Download Sources of Social and Economic Asymmetries in the

The North American Approach
to North-South Integration:
Mexico, Canada, and the United
States Under NAFTA
Colloque du Réseau Intégration Nord Sud (RINOS)
INTÉGRATIONS RÉGIONALES ET STRATÉGIES DE DÉVELOPPEMENT :
Les relations Nord-Sud dans l’Euromed, les Amériques et l’Asie
Université du Québec à Montréal
Conférence Spéciale
2 Juin 2005
Robert A. Blecker
Professor of Economics
American University
Washington, DC
Alternative Title:
“¡Pobre México!
¡Tan lejos de la Unión Europea, y
tan cerca de los Estados Unidos!”
Distinguishing Characteristics of
North American Integration
1. Large and persistent development gap
between Northern (US, Canada) and Southern
(Mexico) economies in a FTA
2. Asymmetries in economic size and political
power, US vs. Canada/Mexico
3. Mostly “dual bilateral” relations, Canada-US
and Mexico-US; weak trilateral ties
4. Narrow institutional framework (NAFTA) does
not cover important aspects of the integration
process
5. Legal and institutional framework mostly
ignores the development dimension and NorthSouth issues
Persistent Income Gaps in North America:
No Convergence of Mexico from 1993 to 2003
Mexico
Canada
United States
1993
2003
1993
2003
1993
2003
GDP (current US$ billions)
403.2
626.1
554.7
834.4
6,582.9
10,881.6
GDP per capita (constant 1995 US$)
3,327
3,717
18,726
23,843
26,592
32,514
GNI per capita, Atlas method (current US$)
4,230
6,230
20,250
23,930
25,800
37,610
GNI per capita, PPP (current international $)
6,680
8,950
19,480
29,740
25,570
37,500
Hourly compensation of mfrg. workers, in US$
$2.40
$2.48
$16.97
$19.28
$16.28
$21.97
Mexico
Canada
United States
Percentages of U.S. Levels:
1993
2003
1993
2003
1993
2003
GDP (current US$ billions)
6.1%
5.8%
8.4%
7.7%
100.0%
100.0%
GDP per capita (constant 1995 US$)
12.5%
11.4%
70.4%
73.3%
100.0%
100.0%
GNI per capita, Atlas method (current US$)
16.4%
16.6%
78.5%
63.6%
100.0%
100.0%
GNI per capita, PPP (current international $)
26.1%
23.9%
76.2%
79.3%
100.0%
100.0%
Hourly compensation of mfrg. workers, in US$
14.7%
11.3%
104.2%
87.8%
100.0%
100.0%
Sources: World Bank, World Development Indicators, on-line version, and
U.S. Department of Labor, Bureau of Labor Statistics, "International Comparisons of Hourly Compensation Costs for Production Workers in
Manufacturing, 2003" and "Supplementary Tables, 1975-2003," on-line at www.bls.gov/fls/home.htm.
Dimensions of North American
Economic Integration: Trade
• Trade Flows: the US accounts for:
– nearly 90 percent of Mexico’s exports and over 80
percent of Canada’s exports
– about 60 percent of Mexico’s imports and 70 percent
of Canada’s imports
• Canada and Mexico are the United States’ two
largest trading partners, but together account for
only 30 percent of US trade (exports + imports)
• Intra-NAFTA trade grew rapidly in the 1990s, but
has grown more slowly since 2000
– Rising imports from China and other Asian countries
have displaced intra-NAFTA trade since 2000
U.S.-Canadian and U.S.-Mexican Trade in Goods:
Grew Rapidly in 1990s, Slowed Down After 2000
Exports to Canada
Imports from Canada
Exports to Mexico
Imports from Mexico
200
0
-100
-200
p)
20
04
(
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
-300
19
Billions of U.S. Dollars
100
Source: U.S. Department of Commerce, Bureau of Economic Analysis, International Transactions Accounts,
Release of March 16, 2005 <www.bea.gov>. Data for 2004 are preliminary.
