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Free Trade and NAFTA
Theory versus Reality
Dennis C. McCornac, PhD.
Sellinger School of Business
Loyola University Maryland
Baltimore, Maryland
[email protected]
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WHAT FREE TRADE THEORY SAYS
SHOULD HAPPEN
• Making things in one country and selling
them in another makes both better off
• In the best case
Countries consume
goods they couldn’t
otherwise make
o Countries could specialize in what they’re more
efficient at producing what they do best, creating
jobs and raising wages
o
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Model of Free Trade
The assumption is made that in a system with open and free
markets, the economy will operate more efficiently with a
higher level of overall prosperity.
How does it Work ?
The principle of comparative advantage. The ability of a firm
or individual to produce goods and/or services at a lower
opportunity cost than other firms or individuals.
A comparative advantage gives a company the ability to sell
goods and services at a lower price than its competitors and
realize stronger sales margins.
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Understanding the Boring Stuff
Employing the principle of comparative advantage will allow economic
specialization and therefore greater economic efficiency.
Not only will producers be experts at which they do, but they will also
accrue more profits.
With people paying less for higher quality goods, they have money to
buy more things.
With more money in circulation, more firms will succeed.
With more firms succeeding, more taxes will be available to
infrastructure, helping firms reduce costs, have better workers, & obtain
more materials.
Promotes economies of scale.
Open markets will assure competition among efficiency producers,
assuring the lowest possible prices at the highest.
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The Good and the Bad of Free Trade
Free trade generates winners & losers.
Whether it leads to greater general prosperity depends
at least to some degree on interpretation of data.
Disparities in income increase.
The powerful may gain inordinately at the expense of the
powerless.
Majority of power rests in the hand of multinational
corporations and rich countries
Minimize opportunities for vulnerable producers and
sometimes degrades the environment
Focuses of short-term profits; evades the full costs of
commerce, and overlooks the plight of marginalized
people and the environment
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Benefits
• Global trade has clear benefits
• Developing countries can
provide new, valuable markets
for goods, services produced by
developed countries
• Technology, services, money
from developed nations can
improve public services, raise
standard of living of developing
countries
Anti-Globalization
• Opponents argue process benefits
wealthy developed nations at
expense of developing nations
• Free trade encourages practices
that exploit workers, destroy
environment
• Some promote fair trade, like fair
trade coffee movement
guaranteeing fair prices to coffee
bean farmers
“...the misery of being exploited by capitalists is nothing compared to the misery of not being
exploited at all.” ~Joan Robinson
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Point-Counterpoint: North American Free
Trade Agreement
Supporters of NAFTA
• Opened new markets for
the three countries.
• Competition of lowerpriced goods produced
in Mexico forces down
the price of goods
produced in the United
States and Canada;
thus, U.S. and Canadian
consumers “win” with
lower-priced goods.
Critics of NAFTA
• Primarily opened new markets
for Mexico and Canada.
• Low labor costs in Mexico and
lower-priced goods in the
United Sates and Canada
cause U.S. and Canadian
companies to move their
production
operations
to
Mexico; thus, thousands of
jobs are lost (“exported”) to
Mexico, hurting employment in
the United States and Canada.
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Point-Counterpoint (cont’d)
Supporters of NAFTA
Critics of NAFTA
• Creates thousands of • Many of the jobs created are
low paying and are U.S.jobs in Mexico. Cities
owned companies employing
and towns in northern
Mexican workers near the
Mexico,
where
the
border to cheaply assemble
majority
of
NAFTAproducts for export to the U.S.
related
production
This grew to 30% of Mexico's
(maquila) takes place,
labor force. These workers
enjoy much higher living
have "no labor rights or health
standards and higher
protections, workdays stretch
out 12 hours or more
rates of employment
than most other parts of
the country.
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Point-Counterpoint (cont’d)
Supporters of NAFTA
• Strengthens
Mexican •
environmental conditions
through
environmental
side
agreements
negotiated along with the
primary trade agreement,
resulting in a healthier
environment for Mexico
and especially the border
region;
reverses
environmental damage on
the U.S. side of the border.
Critics of NAFTA
The
side
agreements
negotiated with NAFTA fall
far short of strengthening
environmental
laws
and
enforcement in Mexico. U.S.
companies
are
further
attracted to relocation in
Mexico
due
to
lax
enforcement.
NAFTA
protects
the
companies’
rights to free trade over the
rights of people living in
areas polluted by factories
and
other
production
facilities.
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BUT THAT’S NOT WHAT HAPPENED
WITH “FREE TRADE”
• Home-grown industries in developing
countries like Mexico were wiped out by
having to compete with imports produced
by multi-national corporations
• Good jobs were lost and replaced by bad
jobs that often paid less
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To Summarize ….
