The North American Free Trade Agreement or commonly called “NAFTA” is a three party trade agreement between Canada, Mexico and the United States. The general purpose of this trade agreement is to reduce, if not totally remove, trade barriers among the said countries. NAFTA also aims to facilitate the movement of goods and services across these North American borders. It also intends to increase investment prospects, encourage fair competition, and implement intellectual property rights in each of the party's territory (Peach & Adkisson, p. 1).
Article 102 of the NAFTA agreement describes its specific purpose as follows:
Award Mexico, Canada and the United States with the Most Favored Nation status.
Reduce trade barriers and help the cross-border flow of goods and services.
Uphold conditions of fair market competition.
Enhance opportunities for investment.
Give protection and implement intellectual property rights.
Develop procedures for trade dispute decisions.
Create a framework for further tri-party, regional and multi-lateral cooperation among nations to extend its trade benefits.
According to Ford of Time Magazine USA (p. 1), NAFTA has actually reduced trade limitations, enhanced investment opportunities and developed procedures for trade dispute resolutions. Most importantly, NAFTA has enhanced the global competitiveness of the three North American countries. This has been significant in the global context of the creation of a European Union (EU) and the robust growth of the Chinese economy and the other emerging markets. The EU has then replaced the United States as the world’s largest economy and NAFTA has helped in diffusing the economic effects of this change.
The idea behind promoting economic development through the facilitation of goods and services between the North American countries of Canada, Mexico and the United States has been conceived way back the administration of then U.S. President Ronald Reagan (p. 1). In his 1979 political campaign, President Ronald Reagan discussed a certain North American agreement. Prior to NAFTA was the Canada-U.S. Free Trade Agreement (CFTA). This agreement was superseded by NAFTA on January 1, 1994. In effect, the NAFTA was a strengthened CFTA which added Mexico in its agreement (p. 1).
Before NAFTA, Mexican tariffs on imported U.S. goods were 250% higher than the tariffs U.S. applies on Mexican imports. In 1991, Canada requested a trilateral agreement, which then led to NAFTA (SOURCE). Then U.S. President George H.W. Bush, Mexican President Salinas and Canadian Prime Minister Brian Mulroney signed NAFTA in 1992 (Peach & Adkisson, p. 1). Their respective countries ratified this agreement in 1993. The U.S. House of Representatives approved this agreement on November 17, 1993. Three days later, the U.S. Senate also approved it. President Bill Clinton enacted on this law on December 8, 1993. NAFTA became effective on January 1, 1994. While NAFTA was enacted by President George H.W. Bush, President Clinton reaped the recognition for the initial acclaims of NAFTA (Ford, p. 1). In 1993, concerns about liberalization of labor and environmental regulations led to the adoption of two addendums to NAFTA (p. 1).
Despite the numerous benefits of NAFTA, it has been a very controversial and political topic. Its flaws are always highlighted during presidential campaigns. Before NAFTA was ratified in 1992, the Independent U.S. Presidential candidate Ross Perot popularly cautioned the citizens that "they will hear a massive sucking sound of employment being pulled out of America" (Ford, p. 1). This presidential candidate predicted that the country would lose 5 million job positions which is a significant 4% of all the employment available to the U.S. These job opportunities would be transferred to lower-cost Mexican workers. However, this event did not happen during that time since Mexico was hit by a recession and the U.S. progressed economically. What happened was the displacement of the American goods by the cheaper Mexican imports, which in turn, lowered the demand for American labor.
During the 2008 Presidential campaign, NAFTA was criticized from all sides. Then presidential candidate Barack Obama blamed NAFTA for the rising unemployment (p. 1). He explained that business spurred at the expense of the American workers. He also said that NAFTA did not give enough protection against the environmental degradation and workers exploitation in the Mexican borders. Hillary Clinton also highlighted the NAFTA in her promise to rigidly enforce all of the current trade agreements. She also pledged to stop the enforcement of the new agreements. These two candidates pledged to change the provisions of NAFTA or to scrap it altogether.
