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Free Trade and NAFTA Theory versus Reality

Dennis C. McCornac, PhD.Sellinger School of BusinessLoyola University Maryland

Baltimore, Marylanddcmccornac@loyola.edu

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WHAT FREE TRADE THEORY SAYS SHOULD HAPPEN

• Making things in one country and selling them in another makes both better off

• In the best caseo Countries consume

goods they couldn’t

otherwise make o Countries could specialize in what they’re more

efficient at producing what they do best, creating jobs and raising wages

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Model of Free TradeThe assumption is made that in a system with open and free markets, the economy will operate more efficiently with a higher level of overall prosperity.

How does it Work ?

The principle of comparative advantage. The ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals.

A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

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Employing the principle of comparative advantage will allow economic specialization and therefore greater economic efficiency.

Not only will producers be experts at which they do, but they will also accrue more profits.

With people paying less for higher quality goods, they have money to buy more things.

With more money in circulation, more firms will succeed.

With more firms succeeding, more taxes will be available to infrastructure, helping firms reduce costs, have better workers, & obtain more materials.

Promotes economies of scale.

Open markets will assure competition among efficiency producers, assuring the lowest possible prices at the highest.

Understanding the Boring Stuff

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The Good and the Bad of Free Trade

Free trade generates winners & losers.

Whether it leads to greater general prosperity depends at least to some degree on interpretation of data.

Disparities in income increase.

The powerful may gain inordinately at the expense of the powerless.Majority of power rests in the hand of multinational corporations and rich countriesMinimize opportunities for vulnerable producers and sometimes degrades the environmentFocuses of short-term profits; evades the full costs of commerce, and overlooks the plight of marginalized people and the environment

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• Global trade has clear benefits

• Developing countries can provide new, valuable markets for goods, services produced by developed countries

• Technology, services, money from developed nations can improve public services, raise standard of living of developing countries

Benefits• Opponents argue process benefits

wealthy developed nations at expense of developing nations

• Free trade encourages practices that exploit workers, destroy environment

• Some promote fair trade, like fair trade coffee movement guaranteeing fair prices to coffee bean farmers

Anti-Globalization

“...the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.” ~Joan Robinson

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Point-Counterpoint: North American Free Trade Agreement

Supporters of NAFTA• Opened new markets for

the three countries.• Competition of lower-

priced goods produced in Mexico forces down the price of goods produced in the United States and Canada; thus, U.S. and Canadian consumers “win” with lower-priced goods.

Critics of NAFTA• Primarily opened new markets

for Mexico and Canada.• Low labor costs in Mexico and

lower-priced goods in the United Sates and Canada cause U.S. and Canadian companies to move their production operations to Mexico; thus, thousands of jobs are lost (“exported”) to Mexico, hurting employment in the United States and Canada.

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Point-Counterpoint (cont’d)

• Creates thousands of jobs in Mexico. Cities and towns in northern Mexico, where the majority of NAFTA-related production (maquila) takes place, enjoy much higher living standards and higher rates of employment than most other parts of the country.

• Many of the jobs created are low paying and are U.S.-owned companies employing 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

Critics of NAFTASupporters of NAFTA

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Point-Counterpoint (cont’d)

• Strengthens Mexican environmental conditions through environmental side agreements negotiated along with the primary trade agreement, resulting in a healthier environment for Mexico and especially the border region; reverses environmental damage on the U.S. side of the border.

• The side agreements negotiated with NAFTA fall far short of strengthening environmental laws and enforcement in Mexico. U.S. companies are further attracted to relocation in Mexico due to lax enforcement. NAFTA protects the companies’ rights to free trade over the rights of people living in areas polluted by factories and other production facilities.

Supporters of NAFTA Critics of NAFTA

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BUT THAT’S NOT WHAT HAPPENED WITH “FREE TRADE”

• Home-grown industries in developing countries like Mexico were wiped out by having to compete with imports produced by multi-national corporations

• Good jobs were lost and replaced by bad jobs that often paid less

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To Summarize ….