Dimensions of North American
Economic Integration: Investment
• N.A. capital markets have been integrated through
financial market liberalization and the liberalization of
trade in financial services
• The US accounts for a majority of the FDI in Mexico and
Canada
– But other countries (European, Asian) also provide FDI inflows
• FDI inflows into Mexico have increased in financial
services as well as in manufacturing
• Mexico succeeded in replacing “hot money” inflows with
FDI after the 1994 crisis and NAFTA
• But FDI inflows into Mexico have diminished since 2000
– FDI inflows were surpassed by remittances in 2003-04
Mexican Net Financial Inflows, Direct
Investment, and Remittances, 1990-2004
Net Financial Inflows
Foreign Direct Investment
Remittances
36
NAFTA
Billions of U.S. Dollars
30
24
18
12
6
0
-6
-12
1990
1991
1992
1993
1994
1995
1996
Sources: International Monetary Fund, Banco de México.
1997
1998
1999
2000
2001
2002
2003
2004
Dimensions of North American
Economic Integration: Migration
• Mexican emigration is driven by:
– Rapid growth of the labor force (nearly 1 million
workers per year)
– Inadequate domestic job creation
– Lower wages (roughly 1/10 of US and Canada)
• An estimated 4-5 million Mexicans migrated to
the United States in the 1990s
– roughly half of them were illegal (“undocumented”)
• US efforts to enforce migration restrictions have
not stopped migration, but have increased
hardships for migrants—and have induced
Mexicans who reach the US to stay
Dimensions of North American
Economic Integration: Migration
continued
• An estimated 8% of all Mexican-born people live
in the United States
• Existing networks of immigrants attract more
migrants
• Mexican immigration in Canada is smaller but
legalized through a guest worker program in
agriculture
• By 2003-04, annual inflows of remittances from
Mexicans abroad exceeded FDI inflows into
Mexico
– Remittances reached nearly $17 billion in 2004
Employment in Mexico Since NAFTA:
Overview
• Overall, job creation in export-oriented
manufactures and agriculture has been offset by
job losses in domestic/import-competing
manufactures and agriculture
• Most net job growth in Mexico has been in nontraded services and the “informal sector” in spite
of NAFTA and export promotion efforts
• Trade liberalization has not solved Mexico’s
employment problems
Employment in Mexico Since NAFTA:
Details
• No single, comprehensive data source exists
– We have to rely on partial and incomplete surveys, some of which have
changed over time (Polaski, others)
• Maquiladoras:
–
–
–
–
Increased by approx. 750,000 from 1993-2001
Then fell by 180,000 from 2001-2004
Net increase of 570,000 from 1993-2004 (more than doubled)
Decreasing female share (now just over half)
• Large non-maquiladora manufacturing firms:
– Net decrease of about 100,000 (roughly 7%) from 1994-2004, but with
larger cyclical fluctuations up and down in-between
• Agriculture:
– New survey shows decline of 730,000 from 1998-2003
– Old survey showed decline of 370,000 from 1991-1998
– Census data show an 8 percentage point drop in the share of
agriculture in male employment, little change in female share (Hanson)
• Evidence of skill upgrading in the most dynamic export industries
(Hanson, Verhoogen)
Why NAFTA Didn’t Create More Jobs in
Mexico: (1) Slow GDP growth
• Growth rates have been lower since trade
liberalization than in the import substitution era:
–
–
–
–
Average for 1951-1980, 6.4 percent per year
Post-GATT (1987-2004), 3.0
"
Post-NAFTA (1994-2004), 2.8
"
Post-peso crisis (1996-2004), 3.7 "
• Mexico needs a higher GDP growth rate (at least
6 percent) to keep up with productivity growth,
raise real wages, and promote convergence to
US-Canadian income levels and real wages
Macro Factors that Have Affected
Mexican Employment
• Mexican growth is positively correlated with US
growth since 1996
• US business cycles: late 1990s boom, 2001
recession, 2002-03 slow recovery
• Exchange rate fluctuations
– Peso or “tequila” crisis of 1994-95
– Subsequent real appreciation
• Restrictive macro policies designed to prevent
another financial crisis since 1995
– under both Zedillo and Fox
• Trade surplus with US is outweighed by a larger
deficit with rest-of-world
Annual Growth Rates of Real GDP,
United States, Canada, and Mexico, 1970-2004
12
U.S.-Canada
FTA
NAFTA
Percent
8
4
0
-4
-8
1970
1972
1974
1976
1978
1980
1982
1984
USA
1986
1988
Canada
1990
1992
1994
1996
Mexico
Source: International Monetary Fund, World Economic Outlook, on-line databases.
