Poi Dog has asked for some information regarding NAFTA (North American Free Trade Agreement) and its impact on the Nation and economy. This is an excerpt from a web site written 3 years after passage. We now know the result has been increasingly worse. I did look for comment of the 'pro' side and found only one line type rhetoric. I put it at end so I won't be acused of only presenting one side. As soon as I locate it, I will put up a speech made by Sir - Goldsmith, who came to United States and presented a substantial text against its' passage at the time NAFTA was being considered. It is an impassioned plea and argues American identity as a Nation will eventually be lost if it were to be allowed to pass. See the Immigration Act of Pres. Bush today for update on this.
I hope it brings attention to this issue which is a dagger in the heart of America and is slowly killing our identity and hope as a Nation. My father fought for this Country and the freedoms his father wanted. That the memory of those brave Americans is today betrayed by the 'tour' of Presdential politics to Tyrranical Govenments such as Mexico, which people flee from due to its oppresion and disregard for human rights, is a disgrace and would be judged criminal and shameful by our forefathers. Obviously, I am biased on this issue and am proud to say I oppose NAFTA and the GATT.
For those not up to speed, this President just agreed to increase NAFTA provisioning for Canada, a nation which stood arm-to-arm against our military endeavors in the Middle-East. That this President is spineless and would concede any principles for financial gain is to be kind inmy opinion. He has shown himself to have all the backbone of Clinton so far.
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NAFTA: Are We Better Off Because of It?
Corporations are - the workers are not!
by Nick Campolo
The North American Free Trade Agreement was approved by the U.S. Congress, the U.S. Senate, and the Mexican Senate in November 1993. The Canadian government's approval followed shortly after in December 1993. This agreement called for a complete removal of trade barriers within 15 years. Many trade barriers have already been removed.
There has been much debate among different interest groups and individuals as to what the overall effect of this agreement would be. Although the agreement includes the countries of the U.S., Canada, and Mexico, the major debate in the U.S. focuses on the issue of Trade with Mexico. For this reason, this paper focuses on that part of the agreement.
First, it makes sense to discuss why the prediction was that we would all be better off with this trade pact than we were without it. Ricardo's Theory of Comparative Advantage predicts we would be better off with free trade as participants specialize in their areas of greater factor productivity's. The Heckscher Ohlin (HO) Theory agrees with this, and elaborates on it. The HO theory argued countries with different factor endowments could benefit from free trade. The theory shows that if one nation is capital abundant and another is labor abundant, each nation will specialize in producing goods that uses its most abundant resource. The U.S. is capital abundant, and Mexico is labor abundant. While greater output is predicted with free trade, it is also predicted that in the U.S., owners of capital will benefit while laborers will loose. However, the gains are large enough that if the winners would compensate the losers, all would still be better off. So, while gains from trade are predicted, there is still a valid argument for trade adjustment assistance in the U.S. In Mexico, it is predicted that laborers will gain at the expense of capitalists. The HO Theory model makes several assumptions, which are summarized below.
Assumptions made for Heckscher Ohlin (HO) Theory Model
1. There are two countries using two factors of productions, capital and labor, to produce two goods.
2. Identical production functions exist in both countries.
3. Production functions in both countries display constant returns to scale.
4. One of the commodities is capital intensive at all input prices, the other is labor intensive.
5. Perfect competition in both commodities and factor markets, as well as full employment of resources exists in both nations.
6. Both nations have identical tastes.
7. There are no transportation or similar costs and no barriers to free international trade.
8. Perfect factor mobility exists within each nation but not between nations.
9. Neither country has complete specialization in production.
It is likely that the proponents of this agreement invoke the Theory of Comparative Advantage and the HO Theory, although it is fair to say that many advocates are concerned with some particular self interest they have. Of course, opponents may also be more concerned with self interest than national or global welfare.
The opponents of NAFTA include labor and environmental groups, among others. Labor groups voiced their fears of wage and benefit reductions that would be asked for in the name of competitiveness, as well as their fears of complete job displacement. They foresaw American companies moving to Mexico to reap the ultra cheap labor and lax environmental laws.
Environmentalists envisioned more severe environmental degradation in Mexico where environmental laws are lax and often unenforced. They also predicted that there would be a weakening of America's present environmental laws in the name of staying competitive with Mexico. Critics include labor leaders such as John Sweeney, president of the AFL-CIO, and some political figures such as Rep. Richard Gephardt, House Minority leader. The Sierra Club, an environmental group, has been a strong critic of NAFTA.
