NAFTA, the North American Free Trade Agreement, has been getting a lot of not so favorable, and sometimes, controversial headlines in recent years. Some critics blame it for the current labor shortages in the United States, due to the fact that most U.S. companies have been and continue to outsource and ship jobs overseas. While its proponents have been hailing it as a great success in helping lowering national prices on certain manufactured goods and services and that it has caused to increase wages for certain jobs within the U.S.
In this document, we are going to explore the cons and pros of NAFTA. The author of the document has specifically selected this topic because of a familiar ground. Most of his families and friends have lost their jobs in recent years, and whenever the word ‘NAFTA’ is mentioned, the blame seems to be more placed on NAFTA and Bill Clinton, for causing it to happen, than on the current economic downturn cycle. Before we look deeper on the aforementioned issues, we must first look at what is NAFTA, its causes, advantages and disadvantages.
In 1989, Canada and the United States implemented a bilateral free trade agreement, and in 1993, they included Mexico. On December 8, 1993, the leaders of the governments of Canada, United States, and Mexico signed, then the most anticipated trilateral free trade agreement, known as, the North American Free Trade Agreement (NAFTA), and was implemented on January 1, 1994, for the sole purpose of helping to remove most of the trade and investment barriers, while boosting high economic growth between the tri-bloc neighboring countries.
The Agreement was signed by Bill Clinton, president of the United States, Brian Mulroney of Canada, and Carlos Salinas de Gortari of Mexico. It was hailed as the highest achievement and largest trilateral agreement between the tri-bloc countries in decades. “Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others being phased out over periods of 5 to 15 years. This allowed for an orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008” (United States Department of Agriculture, Foreign Agricultural Service).
Over the years, the partner countries have continued to make certain provisions, adding or removing some, according to economic conditions in order to improve the agreement. Certain provisions were not initially included such as the agricultural provision was not amended until in 1998. Such provisions are necessary as each country tries to improve its international trade relationship with other trade partners. “The agricultural provisions of the U.S.-Canada Free Trade Agreement, in effect since 1989, were incorporated into the NAFTA. Under these provisions, all tariffs affecting agricultural trade between the United States and Canada, with a few exceptions for items covered by tariff-rate quotas, were removed by January 1, 1998. Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products. The Mexican-Canadian agreement eliminated most tariffs either immediately or over 5, 10, or 15 years. Tariffs between the two countries affecting trade in dairy, poultry, eggs, and sugar are maintained” (United States Department of Agriculture, Foreign Agricultural Service).
Since its implementation, some of the tri-bloc partners seem to have greatly benefited from the trade agreement, with the exception of the United States. According to NAFTAnow.org, its official web site, as of 2007’s NAFTA’s fiscal report indicate that NAFTA members have a combined population of over 439 million, with a combined Gross Domestic Product (GDP) of $16.2 trillion, and the number of jobs created since 1993 are more than 39 million, with a national employment level of 205.8. “In terms of combined purchasing power parity GDP of its members, as of 2007 the trade block is the largest in the world and second largest by nominal GDP comparison. It also is one of the most powerful, wide-reaching treaties in the world” (NaftaNow.org).
On an individual member basis, Canada has a population of 33 million as of July 2007, and achieved a record GDP of $1,425 billion, while its trading with NAFTA partners reached $542.9 billion. Its inward Foreign Direct Investment among NAFTA countries for 2006 was $235.1 million, while the number of jobs created in the U.S. between 1993 and 2007 was 4.1. Its national employment level is 16.9 million. For the United States, its population, as of July 2007, is 301.6 million, with a GDP of $13,844 billion, and $870.2 billion in trade with NAFTA Partners. As of 2006, the United States achieved over $165.1 billion in inward Foreign Direct Investment among NAFTA countries, while the number of jobs created between 1993 and 2007 reached 25.8 millions, and its national level employment was 140.0 millions. For the third member country, Mexico, its population in July 2007, was 105.2 million, and it reached a record GDP of $886 billion, while its trade with NAFTA partner reached $375.4 billion. In 2006, Mexico reached an inward Foreign Direct Investment of $129.1 billion among NAFTA countries, and the numbers of jobs created in Mexico between 1993 and 2007 were 10.1 million, while its national employment level rose to a record 42.9 million (NAFTANow.org).
