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NAFTA: Off with the rose-colored glasses

When economists make long-term predictions, turn a skeptical ear. Few such forecasts hold up. That's certainly the case with the North American Free Trade Agreement, the US-Canada-Mexico deal that took effect, with great fanfare, in 1994.

In the political battle for its approval by Congress, pro-free traders used glowing terms. There would be great economic blessings for the US. It would be better than truffles.

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But NAFTA actually was a risky experiment. Most previous free-trade deals were between similar nations, such as Canada and the US, or the industrial nations of Western Europe.

NAFTA rapidly unites the markets of two wealthy nations and one populous, poor, low-wage, developing country. Mexico has 102 million people. Its labor force grows by 1 million a year, mostly youths, often desperate to find work. Mexico's national output is just 1/25th of the US.

The agreement also deregulated investment between the three nations.

Six years later, NAFTA has not met the rosy forecasts. At the AFL-CIO convention in Los Angeles last week, critical trade union leaders were, in effect, saying, "I told you so." Delegates shouted, "No more NAFTAs."

Charles McMillion, a consulting economist in Washington, spells out some NAFTA failures in a new report:

*NAFTA enthusiasts insisted the agreement would create good jobs in the US by providing the US a total trade surplus in goods with Mexico of $50 billion in its first six years. They ridiculed doubters. In fact, the US piled up a six-year trade deficit with Mexico of $93 billion.

*Because of shrinking tariffs, the US would have a big trade advantage in Mexico in competition with other nations, NAFTA advocates said. This would assure US trade surpluses.

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Not so. The US has accumulated $118 billion of red ink in the past six years on its current account with Mexico - a measure that includes services such as tourism and trade in goods. Other nations, in contrast, enjoy a current account surplus of $190 billion.

*Because of the net loss in exports to Mexico, the US has seen 378,000 higher-wage, goods-producing jobs disappear, replaced by service jobs paying 38 percent less. A "proper accounting" for jobs lost to the maquiladoras in Mexico and for intra-firm trade by US multinationals would boost the job displacement to more than 500,000.

American firms are shifting production jobs to Mexico, where the minimum wage is the equivalent of $3.40 a day.

*In the 12 months ending in June 1999, Mexico exported 621,000 cars just to the US. US-based carmakers exported only 477,000 cars to the entire world. The US net export deficit with Mexico for cars, light trucks, and parts may exceed $20 billion in 1999.

The US deficit with Mexico for computers and their components may reach $4.4 billion this year.

"Clearly a process that leads the US to specialize in cereals and seeds while moving away from autos, electronics, and computers ... is not a net positive for the US economy, its workers, or domestic producers," notes Mr. McMillion.

Pro-NAFTA economists employ a standard economic theory - that free trade means each nation produces and exports the goods or services where it has a "comparative advantage." They assure that much lower labor, environmental regulation, and other production costs in Mexico compared with those in the US are of little importance to American businesses because of higher US productivity.

McMillion calls that "obsolete theorizing." American multinational firms easily ship their modern technology to Mexico, quickly train Mexican workers, and pay a pittance.

"Mexico is not Canada or Europe, and it is preposterous for economists and politicians to ignore the massive differences in conditions and commercial patterns," McMillion argues.

Indeed, Mexican manufacturing wages were 85 percent below those in the US in 1983, 90 percent less in 1998. Real competition, plus threats of plant relocations, depress US wages, he says.

Oddly, NAFTA hasn't stopped Mexicans from suffering from the 47 percent devaluation of the peso in 1994-95 and the accompanying Mexican banking crisis. Mexican wages fell 20 percent below pre-NAFTA levels.

And, in McMillion's view, the $50 billion US stabilization loan and the subsequent Mexican government bailout of Mexico's financial system saved the financial skin of foreign lenders more than that of Mexicans.

Is this all water over the dam?

No, the Clinton administration wants to widen free trade in Latin America.

To ignore the Mexican experience and lurch ahead with new deals is "a recipe for even deeper and wider trouble," McMillion holds.

*David R. Francis is senior economic correspondent for the Monitor.

(c) Copyright 1999. The Christian Science Publishing Society

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