For both the US and Mexico, Nafta has failed to deliver on its economic promises. It’s time for it to be renegotiated
In Mexico, the fifteenth birthday is a special time, an ornate coming of age celebration – the quinceañera – complete with dancing and piñatas. On January 1, the North American Free Trade Agreement turns 15, but it does not seem like anyone in Mexico is going to throw any parties for the groundbreaking trade agreement.
Celebrations in Washington are likely to be muted as well. President-elect Barack Obama swept to victory on a platform critical of Nafta and similar trade agreements, and he will have a Congress that has continued to shift away from such free-trade policies.
Obama also promised to take a “time-out” on trade agreements while a thorough review of US trade policy is carried out. He should make good on that promise. And unlike the campaign, which focused exclusively on how these agreements have brought limited benefits for people in the US, the review should take a hard look at Mexico’s experience as well. It is not a pretty picture.
In Washington, many people almost take it for granted that Mexico was the big winner from Nafta. After all, the Mexican government got exactly what it wanted from the agreement: exports to the US increased sevenfold, much of it in manufacturing, and foreign direct investment jumped to four times pre-Nafta levels. With inflation down and productivity up, the Mexican economy was ready for takeoff.
It didn’t happen. The economy grew slowly – an annual rate of 1.6% per capita. This was low by historical standards. The economy grew 3.5% per year from 1960-79, under the widely criticised policies of “import substitution”. And it was low by developing country standards. China, India and Brazil all vaulted ahead of Mexico, following a much less orthodox set of policies that would be illegal for Mexico under Nafta.
Slow growth means limited job creation, all the more so with US exports displacing “inefficient” domestic producers. Estimates vary, but Mexico probably gained about 600,000 jobs in the manufacturing sector since Nafta took effect, but the country lost at least two million in agriculture, as cheap imports of corn and other commodities flooded the newly liberalised market.
So Mexico saw a net loss of employment under Nafta, and this at a time when the country’s baby boom has about one million young people entering the work force each year. No wonder an estimated half-million Mexicans make the increasingly perilous and militarised crossing to the US each year, double the migration rate before Nafta, which, remember, was promised to end the migration problem by allowing Mexico to “export goods, not people”.
No wonder some Mexicans are calling for their own government to renegotiate Nafta on its fifteenth birthday. The wage gap with the US has gotten bigger, not smaller, with US wages nearly six times Mexico’s. About half the population can’t find formal employment. Poverty rates and inequality are down only slightly, in part because remittances from Mexicans who migrated to the US are up six-fold since Nafta took effect.
Nafta’s defenders may be right to say that the agreement was a success for Mexico, if success is just about increasing trade and investment. No one can deny that Mexico received preferential access to the coveted US market and huge inflows of US capital. But those who care about economic development ask for – and were promised – more. They ask that economic and trade policies benefit the population at large. On this, Nafta has failed.
This has important implications for US trade policy, and for any developing country seeking to sign a trade agreement with the US. Nafta is the template for such agreements. If Mexico, with a 2,000-mile border with the US, a strong history of bilateral trade and trade preferences that meant something during what turned out to be the longest economic expansion in US history, didn’t prosper from its trade agreement, other developing countries are not likely to either.
The incoming Obama administration should make good on its promises to review Nafta. Indeed, review US trade policy as a whole. And examine not only its impacts on US workers and farmers but its development impacts in Mexico.
Then let’s start from scratch and fashion trade agreements that are worthy of grand celebrations on both sides of our borders.
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