United States has a comparative advantage.

American motivations are also related to other strands in its trade policy. It may be no coincidence that the Uruguay Round of GATT successfully concluded only after NAFTA had been approved. Because the EU has always been able to fall back on regional free trade whenever global negotiations turned sour, the United States lacked the bargaining power to complete the deal until NAFTA demonstrated that the United States had a similar alternative. Moreover, NAFTA introduced innovations that became precedents for global agreements, including its dispute-resolution mechanism (particularly compulsory arbitration and surveillance of trade policies), its treatment of services, and its elaboration of specific rights and obligations concerning national treatment.

But the best explanation for American interest in NAFTA may derive from the Reagan and Bush administrations’ conviction that the ideal political economy is structured according to laissez-faire principles of deregulation, liberalization, and privatization. They hoped that the more competitive environment created by NAFTA would strengthen the case for pursuing a competitiveness strategy that emphasizes lower taxes, weaker labor organization, and a diminished welfare state. Thus, NAFTA constituted an external reinforcement for a liberal policy program whose internal elements had been under constant attack from critics as they were adopted piecemeal since Reagan’s inauguration in 1981. In Canada, too, NAFTA represented the culmination of a strategy of liberalization – both in the domestic economy and in foreign trade and investment – that commenced with the beginning of the Mulroney government in 1984. Liberal proponents expected that NAFTA would bolster the similar drive that had been underway in Mexico since the early 1980s by enabling the Mexican government to appeal to the necessity of competing with American firms. They hoped that successful development there might serve as a liberal model for other Latin American nations as well. Many of these nations, like Mexico, have engaged in heavily protectionist import-substituting industrialization (ISI) in the past and, in the process, acquired large debts that are potentially destabilizing for their own political systems, hemispheric foreign relations and, perhaps most importantly, the U.S. banking system. In fact, negotiations are currently under way to expand NAFTA’s liberal vision throughout the Western Hemisphere in a Free Trade of the Americas Agreement. To see what this liberal ideal entails, we must consider how the various trade dilemmas posed by NAFTA were viewed by political actors in all three nations.

The dilemmas in NAFTA and the political response

Public opinion concerning NAFTA divided along the familiar fault lines of nation and class, but national sentiment did not reflect analysts’expectations of relative gains. For example, most analysts believed that the United States would gain less than either Canada or Mexico–and some questioned whether there would be any trade expansion for the United States at all–but the objection to NAFTA on these grounds was negligible among the American public. Apparently, asymmetrical benefits provoke little concern unless the nations involved are perceived as rivals; reciprocity is more important in dealing with Japan than with Mexico. Moreover, NAFTA was expected to have less impact on aggregate economic outcomes than on the issues raised by the dilemmas of trade. Thus, in the United States, the greatest protests emerged over NAFTA’s effect on unskilled labor (in response to the distributional dilemma) and the environment (in response to the dilemma of competing values).
Still, NAFTA attracted the usual litany of opposition to liberalization only when its first year of existence witnessed a serious economic collapse that culminated in the worst Mexican depression since the 1930s. This outcome dealt a serious blow to the liberal creed because economic prosperity was deemed to be not only the chief benefit of NAFTA, but so great as to render acceptable the familiar sacrifices associated with trade dilemmas–adverse distributional consequences, diminished national sovereignty, and the erosion of alternative values. In Mexico, NAFTA initially escaped much of the criticism usually directed against the distributional implications of free trade policies simply because the liberalization that preceded NAFTA had already drawn most of that fire. Mexico had been in the process of reducing trade protection and capital controls since the debt crisis of 1982 and more intensively since 1987. During that time trade levels had doubled, but in real terms GNP per capita at the introduction of NAFTA in 1994 remained below its level in 1981. Thus, it was thought that the dislocation costs had already been borne, and so most saw NAFTA as a means to capture with greater certainty and permanence the benefits that the unilateral policies of the previous five years had only promised. However, a peasant revolt that began in the southern Mexican region of Chiapas in 1993 was directed against the economic priorities of the PRI–especially a tolerance for adverse effects on the poor–which were manifested in both NAFTA and earlier liberalization policies. 

