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NAFTA at 10 – A Miserable Failure
By Alan Tonelson
Tuesday, January 20, 2004
To anybody even remotely open or fair-minded, the case against NAFTA has been clinched by two holiday season developments.
The first, and most screamingly obvious, is President Bush's brand new plan to regularize the flow of Mexicans and other immigrants into the United States and grant a still-vague legitimacy to illegals already here.
The second, is General Motors acknowledgment that it has become so uncompetitive versus foreign brands that, in addition to the huge cash rebates and other incentives it's used recently to shore up sales, it will literally start giving away its cars and trucks -- 1,000 to be exact, over the next two months.
These developments show in the most dramatic way that, ten years after it went into effect, NAFTA has failed utterly to achieve its two major objectives: improving life enough for the typical Mexican to stem the immigrant tide into the United States, and strengthening domestic industry enough to help it regain market share at home and abroad, as well as boost the living standards of American workers.
The debate surrounding NAFTA's tenth birthday, however, has been almost as incoherent and misleading as the debate surrounding the agreement itself. NAFTA supporters prattle on about expanding U.S.-Mexican trade and investment flows, and about the 1990s U.S. boom that followed NAFTA's passage. They forget that simply expanding the volume of trade in any economic relationship has no importance at all independent of the structure of that trade and its financial sustainability.
But as even Bill Clinton admitted in a 1997 speech, most of the trade expansion consisted of "round-trip," maquiladora-style trade, i.e. U.S. exports to Mexico that supplied Mexican plants (and workers) that had replaced American plants and workers, and Mexican re-exports right back to the United States of these goods after they were assembled or further processed. In other words, these increased U.S. exports mostly were not supplying new Mexican customers. They were supplying existing American customers.
In addition, as the United States saw its Mexico trade balance change from a surplus to a big deficit, NAFTA added to the growth of the ballooning global deficits and debts that threaten America=s long-run living standards.
As for the 1990s boom, the U.S. economy so dwarfs U.S.-Mexico trade that it's laughable to credit NAFTA -- even a little bit. Moreover, hindsight is making clear that the '90s boom was really a '90s bubble, inflated by Federal reserve shenanigans, massive foreign borrowing, and New Economy hype that created wild overinvestment in technology products and "irrationally exuberant" financial markets, to quote Alan Greenspan's memorable phrase.
NAFTA opponents have propagated some fallacies as well. Just as NAFTA could not have sparked the '90s boom, its effects alone cannot be the root of all evil and woe in a U.S. economy so much bigger than North American trade and investment flows. And Mexico really has had no choice but to increase exports and integrate itself more thoroughly with the United States.
Domestic-generated growth has never been an option because the Mexican market is simply too small -- unless you assume that oil will reach $100 per barrel and stay there forever. Further, although clearly U.S. agri-business exports have devastated Mexico's small corn farmers, they had no future other than perpetual impoverishment if they remained subsidized, protected producers.
That said, an acid test of NAFTA's success, according to supporters and opponents alike, has been the promotion of economic change and reforms that would encourage many more Mexicans to stay in Mexico, and reduce the export of Mexico's problems -- drugs as well as peasants -- to the United States . Consequently, President Bush's immigration plan is clearly an admission of defeat on this score.
U.S. employment rates have been in the six percent range since early 2002, and the official number of discouraged workers, who believe no jobs are available, is at a nine-year high. So it's not like U.S. employers desperately need a more reliable supply of Mexican workers, whether legal or illegal -- assuming their claims of labor shortages during the late '90s did not simply stem from a reluctance to increase wages.
Instead, the flow of Mexicans into the United States has actually accelerated under NAFTA -- to the point where Mexicans are risking their lives to cross the border on foot or in vans as jam-packed as the trains to Auschwitz. The Mexican economy remains so bad that they're literally dying to come to America.
With Chrysler having been taken over by Germany's Daimler-Benz, it's become somewhat misleading to refer to the "Big Three U.S. automakers." Nonetheless, the woes of all these companies show that NAFTA has failed domestic manufacturing as well.
No sector of the U.S. economy took greater advantage of NAFTA than motor vehicles. So much U.S. production capacity moved into Mexico that the country started to be known as "Detroit South." The idea was to help the Big Three by shipping enough labor-intensive auto work to low-wage Mexico to help them price cars competitively with the Europeans and Japanese.
So how has it worked out? Final 2003 sales figures show that after months of unprecedented incentives, the Big Three's share of the U.S. car and truck market fell to an all-time low of 60.2 percent. Ten years ago -- at NAFTA's signing, incidentally -- this figure exceeded 70 percent. Toyota seems certain to nose Chrysler permanently out of the number three spot within months. Quite understandably, the Big Three have done no better outside the United States, in markets they don't know as well, and which often remain substantially closed.
What went wrong with NAFTA? So much. But one failure that stands out from all the others has been America's continuing refusal to put limits on trade liberalization -- to establish priorities to ensure that the benefits of expanded trade would flow to the intended beneficiaries.
U.S. policymakers started off on the wrong foot, granting trade preferences within the NAFTA zone to genuinely North American-made products. But the penalties for selling non-North American products to NAFTA buyers (the agreement's external tariffs) were too low to act as a deterrent. This problem emerged full-blown after the Asian financial crisis of the late-1990s, which deeply depressed many Asian currency values and thus the price of Asian goods versus their North American counterparts.
Throughout the 1990s, Clinton administration officials and their Republican supporters further undermined NAFTA by liberalizing access to the U.S. market literally to all comers -- the Caribbean Basin countries, the Andean South American countries, Vietnam, sub-Saharan Africa, the East Asians after the financial crisis, the entire world with the Uruguay Round agreement, and, of course, China.
These deals and decisions have produced a trade policy where everything is a priority, and therefore nothing is a priority -- least of all Mexico. Not surprisingly, Mexico's share of the U.S. import market has fallen from 11.6 percent in 2002 to 11 percent through October, 2003, while China's share has risen from 10.8 percent to 12 percent. Mexico has lost more than 200,000 factory jobs to China over the last two years. And Mexico is so optimistic about these trends turning around that it's been filing anti-dumping suits against China.
At the same time, Washington never helped U.S. industries pry open major closed consumer markets, like Europe and Japan. As a result, even though U.S. multinational companies did reap some cost benefits by shipping production to Mexico (and other low-wage export production platforms), all the other disadvantages of competing with foreign rivals remained in place. And most U.S. manufacturing industries mirrored the auto industry's experience and lost substantial market share to foreign rivals during the so-called '90s boom.
Because NAFTA's main flaws remain neglected by American leaders and analysts, what passes for a national trade policy debate today remains mired in free trade nostrums and equally stale calls for tighter labor and environmental standards in future trade agreements. Meanwhile, of course, President Bush presses ahead with trade liberalization for Central America, the Middle East, and the entire Western Hemisphere, in addition to continuing global trade talks. Will a learning curve finally kick in by NAFTA's twentieth birthday?
Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).
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