Each of the NAFTA’s three-member countries seems to have amassed a great success as a result of international trade, with Mexico and Canada being the most beneficial nations. “Trade liberalization has transformed and modernized Mexico’s vibrant economy by successfully boosting trade and investment flows. Within just a few years, Mexico’s exports have diversified from primarily oil to include an array of manufactured products, making Mexico one of the largest exporters in the world. While, one in five jobs in Canada is linked to international trade, and Canada’s prosperity is built on its openness to international trade and investment. As such, the North American continental partnership is without a doubt an important competitive advantage for Canada. Canada is using this continental platform as a way to help Canadian business embrace commercial opportunities around the world. As for the United States, the largest and most diversified economy in the world, its market economy whose businesses are world leaders in the manufacturing and high-tech sectors, especially computers, medical equipment, and aerospace, and in services, including financial services and telecommunications, and in agriculture, may have benefited equally” (NAFTANow.org).
The data and summation herein provided seem to indicate a huge success in partner trade between the NAFTA country-members, however, many critics are not so merry-and-jolly about the free trade agreement. Most blames the huge loss of jobs, as U.S. companies outsource and ship jobs to Mexico, Latin America and South East Asia as a result of this liberalized trade agreement. “Debate a decade ago over the North American Free Trade Agreement, or NAFTA, drew loud warnings that liberalized trade with Mexico would lead to huge job losses in the U.S. Trade with Mexico has soared since NAFTA’s debut in 1994, but recent studies have concluded that the U.S. did lose more jobs in various industries than it gained because of the pact” (Wall Street Journal, December 8, 2008).
In fact, the issue with NAFTA has been some of the main focus by both candidates during the 2008 U.S. presidential and primaries campaign. The presidential candidates, Obama, McCain, and Clinton, both agreed that NAFTA was a mistake. The main blame was that NAFTA has caused a huge loss of employment to many Americans, as most jobs were shipped overseas to countries who are offering cheap labor, while those who still hold on to their jobs in the U.S., have seen their wages shrinking to the lowest, coupled with huge pay cut, reduced benefits and most times, no medical insurance benefits, all as a result of an increase labor demand versus shortage in labor supply. “Campaigning in Ohio, a formerly industrial state that is rapidly becoming a postindustrial state, both Hillary Clinton and Barrack Obama expressed reservations about the trade deal and suggested it might need to be revisited. Clinton tried to make a meal over a report that Obama economic adviser Austan Goolsbee, a University of Chicago professor and an occasional Slate contributor, told Canadians that Obama’s anti-NAFTA rhetoric was just for show and that they should trust in Obama’s free-trade credentials” (Newsweek).
Like the then presidential candidates, most people in the U.S., especially in certain states that have lost most jobs such Ohio, Michigan, and others, NAFTA is not that popular. It’s seen as the devil that snapped away people’s meals and well-being. “Mexico and Canada aren’t really Ohio’s main problems. The last time I visited the state, I went to a steel plant outside Cleveland where one of the furnaces was being dismantled and sent to … China. The state, which has lost large numbers of manufacturing jobs, is currently experiencing the negative aftereffects of an economic boom (high unemployment and foreclosure rates), even though it never felt many of the boom’s benefits. So what accounts for the state’s visceral hostility to NAFTA? The Wall Street Journal yesterday published a poll showing that Democrats in Ohio disapprove of NAFTA by a 59-13 margin. (In Texas, only 40 percent of Democrats disapprove, while 33 percent approve.) As my NEWSWEEK colleague Keith Naughton notes, Mexico holds a special symbolic status for employees of automakers and similar smokestack industries, which used to be large presences in Ohio and which moved big chunks of their production south of the border in the 1980s and ’90s” (Newsweek).
However, in Mexico and Canada, the resentment on NAFTA is not as the same in the U.S. Most people in Mexico deem NAFTA as the blessing in the sky, because it has caused to create more and better paying jobs in most part of the country, in which for years most residents lived on scrapping farm produce for their daily consumption. And, as more and more U.S. companies open up large manufacturing plants in most areas in Mexico, more and more Mexicans found themselves plagued by a huge selection of, better paying employment , which even though most account for less than $2 an hour, still makes a big difference to them. “The fact that Mexican firms now export large quantities of goods to Canada and the United States means they are creating jobs—and incentives—for Mexicans to stay at home. In some ways, NAFTA has been a boon for activists. Just think how much higher the northward flow of work-seeking immigrants from Mexico would have been in the absence of NAFTA” (Newsweek).
