The scorecard of NAFTA: Losses for all three countries

The North American Free Trade Agreement has been a lose-lose-lose proposition for working people in Canada, the United States and Mexico.

Let us count the ways: Lost jobs, reduced wages, more unemployment, higher food prices and reversals of environmental laws. NAFTA, a 20-year laboratory for mainstream economics, has been a bonanza for the executives of multi-national corporations, and that is all you need to know why the so-called “free trade” model continues to be promoted despite the immiseration and dislocation it spawns. Agreements like NAFTA, and proposed deals that would go further in handing power to corporate executives and financiers such as the Trans-Pacific Partnership, have little to do with trade and much with ensuring corporate wish lists are brought to life.

Not dissimilar to medieval doctors who insisted that having leeches bleed the patient was the only course of action, neoclassical economists, who dominate the field, won’t budge from their prescriptions of neoliberal austerity. But although the medical field has made enormous strides in recent centuries, there is no such progress among neoclassical economists. That is because said economists — most often under the banner of “Chicago School” but sometimes using other names — promote ideology on behalf of the powerful, not science for all humanity.

"Canada in fog" photo by Kat Spence

“Canada in fog” photo by Kat Spence

Thus the spectacularly wrong predictions made for NAFTA before it was went into force on January 1, 1994, have no effect on their predictions for new deals. To provide one example, in 1993 the Peterson Institute for International Economics predicted 170,000 jobs would be created in the U.S. alone by 1995, that the U.S. would enjoy an expanded trade surplus with Mexico and that the Mexican economy would grow by four to five percent annually under NAFTA.

As we will see presently, none of those rosy predictions came close to becoming reality. (True to neoliberal form, the institute is grandly predicting “gains of $1.9 trillion” for the Trans-Pacific Partnership.) The point here isn’t to pick on one particular institution — in fact, it is quite typical. The models developed to make these predictions and explain economics are mathematical constructs disconnected from the real world.

Sure it works better in a dream world

The Chicago School and other mainstream neoclassical schools of economics rest their models on the concept of “perfect competition,” which assumes that all prices automatically calibrate to optimum levels, and that there are so many buyers and sellers that none possess sufficient power to affect the market. This model assumes that employees are in their jobs due to personal choice, and wages are based only on individual achievement independent of race, gender and other differences. That this bears little resemblance to the real world is not your imagination.

From this, mainstream economists assume all trade will be beneficial because all economic activity quickly adjusts to create a new equilibrium following a disruption. As Martin Hart-Landsberg wrote in his 2013 book Capitalist Globalization: Consequences, Resistance and Alternatives:

“[T]his kind of modeling assumes a world in which liberalization cannot, by assumption, cause or worsen unemployment, capital flight or trade imbalances. Thanks to these assumptions, if a country drops its trade restrictions, market forces will quickly and effortlessly lead capital and labor to shift into new, more productive uses. And since trade always remains in balance, this restructuring will generate a dollar’s worth of new exports for every dollar of new imports. Given these assumptions, it is no wonder that mainstream economic studies always produce results supporting ratification of free trade agreements.” [page 104]

World Bank studies promoting “free trade” agreements, Professor Hart-Landsberg wrote, assumes that tariff reductions will have no effect on government deficits, governments will automatically be able to replace lost tariff revenue with revenue from other sources and that there is full employment. He writes:

“Although working people have been ill served by capitalist globalization, many are reluctant to challenge it because they have been intimidated by the ‘scholarly’ arguments of those who support it. However … these arguments are based on theories and highly artificial simulations that deliberately misrepresent the workings of capitalism. They can and should be challenged and rejected.” [page 80]

Mexican farmers forced off their lands

Mexico had annual per capita gross domestic product growth of 0.9 percent in the first 20 years of NAFTA — one-fifth of the per capita GDP growth of the preceding 20 years. The Center for Economic and Policy Research reports that Mexico’s growth during the past 20 years under NAFTA ranks the country 18th of 20 Latin American countries and is half of the average Latin American growth rate. Among other results, the center reports:

• 4.9 million family farmers have been been displaced — more than half the total number of Mexican farmers in 1991.
• More than 14 million more Mexicans live below the poverty line than in 1994. Just more than half of Mexicans are below the poverty line, nearly identical to the 1994 rate, but the population has increased.
• Inflation-adjusted wages have risen two percent over 18 years and are barely above the 1980 level.

