Commentary | Trade and Globalization

Overhauling NAFTA

Opinion pieces and speeches by EPI staff and associates.


Overhauling NAFTA

By Jeff Faux

Barack Obama and Hillary Clinton concur that the North American Free Trade Agreement was a bad deal. Both say that as president they would renegotiate the agreement to include enforceable worker and environmental protections that were left out of the original agreement at the insistence of business interests in Mexico, the United States and Canada. That would be a start, but it doesn’t go nearly far enough to fix this flawed agreement, and the harm it has caused.

NAFTA’s basic economic assumptions clearly were wrong. Its promoters told American workers not to worry about losing jobs to low-wage Mexican labor because free trade by itself would create a booming Mexican economy and a huge middle-class market for U.S. goods. They confidently predicted that our trade surplus with Mexico would grow, generating net new good jobs in the United States and at the same time reducing illegal immigration from Mexico.

But neither the Mexican boom nor the vast middle-class market materialized. The gap between wages in the two countries actually widened. And the trade surplus turned to a chronic deficit, moving hundreds of thousands of American jobs south of the border. At the same time, imports of highly subsidized U.S. and Canadian grain and other agricultural products undercut Mexico’s rural economy and drove over 2 million family farmers off the land. With no jobs in the cities, they swelled the migrant stream north. After NAFTA, annual illegal immigration from Mexico doubled.

Things are getting worse. The International Monetary Fund estimates that Mexico grew more slowly in 2007 than all but one other Western Hemisphere nation. For 2008, it expects Mexico to be at the bottom — below even Haiti. A recent Mexican government report concludes that low wages and social inequality will continue to generate heavy out-migration to the United States at the current annual rate of roughly 500,000 — for the next 15 years! Wall or no wall, workers who are desperate will find a way over the border. The problem with the Mexican economy wasn’t that it lacked free trade. It was that it is run by a small elite of crony capitalists. NAFTA simply provided more opportunities for the rich to get richer by selling to the U.S. market – and that made the mal-distribution of wealth and power even worse. Unfortunately, having now given away the leverage of access to that market, a new President Obama or President Clinton wouldn’t be in a position to simply demand that labor and environmental standards be added to the agreement.

Like it or not, we can’t turn back the clock. Thanks to NAFTA, North American economic integration is now here to stay. Every day more business connections in finance, marketing and production are being hardwired into a continental economy. Permanent supply lines for thousands of firms now criss-cross the borders. Despite the post-9/11 restrictions, more people are moving back and forth between countries – Mexican workers coming north, American retirees moving south.

Making this integrating economy work for people in all three countries will require a new continental bargain. The deal that undergirded the creation of the European Union might serve as a rough model. To prevent the mass migration of workers from poor to rich nations the EU provided investment funds to generate job growth in Spain, Portugal, Ireland and Greece. As part of the deal these countries restructured their economic policies to encourage widely shared domestic growth. It was a spectacular success. Despite the free movement of labor within the common market, workers in the poor economies stayed home, where they prospered and provided consumers for goods from their wealthier neighbors.

A North American version could provide for a similar fund for investment in Mexico in exchange for changes in Mexican law and institutions that would allow the income of Mexican workers to rise as their economy grows. These would include guarantees for free trade unions, enforceable minimum wages, and an increase in education and other social spending. Much of the investment assistance could take the form of loan guarantees rather than cash.

There are many possible variations on this model, and perhaps other models. But now that we have a consensus, among Democrats at least, that we need something new, it’s time to consider replacing NAFTA with an agreement that works for working people on all sides of our borders.

Jeff Faux is Distinguished Fellow at the Economic Policy Institute.


See related work on NAFTA | Trade and Globalization

See more work by Jeff Faux