1998
2000
2002
2004
Multilateral Real Effective Exchange Rate Indexes:
USA, Canada, and Mexico, Monthly January 1990 - December 2004
180
Index, 1990 = 100
160
140
120
100
80
60
JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN JAN
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Sources: Federal Reserve (USA), International Monetary Fund (Canada), Banco de Mexico
(Mexico).
USA
Canada
Mexico
Why NAFTA Didn’t Create More Jobs:
(2) Rapid productivity growth
• Rapid productivity growth allows output to increase with
proportionally smaller increases in employment
• Features of Mexican productivity growth:
– Trade liberalization destroys jobs in import-competing industries
as less efficient plants shut down and surviving plants increase
efficiency to compete (similar to Canada – see Trefler)
– Significant inter-industry reallocation to export sectors with
higher (and faster growing) productivity (Lopez-Cordova)
– Productivity has increased in both maquiladora and nonmaquiladora manufacturing plants
• Quality upgrading in non-maquiladora exports
emphasizes activities with higher capital intensity, higher
productivity, and greater skill requirements (Verhoogen)
Why NAFTA Didn’t Create More Jobs:
(3) Exports not linked to rest of economy
• Value added in Mexican manufacturing has not kept up
with the growth of exports (UNCTAD)
• Export activities are increasingly integrated into regional
(North American) and global production chains, but not
well integrated into the Mexican economy
• Exports accounted for 17.7% of output but only 10.6% of
employment in 1995-2000; less than one indirect job is
created for each direct export job (Ruiz-Napoles)
• Maquiladora imports account for 76% of maquiladora
exports and 36% of total exports
• MNC exporters have higher import coefficients than
domestic firms
• Export growth is not generating adequate “backward
linkages”
Mexican Exports of Goods, 1991-2004
Corrected for Maquiladora Imports
200
Billions of U.S. Dollars
175
150
Maquiladora
imports
125
100
75
50
25
0
1991
1992
1993
1994
Total Exports
1995
1996
1997
1998
1999
True Exports (Adj. for Maq. Imports)
2000
2001
2002
Non-Maquiladora Exports
2003
2004
Why NAFTA Didn’t Create More Jobs:
(4) Growing competition from China
• Mexico is a victim of the “fallacy of composition” in the
export-led growth paradigm. Especially:
• China displaced Mexico as the second largest source of
US goods imports (after Canada) in 2003-04.
• China has kept its currency undervalued while Mexico
has let the peso appreciate (in real terms) to hold down
inflation
• China and other Asian countries are also increasing their
shares of Mexico’s imports at the expense of imports
from the US (and at the expense of Mexican domestic
production)
– American “big box” retailers (Wal-Mart etc.) encourage
consumption of cheap consumer goods from outside N.A.
20
p)
03
02
01
00
99
98
97
96
95
04
(
20
20
20
20
19
19
19
19
19
94
93
92
91
90
89
88
87
86
85
84
83
82
81
80
Mexico
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
Billions of U.S. Dollars
U.S. Imports of Goods from Mexico and China, 1980-2004(p)
China
200
175
NAFTA
150
125
100
75
50
25
0
More Unequal Income Distribution
• Overall, real wages in manufacturing still had not
recovered to their 1994 level by 2004 in spite of
rapid productivity growth (in both maquiladoras and
non-maquiladoras)
• Wages for more “skilled” (educated) workers have
risen relative to less “skilled” (educated) workers in
Mexico as well as the US (Hanson)
• Real wages have fallen more in the center/south
compared with the border/north regions (increasing
regional disparities) (Hanson)
• Adjustment costs have been severe in both
expanding and contracting regions
• Less skilled workers have to compete with lowerwage workers in other developing countries,
including China
Real Hourly Wages and Productivity for All
Persons in Mexican Manufacturing, 1994-2004
Source: INEGI official data series, not including maquiladoras.
