What You Don't Know About Nafta

The free-trade deal is taking the blame for huge job losses. But its true effects on workers and competitiveness are far more complicated

Trade hawks hunting for the corporate villains behind the flight of U.S. manufacturing jobs to Mexico might find General Electric a handy target. In the 14 years since the North American Free Trade Agreement dismantled most barriers to trade and investment between the U.S., Canada, and Mexico, GE has sent thousands of U.S. jobs making everything from refrigerators to electric meters to Mexico. Today, the conglomerate and its joint-venture partners employ 30,000 Mexicans at 35 factories.

GE (GE) is moving higher-value work, too: It now hires an engineer a day at its 1,050-staff engineering and design center in Queretaro. Starting pay there is one-third of U.S. salaries.

But the story of GE and Mexico is about more than lost U.S. jobs. Since 2006, GE has struck deals to sell Mexican companies $350 million worth of turbines built in Houston, 100 locomotives made in Erie, Pa., and scores of aircraft engines. GE Capital has amassed $10 billion in real estate, corporate loans, mortgages, and other assets south of the border. This is what a free-trade deal is intended to achieve. Mexico specializes in industries where its cheap labor gives it an edge, and it imports U.S. goods requiring advanced technology and major capital investment. Some U.S. workers lose jobs, but new ones are created in services and heavy manufacturing. "Nafta has been an unqualified success," says Rafael Diaz-Granados, CEO of GE's Mexico operations. "It helped turn GE from a very America-centered company into a much more global one."


In an election year, at a time when the U.S. working class is in growing distress, such logic is drowned out. Nafta has suddenly reemerged as a hot-button issue. Democratic candidates Barack Obama and Hillary Clinton both ripped Nafta before the Mar. 4 primary in Ohio, a state that has lost more than 200,000 manufacturing jobs since 2000. And they're expected to renew the attack now that the nomination battle is focused on Pennsylvania's Apr. 22 primary. Nafta will also be a factor in Michigan if Democrats redo that state's primary.

Yet the world has changed so profoundly since 1994 that trying to pin specific job losses and gains directly on Nafta is an exercise in futility. Myriad free-trade deals, from bilateral pacts to the World Trade Organization, have been struck since. Nations in Asia, Latin America, and Central Europe have opened up to foreign investment and have deregulated local industries. China has emerged as the world's workshop. Emerging-market crises and spendthrift U.S. policies have radically revalued currencies time and again.

You'd never know it listening to the Democratic candidates, who have both threatened to pull the U.S. out of Nafta unless it is renegotiated. In Ohio, Senator Obama blamed Nafta for 1 million job losses and declared "entire cities have been devastated" by trade pacts. "I don't think Nafta has been good for America, and I never have," he said. And although her husband pushed Nafta through Congress in 1993, Senator Clinton labeled the pact "flawed" and said she was a critic "from the beginning." Neither candidate has done much to remind voters of their voting records on trade, which suggest far more measured views.

Predictions Missed the Target

There is no shortage of statistics making Nafta look bad. Free traders' claims in the early '90s that Nafta would create hundreds of thousands of U.S. jobs, turn the slight deficit with Mexico into a $10 billion annual trade surplus, and eliminate illegal immigration proved wildly off the mark. Instead, America's deficit with Mexico passed $74 billion in 2007. The U.S. has also shed 3 million manufacturing jobs since the early '90s.

Whether these ugly stats have much to do with Nafta is far from clear. America's debt-fueled spending binge and low savings rate are mainly to blame for the current-account deficit. Many Americans lost jobs as textile, auto parts, and electronics production migrated to Mexico. But China's export takeoff has been a far bigger factor in job losses of the past five years. Investment in automation and information technology has led to massive reductions of factory workers everywhere, including China. The last time the Congressional Budget Office studied Nafta, in 2003, it concluded the impact of the treaty on U.S. gross domestic product was minuscule.

Trade boosters, meanwhile, cite average 3.7% annual growth in the U.S. since 1993, sharp drops in unemployment, and record exports of $982 billion last year. Trade now accounts for 27% of American economic output annually, compared with around 20% in 1993. Gary C. Hufbauer and Jeffrey J. Schott of Washington's Peter G. Peterson Institute for International Economics calculate that U.S. exports to nations with which it has free-trade deals, such as Singapore and Australia, have grown far faster than with the rest of the world. "By any definition, free-trade agreements have been a plus," contends U.S. Trade Representative Susan C. Schwab.