Subsidized corn from the United States flooded Mexico, sold below the costs of small Mexican farmers. Corn imports from the U.S. increased fivefold and pork imports from the U.S. increased by more than 20 times, according to a Truthout report by David Bacon.

As a result, Mexican farmers forced off their land either became seasonal workers on growing agribusiness farms, sought work in the cities or migrated north. Seasonal agricultural workers (those working less than six months per year) grew by almost three million — more than doubling their ranks — during the same period that 4.9 million family farmers were displaced. The number of Mexicans emigrating to the U.S. rose by almost 80 percent from 1994 to 2000, before falling significantly afterword because of the post-9/11 increased border security.

Nor did Mexicans get cheaper food as a result of the flood of U.S. corn. Public Citizen, in its just released report on NAFTA, reports that the deregulated price of tortillas nearly tripled in the first 10 years of the agreement and that a Mexican minimum-wage earner can buy 38 percent less than he or she could when NAFTA went into effect.

The only countervailing effect, the increase in factory jobs as maquiladoras (factories near the U.S. border producing for export) increased for a time, but those low-wage jobs are now dwindling because China’s wages are far cheaper than Mexico’s. The same pitiless market competition that sent jobs south now sends them across the Pacific. China now accounts for 23 percent of U.S. imports as compared to Mexico’s 12 percent, according to International Monetary Fund statistics.

A 2011 paper issued by the Economic Policy Institute summarized the effects of NAFTA on Mexico:

“From the standpoint of the business community, NAFTA’s most important achievement was that it made Mexico a much safer and more attractive location to invest and outsource U.S. manufacturing production. NAFTA’s investment provisions created new and improved safeguards for foreign investors, including new dispute settlement tribunals providing a mechanism for settling disputes with foreign governments outside of the Mexican legal system. By eliminating Mexico’s developmental state and use of local content rules, and other demands and conditions on foreign investors, the trade agreement greatly reduced the cost of doing business in Mexico, and increased the security of those investments.” [page 6]

Mexico’s conversion into an export platform does not mean higher skills for its workforce. The biggest initiative in job creation came during the administration of Vicente Fox, which offered training in low-skill jobs for landscapers, construction workers, factory workers and maids.

Hundreds of thousands of jobs leave the United States

The United States has seen a net displacement of almost 700,000 jobs through 2010 directly attributable to NAFTA, according to Economic Policy Institute calculations. Moreover, the U.S. has had large annual trade deficits with Mexico since NAFTA was implemented; in earlier years, trade was roughly balanced between the two. In addition to the job losses, Public Citizen reports these negative impacts on U.S. workers:

• U.S. food prices have risen 67 percent since NAFTA took effect, despite an increase in food imported from Mexico and Canada.
• Purchasing power for U.S. workers without a college degree, adjusted for inflation and taking into account those consumer goods that have become cheaper, has declined 12 percent under NAFTA.
• Two-thirds of displaced manufacturing workers who were rehired in 2012 experienced a wage cut; the reduction in the majority of cases was at least 20 percent.
• U.S. manufacturing and services exports to Mexico and Canada grew slower after NAFTA took effect than it had been earlier.

By making it easier for capitalists to move production, NAFTA has directly contributed downward pressure on wages. With fewer well-paying manufacturing jobs, pressure on wages not only affects manufacturing but other industries as well as displaced workers seek employment elsewhere.

Capital mobility has been an irresistible hammer for holding down wages and worsening job conditions — a study by Cornell University Professor Kate Bronfenbrenner found that more than 50 percent of employers made threats to shut down and/or move their facilities in response to unionization activity during the three-year period of 1993 to 1995, and that the rate of actual shutdowns tripled from the pre-NAFTA rate. She wrote:

“NAFTA has created a climate that has emboldened employers to more aggressively threaten to close, or actually close their plants to avoid unionization. The only way to create the kind of climate envisioned by the original drafters of the [National Labor Relations Act], where workers can organize free from coercion, threats, and intimidation, would be through a significant expansion of both worker and union rights and employer penalties in the organizing process both through substantive reform to U.S. labor laws and by amendments to the North American Agreement on Labor Cooperation.” [page 3]

That would take massive organizing to achieve. The Obama administration is actively trying to use the rules of NAFTA as a starting point for further weakening of labor, safety, health and environmental laws in the ongoing Trans-Pacific Partnership negotiations, which would tighten corporate control should the ongoing TPP negotiations be successful. The White House undoubtedly has the same goals for the Transatlantic Trade and Investment Partnership talks with the European Union.