In Canada, the evaluation of NAFTA was colored by the experience of the previous five years with CUSTA (especially the deep recession that initially accompanied it too), the long history of uneasy economic relations with the United States, and uncertainties about the future of the federal system of Canada itself. Anxieties about national sovereignty and the outlook for labor have weighed heavily in Canadian assessments of NAFTA; these assessments became a litmus test of attitudes toward the Conservative government, which negotiated both CUSTA and NAFTA. Antagonism toward free trade contributed to the October 1993 national election in which Conservatives were humiliated by losing all but two of their 169 seats in the 295-member Parliament and winning only 16 percent of the popular vote. New Liberal prime minister Jean Chrétien originally vowed to renegotiate NAFTA but later backed off from this position.

The dilemma of national sovereignty

International agreements that preclude certain national policies–as NAFTA prohibits most trade barriers–invariably involve some loss of national sovereignty. Although this dilemma has affected attitudes toward NAFTA in all three countries, the issue has arisen in a different way and with a different intensity in each nation.

In the United States, national sovereignty was a minor concern, subsumed by greater apprehension about the environment and job issues though related to both. For example, NAFTA shifts some economic and environmental decisions away from national legislatures to binational review panels created to resolve trade disputes. Environmental and other groups that have considerable influence on Congress but none on these panels contend that the transfer of authority to supranational bureaucrats undermines national sovereignty and deprives citizens of rights of access to officials through elections, lobbying, and open public debates. This same issue arose much more powerfully in the context of the WTO, apparently because Americans do not see Canada and Mexico as the grave threat to national sovereignty that a global institution might become.

Mexican concern about national sovereignty produced one major concession in the NAFTA agreement: the exemption of Pemex, the Mexican national oil company, from its investment provisions. Pemex, though inefficient and corrupt, has become a Mexican symbol of independence and autonomy that has resisted privatization and retains protection against foreign competition in some areas.

The national sovereignty issue acquired its greatest prominence in Canada, where closer trade with the United States has always triggered concern about maintaining national autonomy in matters of politics, economics, and culture. The continuing fear of U.S. domination is exemplified by the fate of the 1911 Canadian-American free trade treaty. During its ratification in the U.S. Congress, some proponents represented it as a first step toward the annexation of Canada, an outcome vehemently opposed by most Canadians. As a consequence, the Canadian government was denied reelection in a campaign dominated by the campaign slogan of the opposition, “No truck or trade with the Yankees.”

The source of these concerns is not hard to see. In economic terms, critics claimed that NAFTA would increase American domination of Canada. Even before CUSTA, exports to the United States constituted 75 percent of Canada’s trade and 20 percent of its total GNP. American foreign direct investment in Canada was valued at $70 billion with 20 percent of Canada’s 500 largest firms owned by Americans. About half of Canadian manufacturing was foreign-owned, most by Americans. By 1998, 81% of Canadian exports went to the U.S. and American foreign direct investment in Canada exceeded $100 billion. More Canadian manufactured goods are exported to the United States than are consumed in Canada. Statements like that of U.S. trade representative Clayton Yeutter to a Canadian newspaper shortly after the CUSTA negotiations do not allay those fears:

“The Canadians don’t understand what they have signed. In 20 years they will be sucked into the U.S. economy.”

The response is predictable; Shirley Carr, president of the Canadian Labour Congress, remarked, “It is in the interest of the United States to try to take over Canada. …They want to disrupt and disturb everything we have and bring us down to their level.” Of course, intensive trade with a more developed and more powerful nation has fed such anxieties since the days of Friedrich List, but regional integration can be especially troublesome in this regard. Indeed, the dilemma of declining national sovereignty has even dogged the EU, though Germany is much less dominant within the EU than the United States is within NAFTA. American dominance has been especially striking in terms of culture: “Only 3 to 5 percent of all theatrical screen time in Canada goes to Canadian films; 97 percent of profits from films shown in Canada go out of the country, 95 percent to the U.S.; 95 percent of English-language TV drama is non-Canadian; Canadian-owned publishers have only 20 percent of the book market; 77 percent of the magazines sold here are foreign; 85 percent of record and tape sales are non-Canadian.”

In response to these concerns, CUSTA’s Article 2005 states that “cultural industries are exempt from the provisions of this agreement,” thus allowing a continuation of Canadian protection and promotion of cultural industries that has existed for most of the twentieth century. It is interesting that this very same issue also arose in the Uruguay Round talks, with French negotiators eventually winning protection from Hollywood film producers they regarded as symbols of American cultural hegemony.

