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Flawed NAFTA really stuck it to U.S. workers

Supporters of the North American Free Trade Agreement–implemented two years ago with great fanfare–have been suspiciously quiet lately. And with good reason, as it turns out, since the problems facing workers in all three countries have grown substantially since NAFTA.
Instead of providing a structure for sustainable and equitable economic growth, NAFTA has contributed to the loss of jobs and income for workers while enriching elites.
In Mexico, the impact of NAFTA is most clearly seen in the U.S.-Mexico bilateral relationship. In 1993, the year prior to NAFTA, the United States had a merchandise trade surplus of $1.7 billion with Mexico. That surplus declined to $1.3 billion in 1994 and then exploded to a $15.4 billion deficit trade balance in 1995.
The trade deficit with Mexico will continue for the foreseeable future because the Mexican economy has severely contracted following its worst economic crisis in decades. Today, a majority of the formal Mexican work force of 30 million now takes home less than $140 per month.
Mexican exports to the United States, however, have increased substantially. In effect, NAFTA has made all of Mexico into one giant “export zone” where the minimum wage is now $2.68 per day. In 1995, Mexican exports to the United States soared, undercutting U.S. workers in high technology and high value-added industries such as electronics and autos.
In Canada, with merchandise trade totaling $272 billion between the two countries, our neighbor to the north is the United States’ largest trading partner. Unfortunately, the merchandise trade deficit with Canada increased by 70 percent during the first two years of NAFTA to $18.2 billion in 1995, contributing to a combined merchandise trade deficit with NAFTA partners of $34 billion–one-fifth of the entire U.S. deficit.
During the NAFTA debate in Congress, supporters claimed that 170,000 U.S. jobs would be created by 1995 as a result of the trade agreement. The figure was determined by calculating that every billion dollars of net exports creates 20,000 jobs. Given the large trade deficit with Mexico, it is now clear that NAFTA has actually destroyed jobs in the United States. The $15.4 billion trade deficit in 1995 means that more than 262,000 jobs were lost or not created.
The effect of the large merchandise trade deficit with Canada is often overlooked when considering NAFTA’s effect on U.S. jobs. In 1995, trade deficits with NAFTA trading partners were responsible for the loss of 575,000 job opportunities in the United States. These results are consistent with AFL-CIO predictions that half a million jobs would be lost because of NAFTA; unfortunately, it happened much sooner than anticipated.
Contrary to NAFTA proponents who claimed that the agreement would eliminate the need for maquiladora assembly plants along the U.S. border, as many as 160 new maquiladoras are likely to be established in 1995-96, according to a study by the Wharton Econometric Forecasting Association. Estimates by WEFA are that the number of maquiladora jobs will total 943,000 by 2000.
The massive devaluation of the peso has effectively reduced the cost of purchasing foreign direct-investment assets in Mexico. As other capital-rich countries realize the profits available from producing in Mexico with devalued pesos and selling in dollars to the U.S. market, foreign direct investment from all sources will continue to surge into Mexico.
In a move that signals a graduation from low-tech to high-tech production in Mexico’s border plants, Samsung Group on March 29 opened a $200 million industrial park in the city of Tijuana. The vertically integrated facility will make it easier to sell in North America. This year Samsung expects to produce 1.1 million color televisions, 400,000 televisions with enclosed VCRs, color picture tubes and tuners, and other products. The industrial park, some six miles south of the San Diego border, is expected to employ more than 6,000 workers. Samsung will meet the content requirement for preferential tariff treatment under NAFTA and be close to the large U.S. market.
At a ceremony headed by President Zedillo on Dec. 4, 1995, 100 foreign firms pledged to boost investment in Mexico by $6.3 billion in 1996. The investment from U.S., European and Asian firms will mark a 53 percent increase over 1995.
Reflecting the impact of NAFTA on corporate investment decisions, Deere & Co. said on March 1 that it would build a new diesel-engine factory for $100 million in Torreon, Mexico. It will be the largest the company has built since the late 1970s.
