Alphabet Soup, Part I: NAFTA and the American Economy

by B. Lana Guggenheim The United States has trade agreements with 20 countries, and many more are in the works; the names of these agreements are often a sea of alphabet soup (NAFTA, TPP, TAFTA, TTIP, etc). That alone is enough to make most Americans tune out, but the current election cycle has brought to light a lot of ire not just at the state of the economy, but about these trade deals, which are perceived by many to be some of the vehicles of economic insecurity. Both Republican nominee Donald Trump and ex-Presidential hopeful Vermont Senator Bernie Sanders have lambasted specifically NAFTA and the TPP, saying that these deals (along with globalization in general) outsource American jobs and hurt the poorest, most vulnerable Americans. These deals mean that trade is diverted, rather than created. But Democratic nominee Hillary Clinton and other trade experts disagree, saying that increased international trade increases commerce (so more trade is created than diverted), which means American companies do better both at home and abroad - in addition to other geo-strategic gains that such agreements might provide.

So who’s right? Well, both of them. Sort of.

These trade deals are often examined cursorily and in isolation, especially when farmed for punchy sound-bites, like how many jobs lost (NAFTA is estimated to have cost about 850,000 jobs, due to manufacturing moving abroad, for example). And that’s true as far as it goes; the removal of trade barriers between countries allows for companies to set up in locales that might be more favorable to their bottom line - and close up shop where it is not. But instituting a closed economy would not save us. Trade deals are a natural part of a global economy, and that’s not something that you can put the brakes on or reverse; attempts to do so and close the economy or relying on other forms of protectionism would be extremely harmful to the American economy, even as it would protect factories from closing down right away. But close they still would, not because the jobs “moved away,” but because the country would no longer have the wealth to produce anything, or buy products. Hitting the brakes on development and trade in America does not mean the rest of the world will follow suit - and playing catch-up on the global stage is difficult indeed. In the end, the transition is only delayed, not prevented, and the American worker is worse off for trying.

The result is that you have a devil’s choice between an economy that hurts some citizens, but is considered good for the country overall, or scuttling the economy for everyone. In general terms, it is clear that trade is beneficial, but when it comes to implementing trade agreements, there are short-term costs. (Note that short-term can mean a month, a year, or even a generation.) But a trade deal that is good for America does not mean it is good for all Americans. There is a real, desperate lack of sufficient compensatory policies and safety nets for displaced workers. No wonder people are mad: with choices like these, the most vulnerable Americans are left out to dry either way.

Much differs from deal to deal, and not all trade deals are created equal. Some really have hurt Americans, but some have been quite beneficial. Some have been both. While it is beyond the scope of any one article to examine every trade deal, we are going to examine three: NAFTA, TPP, and TTIP. These three include one that has been in effect for many years, one that was just signed, and one in negotiations, with the ultimate goal to examine what is beneficial, what is not, and what is controversial. All three have been discussed in recent news cycles and serve as a form of political signaling in the current election.

Functioning as something of a political lightning rod, NAFTA (the North American Free Trade Agreement), is a trilateral free trade agreement between Canada, Mexico, and the USA. Signed into law by President Bill Clinton in 1994, NAFTA created the world’s largest free trade zone. The details of this trade deal are many, but the goal is to privilege goods made exclusively in, or transformed by these three countries, and to that end, eliminate or reduce duties and tariffs across the borders, and in theory, address environmental and labor concerns. The three NAFTA countries did agree to toughen health, safety, and industrial standards to the highest existing standards among the three, which are nearly always American or Canadian standards. Supplemental agreements were meant to address Mexico’s lower wage scale that would cause American companies to relocate to Mexico to cut costs, as well as prevent pollution from rapid industrialization, with commissions established to handle labor and environmental issues. But environmental and labor groups from the USA and Canada have repeatedly charged that these supplemental agreements have not been enforced, and neither has Mexico’s wage scale caught up.

NAFTA had the effect of opening up Mexican markets in an unprecedented manner, significantly benefiting US exports, but without the promised resolution of wage-scale differences. Some of the worst nightmares of American factory workers and oppositionists, such as former Presidential candidate Ross Perot, did come to pass. American manufacturers have indeed moved to Mexico, resulting in massive anger, as seen in the well-publicized outrage when Carrier shut down their Indianapolis plant in favor of their Mexican facility. It has also contributed to American wage stagnation and depression, especially for those who are not college-educated, and who are now in direct competition with lower-paid Mexican workers. The jobless recovery post-recession has not made things better, as no new opportunities have materialized for these workers, even when economists had assured they would. And yet, NAFTA has also resulted in more jobs in other sectors, more opportunities for small and medium sized businesses, more products available at a lower price, and modest growth for American GDP. This is great for some Americans, but cold comfort to those who lost their jobs and see no other opportunities on the horizon.