The dilemma of value trade-offs and environmental politics

Most of the major American environmental groups opposed NAFTA, especially the Sierra Club and Friends of the Earth, which (unsuccessfully) sought a court order to require the administration to file an environmental impact report. For three reasons, critics feared that a commitment to NAFTA’s free trade principles would require a compromise with the value of environmental protection. First, the border region of Mexico could become an export platform for companies who want to sell products in the United States but evade American environmental standards. Second, the availability of the border region to polluting industries may produce social-dumping pressures on American state and local governments to save jobs by lowering environmental standards. Third, NAFTA opens American environmental regulation to foreign challenge because it can be interpreted as an illegal barrier to trade.

The direct environmental dangers are concentrated in the border area between Mexico and the United States, which hosts the maquiladora program. Countless reports and studies have documented it as an environmental wasteland with threats to the human population on both sides of the border, especially from water pollution. The Rio Grande, which serves as the U.S.-Mexican border for much of its length, is heavily polluted with metals and raw sewage. It provides drinking water for a million people and irrigation water for a large agricultural area, but its fecal contamination levels “regularly exceed, often by a factor of a hundred, standards to protect public health.” The New River, which begins in Mexico and flows into the Salton Sea, California’s largest lake, is known as the most polluted river in North America. Beaches within several miles of the outlet of the Tijuana River into the Pacific Ocean have been closed for ten years. In San Elizario, Texas, 90 percent of the population has contracted hepatitis by age thirty-five because of a polluted aquifer.

This pollution originates largely in maquiladora firms, fully 10 percent of which admitted that they had migrated to avoid American environmental regulations and take advantage of the weaker environmental laws and notoriously lax enforcement in Mexico. For example, the La Paz agreement of 1983 required that industries importing chemicals into Mexico return any resulting hazardous wastes to the country of origin, but a 1988 report of the U.S. EPA showed that only 1 percent of maquiladoras had done so. This record cannot be a surprise: In 1990, the Mexican federal government budget for environmental law enforcement was only $3.15 million.

Environmentalists also feared that NAFTA would trigger value trade-offs similar to those that have arisen from conflicts between various environmental policies and previous free trade agreements, including the WTO. For example, the Bush administration successfully pressured British Columbia to end a government-funded tree-planting program because it was an “unfair subsidy” to the Canadian timber industry. Similarly, government payments to farmers to promote soil and water conservation could be interpreted as an unfair subsidy of agricultural exports. Export restrictions on lumber designed to enforce practices of sustainable forestry could be considered a violation of prohibitions against export restraints. Restricting imports of food contaminated with pesticides now banned in America can be grounds for foreign governments to sue the United States for establishing non-tariff barriers to trade.

The most dramatic episode occurred in the 1994 clash known as “GATTzilla versus Flipper”, in which a GATT tribunal ruled in favor of a complaint brought by the EU on behalf of European tuna processors who buy tuna from Mexico and other countries that use purse seine nets. The United States boycotts tuna caught in that way, since the procedure also kills a large number of Adolphins, but GATT ruled that the U.S. law was an illegal barrier to trade because it discriminated against the fishing fleets of nations that use this technic.

Initial experience with CUSTA confirms that such environmental trade-offs will arise under NAFTA. The first trade dispute under the free trade agreement involved a challenge by the U.S. to regulations under Canada’s Fisheries Act established to promote conservation of herring and salmon stocks in Canada’s Pacific coast waters. The provision to require reporting was struck down by the dispute panel. Similarly, the Canadian government challenged the U.S. EPA’s regulations that require the phaseout of asbestos, a carcinogen once frequently used as a building material. A balance between environmental concerns and free trade principles could be achieved, but NAFTA, which lacks the EU’s recognition of the social and political dilemmas of trade, does not do so.

The distributional dilemma and the politics of labor issues

In both Canada and the United States, however, the most controversial issue concerned the impact of NAFTA on jobs and wages. Unlike the Corn Laws, which posed the distributional dilemma principally in terms of sectors of the economy, in NAFTA the dilemma emerged as a class issue. Opponents contended that NAFTA would produce a net loss of jobs, especially among the unskilled, who are least able to adjust; a decline in wages among the unskilled who remain employed; and a transition period involving disruption and risk that is excessive given the small and uncertain projected gains.