Mexico seems to be the one that has most benefited than the other two partners. A lot has changed in Mexico since NAFTA was implemented to include it as part of the free trade partners. According to the report by Carlos Salas in the Economic Policy Institute: Although Mexico now has a large trade surplus with the U.S., Mexico has also developed a large and growing overall trade deficit with the rest of the world. In fact, Mexico’s net imports from the rest of the world now substantially exceed its net exports to the United States. Official unemployment levels in Mexico are lower now than before NAFTA, but this decline in the official rate simply reflects the absence of unemployment insurance in Mexico. In fact, underemployment and work in low-pay, low-productivity jobs (e.g., unpaid work in family enterprises) actually has grown rapidly since the early 1990s. Furthermore, the normal process of rural-to-urban migration that is typical of developing economies has reversed since the adoption of NAFTA. The rural share of the population increased slightly between 1991 and 1997, as living and working conditions in the cities deteriorated.
As Mexico flourish, the opposite is happening in the US. Forbes magazine recently reported a list of the fastest dying cities in America, and in Ohio, Dayton, Cleveland, and Youngstown are some of many in the US that have been affected, not only by the current economic crisis, but by many of the manufacturing jobs being shipped overseas, while leaving most American jobless. The report indicates that Youngstown is on the blink of completely becoming a ghost town. Most retail stores have moved out, and the City of Youngstown has been on the buying spree, buying up abandoned properties, and dismantles them to clean them up and turn them in to parks instead. Whereas in Mexico, “total employment grew from 33.9 to 39.1 million jobs over the 1995-99 period (3.7% annually), according to officially reported data (INEGI 1995 and 1999). But these data must be used with some caution, because the sample used for the National Employment Survey changed in 1998. Comparing the 1998 and 1999 data provides a more realistic rate of employment growth. Total employment reported for 1998 was 38.6 million jobs, resulting in an actual rate of growth in 1999 of only 1.2%” (Economic Policy Institute).
As for Canada, all else equal, the tri-bloc member country has one specific pressing issue, losing its water to the U.S. as a result of NAFTA. According to Inter Press Service; under the North American Free Trade Agreement, Canada lost control over its energy resources. Now, with “NAFTA-plus”, it could also lose control over its freshwater resources, say experts. Canada’s water is on the trade negotiating table despite widespread public opposition and assurances by Canadian political leaders, said Adèle Hurley, director of the University of Toronto’s Programme on Water Issues at the Munk Centre for International Studies. “A new report released Sep. 11 by the programme reveals that water transfers from Canada to the United States are emerging as an issue under the auspices of the Security and Prosperity Partnership (SPP). The SPP — sometimes called “NAFTA-plus” — is a forum set up in 2005 in Cancún, by the three partners, Canada, United States and Mexico”( Inter Press Service).
In addition to Canada being a large supplier of fresh water to the United States, this may be a surprise to some that, Canada is also the largest supplier of crude oil to the United States. “Canada exports more crude oil to the United States than any other nation, including Saudi Arabia. All of that oil, along with a gusher of natural gas, comes free of any kind of export controls or tariffs, courtesy of NAFTA. In fact, the United States consumes almost 100 percent of Canada’s energy exports” (Salon.com).
So, who actually benefit the most from the North American Free Trade Agreement? According to the Office of United State Office of Trade Representative, when NAFTA was implemented 10 years ago, it created the world’s largest free trade area, which now links 426 million people in an area which produces more than $12 trillion worth of goods and services. During the past decade, NAFTA partners have been conducting business within a framework that is extremely open, governed by clear rules and accessible enforcement mechanisms, with the goal of greater economic integration and cooperation.
“In the first decade of NAFTA, U.S. manufacturing output soared, U.S. employment grew, and U.S. manufacturing wages increased dramatically. Income gains and tax cuts from NAFTA were worth up to $930 each year for the average US household of four. While, for Mexico, wages in export-related industries are 37% higher than the rest of its economy. Mexican wages and employment tend to be higher in states with higher foreign investment and trade, and migration from those states is lower. Wages are also higher in sectors with more exposure to imports or exports. Two-way agricultural trade between the United States and Mexico increased more than 125% since NAFTA went into effect, reaching $14.2 billion in 2003 compared to $6.2 billion in 1993. As for Canada, merchandise exports to the United States expanded by 250% since 1989 and account for 87.2% of Canada’s total merchandise exports. Foreign Direct Investment in the finance and insurance industry accounted for 36% of Canadian FDI in Mexico in 2001, while not even registering in 1989” (Office of the U.S. Trade Representative).
All these numbers and reports are good and highly enticing, however, more and more people in the U.S. have lost their jobs. According to the United States Department of Labor, about 600,000 jobs were lost towards the end of January 2009 alone. One can easily blame NAFTA, India, China or other countries offering lower wages that in turn cause to attract many US companies to ship jobs to these countries. I am of the opinion that from a macro-employment perspective, on a long-term basis, NAFTA is not entirely the only cause of the current high rise of unemployment in the United States. It’s actually true as reported that most U.S. companies have shipped and outsourced jobs overseas, as a result of NAFTA.