Canadian safety net shredded to ‘compete’ in markets

Spending on Canada’s social safety net has decreased while corporate revenue has doubled and manufacturing jobs disappeared. In addition, a Canadian Centre for Policy Alternatives researcher reports, the country’s growing trade surplus with the United States has translated to few jobs. The study found:

• After 12 years of NAFTA, government transfers to individuals have dropped from 11.5% of GDP to 7.8% of the country’s GDP.
• “[M]uch of the growth in gross exports over the last decade reflected the markedly elevated use by Canadian-based companies of imported inputs in their production, significantly overstating the employment impact of the growth of manufactured exports.”
• The length that Canadians could collect unemployment benefits was reduced, the amount of the benefits were cut and the criteria for those eligible were reduced, reducing the proportion of unemployed people who qualified for unemployment insurance to one-third from three-quarters.
• Composite revenues of 40 of Canada’s biggest businesses increased 105 percent from 1988 to 2002, while their workforces shrank by 15 percent.

These developments fueled rising inequality, the centre’s executive director, Bruce Campbell, wrote:

“The most striking feature of this growing inequality has been the massive gains of the richest 1% of income earners at the expense of most of the population. The growth of precarious employment, the undermining of unions as a countervailing power to transnational capital, the erosion of the Canadian social state, and heightened economic dependence on the United States are the hallmarks of the free trade era in Canada.” [page 53]

Pressing its advantage, Canadian big business interests demanded and received tax cuts on the ground that Canada could not be competitive otherwise. Those cuts resulted in loss of C$20 billion in federal revenue for 2005 alone, the study said, on top of provincial revenue losses of $30 billion. The tax cuts were primarily given to high-income individuals and corporations, who argued that these would create “a level field of competition” with the United States but also increase labor market “flexibility” — a code word meaning lower wages and reduced job security, always the goal of capitalists.

It’s always our turn to ‘cut back,’ never the bosses’ turn

The key NAFTA provision is Chapter 11, which codifies the “equal treatment” of business interests in accordance with international law and enables corporations to sue over any regulation or other government act that violates “investor rights,” which means any regulation or law that might prevent the corporation from extracting the maximum possible profit.

Under these provisions, taxation and regulation constitute “indirect expropriation” mandating compensation — a reduction in the value of an asset is sufficient to establish expropriation rather than a physical taking of property as required under U.S. law. Older decisions become precedents for further expansions of investor “rights” and thus constitute the “evolving standard of investor rights” required under “free trade” agreements.

Toothless “side agreements” on labor rights are meaningless window dressing; the arbitration bodies that decide these cases (in secret with no accountability or right of appeal) are governed by the main body of the text, such as Chapter 11. Corporations can sue governments over regulations or laws they don’t like, but working people and governments have no right to sue.

As Mr. Bacon put it in his Truthout report:

“The most any union or group of workers got from filing a case was ‘consultations’ between the governments and public hearings. There is no process in the agreement for penalties for violation of union rights. And although there are minor penalties for violating child labor or occupational health laws, they’ve never been implemented. Not a single contract was signed as a result of the side-agreement process, nor was a single worker rehired. Those unions that have filed cases have generally sought to use the process to gain public exposure of abuses and exert indirect pressure on employers.”

The neoliberalism that began gathering steam with the rise of Margaret Thatcher and Ronald Reagan, and which has intensified since, is not the handiwork of some secretive cabal, nor is it some tragic bad turn from an otherwise “rational” system. It is the natural evolution of modern capitalism and its relentless competition. “Free trade” agreements that have little to do with trade and much to do with imposing corporate wish lists in the service of ever more inequality and power imbalances is an inevitable component.

Implementing a “reform” of agreements designed to maximize corporate profits above all other considerations and shred the remnants of democracy is less than an illusion. Overturning the entire “free trade” apparatus is indispensable to any serious project of building a better world. Trade should conducted for the benefit of all, not only the one percent — unlike the current global system in which human beings are in the service of markets instead of the other way around.

