Viva NAFTA? – Pros and Cons of NAFTA – Cover Story

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The first thing to say about the North American Free Trade Agreement is that the protectionist attacks on it by Ross Perot, Dick Gephardt, Ralph Nader, Jesse Jackson, and others are nonsensical. Jimmy Carter was not exaggerating when he characterized Perot as a demagogue “with unlimited financial resources, who is extremely careless with the truth, and who is preying on the fears and uncertainties of the American public.” The agreement will not create a giant sucking sound and it will not result in the loss of tens of thousands of American jobs. Possibly it will create jobs, as supporters maintain. But the jobs issue that has dominated the debate is a distraction. In searching for the good and the bad in NAFTA, the issue points us in entirely the wrong direction.

Cato Institute Chairman William Niskanen, a NAFTA supporter, finds the jobs issue “extraordinarily overblown on both sides,” and doesn’t think the agreement’s effect on jobs is measurable. In general he finds the agreement “messy,” with “an awful lot of junk in it,” but still, “on net it is beneficial.” Michael Kinsley of The New Republic is right when he says that “the person who will get a job because of NAFTA isn’t even aware of it yet; the person who may lose a job because of it is all too aware.” Robert Samuelson of Newsweek is right when he criticizes the idea that Mexico “will hijack our industrial base.” If this were true it would already have happened. “Mexico’s wages have long been lower than ours, and most of its exports already enter our market without any tariff,” says Gary Hufbauer of the Institute for International Economics.

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Milton Friedman of the Hoover Institution says: “I strongly support the passage of NAFTA, even though it does not go as far as I would like. It is mislabeled. It should be called the North American Managed Trade Agreement because it retains so many restrictions on free trade. Nonetheless, it is a step in the right direction …” Those who are skeptical of endorsements by economists should know that support for free trade is one of the few areas where liberal and conservative economists have been both in agreement and overwhelmingly correct (if you think that economic growth is a good thing and that monopoly is undesirable).

NAFTA’S goal is to reduce tariffs among Mexico, Canada, and the United States over a period of years, making it easier to trade goods across national borders, and increasing economic efficiency in North America. These goals are laudable, and if there were nothing more to NAFTA than that, it would clearly deserve the strong support of all who believe in liberty and free markets.

But that is not all. NAFTA comes with side agreements on labor and the environment, and yet another on “import surges.” The latter permits a “snap-back” to pre-NAFTA tariff rates “if increased exports from Mexico are a substantial cause of, or threaten, serious injury to a domestic industry.” In other words, a specifically protectionist provision has now been unambiguously written into a “free-trade” agreement.

These side agreements were not made public until September, by which time politicians of all persuasions had declared for or against the treaty: in so doing, they were totally dependent upon the interpretation of a small number of staff aides and think-tank researchers, some of whom had themselves only seen summaries of these documents. Representative Dick Armey, who supports the agreement, told me that he had not actually studied the legalese, but was relying on Joint Economic Committee staffer Edward Hudgins, who had. The same was no doubt true of all 434 other congressmen–except that many of them wouldn’t even have had the services of Mr. Hudgins so readily at their disposal.

Armey told me that the agreement wasn’t perfect but probably took us “as far and as fast as we can go in the direction of free trade” right now. He would have preferred a two-page document, he said, but the side agreements were more in the nature of “sunshine commissions” than “concessions of our own autonomy.”

The principal concern is the side agreement on “environmental cooperation,” which will create a Commission with an “aggressive and important workplan,” a Council made up of the three countries “top environmental officials,” a Joint Advisory Committee, and, yes, a Secretariat. As the example of Maastricht has shown, the powers that such transnational bodies feel free to exercise within a few years of their creation can only be described as uncertain. In a speech to the House of Lords recently, Margaret Thatcher made a last-minute but unavailing attempt to derail the movement toward closer European union and loss of national sovereignty. “Thatcher declared she had been hoodwinked as prime minister into letting Britain slide toward a federal-type Europe,” AP reported. “‘Yes, we got our fingers burned,” she said, accusing the EC of using a 1986 act that demolished trade barriers to sneak in regulations on everything from labor rights to water standards.”

