Themes > Current Issues

15.01.2004

Ten years of NAFTA

Jayati Ghosh

The first day of this year marked the tenth anniversary of NAFTA - the North American Free Trade Agreement, which brought the economies of the United States, Canada and Mexico together. This was a trade deal preceded by much debate and opposition, but ultimately pushed through with enthusiastic support from the large corporations of the US, some would say even written by them. But the decade’s experience suggests that it is mainly these corporations that have benefited, while almost all of the other promises of the agreement’s supporters have turned sour.

NAFTA was an ambitious agreement in some respects, bringing together three very different economies: the rich and powerful United States, developed Canada with its extensive social security system and workers’ protection, and developing Mexico with its regional inequalities and backwardness. At the time, leaders in all three countries assured the people that the agreement would not just boost trade and investment in the region, it would create millions of new and better jobs and raise living standards “from the Yukon to the Yucatan”.

Of course, it was clear from the start that some would gain more than others, particularly because of the way in which the final agreement was structured. The United States administration refused to make any commitments with regard to agricultural subsidies, and retained the right to protectionist measures against surges of imports from Canada and Mexico. Despite this, it was able to push through very significant liberalisation of rules in Canada and Mexico with regard to investment and intellectual property, which greatly increased the power of US capital in these countries.

It is obviously difficult to separate the effects of NAFTA from the effects of the broader process of global economic integration over the past ten years. Nevertheless it is clear that NAFTA did indeed dramatically transform the economic landscape of North America, but not necessarily in ways that have been beneficial for the bulk of the people.

Certainly it is true that NAFTA has resulted in increased trade and investment flows within the region. Total trade among the NAFTA countries more than doubled between 1993 and 2002, growing much more rapidly than trade with countries outside the region. Foreign direct investment by NAFTA investors in the three countries jumped from $137 billion in 1993 to nearly $300 billion in 2000.

However, this increase in trade and investment has not translated into commensurate income increases, especially for most workers, contrary to predictions. The gains have been concentrated among corporations, whose profits have increased manifold, and among favoured (typically urban) consumers with purchasing power. In each NAFTA country, the net effect upon workers as a whole has been negative.

Canada is supposed to be one of the globalisation’s few economic success stories, generating 560,000 new jobs and growing 3.4 percent in 2002, the fastest rate among the top seven industrial economies. But these numbers for job increase do not take account of job losses, and so do not give the net effect. At least 300,000 jobs are estimated to have moved south to Mexico and low-wage locations in the US. More importantly, almost everyone concedes that NAFTA has significantly reduced the bargaining power of workers vis-à-vis capital and has contributed to the erosion of social security systems that were among the best in the world.

One Canadian analyst, Murray Dobbin, has argued that real wages of Canadian workers have come down by 20 per cent over the decade, and productivity increases have been appropriated entirely by capital. Unemployment insurance and other social security provisions have been scaled back. Health care provision and other public utilities like water and electricity have been cut or privatised. In consequence, Canada has slipped from first to ninth place in the UNDP’s human development ranking, in just a few years.

In the United States, NAFTA has brought about big increases in profits for certain corporations, especially those involved in making in automobile and auto components, and agribusiness companies, which have seen profits go up by 2 to 3 times since NAFTA took effect. Part of the reason for this unprecedented increase in profitability is the newfound ability of corporations to move to the cheapest locations in the region, or simply to threaten to move in order to contain workers’ wage and other demands.

But corporations have also benefited greatly from the provisions in NAFTA that allow companies to receive compensation for supposed restrictions on their expansion and behaviour by governments. NAFTA rules limit each country's domestic policies to deal with issues ranging from environmental health and food safety to banking and truck safety regulation. Under the investor rights guaranteed in the agreement, investors are allowed to demand compensation for “indirect expropriation”.

This has been interpreted to include any government act, including those directed at public health and the environment, which can diminish the value of a foreign investment. These cases are adjudicated by special tribunals, bypassing the legal system of all three countries. Already, suits with claims amounting to more than $13 billion have been filed by large companies.

In a typical case in 2000, the Mexican government was ordered to pay nearly $17 million to a California firm that was denied a permit from a Mexican municipality to operate a hazardous waste treatment facility in an environmentally sensitive location. While the result of such provisions has been an alarming increase in environmental pollution, especially in the newly industrialising border areas of Mexico, it has definitely allowed US companies to reduce their operating costs and thereby increase their profits. But the treaty affords no comparable protection to those harmed by the actions of multinational companies, for example in terms of adverse environmental effects.