Liberal trade theory made a persuasive case for NAFTA’s long-term benefits, including more job creation than job loss, though macroeconomic computer models generally showed the net effect to be quite small. Opponents of NAFTA questioned outcomes derived from such computable general equilibrium (CGE) models because they required unrealistic assumptions such as full employment, balanced trade, and capital immobility. It is especially noteworthy that the major fear–job loss–was assumed away by the CGE assumption of full employment. As one critic pointed out, “We might forgive the Ford employee for being less than convinced by a CGE model that crosses a deep ravine by assuming a bridge.” Arguments for free trade often appear most convincing to those who have no stake in their truth, but for the workers whose livelihood depends on the accuracy of the trickle-down models, the theories usually seem too flimsy to justify the risks.

Labor concerns arose from the recognition that NAFTA would destroy American jobs as some U.S. firms lost sales to Mexican firms and others moved production facilities to Mexico. Opponents emphasized dislocations from NAFTA-related job loss estimated in the range of 150,000 to 500,000. The transition period can be long and painful: It was estimated that 40 percent of laid-off workers would remain unemployed a year later and that the remainder would suffer wage losses averaging 10 percent for service workers, 20 percent for manufacturing workers, and 30 percent for automobile and steel workers. Within five years, most workers would have recovered their previous wages; but 35 percent would never again make the same wages, and three-fourths of workers would not go back to the same type of job. The average cost of a job loss for a worker was estimated to be about $80,000 over a lifetime.

Proponents observed that NAFTA-related job-loss estimates were modest in relation to the 2 million Americans expected to lose their jobs every year for the next decade for reasons unrelated to NAFTA. Further, they noted that job loss to low-wage countries was inevitable even in the absence of NAFTA. Finally, they pointed out that some job gains from NAFTA were just as inevitable as some job losses. Indeed, the positive employment effects of increasing exports should equal or exceed the negative effects of increasing imports. It is no wonder that businesses emphasized their vision of an efficient, comparative advantage-based economy that would eventually result from NAFTA and that labor organizations emphasized the transition costs that would be borne before such a future could emerge.

Free trade always triggers labor’s concern about employment, wages, and social dumping, but three considerations made the issue unusually acute in the case of NAFTA. First, huge disparities in wage rates and working conditions between the United States and Mexico increase the pressure on American workers. With wages for unskilled labor roughly eight to ten times higher in the United States than in Mexico, American firms have a strong incentive to either abandon production requiring unskilled labor or move it to Mexico. Negotiating under this kind of threat, American workers may be unable to resist a decline in wage rates and living standards. “A Wall Street Journal survey of 455 senior corporate executives taken just after NAFTA was initialled, found that 25 percent would use NAFTA to bargain down wages and 40 percent would move production to Mexico.” Furthermore, a 1997 study of 600 attempts by labor unions to organize workers or negotiate a first contract revealed that “62 percent of employers threatened to move their operations instead of negotiating with the union.” (11) The factor price equalization theorem, an elaboration of Heckscher-Ohlin, states that free trade will cause all factor prices, including wage rates, to equalize across nations. Supporters hoped that NAFTA would bring a growth boom to Mexico that would result in Mexican wages rising to U.S. levels rather than American wages falling to Mexican levels, but such a result is, at best, a long way off. Labor surpluses and weak labor laws in Mexico preclude substantial upward pressure on wage rates for many years. As a result, NAFTA might lower wages in the United States without raising them in Mexico, which would be especially alarming because wages for unskilled labor are already declining in the United States. For example, during the 1980s the real wages of those without a high school diploma fell 10 percent, and a similar effect seems to be spreading to high school graduates.

Second, capital mobility, which makes the relocation of labor-intensive production to Mexico easy, sharpens the competition between American and Mexican labor, especially by eroding productivity differences between them. The factor price equalization theorem holds that wage rates will fully equalize only if the productivity of workers in the two countries is identical. Thus, the current gap in wage rates should persist so long as American workers remain so much more productive than Mexican workers, but the modernization of the Mexican economy fueled by the foreign direct investment (FDI) of American firms could erode that difference for unskilled labor. By the end of 1991, foreign direct investment in Mexico totaled about $33 billion, with nearly two-thirds of it originating in U. S. corporations. In anticipation of NAFTA, capital inflows to Mexico were estimated at $18 billion in 1992, including $5 billion in foreign direct investment.