The proponents of NAFTA include most economists, multinational corporations in general, and several key political figures, like President Clinton. Economists predicted the gains their models indicated, while multinational corporations were attracted to the expected bottom line gains.
To appease the fears of opponents, there were "side agreements" made on environmental and labor rights issues. While issues such as patents, copyrights, and other forms of intellectual property rights were made part of the core agreement of NAFTA, labor rights issues and environmental issues were made part of a "side agreement." Three institutions were created: The Commission on Environmental Cooperation (CEC), the Border Environmental Cooperation Commission (BECC) and the North American Development Bank. A NAFTA Trade Adjustment Assistance Program was created to compensate displaced workers.
After Three Years of NAFTA
After three years of NAFTA, the U.S. economy is still going strong, implying that NAFTA has not destroyed the U.S. economy as some opponents had predicted. An expansion that began well before NAFTA hasn't slowed, and unemployment is running at a very low rate of 4.7 % with inflation staying unexpectedly low. Multinational Corporations that have moved operations to Mexico are enjoying higher bottom lines. At the same time, we have growing trade deficits with many nations, including Mexico, that are alarming when considering long term implications. And there are many indications that the fears of labor groups and environmentalists have been well founded. Although we have low unemployment, many higher paid workers have been forced into lower paying jobs, and there is much data to show that environmental conditions in North America have been damaged by NAFTA.
There are documented cases of workers who have lost their higher paying jobs due to trade , being thrown into a labor market that paid significantly lower wages. Public Citizen, a watchdog group, reported that there were an estimated 69,000 jobs in the high paid motor vehicle industries that were lost due to trade with Mexico in 1996. This same year, many other manufacturing facilities, such as Zenith Television, ,JVC, and Thompson Consumer Electronics have closed down American plants and opened shop in Mexico. During this same year, there has been an increase of 7 % in temporary services employment. Temporary services jobs often are low paid with little or no benefits, and have become a means to cheaply replace more expensive workers that work directly for companies. The department of Labor had certified that 127,000 workers had lost their jobs due to imports from Mexico or Canada, yet only 5,300 workers received NAFTA transitional adjustment assistance. It can certainly argued that many jobs were created by NAFTA, but this means little to the individuals who were forced to find jobs in a market that paid lower wages for the same skills they were once paid more for.
Companies have also used threats to move to Mexico when bargaining with workers. NAFTA Labor Secretariat Professor Kate Bronfenbrunner of Cornell University reported that over one half of companies surveyed had used the threat of moving to Mexico when confronted with union organization attempts.
In looking at the income redistribution effects from trade, there are other indicators that should be considered besides the most apparent high paid job dislocations that have occurred. In recent decades, income inequality began to increase sharply. There has also been a significant increase in trade with other nations, which of course includes developing nations. It is reasonable to say that this trade may have been at least partially responsible for the increased inequity seen in recent decades. It may also serve as an even stronger indicator that Trade Adjustment Assistance has been inadequate.
Consumer Gains in the U.S.
It is fair to say that consumer gains occurred to some extent. But there are also indications that consumer gains were less than they should have been. For example, many American auto plants have moved to Mexico to utilize labor costs that were 1 / 11 the average U.S. cost. But as they began producing the same models formerly made in the U.S., they continued selling these models for the same prices as before. Their cost savings have clearly not made their way to consumers.
The Environment
Public Citizen and The Sierra Club reported a harshly negative impact on the environment. They indicated that promises the environmental side agreements were to address failed to do so, and compiled much data indicating that the environmental conditions have eroded.
U.S. Companies have used threats of moving to Mexico to bargain for reductions in environmental restrictions. Timer Giant Boise Cascade has moved operations from the U.S. to Guerrero, Mexico. A comment they had made after this move was, "How many more mills will be closed depends on what Congress does." The 104th congress created a law that allowed for a vast increase in logging of national forests, and suspended many other environmental logging restrictions. There is little doubt that the threats made by the logging industry provided the impetus to undo environmental policies that took decades to create.