IN POOR countries
 Unemployment increases as free
trade destroys home-grown jobs
 Foreign capital converts good jobs into
non-union low wage bad jobs
 Wages grow slowly, if at all, and may
actually fall as competition increases
with even poorer countries
IN RICH countries
• Corporations stop investing in job
creation go offshore
• Workers suffer as stagnant wages in
poor countries lower demand for
exports from rich countries
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NAFTA’s VICIOUS CIRCLE
Maquiladora
jobs double,
then decline.
Companies
develop Asian
supply chains.
Mexico’s
trade deficit
grows. More
workers
pitted against
each other.
Displaced
Mex. workers
flee to U.S. or
to Canada (as
guest
workers).
Displaced
workers
migrate to
maquilador
as …
Canadian & U.S.
manu-facturing
moves to
Subsidized
Mexico. Pits
U.S. grain and
workers against
meats
each other
dumped into
Mexico
2.3 million
Mexican farmers
forced off land.
Increased
unemployment
Mexican
lowers
manufacturing manufacturing
firms disappear wages.
increasing
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unemployment
NAFTA – THE RESULTS: BAD FOR US
AND CANADA, DISASTER FOR MEXICO
500,000 manufacturing
jobs lost. Increased
inequality. Stagnant
wages and job creation.
Roll-back of social
programs.
Millions of good (union) jobs
lost while only low wage and
contingent jobs created. Wage
suppression. Median wages in
formal economy $2.13 an hour
and in informal economy
$1.48. Now lower than China.
Labor rights eroded. Massive
out-migration. Poverty grows:
700-900,000 jobs lost.
Wages stagnant as
inequality grows. Rise
of contingent labor.
Labor rights eroding.
Costco in Mexico
sells tortilla chips
and salsa trucked
in from California.
Over 1,724
Wal-Marts
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Mexico’s Agriculture
• US farmers are being subsidized.
• Mexico farmers do not receive subsidies,
this…
– Puts downward pressure on Mexican Farmers
– Results in Dumping
• US Farmers selling below cost in Mexico because
they have already received subsidies.
• Results in Unemployment and Immigration to United
States
• Some claim as many as 2 million Mexican farmers are
out of business
• Immigration from Mexican Farmers has increased
since NAFTA.
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Mexican Employment
• Mexico
– Employment increased directly following NAFTA
introduction, but decreased over time.
• Many new jobs were in the Maquiladora area’s
– Agriculture sector specifically hit hard
– Estimated 28,000 small and med sized businesses
eliminated due to low cost producers.
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Environmental/Standard of living Effects
•Maquiladora - is a factory that imports materials and
equipment on a duty-free and tariff-free basis for assembly
or manufacturing and then re-exports the assembled
product usually back to the originating country.
• Maquiladora firms have approx. doubled since NAFTA
– 2,143 to over 3,703 currently
• This is a problem for NAFTA because Maquiladora’s are
notorious for having terrible low-pay working conditions.
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Maquiladora Working Conditions
•
•
•
•
•
Women especially discriminated against
Average wage is $1.00 per hour
Work 10-12 hours a day
Compared to sweat shops of China
Many are working to improve rights of
Maquiladora workers.
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Environmental Effects
• "We have no way to provide water, sewage,
and sanitation workers. Every year, we get
poorer and poorer even though we create
more and more wealth."
– Ciudad Juarez, Mayor Gustavo Elizondo
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http://www.pewhispanic.org/2012/04/23/net-migration-from-mexico-falls-to-zero-and-perhaps-less/
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LABOR RIGHTS NOT ENOUGH TO FIX IT
…
Investment is
free to move
from country to
country
destroying good
jobs faster than
labor can
organize
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The Next Step: TPP (Trans - Pacific Partnership)
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Selected References
1. Bacon, David (January 23, 2012) “How US Policies Fueled Mexico's
Great Migration.” The Nation. http://www.thenation.com/article/165438/howus-policies-fueled-mexicos-great-migration
2. Bacon, David (October 11, 2014). “Globalization and NAFTA Caused
Migration from Mexico.” Politicalresearch.org.
http://www.politicalresearch.org/2014/10/11/globalization-and-nafta-causedmigration-from-mexico/
3. Passel, J.S., D. Cohn, and A.Gonzalex-Bazzera (April 23, 2012). Net
Migration from Mexico Falls to Zero—and Perhaps Less.
http://www.pewhispanic.org/2012/04/23/net-migration-from-mexico-falls-tozero-and-perhaps-less/
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