Free trade fiasco
As it celebrates its tenth anniversary, many experts agree that the North American Free Trade Agreement has failed to live up to expectations. Jaideep Mukerji finds out why
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PRESIDENT GEORGE W BUSH, and President Vincente Fox shake hands at the conclusion of their joint press conference during the Summit of the Americas in Monterrey, Mexico.
Bush won strong support from Fox on Monday for a proposal to grant temporary guest worker status to thousands of illegal Mexican immigrants in the United States. The move is part of an effort to soothe relations between the two countries, which have become strained in recent times, due to the US being occupied with its war on terror and Mexico's decision to stay out of the war on Iraq.
The rapprochement was a bright spot of the summit for the US, which had also hoped to use the Summit of the Americas to push forward its bid to finalise the Free Trade Agreement of the Americas (FTAA) by 2005. Instead, the high profile gathering of 33 heads of state from across the Americas highlighted the growing rift between the US and many Latin American countries over trade policies, the war on drugs and US interference in the region.
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At its inauguration 10 years ago, the North American Free Trade Agreement (NAFTA) was heralded as the start of a new era in trade that would transform North America. NAFTA's creators boasted the accord would "establish clear and mutually advantageous rules governing trade", as well as "create new employment opportunities and improve working conditions and living standards". Former US President Bill Clinton declared at the time that NAFTA would create 200,000 jobs in the US in its first two years alone.
Ten years on, however, critics say NAFTA has instead delivered nothing more than unfulfilled promises and economic hardship.
Signed by the United States, Canada and Mexico in 1994, NAFTA created the largest free trade zone of its kind in the world. All three governments claimed NAFTA would improve productivity, spur economic growth across the continent and help pull Mexico into the fold of First World countries. At a NAFTA meeting coinciding with the 10th anniversary of the agreement, government officials continued to share a great deal of optimism over the accord.
"NAFTA has been a huge success for the United States and its NAFTA partners over its ten-year history," said US Trade Representative Robert Zoellick. "It has contributed to more trade, higher productivity, better jobs and higher wages." In a joint press release, US, Canadian and Mexican officials lauded NAFTA as "an outstanding demonstration of the rewards that flow to outward- looking countries that implement policies of trade liberalisation".
However, assessing NAFTA's impact depends on how its economic data is interpreted. For instance, while the US nearly doubled its exports to Mexico and Canada from $142 billion to $263 billion annually, the US also saw its trade deficit balloon from $9 billion in 1993 to $87 billion in 2002. And while NAFTA created over a million jobs in Mexico, the average Mexican worker has only seen a nine per cent rise in his income over the last 10 years, a growth rate four times lower than pre-NAFTA levels.
One incontestable reality of NAFTA is that of the three countries involved in the agreement, Mexico clearly saw the fewest benefits. In many ways, NAFTA defied conventional economic thinking when it came time to deliver economic growth in Mexico. NAFTA proponents predicted that the trade agreement would motivate companies to come to Mexico and take advantage of its cheap and abundant labour. This in turn would create jobs for Mexicans who would then use their earnings to buy more products, thus increasing demand and creating what economists called "a virtuous cycle of economic growth". Ten years later, however, this "virtuous cycle" has failed to materialise.
US and Canadian companies did of course flock to Mexico. Dozens of giant export assembly plants -- called Maquiladoras in Mexico -- sprung up along the Mexican border with the US. But while the Maquiladoras created employment in Mexico, real wages for the plant's employees in fact fell over NAFTA's first ten years, according to a report released by the Carnegie Endowment for International Peace. And even though the Maquiladoras created hundreds of thousands of jobs, they also created a storm of controversy over their poor worker benefits, long hours and low pay.
Mark Weisbrot, co-director of the Washington based Centre for Economic and Policy Research, says that Mexico learned some painful lessons from NAFTA.