During the NAFTA debate, the AFL- CIO argued that the agreement would transform Mexico into one giant maquiladora zone. Because the border is now saturated and because of strong financial incentives, Mexico’s interior cities are luring maquiladoras. For example, one apparel manufacturer based in El Paso, Texas, recently opted to locate a plant in Torreon, 520 miles south, rather than in Ciudad Juarez, just across the Rio Grande. Last year, the northern Mexican city of Monterrey, 150 miles from the Texas border, welcomed 29 new maquiladoras, a 27 percent hike over 1994.
In testimony before Congress nine months prior to the implementation of NAFTA, the AFL-CIO warned that “devaluation (of the Mexican peso) is inevitable.” At the time of enactment, on Jan. 1, 1994, the peso was valued at 3.1 pesos to the dollar. It declined steadily during the year and, in December 1994, because of its inability to maintain sufficient capital inflows to finance its growing trade deficit, Mexico was forced to allow the peso to freely float in value relative to the dollar. As a result, the value of the peso has fallen to 7.6 pesos to the dollar, a drop of 60 percent since NAFTA.
The cost of this devaluation, together with its underlying economic causes, will be borne largely by workers in both countries. For Mexican workers, imported goods have skyrocketed in cost, real earnings have plummeted as inflation has soared, and a million jobs have disappeared. At the new exchange rate, compensation for Mexican manufacturing workers is only about one- twelfth of U.S. compensation, and is even less in the maquiladora sector.
U.S. workers will continue to experience downward pressure on their wages, and will see their jobs disappear as Mexico cuts imports, promotes exports, and attracts more and more U.S. investment to take advantage of its cheap labor costs. Inflation-adjusted average hourly earnings of U.S. production workers in 1995 declined to $12.01 from $13.05 in 1986.
During each step in the process of creating and implementing the NAFTA environmental provisions, environmentalists’ goals were satisfied minimally. The result has been to narrow the scope and powers available for environmental protection under those provisions. Two years after NAFTA took effect, NAFTA’s environmental provisions are simply too weak to achieve their purposes. The Commission for Environmental Cooperation (CEC), established by NAFTA’s environmental side agreement, rejected petitions regarding the Endangered Species Act and logging laws. The third petition produced only doubtful environmental benefits to migratory water fowl.
During the two years of NAFTA, the damage to the environment and public health caused by illegal dumping of hazardous waste along the U.S.-Mexico border has increased. NAFTA has stimulated a host of environmentally destructive and socially inequitable investments. For example, in August 1995, Carbon II, a new coal-fired power plant serving Mexico’s maquiladora export zone, began operating in Piedras Negras, Mexico. Although Carbon II fully complies with Mexican law, it lacks smokestack scrubbers. “On some days particulate pollution in Big Bend is worse now than in Houston,” reports environmental activist Scott Royder.
The newly created North American Development Bank was to have provided funds to clean up the U.S.-Mexican border. However, the NADBank created a shaky funding scheme that relies on government guarantees to attract private investment for water and sewer projects. Mexico’s peso crisis shook investors’ confidence in NADBank guarantees, so they are reluctant to finance projects. As a result, cleanup funds have not materialized while critical environmental projects have languished up and down the border.
Regrettably, the AFL-CIO’s predictions about the impact of the flawed NAFTA have come to pass. Downward pressure on workers in both countries has intensified, while the promise that NAFTA would bring about increased employment and prosperity for all has proved empty. Clearly, a new model is needed.
If progress is to be made, it must be recognized that economic integration is a complex process that should be undertaken slowly and with extreme care. If anything, a deepening and widening of the negotiation agenda is needed. Issues such as capital markets and, most importantly, worker rights and standards, must be dealt with directly. Certainly, U.S. taxpayers should no longer be required to be the ultimate rescuers of Wall Street speculators and elitists involved in ill-conceived economic activity, as is the case with Mexico.
It is vital that any future negotiations address NAFTA’s deficiencies and place the interests of working families at the center, rather than the periphery, of trade agreements.
(Ronald Pettengill is president of the Rochester Labor Council, AFL-CIO.)

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