More Free Trade Agreements? When NAFTA Failed?

03/20/2011 08:00 pm ET | Updated May 25, 2011
  • Ian Fletcher Author, 'Free Trade Doesn't Work: What Should Replace It and Why'

With the Republicans and the Obama administration attempting to rush headlong into a new trade agreement with Korea, and possibly also with Panama and Colombia as well, it is incumbent on Americans to apply a bit of empiricism. How have our past trade agreements worked out? Above all, how's the grand-daddy of them all, NAFTA, doing?

Unfortunately, NAFTA is a veritable case study in failure.

This is all the more damning because this treaty was created, and is administered, by the very Washington elite that is loudest in proclaiming free trade's virtues. So there is no room for excuses about incompetent implementation, the standard alibi for free trade's failures in the developing world. So if free trade was going to work anywhere, it should have been here.

Instead, what happened? NAFTA was sold as a policy that would reduce America's trade deficit. But our trade balance actually worsened against both Canada and Mexico.

For the four years prior to NAFTA's implementation in 1994, America's annual deficit with Canada averaged a modest $8.1 billion. Twelve years later, it was up to $71 billion.

Our trade with Mexico showed a $1.6 billion surplus in 1993 but by 2010, our deficit had reached $61.6 billion.

Eccentric billionaire and 1992 presidential candidate H. Ross Perot was roundly mocked for predicting a "giant sucking sound" of jobs going to Mexico if NAFTA passed. But he has been vindicated. The Department of Labor has estimated that NAFTA cost America 525,000 jobs between 1994 and 2002. According to the more aggressive Economic Policy Institute:

NAFTA has eliminated some 766,000 job opportunities--primarily for non-college-educated workers in manufacturing. Contrary to what the American promoters of NAFTA promised U.S. workers, the agreement did not result in an increased trade surplus with Mexico, but the reverse. As manufacturing jobs disappeared, workers were down-scaled to lower-paying, less-secure services jobs. Within manufacturing, the threat of employers to move production to Mexico proved a powerful weapon for undercutting workers' bargaining power.

The idea of Mexico as a vast export market for American products is a sad joke; Mexicans are simply too poor. In the 1997 words of Business Mexico, a pro-NAFTA publication of the American Chamber of Commerce of Mexico:

The reality is that only between 10 and 20 percent of the population are really considered consumers. The extreme unequal distribution of wealth has created a distorted market, the economy is hamstrung by a work force with a poor level of education, and a sizable chunk of the gross domestic product in devoted to exports rather than production for home consumption.

According to official figures that year, fewer than 18 million Mexicans made more than 5,000 pesos a month. And even that was only about $625: roughly half the U.S. poverty line for a family of four. This has not improved much since, so, as Paul Krugman has pointed out, "Mexico's economy is so small--its GDP is less than four percent that of the United States--that for the foreseeable future it will be neither a major supplier nor a major market."

But if NAFTA wasn't a plausible economic bonanza for the U.S. and America's establishment knew it, then what was going on? Krugman again supplies an answer, writing in Foreign Affairs that, "For the United States, NAFTA is essentially a foreign policy rather than an economic issue." The real agenda was to keep people like President Carlos Salinas, friendly with powerful interests in the U.S., in power in Mexico City.

Bottom line? Free trade was pushed not because of any sincerely anticipated economic benefits, but to serve an extraneous foreign policy agenda. To his credit, Krugman later admitted the utter chicanery of it all, writing in The New Democrat in 1996 that:

The agreement was sold under false pretences. Over the protests of most economists, the Clinton Administration chose to promote NAFTA as a jobs-creation program. Based on little more than guesswork, a few economists argued that NAFTA would boost our trade surplus with Mexico, and thus produce a net gain in jobs. With utterly spurious precision, the administration settled on a figure of 200,000 jobs created--and this became the core of the NAFTA sales pitch.

NAFTA was sold in Mexico as Mexico's ticket to the big time. Mexicans were told they were choosing between gradually converging with America's advanced economy and regressing to the status of a backwater like neighboring Guatemala.

What actually happened? In reality, the income gap between the United States and Mexico grew (by over 10 percent) in the first decade of the agreement. This doesn't mean America boomed; we didn't. But Mexico slumped terribly.

In NAFTA's first decade, the Mexican economy averaged 1.8 percent real growth per capita. By contrast, under the protectionist economic policies of 1948-73, Mexico had averaged 3.2 percent growth.

Because Mexico's labor force grows by a million people a year, job creation must get ahead of this curve in order to raise wages; this is simply not happening. Mexican workers can often be hired for less than the taxes on American workers; the average maquiladora wage is $1.82/hr. The maquiladora sector is deliberately isolated from the rest of the Mexican economy and contributes little to it. Workers' rights, wages, and benefits are deliberately suppressed. Environmental laws are frequently just ignored.

Mexican agriculture hasn't benefited either: NAFTA turned Mexico from a food exporter to a food importer overnight and over a million farm jobs were wiped out by cheap American food exports, massively subsidized by our various farm programs.

Promoters of NAFTA have tried to cover up its problems by using inappropriate yardsticks of success. For example, they have claimed that the expansion of total trade among the three nations vindicates the pact. But this expansion has been due to a growing American deficit. Because a growing deficit means, by definition, that our imports have been growing faster than our exports, there is no way that economic growth per se will ever solve the problem.

Congress was right to reject NAFTA initially, which never enjoyed sincere majority support in either the House or the Senate and was bought with sheer patronage by Bill Clinton.

To be fair, NAFTA is not the only thing that has been wrong with the Mexican economy in recent decades. But NAFTA was the capstone to a series of dubious free-market economic experiments carried out there since the early 1980s. Between 1990 and 1999, Mexican manufacturing wages fell 21 percent.

It gets worse. Despite the fact that, compared to the U.S., Mexico is a cheap-labor economy, there are plenty of nations with even lower average wages. For example, Mexico is now losing manufacturing jobs to China in such areas as computer parts, electrical components, toys, textiles, sporting goods, and shoes: 200,000 in the first two years of the millennium alone.

Mexico's trade deficit against the rest of the world has actually worsened since NAFTA was signed. In the words of liberal commentator William Greider, "The Mexican maquiladora cities thought they were going to become the next South Korea, but instead they may be the next Detroit."

NAFTA is not America's only free trade agreement, of course. But our other agreements tell similar tales. We have signed 11 since 2000: with Australia, Bahrain, Chile, Colombia, Jordan, Korea, Oman, Morocco, Singapore, Panama, and Peru. (El Salvador, Nicaragua, Honduras, Guatemala, and the Dominican Republic were lumped together in the Central America Free Trade Agreement or CAFTA.) Every agreement but one has coincided with greater American deficits. The only exception is Singapore, where our existing surplus increased somewhat. But Singapore is tiny, a mere city-state.

Nevertheless, our government pushes for more. As of 2011, country agreements with Colombia, South Korea, Oman and Panama were pending ratification, and the U.S. was in stalled negotiations with Malaysia, Thailand and the United Arab Emirates. Next on the list are reportedly Algeria, Egypt, Tunisia, Saudi Arabia and Qatar.

In December 2009, the Obama administration announced its intention to eventually join the existing Trans-Pacific Partnership and elevate it into a full-blown free trade area comprising the U.S. plus Singapore, Chile, New Zealand, Brunei, Australia, Peru, and Vietnam. In December 2010, the administration reached a slightly-improved deal with South Korea and announced it would push for Congressional ratification.

When will we ever learn?