The maquiladora program can be seen as a kind of pilot project for NAFTA, demonstrating the power of combining American capital with Mexican labor. Since 1965, firms on the Mexican side of the U.S. border, known as maquiladoras, have been permitted to import parts duty free from the United States and to export the assembled product back into the country, also duty free. By 1992, nearly 2,000 factories operating under this program employed nearly 500,000 workers, about 20 percent of the total manufacturing labor force in Mexico. Meanwhile, employment and wages for American unskilled labor had stagnated.

Third, unlike the EU, NAFTA contains very little provision for dealing with dislocations, and, unlike in Europe, the social welfare system in the United States provides less protection from structural unemployment. In Canada, where the welfare state is more advanced than in the United States, the left feared that dislocations would overwhelm its capacity and force the abandonment of prized programs of social insurance. From 1990 to 1997, the proportion of the unemployed eligible to collect unemployment insurance dropped from 89 percent to 43%.(12)

Partisan alignments reflect the Stolper-Samuelson expectation that free trade will benefit the abundant factor of production (capital, in the United States) and harm the scarce one (unskilled labor is scarce in the United States relative to the huge surplus of cheap labor in Mexico). These distributional implications of free trade explain why more than 75 percent of Republicans voted for final passage of NAFTA in the U.S. House of Representatives and why more than 60 percent of Democrats voted no even after heavy lobbying by Democratic president Bill Clinton.

The Impact of NAFTA and the Mexican Collapse

More than five years after its inception, NAFTA’s effects continue to be disputed, not because the three economies remain unaltered but because the dramatic changes that have taken place cannot be definitively associated with NAFTA. Trade among the three countries has increased even more than expected – by 1999, it was more than twice its 1990 level – but the effect of NAFTA cannot be isolated from the broader liberalization strategy that was well underway in all three nations before NAFTA took effect. Moreover, trade levels were not the only source of the strikingly divergent paths taken by the three nations in this period. Both Canada and the United States entered recessions shortly after CUSTA took effect in 1989, but the downturn was far longer and deeper in Canada than in the U.S. The period from 1989 to 1996 was the longest period of below potential growth for Canada since the Great Depression in the 1930s, with unemployment rates exceeding 11 percent. Nearly 20 percent of all Canadian manufacturing establishments closed during this period, as many as half in response to the increasing competition under first CUSTA and then NAFTA.

This trade competition encouraged fiscal and monetary policy designed to keep production costs low, but the competitiveness strategy also stifled growth in output, wages and employment while weakening government programs that provided social protection. Thus, rising levels of trade and even a growing trade surplus with the U.S. have not prevented a substantial increase in inequality in Canada. However, advocates of liberalization argue that these dislocations were temporary. Furthermore, they contend that the trade competition produced by CUSTA/NAFTA did not cause the painful policy changes but only demonstrated that they were necessary to correct pre-existing conditions in Canada.

By contrast, in the U.S. the recovery which began in 1992 produced the longest expansion of the post-World War II period and unemployment rates fell to around 4 percent, the lowest in more than 30 years. NAFTA does not appear to have played any substantial role in this growth, which has, however, easily absorbed whatever modest job loss may have been associated with NAFTA. Fewer than 200,000 workers–under 4 percent of the total number of U.S. workers dislocated during this period–have been certified as qualified for NAFTA-related Trade Adjustment Assistance. There is also little evidence that NAFTA has had much effect on U.S. wage rates; while real hourly compensation certainly has grown much less slowly than corporate profits, executive compensation, or productivity gains, such inequality in allocating the benefits of prosperity has been a growing trend since at least the late 1970’s. In short, though NAFTA has surely benefitted some and harmed others, its aggregate effect on the U.S. economy appears to have justified neither the most optimistic nor the most pessimistic predictions.

In Mexico too the effect of NAFTA is disputed because of its entanglement with other dramatic economic events, but here it is far easier to see the case made by critics. It is certainly impossible to evaluate NAFTA without considering the dramatic collapse of the Mexican economy barely a year after its initiation. The meltdown began with a currency crisis, which was marked by a 43 percent decline in the value of the peso that not only disrupted regional trade and precipitated a deep depression in Mexico but also triggered concern about Mexico’s ability to meet its foreign-debt obligation. In response, the Clinton administration, fearful of the political and economic consequences of a collapse in the Mexican economy, provided a $20 billion line of credit as part of a $50 billion international effort to rescue Mexico from imminent default.