Back when Mexico was still a colony of Madrid, Monterrey was frontier–much like America’s Wild West, more than 200 years later–settled by a rugged cast of characters, including unmoored Jews and some in trouble with the Spanish crown, whose present-day descendants are fiercely proud of their heritage and the modern metropolis they developed. Monterrey is the most important business center in the country after Mexico City. It’s as if San Antonio, Texas, went on to become Pittsburgh, Pa., skipping the Rust Belt phase. This city of nearly 4 million, often confused by Americans with its California namesake, is, after all, still in its ascendancy, and–like Texas, its closest American kin–it has tall ambitions that may prove critical to how Mexico as a whole develops. Or maybe not.

Monterrey is home to many of Mexico’s largest companies, some now in the vanguard of going global. They benefited from their proximity to the U.S. and from imitating its business culture. (The Dallas Cowboys count about 1,400 Monterrey fans as season-ticket holders.) They also bulked up on Mexico’s earlier import-substitution policies, which positioned them well for the challenges and opportunities when the North American Free Trade Agreement (NAFTA) came into force in January 1994. The lion’s share of $200 billion of foreign investment that has rolled in since then–two-thirds from the U.S.–went to the north, both to maquiladora assembly operations in border towns and to Monterrey and nearby Saltillo, also known as Little Detroit for the sizable auto investments there, especially by the U.S.’s Big Three. Thirty percent of Mexico’s GDP comes from manufactured exports, 80% of that auto related, and the U.S. accounts for 60% of that.

Yet Monterrey may be getting less competitive, as is Mexico itself. The country needs tax enforcement, regulatory reform, a deregulated oil industry and agricultural reform–in the U.S. also–if it is to maximize the potential that NAFTA offers. If not, the U.S. can expect an even larger flood of new arrivals, to whom a fence installed by Congress may as well be made of cardboard.

Grupo Industrial Saltillo, with eight business units, shows the link and how NAFTA’s market access is accelerating this corporation’s global evolution. More than half its roughly $1 billion in sales last year went to the U.S., Canada, Japan and Australia, and 84% was auto parts. That will expand when a $136 million engine factory, a joint venture with Caterpillar, opens next year. Saltillo’s building-products division, on the other hand, is 90% dependent on the domestic market. Within five years, this proportion is projected to be evenly split between domestic and foreign sales, a feat that may not prove feasible for other business units, which would then be more likely to be sold off. “Mexico is a country in transition, and much of that change has been forced by NAFTA,” says Robert Bryant, Saltillo’s executive vice president of corporate strategy and business development. “In a protected economy, conglomerates made a lot of sense because there were synergies across business units. Well, in a worldwide economy where you have to be globally competitive in each of your business units, those domestic synergies aren’t as relevant.”

Democrats Hillary Rodham Clinton and Barack Obama squared off in a presidential debate Thursday night in Austin. Here is some context behind two of the claims that arose:

The claim: Clinton said Obama’s borrowing passages of speeches first made by Massachusetts Gov. Deval Patrick “raises questions.” She added: “Lifting whole passages from someone else’s speeches is not change you can believe in, it’s change you can Xerox.”

The facts: Patrick is a national co-chairman of Obama’s campaign. Obama said Thursday night that Patrick “gave me the lines” to use in recent speeches. One line was: “I’m not just asking you to take a chance on me. I’m also asking you to take a chance on your own aspirations.” Another was: ” ‘We hold these truths to be self-evident, that all men are created equal’ — just words? ‘I have a dream’ — just words?”

Obama said, “The notion that I had plagiarized from somebody who is one of my national co-chairs, who gave me the line and suggested that I use it, I think is silly. This is where we start getting into silly season in politics.”

The claim: In the debate, Obama called the North American Free Trade Agreement an example of “bad trade deals” that caused “devastating job losses.” His campaign has criticized Clinton for having once supported it.

The facts: In March 1996, three years after President Clinton signed NAFTA into law, Hillary Clinton said, “I think NAFTA is proving its worth,” and called it “a free and fair trade agreement,” according to the Associated Press.

In February, she told Time magazine: “I believe in the general principles it represented, but what we have learned is that we have to drive a tougher bargain.”

