Pros and Cons of Nafta

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. However, 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.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. The pros and cons of NAFTA can be regrouped as following: Proponents claim that:The accord has stimulated democratic reform and opened markets in Mexico and has also improved the standard of living in Mexico. The Bush administration claims that NAFTA has led to income gains and tax cuts amounting to about $930 each year for the average U. S. household of four. Many of the 20 million new jobs the U. S. generated from 1993 to 2000 can be attributed to the free-trade bloc that NAFTA created, the administration continues. NAFTA brought in a flood of foreign investment and contributed to a 24% rise in Mexico’s per capita income as well as a reinforced political cooperationWhile detractors argue that: The agreement has taken a toll on both U. S. and Mexican jobs, according to the Institute for Policy Studies (IPS). While real wages for Mexican manufacturing workers declined 13. 5%, more than half a million U. S. employees have entered government retraining programs after their companies moved production south or north of the border, says IPS. NAFTA has wiped out Canadian social programs, purports IPS. The pact has also destroyed Mexico’s small farmers, says IPS, bringing in an influx of subsidized U. S. food imports.In fact, about 1. 3 million farm jobs have been lost since 1993, indicates a recent report by the Carnegie Endowment for International Peace.

The Carnegie report also concluded that the pact has generated few new jobs in Mexico and might only be credited for a “very small net gain” in jobs in the U. S. What Are the Advantages of NAFTA? : NAFTA created the world’s largest free trade area, linking 444 million people and producing $17 trillion in goods and services annually. Estimates are that NAFTA increases U. S. GDP by as much as . 5% a year. That’s because it eliminates tariffs and creates agreements on international rights for business investors. This reduces the cost of trade, which spurs investment and growth especially for small businesses. Eliminating tariffs also reduces inflation by decreasing the costs of imports. Increased Trade: Trade between the NAFTA signatories tripled, from $297 billion in 1993 to $1 trillion in 2007 (latest data available). Exports from the U. S. to Canada and Mexico grew from $142 billion to $452 billion. Exports from Canada and Mexico to the U. S. increased from $151 billion to $568 billion.One reason trade grew because NAFTA provided the ability for firms in member countries to bid on government contracts. It also protected intellectual properties. Boosted U. S. Farm Exports: NAFTA increased farm exports because it eliminated high Mexican tariffs. Mexico is the top export destination for beef, rice, soybean meal, corn sweeteners, apples and beans. It is the second largest for corn, soybeans and oils. As a result of NAFTA, the percent of U. S. agricultural exports to Canada and Mexico has grown from 22% in 1993 to 30% in 2007. Created Trade Surplus in Services:More than 40% of U. S. GDP is services, such as financial services and health care. These aren’t easily transported, so being able to export them to nearby countries is important. NAFTA boosted U. S. service exports to Canada and Mexico from $25 billion in 1993 to $106. 8 billion in 2007 (latest data available).

Service exports were $40 billion. NAFTA eliminated trade barriers in nearly all service sectors, which are often highly regulated. NAFTA requires governments to publish all regulations, lowering hidden costs of doing business. Reduced Oil and Grocery Prices: The U. S. imported $157. billion in oil from Mexico and Canada (shale oil). This also reduces U. S. reliance on oil imports from the Middle East and Venezuela. It is especially important now that the U. S. no longer imports oil from . Why? Mexico is a friendly country, whereas Venezuela’s president often criticizes the U. S. Both Venezuela and Iran have started selling oil in currencies other than the dollar, contributing to the decline in the dollar’s value. Since NAFTA eliminates tariffs, oil prices are lower. The same is true for food imports, which totaled $28. 9 billion in 2008. Stepped Up Foreign Direct Investment:Since NAFTA was enacted, U. S. foreign direct investment (FDI) in Canada and Mexico more than tripled to $348. 7 billion (as of 2007, latest data available). Canadian and Mexican FDI in the U. S. grew to $219. 2 billion. NAFTA reduces investors’ risk by guaranteeing they will have the same legal rights as local investors.

Through NAFTA, investors can make legal claims against the government if it nationalizes their industry or takes their property by eminent domain. Political Ties Free trade agreements can help to encourage coordination and cooperation among member states, according to southerncenter. rg. Some may argue that NAFTA has, for example, increased Mexico’s willingness to cooperate in the U. S. ‘s crackdown on illegal immigration and international smuggling; others would argue that these problems have not diminished enough to prove that the cooperation is helpful. Disadvantages of NAFTA: NAFTA has many disadvantages.

NAFTA made it possible for many U. S. manufacturers to move jobs to lower-cost Mexico. The manufacturers that remained lowered wages to compete in those industries. Many of Mexico’s farmers were put out of business by U. S. -subsidized farm products. NAFTA provisions for Mexican labor and environmental protection were not strong enough to prevent those workers from being exploited. U. S. Jobs Were Lost: Since labor is cheaper in Mexico, many manufacturing industries moved part of their production from high-cost U. S. states. Between 1994 and 2002, the U. S. lost 1. 7 million jobs, gaining only 794,00, for a net loss of 879,000 jobs. Nearly 80% of these jobs were in manufacturing. California, New York, Michigan and Texas were hit the hardest because they had high concentrations of the industries that moved plants to Mexico.These industries included motor vehicles, textiles, computers, and electrical appliances. U. S. Wages Were Suppressed: Not all companies in these industries moved to Mexico. The ones that used the threat of moving during union organizing drives. When it became a choice between joining the union or losing the factory, workers chose the factory. Without union support, the workers had little bargaining power. This suppressed wage growth. Between 1993 and 1995, 50% of all companies in the industries that were moving to Mexico use the threat of closing the factory.

By 1999, that rate had grown to 65%.Mexico’s Farmers Were Put Out of Business: The 2002 Farm Bill subsidized U. S. agribusiness by as much as 40% of net farm income. When NAFTA removed tariffs, corn and other grains were exported to Mexico below cost. Rural Mexican farmers could not compete. At the same time, Mexico reduced its subsidies to farmers from 33. 2% of total farm income in 1990 to 13. 2% in 2001. Most of those subsidies went to Mexico’s large farms, anyway. Maquiladora Workers Were Exploited: NAFTA expanded the maquiladora program, in which U. S. -owned companies employed Mexican workers near the border to cheaply assemble products for export to the U.S. This grew to 30% of Mexico’s labor force. These workers have “no labor rights or health protections, workdays stretch out 12 hours or more, and if you are a woman, you could be forced to take a pregnancy test when applying for a job,” according to Continental Social Alliance Mexico’s Environment Deteriorated: In response to NAFTA competitive pressure, Mexico agribusiness used more fertilizers and other chemicals, costing $36 billion per year in pollution. Rural farmers expanded into more marginal land, resulting in deforestation at a rate of 630,000 hectares per year.This leads me to conclude that NAFTA has neither been a boon nor a bane as its effects depend on the type of economic agent involved with it. As the Carnegie Endowment for International Peace calls it, the pact is “neither the disaster its opponents predicted nor the savior hailed by supporters. “

Sources:

  1. Carnegie Endowment, NAFTA’s Promise and Reality, 2004 Worldpress. org, Lessons of NAFTA, April 20, 2001
  2. International Forum on Globalization,Exposing the Myth of Free Trade, February 25, 2003
  3. The Economist, Tariffs and Tortillas, January 24, 2008).

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