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Economic Policy Institute Briefing Paper—The Failed Experiment: NAFTA at Three Years

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June 26, 1997 Jointly Released Report

Executive Summary

THE FAILED EXPERIMENT
NAFTA at three years

The President is required to submit “a comprehensive study on the operation and effects” of NAFTA to Congress by July 1st. In this report, several organizations concerned with the well-being of working families and the environment perform their own evaluation of NAFTA’s track record. Although NAFTA clearly has been good for some North Americans, the costs – to many more North Americans – have been much heavier:

U.S. Wages

For nearly two decades, the real wages of American blue-collar workers have been declining. Imports from low-wage countries are an especially important cause of increasing wage inequality, and Mexico is one of America’s most important low-wage trading partners.

  • Between 1993 and 1995, Mexican goods made up 26.7% of the increase of U.S. imports from non-industrialized, low-wage countries. Mexico was also responsible for 43.5% of the increase in U.S. deficits with these countries.
  • Many firms have used the threat of moving to Mexico as a weapon against wage increases and union organization. In a survey commissioned by the NAFTA Labor Secretariat, Professor Kate Bronfenbrenner of Cornell found that over half of the firms used threats to shut down operations to fight union organizing drives. When forced to bargain with a union, 15% of firms actually closed part or all of a plant-triple the rate found in the late 1980s, before NAFTA.

Trade Balances and Losses in the U.S.

  • In 1996, exports were 36.3% higher to Mexico and 33.4% higher to Canada than in 1993. Growth in U.S. imports from Mexico and Canada, however, was much larger-82.7% and 41.1%, respectively, over the same period. As a result, a U.S. surplus with Mexico of $1.7 billion in 1993 became a deficit of $16.2 billion in 1996. America’s overall deficit with the NAFTA countries hit $39 billion in 1996, an increase of 332% from 1993.
  • Based on standard employment multipliers, the increase in the U.S. trade deficit with Mexico and Canada has cost the U.S. 420,208 jobs since 1993 (250,710 associated with changes in the trade balance with Mexico, and 169,498 with Canada). NAFTA was responsible for 38% of the decline in manufacturing employment since 1989. NAFTA and globalization generally have changed the composition of employment in America, stimulating the growth of lower paying services industries and accelerating the deindustrialization of our economy.

NAFTA and the Peso Crisis

  • The 1995 peso crisis is commonly used to excuse the sharp deterioration of the U.S. trade balance with Mexico. However, NAFTA was the foundation for an aggressive export-led growth strategy in Mexico. This assumed that expanding Mexico’s exports would create jobs for Mexico’s rapidly expanding workforce and steadily increase living standards. The peso had to fall in order for this strategy to succeed. As Professor Robert Blecker of American University put it, “Mexico had to devalue the peso in order to attract the direct foreign investment and export-oriented manufacturing that the NAFTA agreement was designed to promote.
  • The peso crisis is also intricately linked with the politics of NAFTA. The artificially high peso held down inflation in Mexico, helped to win votes in the U.S. Congress for passage of NAFTA in 1993, and improved the electoral prospects of Mexican Presidential candidate Ernesto Zedillo in 1994.
  • The real value of the peso has been climbing steadily since late 1995 at 5 – 7% per quarter. The Mexican government has been stimulating the economy in advance of next month’s elections. Past experience suggests that Mexico’s next sudden devaluation, and even deeper depression, are only a matter of time.

Mexico

  • The peso collapse has devastated Mexico’s economy. The number of unemployed workers doubled between mid-1993 and mid-1995, to nearly 1.7 million. Additionally, there were 2.7 million workers employed in precarious conditions in 1996. To make ends meet, many families are forced to send their children-as many as 10 million-to work, violating Mexico’s own child labor law. An estimated 28,000 small businesses in Mexico have been destroyed by competition with huge foreign multinationals and their Mexican partners. Real hourly wages in 1996 were 27% lower than in 1994 and 37% below 1980 levels. Of the 1995 working population of 33.6 million, 19% worked for less than the minimum wage, 66% lacked any benefits, and 30% worked fewer than 35 hours per week. During three years of NAFTA, the portion of Mexican citizens who are “extremely poor” has risen from 32 to 51%, and 8 million people have fallen from the middle class into poverty.

Canada

  • Canada has been mired in recession since shortly after entering into the U.S.-Canada Free Trade Agreement in 1989. Unemployment increased from 7.5% in 1989 to 11.3% in 1992. Joblessness fell back to 9.4%, but has risen slightly in 1997, to 9.6%. Canada’s policies and practices are being harmonized with those of the rest of North America — downward. Between 1989 and 1995, Canada’s real interest rate was 2.9% higher than in the U.S. As a result, Canada is cutting government outlays sharply and dismantling its social safety net, while increasing its unemployment rate.

NAFTA and Labor Rights

Significant areas of labor rights are excluded from effective review by NAFTA enforcement agencies.

  • To date the North American Agreement on Labor Cooperation (NAALC) has completed only five public reviews of complaints of labor violations. Four of these five complaints have centered upon labor rights violations in Mexico. None of the workers involved in these complaints – more than 200 in total – was reinstated or compensated for serious labor rights violations. A new section is needed in the NAFTA agreement to provide real remedies for labor violations.

The Environment and Public Safety

Three years of evidence demonstrate conclusively that the unregulated expansion of North American trade has made an already heavily polluted border region much dirtier and more dangerous; and that the institutions created by NAFTA to handle environmental and public safety problems are utterly inadequate.

  • The NAFTA clean up plan for the U.S. Mexico border has failed, generating only 1 percent of the promised clean-up money. Ozone levels in El Paso have increased steadily since NAFTA. The rate of Hepatitis-A in the border region rose to between 2 and 5 times the U.S. average.
  • NAFTA opened the U.S. borders to trucks that don’t meet U.S. safety standards. Fewer than 1 percent of the 3.3 million trucks entering the U.S. each year are inspected. 50% of those inspected are rejected for major safety violations.
  • NAFTA has weakened food safety inspections. Strawberries, head lettuce, and carrots from Mexico have violation rates of 18.4%, 15.6% and 12.3%, respectively, for illegal pesticide residues.
  • The Ethyl Corporation of Virginia has filed a $250 million suit against Canadian government, under NAFTA rules, after Canada banned a toxic gasoline additive. If Ethyl wins its case, governments will have to pay polluters not to pollute in order to protect public health.
  • NAFTA weakened border inspections of U.S. trade. A tragic side effect was to increase the transshipment of illegal drugs. Transshipment of illegal drugs through Mexico has increased greatly. 80% of the cocaine now entering the U.S. comes through Mexico.

Conclusions

Before it can be expanded, NAFTA should be revised to include enforceable labor and environmental standard
s, effective adjustment assistance, financial market regulation, and protection of national safety nets for those left out of the benefits of trade.


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