160
Indexes, 1994 = 100
140
Output per hour
120
100
Real hourly wage
80
60
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Political and Institutional
Framework: NAFTA
• North American “Free Trade” Agreement (NAFTA)
– Not completely free trade, many exceptions
– Includes strong protections for property rights and liberalization
of capital flows
– No significant institutions or governance mechanisms (except for
dispute resolution tribunals)
• Side Agreements
– Labor and Environmental Commissions: small budgets, no
enforcement powers
– N.A. Development Bank: very limited mandate and funding for
projects in the Mexican-US border region
• NAFTA restricts industrial development policies and
government regulation of foreign investment
– “Expropriation” clause used to overturn social and environmental
regulations at state/provincial levels
What’s NOT Included in NAFTA:
• No common external tariffs or harmonization of other
trade barriers
– Not a customs union
• No coordination of monetary, fiscal, and exchange rate
policies
– No common currency/monetary union
• No significant development assistance for Mexico
(infrastructure, education, etc.)
– No parallel to the EU’s regional and social cohesion funds
– Exception: the NADBank in border areas only (very limited funds
and mandate)
• No provisions for free migration, labor mobility, or rights
of migrant workers
– Except for highly educated professional and technical workers
What’s NOT Included in NAFTA:
continued
• No harmonization of social standards and policies
– Labor rights/standards, environmental protection, consumer
health & safety, occupational safety & health, etc. are all left up
to individual countries
– Some progress in phytosanitary standards and a few other
technical areas
• No integration of security, borders, customs, etc.
– Businesses complain this creates barriers to trade (increases
costs of border crossings)
– Politically difficult because of US post-9/11 security concerns and
desire to limit Mexican immigration
• No continental governance mechanisms
– Few international (trinational) institutions
– Nothing like the European Commission, European Parliament,
etc.
Political Obstacles to Further North
American Integration
• Asymmetrical economic weight and
power relations
– US has greater bargaining leverage, imposes
its interests
– US sees itself as a global power, tends to
ignore Canada and Mexico
– Intra-N.A. relations are relatively more
important for Canada and Mexico than for US
– Canadians and Mexicans resent/fear US
domination
Political Obstacles to Further North
American Integration
• Lack of North American identity or
consciousness
– Citizens identify with their individual nationalities and
regional/ethnic groups
– Governments often prefer to address issues on a
bilateral basis, not trilaterally
– Very different political cultures; no sense of shared
history
• Deep political/partisan divisions within each
country
– George Bush’s unilateralist foreign policy has
lessened Canadian and Mexican interest in deeper
ties with the US
Political Obstacles to Further North
American Integration
• Free-market views enshrined in NAFTA
(“ideological lock-in”)
– Lasting influence of Mulroney/Salinas/Bush
administrations
– Ideological belief in relying on markets (“trade not
aid”)
– Resistance to public policy solutions to development
problems
• Official integration agenda is limited to trade and
investment issues (business perspectives
dominate)
– Now augmented by US “security” concerns
“NAFTA Plus”: Expanding the
Institutional Framework
• Certain business interests, governmental actors,
political activists (NGOs), international agencies,
and intellectual elites are promoting various
types of additional trilateral integration efforts
– Proposals vary according to interests and ideologies
• Various proposals include:
–
–
–
–
–
–
customs union
monetary union
labor rights/environmental standards
migration reform
framework for intergovernmental policy coordination
development assistance funds
• For example:
Independent Task Force Report:
“Building a North American Community”
(May 2005)
• Sponsored (but not endorsed) by
– US Council on Foreign Relations
– Consejo Mexicano de Asuntos Internacionales
– Canadian Council of Chief Executives
• Members consisted of ex-government officials,
corporate & financial leaders, think-tank scholars,
academic experts, etc.
