Nafta nears 10

Nafta nears 10

This fall and early 2004 will witness key 10th anniversary events surrounding the North American Free Trade Agreement. Late November will mark 10 years since both houses of Cong-ress approved the controversial three-nation free trade agreement, and Dec. 1 will mark 10 years since President Clinton signed the legislation into law. Jan 1, 1994 will mark the 10th anni-versary of the date Nafta actually took effect. In the years since, the deal has eliminated many trade barriers among the U.S., Mexico and Canada, there's no doubt that the pact has achieved one of its main goals - an enormous increase in trade among the three neighbors.

But there is substantial disagreement on almost every other aspect.

Supporters, including the Bush administration, say Nafta has boosted employment in all three countries, provided more choices for consumers at lower prices and is leading to the full integration of North America's econ-omies. Critics say Nafta is undermining environmental standards and legal processes in the U.S., causing a net loss in higher-paying manufacturing jobs in all three countries, weakening Canada's social welfare system, destroying Mexico's agricultural sector and sparking a surge in emigration to the U.S.

Which picture is correct? It depends on whom you ask, of course. There are elements of truth in both pictures. Both sides agree that Nafta has caused job losses and dislocation in all three countries and is leading to the integration of all three economies.

"Nafta did not produce most of what was promised; it's created a lot of pain, so what was the gain?" asked Jeff Faux, founding president and now distinguished fellow at the left-leaning Economic Policy Institute (EPI). But Riccardo Amorim, head of Latin American economic research at Idea Global, an international investment consulting firm, said Nafta has been "hugely positive for job creation in Mexico's export sector."

The debate is more than academic, because Nafta and its associated dispute-resolution mechanisms are likely to form the framework for the proposed Free Trade of the Americas (FTAA). "Nafta is the model we're using for negotiating free-trade agreements with other areas of the world," said William Lash, assistant secretary of commerce for market access and compliance. "We just completed the FTA with Chile and now we're negotiating with the countries of the Central American Common Market (Guatemala, El Salvador, Honduras and Nicaragua)."

The Bush administration has set a 2005 deadline for negotiating the FTAA among 34 democratic countries with a combined population of 800 million, $11 trillion in production and $3.5 trillion in world trade. But such an expanded regional trading bloc is likely to come into being only if the countries of the Caribbean, Central and South Amer-ica can be convinced that Mex-ico's experience with Nafta has benefited it overall and that they can be protected against some of the negative effects.

A key measure of the way Nafta is working - or not working - is record of the agreement's dispute-resolution mechanism. Here again, there are diametrically opposing views. The Bush administration says it's working fine. Others complain that Nafta rulings are taking precedence over U.S. law and environmental regulations.

"Nafta is a dagger aimed at the heart of American environmental laws," said Daniel Seligman, director of the Sierra Club's Responsible Trade Program. He cites a Canadian company, Methanex Corp., which produces methanol, an ingredient of MTBE, a gasoline additive that California decided to phase out because it contaminates groundwater supplies. Methanex sued the U.S. for $1 billion under Nafta's investment-dispute rules, arguing that California's action had hurt its stock price.

Seligman said the problem is that the case, which he said ordinarily wouldn't "have a prayer" in U.S. courts, is being considered by the Nafta tribunal, because the rights accorded to foreign property holders by Nafta are broader than those accorded under U.S. law.

Another issue has arisen over whether the Bush administration is overlooking violations of U.S. environmental rules and regulations, particularly by Mexico. When the U.S. Department of Transportation exempted tens of thousands of older Mexican trucks from compliance with U.S. safety and pollution-control laws and lifted a moratorium on their travel beyond 20 miles of the border, an unlikely coalition including labor, trucking and environmental organizations sued to block the ruling.

The 9th U.S. Circuit Court of Appeals issued an injunction ordering the DOT to conduct a full environmental impact study and to force Mexican trucks to comply with the U.S. Clean Air Act. "The ruling gives some hope that we don't need to compromise U.S. environmental standards in pursuit of increased trade," said Al Mayerhoff, a partner with the law firm Milberg, Weiss, Bershad, Hynns and Lerach, which represented the coalition of the Teamsters union, the California Truck-ing Association, the Natural Resources Defense Council, Public Citizen and the California attorney general's office.

"There are ways to retrofit these trucks so that they'll be in compliance with U.S. law and create a level playing field," Mayerhoff said. "Had the Bush administration not jury-rigged the numbers in order to evade their responsibilities under the National Environ-mental Policy Act, we wouldn't have needed the court intervention."

The Bush administration is considering whether to conduct such a study, which could take a year-and-a-half to two years, or appeal the ruling all the way to the Supreme Court, which would take two or three years.