The increased trade has resulted in the sharp rise of trade deficits with both Canada and Mexico, which means that the US imports more from than it exports to these countries, even though they are the two largest destinations for US exports, accounting for over a third of the US total. Running a trade deficit isn’t necessarily a bad thing, even though the term “deficit” sounds scary, especially in times of economic uncertainty. Sometimes it is even a sign of growth and economic health. However, both the trade deficit and the decline of manufacturing were occurring before NAFTA was signed into law. It is a matter of some debate exactly how much NAFTA has exacerbated this trade deficit.

While most economists agree that NAFTA has modestly benefited the USA, many Americans (and many Mexicans) do not have such a rosy outlook. That is because the negative impacts are highly concentrated in specific industries, such as the auto industry, which saw much of its manufacturing relocated to Mexico (Mexican auto plants make up about 25% of North American car manufacturing market, and the American auto sector lost approximately 350,000 jobs since 1994), because costs of labor are lower and there is a real dearth of union protection for Mexican workers; whereas the benefits, including new jobs generated, are more widely distributed across society, and therefore harder to pinpoint.

But because those who have lost their jobs haven’t had other job opportunities, and because wages have not kept pace with labor productivity while income inequality has risen, ire at NAFTA and other trade deals has also risen.

It is worth noting that while Canada hasn’t experienced much change due to NAFTA, Mexico hasn’t exactly had a free lunch, even as their economy expanded the most out of all three participatory nations. Mexican lawmakers saw NAFTA as a way to lock in hard-won economic reforms that opened up the formerly protectionist economy, but there’s been mixed results for the country. Rapid economic growth did occur, but poverty has not been alleviated, wages have not risen to match America and Canada, and paradoxically, Mexican unemployment rose, in part because Mexican farmers, particularly corn producers, were exposed to heavily subsidized US imports. This put many small-scale Mexican farmers out of work - and some speculate, might have led to a bump in illegal immigration. (Mexican immigration, both legal and illegal, more than doubled after 1994, but the flow reversed after the 2008 recession and stricter border enforcement.) This means that NAFTA, among a host of domestic factors such as the devaluation of the peso, dysfunctional regulation, and land reforms drove rapid growth in the industrialized north, but economic hardship for the rural south.

The Zapatista Army of National Liberation has been waging war against the Mexican government in the Chiapas, the southernmost state of Mexico, since January 1, 1994, the very day NAFTA was implemented. That is because a pre-condition for Mexico entering NAFTA was a modification of their Constitution, which means it would be possible to privatize communal ejido-land, a type of shared agricultural land holding where no one owns the land, but they and their children are permitted to use it indefinitely so long as it does not lie unused for more than two years. This system is influenced by a previous Aztec system called calpulli, and is heavily relied upon by poor, indigenous Mexicans. This land reform threatened the basic security of indigenous communities, turning generations of workers into illegal land-squatters and their communities into illegal, informal settlements.

The Zapatistas correctly predicted that because of this, NAFTA would increase the gap between the rich and poor in Chiapas, and declared revolution stating that the Mexican government was so out of touch with the will of the people that the only reasonable reaction was to overthrow it and create a new, direct democracy in its place. Since then, they have waged a defensive war in Chiapas, and have formed several autonomous municipalities, none of which are recognized by the federal or state authorities, but have persisted in their autonomy for ten years. (Violence has mostly subsided between the Zapatistas and the Mexican government, with the most recent eruption in 2014, when a Zapatista-affiliated teacher was shot and killed, and 15 others wounded by anti-Zapatista para-militants.)

Photo from almomento.mx

Compared to a stalemated revolution and legalized dispossession of poor farmers, America’s issues of wage stagnation and job creation look almost tame by comparison. That hasn’t stopped either former Presidential hopeful Senator Bernie Sanders or Republican nominee Donald Trump for lambasting this deal and others like them. Democratic nominee Hillary Clinton’s position is rather more nuanced. Formerly a cheerleader for NAFTA, she has since walked that back, saying that it has not lived up to its promise and has hurt American workers. And as President Obama’s Secretary of State, she had been positive on the TPP, calling it the “gold standard,” a statement which she also later walked back when faced with American populist anti-trade sentiment.

However, it remains that both America’s trade deficit and the decline of manufacturing were occurring before NAFTA (or other trade agreements, like the TPP) was signed into law. Still, it is clear that NAFTA and other trade agreements have become a lightning rod for differing political opinions on globalization and free trade. Growing opposition has made it difficult to get other trade agreements passed, such as when CAFTA (the Central American Free Trade Agreement) was stalled in Congress in 2005 from lack of support.

NAFTA is only one trade deal of many. Despite the decidedly mixed results, the United States has signed another trade deal, the Trans-Pacific Partnership, or TPP. In the next segment, we will examine this newly minted deal and its many opponents, and the potential results once this trade deal is ratified. 

Click the links to check out Part 2 and Part 3 of our series on trade deals.