It is instructive to note that NAFTA both contributed to Mexico’s economic problems and helped export them to the United States. The key role was played by the Mexican peso, which despite a temporary boost from NAFTA could not maintain its value under the pressure imposed by Mexico’s trade liberalization. As trade barriers fell throughout the liberalization of the late 1980s and early 1990s, Mexican imports soared, producing a trade deficit that finally reached 8 percent of GDP in 1994. Ordinarily this deficit would have caused the peso to decline steadily until its equilibrium value was reached, but instead it was offset for a while by a huge–but temporary–inflow of capital from abroad, more than $60 billion in portfolio investment alone from 1990 to 1993. Much of this originated from foreign investors, especially in the U.S., who were persuaded by enthusiastic supporters of liberalization that post-NAFTA Mexico represented the next great investment opportunity. Inevitably, this capital inflow began to decline, putting downward pressure on the value of the peso. The Salinas government recognized that a falling peso would produce domestic inflation, erode the confidence of foreign investors, and undermine the reputation of the PRI for financial management, all of which it wanted to avoid during the 1994 presidential election. Thus, it expended treasury funds to artificially support the peso (and pressured the central bank to expand the money supply by over 20 percent). With foreign reserves nearly exhausted–falling below $7 billion–the new president, Ernesto Zedillo, was forced to announce a 13 percent devaluation of the peso less than three weeks after his inauguration in December 1994. This became the last in a string of incidents–among them the Chiapas revolt, a contested election result, and a political assassination–that had alarmed foreign investors over the previous year. The devaluation effectively acknowledged an economic crisis, which drove frightened investors to react in panic. Nearly $30 billion fled the country in a few weeks. During 1995, the peso declined by 43 percent, the Mexican stock market sank by 38 percent, inflation soared to 60 percent, and unemployment nearly doubled. With American economic interests now tied to the stability of the Mexican economy and NAFTA’s prestige bound up with the success of the Mexican liberalization program, the Clinton administration arranged an emergency bailout with help from the IMF and other institutions. When default on foreign debt loomed, both the Zedillo administration and its supporters (primarily in the Clinton administration and the IMF) were seen to give priority to bailing out investors–especially those abroad–while ignoring the plight of the Mexican masses.

The changes in Mexican macroeconomic policy required by the crisis itself and those imposed as part of the bailout agreement guaranteed a sharp recession that, among other effects, would reduce the trade between Mexico and the United States that NAFTA was designed to boost. More significantly, real GDP per capita, already 10% below the level it had reached at the beginning of the 1980s, declined another seven percent in 1995. As the economy hit bottom in 1995 Mexico registered a 13% decline in private consumption, a 50 percent inflation rate, interest rates at 40 percent, a 20% decline in real wages, and a 70% increase in official unemployment (to 6.3%, but another 20% were reduced to part-time work). Since then Mexico has experienced a recovery, once again led by foreign investment.

At the turn of the century, the dislocations associated with Mexico’s trade liberalization and the NAFTA agreement meant to signify its permanence are more apparent than the benefits that remain projected for the future. The dilemmas of trade have been expressed in a variety of ways. Inequality has grown substantially throughout the liberalization process. The percentage of GDP going to labor declined from 38% in 1980 to under 25% in 1990 and has likely fallen further since then. The wage gap has widened between white-collar and blue-collar workers, skilled and unskilled labor, export-oriented vs. domestic manufacturing, and between border and non-border areas. The security of workers is increasingly precarious, with fewer covered by Social Security and more employed in the informal sector, while the minimum wage has fallen to half its 1987 value. Foreign dependence has grown and self-sufficiency has declined. Not only has trade expanded, but it is increasingly integrated into the productive capacity of the economy. In 1994, 58% of the value of exports was composed of the imported inputs required to produce them (up from 12% in 1983). Foreign debt exceeds $170 billion, two and a half times its level during the debt crisis of 1982. As Teresa Gutierrez Haces puts it, “Mexico has converted itself into a country that is very attractive to international investors but not for millions of Mexicans who daily face conditions of extreme poverty.”(13)

Conclusion: lessons from NAFTA

Trade ties together the fate of nations. Prosperity in one country can be “exported” to another through trade, but dependence on others can also transmit less pleasing conditions. Trade is not equally desirable under all circumstances or with all possible partners, especially because its effect on value trade-offs, distributional patterns, and state concerns can vary dramatically. In this light, regional integration offers a cautious compromise between self-sufficiency and global free trade by allowing a nation to selectively choose its partners in destiny. Despite difficulties in the past and uncertainties about the future, the EU exemplifies the virtue of such an approach, taking advantage of the economic, political, and social compatibility of its members to forge an organization that can address common problems and achieve shared goals.