"Lesson one is that opening up your markets to foreign trade and investment is not a development strategy," he told Al-Ahram Weekly. "Lesson number two is that the race to the bottom is not a good race to get in to," pointing out that despite their initial success, the Maquiladoras have shed 200,000 jobs in the last two years as companies relocate to China where there is even cheaper labour to be found. "You can't just open your borders to foreign companies and assume it will all work itself out," he said.
NAFTA's supporters, however, claim that it is unfair to pin all of Mexico's economic problems on the trade agreement. They claim that the events of 11 September and an inefficient Mexican government also bear a lot of responsibility for Mexico's woes. A recent World Bank report on NAFTA criticised Mexico for "institutional weakness" and "deficiencies in education and innovation policies" it felt prevented Mexico from properly benefiting from NAFTA.
Others caution that it is still too early to label NAFTA a failure. Sandra Polaski, in a Carnegie Endowment for Peace report, reasoned that Canada and the US already had a free trade agreement prior to NAFTA and economic indicators show that Canada is now enjoying a period of economic growth. Given time, the report hints, NAFTA could fulfill its promise of economic prosperity in Mexico.
Weisbrot retorts that such arguments ignore the bigger picture. He says that NAFTA was only one small part of a trade liberalisation scheme that began in the early 1980s.
"A lot of what was in NAFTA had already been implemented in Mexico by executive order [before 1994]. What NAFTA did was to weave these policies into an international treaty so that it could not be reversed by the Mexican congress." Weisbrot argues that if one measures all the liberalisation strategies implemented by Mexico since the 1980s, it is clear that NAFTA, and the policies that gave birth to it, were a net failure.
"For Mexico NAFTA has been a terrible failure in terms of growth. If Mexico had continued on their pre-1980s growth path they would have had a standard of living today that is equal to Portugal or South Korea," he said. "It would be a wholly different country."
Weisbrot also feels it is a mistake to even refer to NAFTA as a free trade agreement in the first place.
"A free trade agreement would lower overall barriers to trade, but NAFTA in fact increases barriers in some areas like intellectual property rights," he pointed out. "Free trade is just a marketing term the government used to sell the agreement. A better name for it would be an investor's rights agreement because what it basically does is establish rights for investors in other countries."
The rights given to investors under NAFTA are in fact at the centre of one of the biggest controversies surrounding the agreement. In a bid to prevent governments from arbitrarily seizing a company's assets, NAFTA was drafted with a clause that gave companies the right to sue a government for actions "tantamount to expropriation". In a mutation of the spirit of that clause, companies in the US and Canada used it to sue governments over environmental legislation that they claim prevents them from making profits.
Yet despite its disappointing economic performance and erosion of environmental standards, the US is enthusiastically pushing for a similar free trade accord with El Salvador, Guatemala, Nicaragua, Honduras and Costa Rica. Officials hope that this new accord, the Central American Free Trade Agreement, will be another step towards the ultimate goal of a Free Trade Agreement of the Americas (FTAA). This pan- American trade agreement would extend NAFTA to include 34 countries across the Americas.
After witnessing NAFTA's underwhelming results in Mexico, however, many Latin American countries are reluctant to sign on. Brazil remains deeply sceptical of the FTAA, with Brazilian President Luiz Inacio Lula da Silva describing the proposed agreement as "a US plan to annex Latin America". Such cynicism does not surprise Weisbrot.
"A lot of people in Latin America can see that NAFTA was a mistake and are saying 'we don't want it' and that is why you are seeing a lot of popular resistance to the FTAA," he said.
Undeterred by opposition to the FTAA and the recent collapse of the World Trade Organisation talks in Cancun last year, US and Canadian officials are quietly working on solutions to circumvent countries that oppose the FTAA. US officials are busy negotiating bilateral trade agreements with South American countries. A free trade accord with Chile took effect on 1 January and analysts say that by expanding free trade on a country-to-country basis, the US will be able to generate a great deal of pressure on those who refuse to sign on to the free trade bandwagon.