IN POOR countriesUnemployment increases as free trade destroys home-grown jobs Foreign capital converts good jobs into non-union low wage bad jobs Wages grow slowly, if at all, and may actually fall as competition increases with even poorer countries

IN RICH countries •Corporations stop investing in job creation go offshore•Workers suffer as stagnant wages in poor countries lower demand for exports from rich countries

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NAFTA’s VICIOUS CIRCLE

Subsidized U.S. grain and meats dumped into Mexico

2.3 million Mexican farmers forced off land. Increased unemployment lowers manufacturing wages.

Canadian & U.S. manu-facturing moves to Mexico. Pits workers against each other

Mexican manufacturing firms disappear increasing unemployment

Maquiladora jobs double, then decline. Companies develop Asian supply chains. Mexico’s trade deficit grows. More workers pitted against each other.

Displaced Mex. workers flee to U.S. or to Canada (as guest workers).

U.S. arms border

Displaced workers migrate to maquiladoras …

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Millions of good (union) jobs lost while only low wage and contingent jobs created. Wage suppression. Median wages in formal economy $2.13 an hour and in informal economy $1.48. Now lower than China. Labor rights eroded. Massive out-migration. Poverty grows: now 51%

700-900,000 jobs lost. Wages stagnant as inequality grows. Rise of contingent labor. Labor rights eroding.

500,000 manufacturing jobs lost. Increased inequality. Stagnant wages and job creation. Roll-back of social programs.

NAFTA – THE RESULTS: BAD FOR US AND CANADA, DISASTER FOR MEXICO

Over 1,724 Wal-

Marts

Costco in Mexico sells tortilla chips and salsa trucked in from California.

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Mexico’s Agriculture

• US farmers are being subsidized.• Mexico farmers do not receive subsidies,

this…– Puts downward pressure on Mexican Farmers– Results in Dumping

• US Farmers selling below cost in Mexico because they have already received subsidies.

• Results in Unemployment and Immigration to United States

• Some claim as many as 2 million Mexican farmers are out of business

• Immigration from Mexican Farmers has increased since NAFTA.

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Mexican Employment• Mexico

– Employment increased directly following NAFTA introduction, but decreased over time.

• Many new jobs were in the Maquiladora area’s– Agriculture sector specifically hit hard– Estimated 28,000 small and med sized businesses

eliminated due to low cost producers.

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Environmental/Standard of living Effects

•Maquiladora - is a factory that imports materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then re-exports the assembled product usually back to the originating country.

•Maquiladora firms have approx. doubled since NAFTA– 2,143 to over 3,703 currently

•This is a problem for NAFTA because Maquiladora’s are notorious for having terrible low-pay working conditions.

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Maquiladora Working Conditions

• Women especially discriminated against

• Average wage is $1.00 per hour

• Work 10-12 hours a day

• Compared to sweat shops of China

• Many are working to improve rights of Maquiladora workers.

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Environmental Effects

• "We have no way to provide water, sewage, and sanitation workers. Every year, we get poorer and poorer even though we create more and more wealth."

– Ciudad Juarez, Mayor Gustavo Elizondo

19http://www.pewhispanic.org/2012/04/23/net-migration-from-mexico-falls-to-zero-and-perhaps-less/

 

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LABOR RIGHTS NOT ENOUGH TO FIX IT …

Investment is free to move from country to country destroying good jobs faster than labor can organize

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The Next Step: TPP (Trans - Pacific Partnership)

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Selected References

1.  Bacon, David (January 23, 2012) “How US Policies Fueled Mexico's Great Migration.” The Nation. http://www.thenation.com/article/165438/how-us-policies-fueled-mexicos-great-migration

 

2. Bacon, David (October 11, 2014). “Globalization and NAFTA Caused Migration from Mexico.” Politicalresearch.org. http://www.politicalresearch.org/2014/10/11/globalization-and-nafta-caused-migration-from-mexico/

 

3. Passel, J.S., D. Cohn, and A.Gonzalex-Bazzera (April 23, 2012). Net Migration from Mexico Falls to Zero—and Perhaps Less. http://www.pewhispanic.org/2012/04/23/net-migration-from-mexico-falls-to-zero-and-perhaps-less/