Republican candidate Ron Paul also promised to abolish NAFTA in his 2088 political campaign. He appreciated the similarity of NAFTA with the European Union but the candidate stressed that the lack of a single currency in NAFTA makes it susceptible to trade irregularities than in EU. He has maintained this position in his 2012 campaign (p. 1). John McCain, a Republican nominee, supported NAFTA along with the other free trade agreements. He also mentioned about enforcing a section on the opening up of the U.S. to the Mexican trucking industry (p. 1). Interestingly, Obama’s present administration has not implemented major changes on this trade agreement.
As a trade institution, the NAFTA has both over reaching local and international consequences. It has remarkable macroeconomic effects on the participating countries, especially for the United States. This is why it has been exhaustively debated since it was promulgated.
There are various oversights of this agreement. First and foremost, the participating countries are not homogenous in their regional characteristics such as their cultural, political and economic elements. To illustrate, San Diego, California and Brownsville, Texas are not well categorized.
Secondly, the agreement’s authors failed to assume that for more than fifty years, North America has been rapidly growing in terms of population more than the growth of the American population (p. 1). Even if border migration were to be strictly controlled, North America would continue to rapidly grow than the national average for several decades (p. 1). It is also important to consider that border region per capita income, except San Diego, is low compared to the U.S. national average. Lastly, in national data comparison, regional unemployment rates are high compared to the low labor force participation rates (p. 1).
As the US was already involved with free trading with Canada since 1988, NAFTA would bring little changes to their trade relationships. Consequently, Mexico had been wholly opening its economy even before the NAFTA. The main effect of this would be the unequal trade status of the U.S. and Mexico when the NAFTA further opens the U.S. borders. This is because Mexico is not as developed as the U.S. and it has an enormously low wage.
As a primary consequence, NAFTA enabled many U.S. manufacturers to transfer their job requirements to the cost efficient Mexican work force. Since Mexican labor is cheaper and many U.S. manufacturing industries transferred their production sites to Mexico, it led to various economic consequences. To illustrate, the U.S. gathered a trade deficit with Mexico of $97.2 billion from 1994 to 2010 (Krueger, p. 763). It has also displaced 682,900 jobs. About 80% of the losses were from the California, New York, Michigan, and Texas manufacturing. These states have high concentration of industries which transferred to Mexico. These manufacturing industries were computers, electrical appliances motor vehicles, and textiles (p. 764).
For those U.S. manufacturers who did not move their production sites, this meant lower wages for their U.S. employees. In a similar aspect, the Mexican farmers were displaced by the U.S. subsidized farm production. The labor and environmental protection provided by the NAFTA did not strongly stipulate the prevention of exploitation of these workers.
For instance, NAFTA stretched the maquiladora program wherein U.S. companies employing Mexican workers along the border can manufacture their products cost effectively and have these exported to the U.S (p. 766). This set up expanded to about 30% of Mexico's work force. However, these Mexican workers have no employment rights or health coverage. Their workdays surpass the normal 8 hours of work to 12 or more hours per day.
The U.S.' restrictive migration policies and their farm subsidies, which adversely affect Mexican farmers, are also areas of oversight. Canada also needs to modify its energy trade policies (p. 762). The increasing complexities of trade agreements and actual trade practices due to globalization make NAFTA even more complicated. It creates and destroys employment and trade opportunities among its member countries.