The clearest proof of Nafta's success is that total trade among the three members more than doubled from 1993 (the year before Nafta's implementation) to 2001, from $297 billion to $622 billion, according to "Nafta at Eight," a report published last year by the Office of Nafta and Inter-American Affairs in the International Trade Administration.

Mexico's exports to the U.S. soared 237 percent from 1993 to 2002, although this growth has slowed since 2001 when China joined the WTO and began to grab a larger share of the U.S. import market. The growth of Mexico's export sector has unquestionably created new jobs, but debate rages as to whether Nafta has benefited Mexico's economy as a whole.

Nafta's overall impact has been to stabilize the Mexican economy and insulate it from external shocks that could touch off another crisis like the 1994 peso devaluation, Idea Global's Amorim said. "It has also created an incentive for the government to enact pro-market reforms," he said.

But the EPI's Faux said one of the chief arguments for Nafta in the 1993 congressional debates over its passage was that it would help Mexico grow fast enough to slow the emigration of Mexicans to the U.S. by creating new manufacturing jobs in Mexico that would enable workers to earn a decent living. There hasn't been enough growth to justify the dislocation of the economy, and the overall impact has been a huge increase in Mexican emigration, he said.

That's because imports of subsidized U.S. agricultural goods have uprooted stable Mexican farming communities in central Mexico just as they were losing their own subsidies, Faux said. Unemployed farmers are streaming northward to take jobs in the largely foreign-owned maquila-dora plants along the U.S. border, or across the border in the U.S.

While Nafta has resulted in the creation of 850,000 new low-paying jobs in the maquiladoras, it has also caused the loss of an equal number of higher-paying, middle-class jobs in central Mexico, Faux said. Wages in the jobs that were lost averaged $5 to $6 an hour, while the maquiladora industries only paid $1 to $2 an hour, though that has risen to $3 an hour more recently. This has gutted the Mexican middle class, he said.

Amorim, while admitting this is true, said it is only the normal adjustment of Mexico's previously protected economy to the rigors of foreign competition and will result in more efficient production in the long run.

"We've created a common market, but without the rules and regulations to govern it," Faux said. "Goods and investments flow across the border, but not environmental and labor regulations."

He argued that Nafta has made Mexico's economic problems worse and conferred upon the U.S. the unacknowledged responsibility for Mexico's economic and political stability. "We're spending a lot of money and lives to help develop Iraq, but we've got a much bigger problem south of the border."

U.S. exports to its Nafta partners grew by 82 percent between 1993 and 2002. While impressive, this growth was not enough to prevent a ballooning trade deficit with both countries. U.S. trade with Mexico swung from a $1.7 billion surplus in 1993 to a $37.1 billion deficit by 2002. And the deficit with Canada swelled from $10.7 billion in 1993 to $48.2 billion in 2002.

Growth of the U.S. trade deficit has been caused in part by a shift in manufacturing production from the U.S. to Canada and especially to Mexico, where U.S. companies have invested in the maquiladora plants along the border that employ Mexican workers at far lower wages than in the U.S.

This has led to a debate among economists about whether Nafta has resulted in net job gains in the U.S. While the results may not fulfill Ross Perot's 1992 campaign crack that Nafta would create a "giant sucking sound" of jobs moving to Mexico, some economists believe it has resulted in a net loss of higher-paying manufacturing jobs in the U.S.

"We were promised as many as 2 million new jobs would be created in the U.S., but we've lost 750,000 manufacturing jobs that have been shifted to Mexico," said Robert Scott., director of International Economics and co-director of research at the Econom-ic Policy Institute. "Nafta has caused job losses in all 50 states," he said.

While this is small in proportion to the U.S. total of 135 million jobs, it has lowered wage levels, he said. That's because many of the workers who lost manufacturing jobs have had to take lower-paying jobs in U.S. service industries, such as health care and retail. In addition, U.S. manufacturers have used the threat of moving factories to Mexico as a weapon to bargain down wages, Scott said.

Nafta's impact on Canada has been less than on the U.S. and Mexico. Canadian exports to the U.S. grew by 88 percent from 1993 to 2002. The growth rate was less spectacular than Mexico's because Canada already had a free-trade agreement with the U.S. that dates to 1989. Since then, many U.S. and Canadian companies operate plants on both sides of the border than are fully integrated into their supply chains.

This has resulted in increasing manufacturing efficiencies on both sides of the border as Canada becomes more integrated into what has become in effect a common market. But it has also touched off a "tremendous collapse" in Canada's social welfare infrastructure, Scott said. That's because Canada has had to cut taxes and lower spending so that it would more closely mirror the economy of the U.S., he explained.

"The economies of all three countries have become woven together;" Faux said. "You can't put the toothpaste back in the tube, so now the big question about Nafta's future is: How do we manage this continental economy?"