The Coastal Post - November 1999

NAFTA Is Costing US Billions

By David R. Francis

When economists make long term predictions, turn a skeptical ear. Few such forecasts hold up. That's certainly the case with the North American Free Trade Agreement, the US-Canada-Mexico deal that took effect, with great fanfare, in 1994.

In the political battle for its approval by Congress, pro free traders used glowing terms. There would be great economic blessings for the US. It would be better than truffles.

But NAFTA actually was a risky experiment. Most previous free trade deals where between similar nations, such as Canada and the US or the industrial nations of Western Europe.

NAFTA rapidly unites the markets of two wealthy nations and one populous, poor, low wage, developing country. Mexico has 102 million people. Its labor force grows by 1 million a year, mostly youths, often desperate to find work. Mexico's national output is just 1/25 of the US.

The agreement also deregulated investment between the three nations.

Six years later, NAFTA has not met the rosy forecast. At the AFL-CIO convention in Los Angeles last week, critical trade union leaders were in effect saying, "I told so". Delegates shouted, "No more NAFTA's."

Charles McMillion, a consulting economist in Washington, spells out some NAFTA failures in a new report:

NAFTA enthusiasts insisted the agreement would create good jobs in the US by providing the US a total trade surplus in goods with Mexico of $50 billion in its first six years. They ridiculed doubters. In fact, the US piled up a six year trade deficit with Mexico of $93 billion. Because of shrinking tariffs, the US would have a big trade advantage in Mexico in competition with other nations, NAFTA advocates said. This would assure US trade surpluses.

Not so. The US has accumulated $118 billion of red ink in the past six years on its current account with Mexico-a measure that includes services such as tourism and trade in goods. Other nations in contrast, enjoy a current account surplus of $190 billion. Because of the net loss in exports to Mexico, the US has seen 378,000 higher-wage, goods-producing jobs disappear, replaced by service jobs paying 38% less.

A "proper accounting" for jobs lost to the maquiladoras in Mexico and for intra-firm trade by US multinationals would boost the job displacement to more than 500,00.

American firms are shifting production jobs to Mexico, where the minimum wage is the equivalent of $ 3.40 a day. The US deficit with Mexico for computers and their components may reach $4.4 billion this year.

"Clearly a process that leads the US to specialize in cereals and seeds while moving away from autos, electronics, and computers, not a net positive for the US economy, its workers, or domestic producers," notes Mr. McMillion.

Pro-NAFTA economists employ a standard economic theory-that free trade means each nation produces and exports the goods or services where it has a "comparative advantage." They assure that much lower labor, environmental regulation, and other production costs in Mexico compared with those in the US are of little importance to American businesses because of higher US productivity.

McMillion calls that "obsolete theorizing." American multinational firms easily ship their modern technology to Mexico, quickly train Mexican workers and pay a pittance.

"Mexico is not Canada or Europe, and it is preposterous for economists and politicians to ignore the massive differences in conditions and commercial patterns," McMillion argues.

Indeed, Mexican manufacturing wages were 85% below those in the US in 1983, 90% less in 1998. Real competition plus threats of plant reallocations, depress US wages he says.

Oddly, NAFTA hasn't stopped Mexicans from suffering from the 47% devaluation of the peso in 1994-95 and the accompanying Mexican banking crisis. Mexican wages fell 20% below pre-NAFTA levels.

And, in McMillion's view, the $50 billion US stabilization loan and the subsequent Mexican government bailout of Mexico's financial system saved the financial skin of foreign lenders more than that of Mexicans.

Is this all water over a dam?

No, the Clinton administration wants to widen free trade in Latin America.

To ignore the Mexican experience and lurch ahead with new deals is "a recipe for even deeper and wider trouble," McMillion holds.

David R. Francis is a senior economic correspondent for the Monitor.

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