« The significance of the Turkish Presidency | Main | Minnesota State Fair through foreign eyes. »

The North American Free Trade Agreement (NAFTA)

NAFTA is a political puzzle. It has increased international trade between the partners and changed the balance of regional trade in ways that would appear to be beneficial. It has helped transform the underlying conditions (productivity, perhaps stability and even growth) of the Mexican economy but it has not led (partly, but not solely, because of a lack of inflow of investment funds) to a reduction in the gap between incomes in the United States and incomes in Mexico. The agreement is unpopular across the political spectrum, particularly in the United States, and not just with the left in Mexico and yet leaders and corporate America on the whole seem to support plans to extend its scope. It is the foundation of an even more ambitious plan to work towards a ‘Security and Prosperity Partnership’ and yet there have been objections to a regional transportation strategy. How are we to make sense of all that is involved? How is NAFTA to be evaluated?

There is a problem about where to start. What NAFTA signifies will be partly determined by the point-of-view. If we take a global perspective (top-down), it could be argued that the world of the future will be one of larger and more integrated trading blocks. The prime example is that of the EU but efforts at economic integration, using various models, are being made in Latin America, Asian and in the Africa. Those, such as the private group responsible for ‘Building a North American Community’ (Council on Foreign Relations 2005), that take this scenario seriously argue that the NAFTA should develop into a more comprehensive economic community with a jointly-agreed agenda to tackle ‘shared challenges to our economic growth’ and the ‘challenge of uneven economic development’. The Independent Task Force that constructed the report was very much drawn from the commercial and business elite with an eye on the issues of global competitiveness and international resource constraints. An integrated North America market would outstrip in sheer volume that of the expanded EU. The task force pointed towards regional cooperation on a tripartite basis rather than European Union style integration.

Those in America who fear ‘loss of sovereignty’ appear to be missing the point. Robert Pastor, who helped draft the report, argues that the NAFTA and associated initiatives such as the ‘Security and Prosperity Partnership’ (established in 2005 and whose established but limited agenda was discussed recently by the leaders of Canada, Mexico and the United States) could be a means of reviewing a range of North American issues ‘that have been neglected or mishandled for a decade’ including security, uneven development, migration, and business regulatory systems. He sees a failure of national leadership with respect all of these areas of potential cooperation in all three countries. If the ‘Unipolar Power’ of the United States is ebbing away as new economic powers emerge and if multilateralism is declining, and complete world-wide free trade is not an option, then getting it right in North America as a whole, will be a significant issue.

There is no single view from Mexico. The Mexican Government continues to be interested in furthering economic cooperation whilst Trade Unionists and farmers’ organizations object strongly to the conditions under which the NAFTA operates. What you see or experience depends on where you sit. At the same time it is clear from the recent World Bank Assessment that the NAFTA has not lived up to the expectations generated by its corporate supporters. The income gaps have not narrowed and more Mexicans than ever before are migrating illegally to the United States. The fact of the emigration is itself muddying the waters with respect to political discussion in the United States of the cost and benefits of NAFTA. If NAFTA were delivering the expected benefits to the Mexican economy, incomes gaps would narrow though the effects of the narrowing would be felt in incomes both in the United States and in Mexico. The benefits can not be expected to impact quickly—they are long-term in nature— but given the World Bank’s assessment of the Mexican economy, there are significant causes for concern. A major problem is in the agricultural sector (maize in the United States is highly subsidized) and the Mexican government does not appear to have a coherent agricultural policy. This is a Mexican problem. It is also a problem for the definition of ‘fair’ with respect to trade that is also intended to be ‘free’. There could be a link from economic decline in maize farming areas in Mexico to migration. NAFTA has neither compensation methods nor any direct transfer policies such as apply within the EU to help areas experiencing uneven development.

Views in the United States are equally mixed. The administration and corporate America continue to support NAFTA as well as the idea of its extension to other areas of cooperation. Democratic Party opinion is confused. One problem is that if the transfer of unskilled manufacturing jobs out of the United States (something that the United Kingdom economy faced decades ago) is more or less inevitable (though there are many places the United States that could benefit from internal ‘outsourcing’) then the issues are not well-understood in opportunity-cost terms. Mexico is in competition with China as a potential host to ‘outsourcing’ and if the NAFTA works to keep work in North America whilst providing the advantages of cheaper production, this could be seen as a plus rather than as a minus. In the North American market, China and Mexico are in competition and this needs to be factored into any analysis of NAFTA. It also means that Mexican competitiveness within the NAFTA or in relation to other export markets cannot be taken for granted.

There is no economic change that does bring with it a series of costs and benefits. The ‘no change’ option has hidden costs that in the end become apparent and real. Economies need to adjust or risk profound stagnation. A free trade area between two developed countries and a country such as Mexico that has developed and significantly less-developed regions and sectors and significant inequalities of income distribution is likely to be problematic when it comes to the pattern of losses and gains. If NAFTA has decreased the variability of Mexican economic performance, this is a gain but not one that is transparent to voters. Mexico needs to have an internally thought through agricultural policy and policies towards income-equality and reform in the patterns of government expenditure and (probably) labor-market reforms. Mexican competitiveness, given the relative significance of China to the United States and the rest of the world, cannot be taken for granted. But if the NAFTA is to succeed there needs to be clear evidence that there are relative income benefits to Mexico as well as to the United States and Canada. There needs to be a clearer policy-context within each country and in the context of the three countries working together for agreed regional ends.

Clearer and more reflective public discussion would also help, keeping in mind that any new policies also have costs and benefits. Such polices would need to work towards securing benefits for all parties to the idea of a ‘Security and Prosperity Partnership’. Some of the issues facing the United States, and where gains could be considerable, are regional and cannot be worked out in isolation or through the construction of higher border fences.


Is there an advantage of having a NAFTA?

As with any economic policy measure, there is no simple answer to the question, 'Is there an advantage to having a NAFTA'? There are advantages and disadvantages and these go to countries and people in differing economic sectors and in different ways. The question then becomes one of 'Do the advantages outweigh the disadvantages?'. Are you interested in any particular country (Mexico or Canada or the United States) or what is happening in any particular sector (say) mexican agriculture?

NAFTA should be fine-tuned into a more comprehensive economic community with a mutually-agreed agenda to tackle ‘shared challenges to partner countries’ economic growth and unequal economic development.


The questions I've been debating are 1) Are the Mexican people better off with NAFTA? Better wages (on average), more open/less corrupt political systems, better standard of living? and 2) Is the US better off? Have we replaced those jobs that have gone to Mexico? How much have we lost or gained?

The evaluation of NAFTA is difficult because of the politicization of views. Mexican trade policies, once highly protective, have changed dramatically. Mexico is more involved in regional and international trade than it was before NAFTA. This should mean according to standard trade theory that resources are being used in more productive ways. Trade between the US and Mexico has increased rapidly as a result of the agreement. Its overall impact on the US economy is not likely to be huge as the US economy is vast and engaged with trade with the rest of the world. The changes have shaken up the conditions under which people in Mexico work and there is a question about the distibution of income. There is also the issue of agricultural policy. Punch 'evaluation of NAFTA'or similar words into Google and see what you come up with.