24 comments on “The scorecard of NAFTA: Losses for all three countries

  1. I think NAFTA proponents were lying through their teeth when they claimed NAFTA and the WTO would improve the economic status of ordinary workers. I think the aim all along was to circumvent local labor and environmental laws to increase corporate profits. If NAFTA had any real merit, Clinton wouldn’t have fast tracked it through Congress.

  2. Tim says:

    Great piece, SD. You’ve written a lot already on this NAFTA and TPP topic but it seems those are still not enough yet for you to stress how destructive these “trade agreements” are.

    Makes me wonder about what calamity will befall my country following the implementation of the ASEAN free trade agreement next year. Even now we’re already flooded with Thai and Chinese goods and the national industry is shrinking.

  3. Steve says:

    In light of your last excellent piece on all these so-called “free trade” agreements, I happened to come across a copy of Harper’s (Feb, 2014) the other day whose headline piece “How Germany Conquered Europe” caught my eye. One of those forums organized by the magazine which included James Galbraith, Ulrike Guerot, John Gray, Christiane Lemke, and Emmanuel Todd. Todd is a favorite of mine because he is not afraid to embrace and defend unpopular positions. And also because he is not an economist.

    Anyway, the discussion centered around the Euro and its viability as a common currency in wildly different socio-political environments that make up present day “Europe”.

    Nothing was really ever agreed upon other than the obvious fact that, given that there exist differing social standards, more consultation is necessary. Aside from Todd’s vague support of the nation-state, most appeared rather content with the structures in place.

    Without going through the entire discussion, Galbraith really surprised me when he said:

    We have experience with what happens to large conglomerate political systems when small pieces of them leave. The Soviet Union did not survive the departure of the Baltic states. Yugoslavia did not survive the departure of Slovenia.

    I would admit that the “Soviet Union” did not survive. But it was replaced by something smaller, more “manageable”? More cohesive, maybe? I don’t know about Yugoslavia. I’m still trying to get through Diana Johnstone’s book. But I still stand by my belief that post-war Europe, as a group of nation-states, was ready to call it quits on the capitalist, or neo-liberal model, had not the US cultivated and influenced certain European elites. Nowhere was there a discussion of a different system.

    The following article, Tunnel Vision, by Andrew Cockburn relates a pretty good history of the Air Force’s A10 Thunderbolt and how its versatility and efficiency was overlooked in the interest of padding military budgets. He doesn’t bother to argue about the insanity of all these wars. He simply points out the incredible tunnel vision of those making major decisions.

    But somewhere, in the back of my mind, there was a connection. Neither of these two articles confronted the basic problem. Am I way off base here?

    • I believe you are very on target, Steve. The U.S. applied carrots and sticks to keep Europe in its orbit following World War II. None of us can definitively say, or know, what direction Europe would have taken had it been left on its own, but there were popular Communist Parties in Italy, France and Greece that had popular authority in light of their Resistance work, and the still fresh knowledge that capitalism had led Europe to a fascist abyss.

      There is an excellent chapter on this in the recently re-issued book The Stalinist Legacy: Its Impact on Twentieth Century World Politics, edited by Tariq Ali. I recommend this book overall, but it also contains the best analysis of the potentialities of a socialist Europe at the end of the World War II I have ever come across.

      I am quite surprised at James Galbraith’s statement that the Soviet Union couldn’t survive the loss of the three tiny Baltic states. I can’t understand such a lack of perspective and understanding by someone who is ordinarily an acute observer. That would like saying the United States could not survive the loss of Rhode Island. I have no wish for Rhode Island to succeed, but the other 49 states could manage just fine if necessary.

      The Soviet Union collapsed for a complex set of reasons having to do with the rigidity of a system far overdue for structural change; alienation in the workplace as a bureaucratic elite arrogated to itself all decision-making; that a top-down system based on meeting numerical quotas led to hoarding of raw materials, disrupting the rational distribution of them to where they were needed; more popular alienation as Gorbachev’s changes came to be widely seen as done on the backs of the Soviet Union’s workers (which they were); the lack of a coherent plan for changing to a democratic system with workplace democracy instituted; that Gorbachev threw in the towel midway through his reign and instituted elements of capitalism that unraveled the network of ties that kept the system functioning; that private networks emerged that were able to grab state property as their own private property; and that well-placed Russians behind Yeltsin were determined to bring the Soviet Union down, no matter the cost to working people.