Clinton has criticized a recent Obama mailer that said she called NAFTA a “boon” to the American economy as recently as 2006. In fact, Newsday, a New York newspaper, paraphrased her as saying that. In its political blog, Newsday later said, “The quote marks (in the mailer) make it look as if Hillary said ‘boon,’ not us.”

NAFTA, an equally misdirected strategy is being employed by both the Administration and sympathetic media. They lob concessions at labor and Green protectionists among congressional Democrats to win them over, and they fire economic logic at simple-minded protectionists outside the Beltway like Ross Perot to discredit them. The second task is easy enough, since the principal protectionist claim is that if NAFTA goes through, U.S. investment and jobs will be sucked inexorably southward. In fact, by eliminating Mexican tariff barriers on American goods, NAFTA would reduce the incentive for U.S. businesses to relocate their factories inside Mexico.

But the first task is trickier. Most Democrats, unpersuaded by the concessions, are sticking with the AFL-CIO and the Sierra Club in their opposition to NAFTA. Which means the Administration must rely on Republicans who don’t need persuading that free trade is a good thing, but wonder if NAFTA will still be free trade with Mr. Clinton’s concessions. The Administration has no answer to that; its guns are pointed in the wrong direction, shooting down the arguments that free trade damages the environment and guts labor protections.

Even before the side agreements, however, NAFTA was not free trade, strictly speaking, but a managed-trade agreement. It reduced trade and investment barriers between Canada, Mexico, and the U.S. in a gradual and regulated way–“snap-back” provisions allow some reimposition of tariffs in case of “import surges”–but maintained existing national barriers against third countries. Indeed, it raised those barriers slightly by strengthening the “rules of origin” to ensure, for instance, that Japanese manufacturers could not gain tariff-free access to the American market by assembling autos in Canada from mainly Japanese-made components and then exporting them to the United States.

The direct economic consequences are likely to be modest for America in both the long and the short term. First, U.S. tariffs are already low-on average 4 per cent–so that their elimination should not create massive job dislocations. One estimate is that the current round of defense cuts will displace ten times as many workers as NAFTA. Estimates of net job gains or losses are not only highly speculative, they are also trivial–a net gain or loss of 150,000 or so over 15 years in an economy which created 19 million jobs in the 1980s. Second, although Mexican tariffs are higher, at about 10 per cent, they have not prevented a sharp rise in U.S.-Mexican trade in recent years, in which the U.S. enjoys a substantial trade surplus. Third, the Mexican economy is only one-twentieth the size of our own.

Even if the entire flow of additional Mexican investment–about $15 billion a year–were financed solely from U.S. sources, it would amount to only 1 or 2 per cent of our annual savings (and, sans NAFTA, would probably have gone to the Far East anyway). And, finally, because NAFTA diverts trade rather than creating it, there will be losers, but they are likely to be located mainly in third countries for instance, Taiwanese manufacturers who lose ground in the U.S. market to less efficient Mexican producers, or European investors who are deterred by the rules of origin from setting up plants in Canada or Mexico. American consumers will be better-off than at present–but less well-off than they would be under a multilateral GATT deal covering the same ground.

And there’s the rub. Because NAFTA’s direct economic impact, though on balance favorable, will certainly be modest, a great deal rides on the wider long-term implications of the agreement. Milton Friedman supports NAFTA as a step toward genuinely free trade; Clyde Prestowitz, a shrewd “trade hawk” (neo-protectionist?), supports it as creating an extended domestic market which makes Mexico an “export platform” for America in the coming struggle for trade. Which of these views will prove correct? Will NAFTA with the side agreements, as described by Tom Bethell (p. 34), extend regulation as much as it liberalizes trade? Will it strengthen the free-market reforms in Mexico or overwhelm its burgeoning capitalism with First World labor and environmental rules that a developing country cannot afford? Above all, does it symbolize a confident America looking outward to its neighbors or a fearful America constructing its own trade fortress in a mercantilist world of trade wars? To these questions we shall return in the next three issues.

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Viva NAFTA? – Pros and Cons of NAFTA – Cover Story. (2017, Apr 13). Retrieved from

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