When the agreement was signed, workers in the US were promised 170,000 additional jobs in each of NAFTA's first ten years, based on the belief that this deal would increase the US trade surplus with Mexico and lower the pre-NAFTA trade deficit with Canada. But instead of the surplus, the United States now has a trade deficit with Mexico that averages nearly $40 billion per year, and has lost close to three million manufacturing jobs.

Under only one government programme for displaced workers, the NAFTA Trade Adjustment System - for which only a relatively small number of affected workers could qualify - 525,000 workers have been officially certified as NAFTA casualties because their jobs were transferred to Mexico.

Unemployment is currently low in the US only because of the strong fiscal impetus provided by the Bush administration over the past two years, which has created more service sector jobs. However, despite the economic growth of the 1990s, real wages in the US are still below 1972 levels, while income inequality has skyrocketed because of the shift from manufacturing jobs to employment in services, where wages are usually much lower.

It may appear that Mexico therefore must be the country to have benefited from NAFTA - but precisely the opposite is true. The most disastrous effects of NAFTA are to be found in Mexico, with grave lessons for other developing countries tempted to take this path of trade integration with more developed economies in the hope of industrialisation.

In the early years of NAFTA, there was some increase in both manufacturing output and employment through FDI in the “maquiladoras” (workshops of gold) near the border, set up by US companies to take advantage of lower labour costs. However, import penetration because of the trade liberalisation imposed by NAFTA destroyed the domestic manufacturing sector which had catered to the home market, so that even in the days of the boom, net manufacturing employment barely increased.

Meanwhile, the overcrowding and environmental destruction characteristic of the maquila areas, the insecure conditions, worker harassment (including sexual harassment of young women workers) and even large incidence of birth defects in the maquila towns, have made them unsuitable models to illustrate the benefits of NAFTA.

Since the late 1990s, recession in the US and competition from other low cost locations such as China have weakened the relocative investment effect, so that manufacturing simply cannot generate enough jobs to counter the effect of job loss in the other sectors, especially agriculture. Even in the service sector, small Mexican businesses including petty retailers have been badly hit by reduced access to credit, as all but one of major banks on Mexico have been sold to major US-based multinational banks that are not interested in such low margin activities.

However, it is agriculture that has experienced the worst effects of NAFTA, and underlined the unfair nature of the original treaty. The US continues with and has even increased its huge agricultural subsidies, which allow large agribusiness corporations to sell produce in Mexico at prices well below actual costs. Meanwhile, NAFTA has eliminated 99 percent of Mexico's agricultural tariffs. As a result, since 1994 the amount of US corn dumped on the Mexican market has increased by 15 times. Similarly, the amount of US beef going into Mexico has doubled, poultry imports from US have tripled and pork imports have quintupled.

The resulting collapse in crop prices in Mexico has completely destroyed the viability of Mexican farming, even subsistence maize farming which was the mainstay economic activity in most of rural Mexico. Ironically this has not meant much of a benefit for those urban Mexican consumers who still have jobs, since retail corn prices have barely fallen.

Estimates of the loss of agricultural employment because of this unfair competition range from 1.3 to 1.85 million workers, and the official estimates is that at least 1,000 people leave the Mexican countryside every day in search of work opportunities or simply the means for basic survival. They clog Mexico City as street vendors, or add to the flow of legal and illegal migrants to the US (now estimated to be more than 150,000 people every year), because they have no other means of subsistence left.

This also helps to explain why farmers’ groups such as the Via Campesina have raised the demand for “food sovereignty” and why agriculture was the dominant issue among both developing countries and people’s groups at the failed WTO meeting in Cancun last year.

Incomes in Mexico have also reflected this major crisis in livelihood. According to the Centre for Economic and Policy Research in Washington, in ten years income per person has grown by only nine percent in Mexico, which is around one-fifth of the growth in the 1960s and 1970s.

All in all, therefore, NAFTA has a dismal record as far as its impact on the people of the region is concerned. It is all the more alarming, then, that the US administration is trying to push the NAFTA model even further, through its aggressive promotion of the FTAA (Free Trade Agreement of the Americas). Once again, in these negotiations, the US government has refused to allow agriculture or non-tariff barriers to be negotiated, but wants the Latin American countries to compromise their national sovereignties in crucial sectors such as banking and telecom, and to agree to NAFTA-style investor "protections."

After a failed meeting in December, the US managed to arm-twist four relatively weak Central American countries - El Salvador, Guatemala, Honduras and Nicaragua - to sign up to this agreement. Costa Rica which still retains some degree of autonomy from the US, withdrew at the last minute. But the Bush administration has every intention of continuing to pressurise other countries to comply, even though this is creating enormous popular resentment across the region.

Anniversaries are usually opportunities for stock-taking. In the case of NAFTA, the popular assessment is summed up by new joint the slogan of several movements across the region: “ten years is enough!”