      There was a whole lot of state property that could be grabbed and turned into private property, enabling the oligarchs to make fortunes.

      • Steve says:

        I think that’s why Georges Marchais was taken down. As I remember, he was for a more pure form of communism, and had France accepted his challenge, the entire history of modern Europe might have been different.

  4. tubularsock says:

    Excellent post as usual SD. “. . . economists . . . promote ideology on behalf of the powerful, not science for all humanity” is the best summation of this entire mess. Now Tubularsock is not an economist and I prefer being in never-never land with drugs not fantasy. I have never really understood their logic while reading their explanations of how it is all going to work but now it is so clear. Thanks SD.

  5. Alcuin says:

    “The neoliberalism that began gathering steam with the rise of Margaret Thatcher and Ronald Reagan, and which has intensified since, is not the handiwork of some secretive cabal, nor is it some tragic bad turn from an otherwise “rational” system. It is the natural evolution of modern capitalism and its relentless competition. “Free trade” agreements that have little to do with trade and much to do with imposing corporate wish lists in the service of ever more inequality and power imbalances is an inevitable component.” I’d change the last sentence to read “Free trade agreements that have little to do with trade are an integral component of the corporate agenda to impose ever more inequality and the predictable result of having both Democrats and Republicans carrying water for corporate America.”

    Much of the left believes in the “secretive cabal” explanation (the Fed, fiat currency, etc.) and much of the right believes in the rationality of capitalism – a misreading of Adam Smith if ever there was one. We are so immersed in the culture of capitalism from birth that we seem to be unable to envision alternatives. Keep on pounding away Systemic – maybe one day enough people will begin to grasp the truth and they will begin to consider an alternative.

    Speaking of corporate megaphones: The corporate megaphones have been turned up to full volume re: Venezuela in South Florida. The latest salvo I read is that Sen. Marco Rubio stated that “supporters of Maduro’s regime ‘steal’ money from Venezuela and then spend it in the United States, particularly in South Florida and Orlando-area resorts”. That’s so far from the truth that it is laughable, but the media in South Florida, the home of a large population of wealthy 1% Venezuelans, are busy distorting reality. My heart breaks when I read about the hardships that they face. Not.

    If you want to know what is going on in Venezuela, read Venzuela Analysis.

    • I routinely read Venezuelanalysis. It is indeed an excellent source as to what is happening in that demonized country. Hugo Chávez won 16 of 17 elections, and Nicolás Maduro has now won twice in less than a year after the Bolivarian forces won the December 2013 municipal elections.

      As to your larger point, it is sadly true that few people as of yet can imagine a world outside of capitalism and we suffer from that lack of vision. But more people than in recent decades can, and as capitalism continues to punish more poeple, more harshly, I believe people will be ready for a reasonable alternative vision. I do hope so, for Rosa Luxemburg’s prediction still holds true for the future: socialism or barbarism. I sure rather would have socialism — a system of political and economic democracy designed to meet human need rather than the private profit of a numerically minuscule elite.

  6. Jeff Nguyen says:

    Like Tubular, I’m no economist but I’ve pretty much learned that any legislation with acronyms and the words ‘pact’, ‘agreement’ or ‘treaty’ in it spell big trouble for the recipients. If only it was your analyses being disseminated in the NYT’s Op-Ed instead of Thomas Friedman, I would start subscribing.

  7. […] jobs, reduced wages, more unemployment, higher food prices and reversals of environmental laws have invariably been the results. Unaccountable, secret tribunals staffed by corporate lawyers have enabled corporations to overturn […]

  8. […] via The scorecard of NAFTA: Losses for all three countries « Systemic Disorder. […]

  9. […] Clearly, Japan is going to stubbornly defend its five ‘sacred’ farm products – including dairy – within the TPP. Japan is not the only problem. One could also mention that Chile’s new left wing government is less than enthusiastic about the TPP. Malaysia is still hostile to some of its key provisions about how SOEs should operate etc etc. And hanging over the entire deal is Obama’s failure to seek Congressional authority – also known as Trade Promotion Authority (TPA) – to even negotiate a trade deal such as the TPP. Obama can always count on some support among Republicans on free trade issues. Yet this scorecard on NAFTA shows why Democratic activists are strongly opposed to going down that same sorry road again. […]

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