Measurements have indicated significantly higher levels of safety and environmental distress. In 1995, the EPA had documented a 30 % increase in the amount of hazardous wastes coming across the border. In the same year, water from wells in U.S. border communities indicated sulfate concentrations twice the safe level, and higher levels of arsenic contamination. The number of unsafe ozone level days in the border town of El Paso has increased from 53 % (of the year) in 1992 to 75 % in 1996.
The lower agricultural and environmental standards has shown itself in the produce imported from Mexico. Inspections has shown illegal pesticide residues of 18.4 %, 15.6%, and 12. 3 % for strawberries, carrots, and lettuce, respectively.
As of 1996, NADBANK had allocated only 1 % of the promised $2 billion of clean up funds, and to date had not even written a single check. In fact, due to U.S. and Mexican budget cutbacks, some water and sewage treatment plants that were started before NAFTA, were stalled.
President Clinton has acknowledged that progress made by the CEC, BEC, and NADBANK has been lower than promised in dealing with the environmental issues, but still indicated he felt that they were on the right track. John Sweeney and Richard Gephardt had called these institutions useless .
Labor in Mexico
NAFTA proponents spoke of expected prosperity for Mexican workers. Unfortunately, these gains did not materialize. Between 1993 and 1995 the number of unemployed workers had doubled to 1.7 million. Between 1994 and 1996 real hourly Mexican wages had fallen by 27 %, and stood at 37 % less than 1980 levels. Of the 1996 working population, 19 % worked for less than minimum wage, and 66 % lacked any benefits. During the first three years of NAFTA, the citizens classed as "extremely poor" had risen from 32 % to 51 %. In 1995 the country experienced the well known Peso Crisis.
Analysis of the Results
The results we have seen so far have fallen far short of the gains that NAFTA proponents had predicted. The results also appear to have fallen short of what the HO Theory implied we should expect. Does this imply that HO Theory was wrong? No. The HO Theory is presented with many assumptions that do not exist in the real world U.S. - Mexico relationship. Also, the HO model did not attempt to consider distortions we now know can be very large in the real world and cannot be overlooked. The actual results do make some sense when looking at what assumptions do not exist in this real world situation.
The fact that many individuals in the U.S. have lost out is actually within the predictions of HO. The HO theory included a qualifier:Winners must compensate losers. This hasn't occurred.
Mexican workers seemed to have actually have fared worse with NAFTA. This disagrees sharply with the HO prediction. However, this prediction requires that Assumption # 5 hold true. Specifically, full employment of resources must exist in both nations. This means that Mexico is operating at full employment. In 1995, the U.S. embassy in Mexico City reported that 35 % of Mexicans in the labor market were either unemployed or underemployed. Upward wage pressures that were expected to push wages up will simply not exist with this kind of massive unemployment.
The HO predictions of consumer gains depends on the existence of the second part of Assumption 5: That perfect competition exists in the commodity and factor markets. Clearly, this is not the case. Many industries producing goods in Mexico are part of large oligopolies, and exert such market power that cost savings need not be passed on to consumers . For example, auto industries that have moved to Mexico have not shown price decreases that reflect their cost savings.
The HO prediction of equalized costs of resources also requires that Assumption # 8 hold true. That is that there is perfect mobility within nations but not between nations. Capital may not flow easily between nations, but it definitely does flow. Much capital used in Mexican development actually comes from other countries, which ends up limiting the upward pressure on the value of Mexican capital.
In fact, each assumption in the HO model does not hold true to some extent. This clearly effects the outcome of free trade in ways that can be debated endlessly. But certainly it can be said that the outcome is less predictable because of this.
The environmental losses that have occurred can clearly be understood by the lack of accurate consideration of this market distortion. Considering that many of the proponents of NAFTA had self interest as their goal, it is likely that they had not made environmental loss compensation a major consideration.
Many economists argue against using protectionism to forward environmental goals. One argument is that the best way to create local demand for environmental welfare is to allow the market activity of free trade to increase economic welfare, which will then create the demand for environmental welfare. This argument is flawed as it assumes that economic welfare will materialize in a reasonable time, and that environmental losses that occur in the interim are negligible. Many assume that Mexico will develop in the same manner as the U.S. has. But Mexico's development now is unlike that of the earlier development of the U.S. U.S. industrial growth occurred to fill the demand of U.S. citizens. And it did not even do this by market measures alone. Large government intervention had to occur at one critical point (The Great Depression) to restore the balance of supply and demand of goods in the U.S. But Mexico's industrial growth is aimed largely at supplying goods for the developed world and is being financed in large by the developed world. The large producer gains are for the most part returned to the developed world. How long will it be before the average Mexican is in a position to demand environmental welfare? How much damage will be done before this occurs? Will the polluters be the ones to bear this cost? In any case, there is strong evidence that as of now NAFTA has created downward pressures on environmental protection in both the U.S. and in Mexico. This questions all arguments stating that environmental protection should not be a fundamental part of NAFTA.