"Far Too Simplistic"

Curiously, by the time Nafta took effect on Jan. 1, 1994, most trade over the U.S.-Canadian border was already nearly duty-free. American trade had also grown rapidly with Mexico, which had dropped average tariffs from 27% in 1982 to 12% in 1993. They slid to 1.8% under Nafta, and import permits once required for most foreign products sold in Mexico disappeared. U.S. tariffs fell from a low average of 4% to 0.18%. A far more important development was Mexico's decision to offer strong investment guarantees and open key sectors, such as banking, to non-Mexican competitors. Such measures were stiffly resisted before Nafta, but then-President Carlos Salinas used the treaty to ram through reforms.

The ability to invest fully in Mexico had a huge impact on North America's auto industry. Before Nafta, foreign automakers had to set up plants with Mexican partners and export enough to offset the value of vehicles they imported into Mexico. When Mexico scrapped such restrictions under Nafta, investment flooded in, lured by wages as low as $3.50 an hour (including benefits), as opposed to $14 to $26 an hour in the U.S. Mexico-based factories could ship cars and parts anywhere in the U.S. within three days, compared with three to eight weeks from Asia.

U.S.-owned auto parts companies set up shop. General Motors (GM), Ford (F), Chrysler, Volkswagen (VLKAY), and Toyota (TM, figures Nafta was responsible for 60,000 U.S. assembly and auto-part jobs lost since 1993. Auto industry consultant Kimberly Rodriguez of Grant Thornton thinks that estimate is high and puts more blame on soaring U.S. health-care costs as a job killer in the industry. "To blame Nafta for a loss of jobs in the Midwest is far too simplistic," she says.

Tough Times in Textiles

The plight of 3,600 striking workers at five American Axle & Manufacturing plants in New York and Michigan acquired from GM in the '90s illustrates how tricky it is to assess blame. Last year, American Axle shut one plant in Buffalo and shipped much of the work to Mexico. Management now is demanding steep compensation cuts from the remaining workers, but the UAW wants guarantees that no more U.S. plants will close. The union claims the Mexican option gives management unfair leverage. The company retorts that the average $73-an-hour pay package at the five old factories is more than twice what workers make in its other U.S. plants.

Nafta's adverse impact seems plainer in textiles. Many big fabric producers backed Nafta because they assumed Mexican apparel factories would mainly [work] with cloth from efficient U.S. plants. "The orthodoxy before Nafta was, we may lose some labor-intensive apparel jobs, but we'll keep capital-intensive textile jobs," says trade hawk Charles W. McMillion, head of Washington consultant MBG Information Services.

But unlike previous pacts with Caribbean nations, there was no rule that Mexican-made apparel must contain U.S. fabrics to enter America duty-free. Mexican and Asian companies also built mills to supply apparel factories in Mexico, prompting a fall in fabric prices. The big blows came when the Asian currency crash of the late '90s made Asian fabrics even cheaper, and Chinese mill capacity soared. Some 500 U.S. mills have shut since Nafta went into effect.

Nafta's reforms often pushed Mexican companies to raise their game. When Mexican cellular service was opened up after Nafta, regulators there weren't vigorous in challenging the entrenched local players. But U.S. carriers were slow to seize the opportunity in cellular. Amârica Móvil, a local telco, made it easier for poor Mexicans to buy air time with prepaid cards. "By the time U.S. carriers woke up, Amârica Móvil owned the market," says Boston Consulting Group senior partner Jesus de Juan.

Nafta: "Just a Proxy"

There have been big U.S. winners, though. Farm exports to Mexico have nearly tripled since 1993. Banamex, owned by Citibank (C), is Mexico's No.2 bank. Wal-Mart (WMT) also dominates Mexican retailing.

The critics know Nafta cannot be blamed for all U.S. job losses. The real issue is globalization itself. "Nafta is just a proxy," says Lori Wallach, head of Global Trade Watch, which opposes free-trade deals. "It's not just that a certain number of jobs have moved to Mexico," adds University of California at Berkeley labor economist Harley Shaiken, who has studied Nafta. "[It's] that many companies have threatened to move to Mexico unless wage concessions were forthcoming."

What would critics fix if Mexico and Canada agreed to renegotiate Nafta? First off, tougher labor and environmental standards and enforcement. Mexico doesn't guarantee workers' rights to form independent unions and bargain collectively, for example. AFL-CIO policy director Thea M. Lee cites a case of union organizers at a Sony (SNE) plant in Nuevo Laredo who were fired. A Nafta panel agreed there were "serious questions" about whether rights were violated but took no action. "We're tired of filing these cases if nothing happens," Lee says.

If Obama or Clinton could reopen Nafta, however, Mexico probably would press its own demands. And a redrawn Nafta would not change the rules of world trade. "We have to go all the way to fixing the WTO," says Wallach. To do that, the U.S. would have to reopen decades' worth of trade talks the world over. Politicians can easily resurrect the rhetoric from the 1990s. Turning the clock back to a pre-Nafta global economy is another matter.

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