However, most of these jobs are low paying jobs that most Americans wouldn’t have wanted in the first place. In a short run, it may be true that NAFTA has caused the high rise of unemployment in the U.S., but looking at the long term, as most companies choose to have their goods and services manufactured in countries with low paying wages, these companies then transfer the goods, as manufactured in foreign countries, and sell them in the United States, at a far cheaper price than if they were manufactured locally. Also, as these companies transfer these goods from their overseas plants to the United States, they are causing to the price labor to increase, meaning that people with more experience and or better education and training are now, in a long run, able to find better and high paying employment. In addition, overseas customers, even for the same low paid labors, are now able to afford to buy American goods and services, even prior to being shipped back to the U.S., and in return, the U.S. companies can then repatriate profits from their foreign operations and reinvest it back within the U.S.
Overall, in doing so, better paying jobs in the U.S. continue to rise, the U.S. GDP continues to grow, and the overall economy may be better off, in the long run. However, there seem to have an empty vacuum between classes of American people; the low income families versus middle income families. As a result of U.S. companies shipping low paying jobs overseas, those with less or no education and in this case, less productive, may end up not having jobs, and those with a college education, special training, expertise or specialization may continue to find better paying employment.
In the process, those who continue to find no better paying employment because of lack of education, special training or specialization, they may end up living on social welfare and in poverty. Whereas, who choose to upgrade themselves with current economic condition may continue to live a better and mostly fulfilled life, as a result of gaining better and high paying employment. “Contrary to what some say, Ohio is benefiting from trade and from NAFTA in extraordinary ways, and no one more than the state’s manufacturers. According to the Bureau of Labor Statistics, a total of 777,000 Ohioans are employed in manufacturing. These workers produced $36.5 billion worth of exports in 2006. Exports to Canada and Mexico account for about $20 billion in Ohio’s manufacturing output. Do the math. Ohio manufacturers are bringing in export revenue of $25,000 for every factory worker they employ. The average manufacturing worker brings home a salary of about $42,000. How could Ohio manufacturers make their payroll without their huge and growing sales to Canada and Mexico? The short answer is, they couldn’t. Too often, arguments over trade miss the simple fact that “free trade” agreements like NAFTA are all about fair trade. The U.S. average duty on imports is about 2 percent. But countries such as Colombia and South Korea impose an average tariff on U.S. manufactured goods of 11 percent – just as Mexico did before NAFTA. For the nation as a whole, just 35 percent of exports go to our NAFTA partners. What this means is that Ohio depends more on exports to our NAFTA trading partners than other states. Ohio’s exports to Canada and Mexico have more than doubled since 1994, when NAFTA came into force. Imagine how much more of the international market would have been open to Ohio manufacturers had our national leaders not demagogued free trade agreements with these countries as bad for America” (The Hillsboro Times-Gazette).
NAFTA is a subject with many supporters and opponents, each group with its own views. Until the economy starts to rebound from its current condition, this is a subject that may not be easily resolved. We will continue to debate and write about it, and neither one of us may ever come to an agreement on what is good or bad as a result of NAFTA.
Refereces
Gross, Daniel (Mar 4, 2008). “Trade Talks: The NAFTA Debate is Shorthand for a Broader Policy Problem.”. Newsweek. Retrieved on February 4, 2009, from http://www.newsweek.com/id/118809?tid=relatedcl.
Salas, Carlos (April 2001). NAFTA at Seven. Its Impact on Workers on Three nations. Economic Policy Institute. Retrieved on February 3, 2009, from http://www.epi.org/pages/briefingpapers_nafta01_mx.
Leahy, Stephen (September 22, 2008). “Trade-Canada: Losing Water Through NAFTA”. Inter Press Service. Retried on February 3, 2009, from http://ipsnews.net/news.asp?idnews=39365.
Salon.com (February 28, 2008). Retrieved on February 3, 2009, from http://www.salon.com/tech/htww/2008/02/28/canada_nafta_and_obama
Office of the United States Trade Representative. Retrieved on February 4, 2009, from http://www.ustr.gov/Document_Library/Fact_Sheets/2004/NAFTA_A_Decade_of_Success.html.
The Hillsboro Times-Gazette. Retrieved on February 4, 2009, from http://www.timesgazette.com/main.asp?SectionID=1&SubSectionID=1&ArticleID=160605.
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