Recommendations
It would be difficult to state that the U.S. and Mexico would be better off without trade. There is no argument there. But free trade benefits are only optimized when externalities are not present, or are insignificant. But they do exist and are substantial. The large gains predicted by models are based on assumptions that do not hold true in the real world. There are also distributional effects within national economies from increased trading that indicate a need for compensation.
Labor leaders have argued against trade without some form of protection to account for the lowered labor conditions in Mexico. But evidence so far is not sufficient to argue that the labor losses cannot be made up for with adequate trade adjustment assistance. However, trade adjustment assistance has fallen far short of what was needed. For one thing, too little was made available. For another, how it was administered is questionable. Assistance that attempts to target those who have lost high paying jobs often misses many. And it could be argued that it should also be offered to the many who have never had high paying jobs in the first place, and never will due to the effects of trade on the market rate for their skills. There is without a doubt a continual growing inequity in our society, which we can at least partly blame on trade effects. A sensible approach to providing trade adjustment assistance would be to target all individuals that are potential losers - that is the individuals in the lower incomes. It is also sensible to try to provide assistance in a way that creates positive externalities. And of course, the assistance must attempt to restore higher incomes to these individuals.
A way to accomplish all these goals is to provide greater higher level educational funding assistance. This would help to relocate the displaced workers, and prepare future workers for this new environment with fewer high paying lesser - skilled jobs. There is little doubt that higher level education is one of the best ways to increase incomes today. And certainly society benefits from a larger portion of educated people.
Pollution is a very real negative externality. Since the environmental side agreement has failed to produce results, this portion of NAFTA should be reconsidered. For this reason some form of trade protection aimed at encouraging environmental welfare in the U.S. and Mexico is warranted. Any form of protection should be contractually written as to guarantee removal of protections when reasonable environmental policies are met. While some may charge that creation of policies to fulfill this objective are too difficult to do, the costs of not doing them are too high not to do.
Some may criticize including environmental restrictions in NAFTA falls in the category of trying to tell Mexico how to run it's affairs. While this is a reasonable criticism, it must be considered that Mexico's environment is closely tied to ours, and that it's environmental policies effect our own. Allowing free trade with a country with lax environmental laws is basically an undermining of the home country environmental policies and goals.
The peso crisis dealt a devastating blow to the average Mexican. Mexicans are still struggling to gain the economic welfare they had before the 1995 peso crisis. How this is related to NAFTA is a matter of debate. Mexican economic and political policies have been sharply criticized for their role in the economic chaos. Even if the consensus is that NAFTA was not a contributing factor to the crisis, we must ask why the expected gains of NAFTA allowed Mexico to have such a hard fall.
Labor standards in Mexico have been laxly enforced, and fall short of our own in the first place. The labor right side agreement has not protected labor in Mexico as it was suppose to. If Mexico and the U.S. agreed on labor right policies in a side agreement, both parties should have been willing to put this into the main agreement. This portion of NAFTA should also be reconsidered. While having an enforced labor right provision in place would likely have had little effect on thwarting the peso crisis, it would have served to protect the average worker from the oppression they have found because of it.
Summary
In summary, NAFTA has failed in a number of ways. The environmental provision and Mexican labor protection provisions of the agreement did not produce the results that they intended. Trade adjustment assistance has not materialized to an acceptable extent. Mexican labor did not gain as predicted, but rather, suffered losses. The poor outcome of the NAFTA agreement is a justified call to renegotiate terms. Environmental and labor provisions should be put into the main agreement. Until environmental and labor rights goals are met, well thought out trade barriers are justified. EXCERPT ENDS
The 'Pro' view i found:
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NAFTA and GATT are manifestations of good economics; free trade benefits everyone. You would be hard pressed indeed to find a serious economist who would disagree with this. Political realities, however, are much different, and many times politics overrules good economics.
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Feel free to comment or e-mail: wahkonta@graffiti.net