The early experience with NAFTA is less clear, and the decision to bind together the fate of all three North American nations cannot yet be definitively assessed. However, a major currency crisis that began less than a year after NAFTA’s implementation in January 1994 has cast doubt on whether Mexico is yet stable enough to be a reliable member of a regional trade organization.

Nonetheless, enthusiasm for liberalizing regional agreements remains strong, especially in the western hemisphere where MERCOSUR, the Central American Common Market, CARICOM, and the Andean Community are all in operation. In fact, less than a year after NAFTA’s inauguration, 34 democratically elected leaders in the region met to initiate negotiations over a Free Trade Area of the Americas (FTAA) which would reach from Alaska to Argentina and encompass a market of nearly 800 million people. Nine different negotiating groups are now considering various facets of this proposal, with negotiations scheduled to conclude by 2005. On a separate track, the U.S. is a leading member of the Asia Pacific Economic Cooperation (APEC) forum, a group of twenty one nations on both sides of the Pacific committed to greater liberalization of trade and investment. This is a far larger group–its members account for more than half of global trade–but it is much more loosely integrated and at an earlier stage in its development.

Trade generates dilemmas that can overwhelm its advantages unless nations and organizations are prepared to respond to them. The regional option is one strategy that appeals to some nations, but others are not located in a region where such an approach is feasible. For them, such as the Asian NICs considered in the next chapter, trade-led growth must occur in a context of globalization.


  1. Regional integration can take a variety of forms. In a preferential trade area, a group of countries establishes lower barriers to the import of goods from member countries than from outside countries. The free trade area is a special case of a preferential trade area in which trade barriers between members are reduced to zero. A customs union is a preferential trade area in which the members adopt a common external tariff. A common market allows the free movement of factors of production such as capital and labor as well as free trade in goods. Finally, an economic union or community occurs when the economic policies of common market nations are coordinated and harmonized under supranational control and a single currency.
  2. Between 1990 and 1994, 26 preferential trade agreements were signed in the Western Hemisphere alone. 22 new regional trade agreements were reported to the WTO between mid-1997 and mid-1998.
  3. Timothy M. Devinney and William C. Hightower, European Markets After 1992 (Lexington, Mass.: Lexington Books, 1991), p. 21.
  4. The Benelux customs union among Belgium, Luxembourg, and the Netherlands had been formed in 1948.
  5. For convenience, I will use the label EU to refer to both the current European Union and its predecessor organizations.
  6. The EU remains slightly smaller than NAFTA in GDP, but its trade is more than twice as large.
  7. The United States has never fully accepted the EU’s conformity with Article 24 because it has not eliminated tariffs on “substantially all” goods (failing, most notably, with respect to agriculture). Nonetheless, the U.S. has not opposed the EU, but it has been active in pushing the WTO to examine the conformity of all regional agreements with GATT.
  8. “The Slippery Slope,” Economist, July 30, 1994.
  9. “Gambling on the Euro,” The Economist, January 2, 1999.
  10. Congress had nearly blocked the initial negotiations for the less controversial CUSTA but failed to do so when the Senate Finance Committee deadlocked at 10 to 10.
  11. Bruce Campbell, Andrew Jackson, Mehrene Larudess and Teresa Gutierrez Haces, “Labour market effects under CUFTA/NAFTA,” (Geneva: International Labour Office,1999), p. 8.
  12. Labor market effects,” p. 9.
  13. Labour market effects, p. 118



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NAFTA replacement signed at G20

SIGNING NAFTA in 1988, the administrations of U.S. President George H, W. Bush, Mexican President Carlos Salinas de Gortari and Canadian Prime Minister Brian Mulroney

U.S. President Donald Trump, Canada’s Prime Minister Justin Trudeau and Mexico’s President Enrique Pena Nieto attend the USMCA signing ceremony before the G20 leaders summit in Buenos Aires, Argentina November 30, 2018. REUTERS/Kevin Lamarque


Representatives of the U.S., Mexico and Canada signed a new pact Friday to replace the North American Free Trade Agreement.

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