Resulting demographic change in California 809
In California and all over the U.S., NAFTA has negative impact in terms of employment, tax differentials and trade deficits. In a national report of the Economic Policy Institute (EPI), more than 700,000 jobs and employment opportunities were lost by the U.S. through increased trade deficits with Mexico and Canada in the light of the NAFTA implementation. More than 500,000 of these jobs were directly lost in the manufacturing sector (p. 765). The report’s state-by-state analysis evidenced that more than 80,000 of NAFTA’s lost jobs and employment opportunities were in California. California directly lost manufacturing jobs due to NAFTA, one third of which was in the production of electrical machinery (p. 766). In April 2001, the government’s NAFTA –Transitional Adjustment Assistance program (NAFTA-TAA), showed that California had 20,312 workers who lost their jobs due to NAFTA. The net job loss figures showed a high figure of 115,723 in California (p. 766).
Other affected U.S. states were Florida, Georgia, Illinois, Indiana, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, and Wisconsin. These states all lost more than 20,000 jobs (Ibid.). The manufacturing sector was accountable for 78% of the net jobs lost under NAFTA. This amounted to a total of 686,700 manufacturing jobs lost (p. 763).
These job losses led to a downward pressure on the standard of living and a weakened bargaining power of the labor force. However, there was no strong evidence to show that NAFTA has greatly affected the growth of population the border of the region (Peach & Adkisson, p. 1). The border region population growth rates were higher before NAFTA than after it. The reduction in the border region population growth rates was strong in both metropolitan and non-metropolitan areas within the region’s border.
According to The Thomas Rivera Policy Institute (p. 10), the fiscal burden to the Californian state related to immigration from Mexico is estimated at $179 million per year. However, this cost must be considered against both the benefits and the impact of immigration to California’s state economy.
Among all its trading partners, Mexico is California’s biggest market for exported goods (man-made). California’s trading with Mexico constituted about 7% of the total bilateral commercial trading between the U.S. and Mexico in 2002. Also, about 17% of all export-related jobs in California are linked to the state’s commercial ties with Mexico (p. 10).
The Center for Immigration Studies depicted that undocumented Mexican immigrants drain the Californian state government due to their low levels of income and educational background, added to their undocumented native born children (p. 24). However, the Urban Institute, approximated that immigrants strongly generate money out of their taxes as compared to the cost of services they receive (considering all levels of government) (p. 24). A 2005 study also showed that the national adjusted per capita health care costs of Mexican immigrants were 55% less than the US-born citizens. In a categorized health care expense analysis, Hispanic immigrants are the ethnic group with the least adjusted per capita health related expenses at the national level (p. 25). This was contested by the greater social services extended to immigrant households. Mexican immigrants purportedly spend more on educational services (they have more children), they receive more transfer income (since they are poorer than the average native households) and they pay lower taxes.
A positive factor to be considered is the positive contribution of the Mexican immigrants to the agriculture sector of California. These immigrants also contribute greatly to the Californian economy as they take jobs in various local industries. For instance, the Californian agriculture industry would likely to disappear if Mexican immigrant labor were scarce. Such industries are upheld because these Mexicans accept jobs at lower wages compared to an average American worker. To add, Mexican immigrants also maintained the local economy during economic recessions (p. 26). They keep the wages down and thus also lowering the prices of consumer goods for the total benefit of all the Californians.
Other factors in the Californian economy include commerce, foreign-direct investment and tourism. While these are all affected by NAFTA, their effects cannot be ruled out as either categorically positive or negative. When all of this is generally considered, the fiscal deficit of the growth of border population due to NAFTA can be seen as both advantageous and disadvantageous.
Works Cited:
Ford, Andrea. A Brief History of NAFTA. Time US Online. December 30, 2008. Accessed on 23 February 2012 < http://www.time.com/time/nation/article/0,8599,1868997,00.html#ixzz1nDAr54Sx>.
Krueger, A. NAFTA’s Effects: A Preliminary Assessment. June 2000. The World Economy, 23 (6), p. 761-775.
Peach, J. & Adkisson, R. NAFTA and Economic Activity Along the U.S.-Mexico Border. June 200. Journal of Economic Issues. Accessed on 23 February 2012 < http://findarticles.com/p/articles/mi_qa5437/is_2_34/ai_n28782666/>.
