November 19, 2003
NAFTA ten years after

Here's a little fuel for the free-trade fires.

As the North American Free Trade Agreement nears its 10th anniversary, a study from the Carnegie Endowment for International Peace concludes that the pact failed to generate substantial job growth in Mexico, hurt hundreds of thousands of subsistence farmers there and had "minuscule" net effects on jobs in the United States.

The Carnegie Endowment, an independent, Washington-based research institute, released its report on Tuesday to coincide with new trade negotiations aimed at the adoption of a NAFTA-like pact for the entire Western Hemisphere.

Trade ministers from 34 countries in the Americas are gathering now in Miami.

The report seeks to debunk both the fears of American labor that NAFTA would lure large numbers of jobs to low-wage Mexico, as well as the hopes of the trade deal's proponents that it would lead to rising wages, as well as declines in income inequality and illegal immigration.

Though sorting out the exact causes is complicated, real wages in Mexico are lower now than they were when the agreement was adopted. Despite higher productivity, income inequality is greater there, and immigration has continued to soar.

"On balance, NAFTA's been rough for rural Mexicans," said John Audley, who edited the report.

"For the country, it's probably a wash. It takes more than just trade liberalization to improve the quality of life for poor people around the world."

The Carnegie findings strike a much more pessimistic note than those of a World Bank team that concluded in a draft report this year that the trade accord "has brought significant economic and social benefits to the Mexican economy."

You can read the full report here. For whatever the reason, I had to search high and low on the CEIP web page to find this - this link came from the author's bio page. Someone please give their webmaster a kick for me, OK?

The NYT story highlights how other countries could learn from Mexico's experience.

Trade negotiators for Central and South American countries, [the report's authors] said, should bargain for more gradual tariff reductions on corn, rice and beans the staples of subsistence farming to give peasants time to adjust to tough competition from large, highly efficient and heavily subsidized American farmers.

Carnegie's researchers also say developing countries should push international donors and rich countries to finance transitional assistance for the retraining of workers and farmers displaced by global competition.

Developing countries should also seek greater leeway to promote the use of domestic suppliers in manufacturing over imported components a step that would increase job creation, the authors say.

We'll see if any of the officials currently gathering in Miami for the FTAA talks (the Miami Herald is your best bet for coverage) are paying attention.

Posted by Charles Kuffner on November 19, 2003 to Bidness | TrackBack

The main problem NAFTA has is that it tries to bring the European Union approach to an area that lacks the resources to follow that approach. In the EU, all of the current members are technologically advanced and center their economies around business and finance. In NAFTA, while the Canadian and American economies are based on business and finance (with all respect intended to the many farmers in both countries), Mexico, although catching up with the other two nations, is still an agricultural nation at heart. To extend the agreement to the rest of the Western hemisphere would cause the same problem, since there are such great disparities in the economic structure of North America and the rest of the region.

The only area where NAFTA does help Mexico seems to be manufacturing, since the wages are lower. If the agreement is extended to the rest of the Western Hemisphere, who is to say that those jobs won't move south, since the wages are even lower in Central America than in Mexico?

In the EU, there are controls to ensure that all companies doing business within the region can compete freely. In an expanded NAFTA, to use an example, would Brazil be able to send their oranges to the US juice manufacturers without the US government providing subsidies for the Florida and California growers? I think not.

NAFTA works in principle, but not in practice.

Posted by: William Hughes on November 19, 2003 8:57 AM

I'm writing a paper which references this report heavily for my graduate course in macroeconomics. Mr. Hughes might have a point--certainly the difficulty here is (a) creating a trade bloc in which one country accounts for over 88% of GDP (b) two countries represent the most mature industrial economies on earth, while the other is, as you mentioned, agricultural at heart, and facing extremely severe obstacles in developing a modern service sector.

I think a lot of the problems in the Mexican American trade relationship are inherent in 3rd world development, water management, security, and commerce generally; also, anyway we tackle it, our own ag subsidy regime is going to hurt. The CEIP study features graphs showing a huge split in worker productivity (soaring) and wages (plummetting) so that the ratio of relative change between the two was 2.3. In other words, whatever the labor costs in Mexico per unit of "effective' labor in 1992, by 2001 this was 2.28 times that. This had no direct connection with NAFTA; the tesebono crisis caused a run on securities, and then, naturally, on the peso.

The report is actually very balanced. But remember there's a lot of things going on in this story. Mexico got hit pretty hard by the tesebono bond collapse and the '97-98 Asian currency crisis. It's more complicated than post hoc ergo propter hoc.

Posted by: James R MacLean on December 23, 2003 1:28 AM