– Mostly center-right leaning with a few exceptions
• Proposes to create a “North American security
and economic community” by 2010
– Much less ambitious than the EU
– Less “bureaucracy” and institutions compared with EU
Caveats:
• These proposals are presented as an important
example, for information and discussion only
• I do not endorse all of these proposals, although
I think some have merit
• The report contains the task force’s majority or
consensus views
• The task force also had many dissenting views
from various perspectives (left/right, national)
• Warning: this sort of elite opinion can be very
influential!
Specific Recommendations of Task
Force for N.A. Community:
• Security issues:
– Common security perimeter and harmonized
border policies (emphasis on anti-terrorism)
– N.A. border pass for expedited passage of
individuals with security clearances
– Move toward freer flows of people in the long
run (deliberately vague what this means)
– Military and intelligence cooperation
– This is a reaction to post-9/11 US political/
military concerns, but also linked to trade and
migration issues
Specific Recommendations of Task
Force for N.A. Community:
continued
• Economic development:
– Mexico to rely primarily on domestic reforms and
initiatives
– US and Canada to fund a “North American
Investment Fund” for Mexican development
• Focused on infrastructure and technical education to attract
private capital
• Conditioned on Mexican reforms and financial contributions
– Enhanced capacity for the NADBank
– Further opening of the energy sector especially in
Mexico
• But no commitment to privatization of PEMEX
– Emissions controls and conservation efforts (weak
exhortations)
Specific Recommendations of Task
Force for N.A. Community:
continued
• Deeper economic integration efforts
– Common external tariffs on individual goods (but not a
complete customs union?)
– Review NAFTA exclusions
– Permanent N.A. tribunal for dispute resolution
– Joint approach to unfair trade practices (very vague)
– Trinational competition (anti-trust) policies
– Greater harmonization of domestic regulations
– Increased labor mobility, including temporary migrant
worker programs, eventual North American
preferences in employment, full labor mobility
between US and Canada (but delayed with Mexico)
– Greater educational cooperation
Specific Recommendations of Task
Force for N.A. Community:
continued
• Political framework
– Regular trinational summits and intergovernmental
consultation
– A permanent North American Advisory Council (with
members appointed by the 3 governments)
– No politically representative or democratic bodies
(e.g., no elected N.A. parliament or congress)
• All of this seems to represent a consensus view
of what is considered politically feasible in North
America in the near future (post-Bush and Fox?)
Conclusions
• The official N.A. integration process
(NAFTA) has largely ignored North-South
issues, lacks a developmental agenda
– Also neglects labor migration—or allows it to
be regulated by unilateral US border policies
– Undemocratic process largely geared to
business interests and US priorities
• There has been no convergence of Mexico
with the US and Canada in the 11 years
since NAFTA went into effect
– Some indicators show a slight divergence
Conclusions (continued)
• Limited gains to Mexico in trade and FDI have
not fostered rapid enough growth to solve the
country’s employment problem
– Both structural obstacles and macroeconomic
constraints have impeded rapid growth
– Result is continued out-migration and increased
reliance on remittances
• Mexican society is also becoming more unequal
– There is a growing North-South divide and a rising
“skill premium” within Mexico
– Sectors, regions, and interests positioned to benefit
from the global/regional economy have prospered
(relatively) while other parts of the domestic economy
have suffered dislocations and declines
Conclusions (continued)
• North America is sufficiently integrated that regional
cooperation is essential to solving continental problems
• Yet political obstacles have prevented a European-style
approach to promoting convergence of less-developed
regions
• Mexico does need more domestic reforms (strengthen
democracy, rule of law, transparency, justice system,
anti-corruption efforts)
• Global developments (e.g., WTO, China, other FTAs) are
undermining Mexico’s special preferences in the US
market and US preeminence in Mexico
• Yet NAFTA commitments restrict Mexican policy makers’
ability to manage trade and investment in the national
interest
The Road Forward:
NAFTA Plus What?
• Status Quo: free trade and investment, no social
integration or development aid
• Deeper Economic Integration: improve borders
and infrastructure, move toward a customs
union, common market, and/or monetary union
• Social NAFTA: migration reform, development
assistance, labor/environmental cooperation
• US Strategic Interests: energy, security
• A North American political community
– what kind of community, and whose interests will be
served?