The 1993 North American Free Trade Agreement (NAFTA) eased restrictions on commerce between the United States, Canada and Mexico by providing duty-free trade on multiple classes of goods and introducing new regulations to encourage cross-border corporate investment. Effects on the economies, companies and populations of all three NAFTA partners are significant. In this article, we'll outline both the positive and negative effects each NAFTA nation experiences.
Chapter 11 investment guarantees, which give investing companies certain guarantees of profitability and immunity from regulatory change, encouraged huge U.S. investments in Mexico and Canada after 1994. According to one study, foreign direct investment induced by NAFTA increased 70% in Mexico in 1994 and was up by 435% a decade later.
While the impact of U.S. investment in Mexico has been substantial, it is less than some had anticipated. Much of the trade between the two countries involved exporting U.S. parts to maquiladoras, the Mexican factories that sprang up near the border to take advantage of cheap labor. Workers would assemble the parts into goods, such as appliances, television sets and auto assemblies, then re-export the assembled products to the U.S.
Corporate investment in maquiladoras was expected to produce a Mexican middle class that would become a large market for U.S.goods. But the plan failed to live up to expectations, as skills and productivity lagged behind labor costs and jobs moved to China. U.S./Mexico truck-transport problems also raised costs for Mexican products coming to the U.S. (The middle class may be on the decline in the U.S. as well. Read Losing The Middle Class to learn more.)
To compound the problem, the migration of workers from Mexico City and further south in numbers not easily accommodated in small border towns produced overpopulated slums with high living costs for the Mexican workers. Nonetheless, some argue that the competition between Asia and the U.S. could have become worse without the temporary low-cost labor available to U.S. companies in Mexico.
Because of all these issues, the effects of NAFTA were largely negative for Mexico. The increase in the middle class was insignificant and many of the original NAFTA jobs went to Asia. The concentration of workers at the U.S. border had deleterious effects on the close-knit Mexican family structure because the living conditions in the border towns did not support more than single-worker residence. While some jobs remain in Mexico, the county has yet to realize the full benefits of the agreement.
Canada has so far experienced significant benefit from:
- U.S. investment in automotive production,
- Increases in oil exports to the U.S. and the rest of the world,
- Increases in shipment of beef, agricultural, wood and paper products to the U.S.
- Export of mineral and mining products, which have fared well in U.S. markets.
Canada has, however, experienced some losses in narrow sectors such as specialty steel production and processed foods due to U.S. imports.
Cities such as Windsor, Ontario, profited from being close to Detroit, where automotive parts and assembly facilities developed on both sides of the border. The eastern and western parts of Canada benefited from NAFTA re-export, as well as from increased traffic through their ports.
U.S. investment provided higher-paying jobs in the automotive, agri-business, energy, aerospace and transportation sectors, among others. This added to the ranks of the Canadian middle class and increased the level of secondary education in the population. It also provided jobs for the wave of immigrants from India and Pakistan who are currently residing in Canada.
U.S. economic winners and losers under NAFTA vary with company size, type of industry or sector, and geographical location. Sectors affected positively include planes, trains and automobiles, large agri-businesses, appliance makers and energy corporations. Clearly, large multi-national companies with investment capacities, world-market savvy and capital resources have benefited from protected investment and cheap labor. These companies enhanced management performance-based compensation while putting downward pressure on production-worker wages and benefits, collective bargaining clout and available jobs, especially in manufacturing. Many view their actions as a major contributor to compensation inequality. (To read more about how income inequality is determined, and its importance, read The Gini Index: Measuring Income Distribution.)
With their lack of internal resources, small regional businesses are not offered the same opportunities by NAFTA, and in fact, the agreement makes them more vulnerable to the concentrated local effect of a multi-national competitor. U.S. manufacturing, often in concentrated geographical areas, suffered large business and job losses as NAFTA cast a shadow over any labor-intensive process that is not highly automated.
While much of the economy experienced gains, the concentration of losses in regional geographical pockets impacted by inexpensive Mexican labor sharpened the blow for many people. The availability of Mexican labor suppressed real wages, reduced benefits and limited collective bargaining power for production workers in the U.S. According to one estimate, workers in Canada and Mexico have displaced 829,280 U.S. jobs, mostly high-wage positions in manufacturing. The heaviest U.S. manufacturing-job losses were in states such as Ohio, Michigan, Pennsylvania, New York, North Carolina, Texas, Connecticut, New Jersey, California, Indiana and Florida. NAFTA proponents, however, argue that increased sales to Canada and Mexico made possible by the agreement have created new jobs and raised incomes in the U.S. overall.
The long-time growth in the U.S.trade deficit accelerated dramatically after NAFTA became effective in 1994. According to the Bureau of Labor Statistics, the $30 billion U.S. trade deficit in 1993 increased 281% to an inflation-adjusted $85 billion in 2002.
Despite a growing trade deficit, a report from the Office of the U.S. Trade Representative categorizes the trade effects as positive:
- Between 1993 and 2006, trade among NAFTA partners climbed 197%, from $297 billion to $883 billion.
- U.S. exports to NAFTA partners grew 157%, versus 108% to the rest of the world in the same period.
- Daily NAFTA trade in 2006 reached $2.4 billion.
- U.S. manufacturing output rose 63% from 1993-2006, compared to an increase of 37% from 1980-1993.
While NAFTA's overall financial impact has been generally positive, it has not lived up to the high expectations of its proponents. It has made many U.S. companies and investors rich - and their managements richer. But it has also cost many U.S. manufacturing workers their livelihoods while failing to raise living standards for most Mexicans. Any major market changes not dictated by market forces usually lead to both opportunity and loss, and this has happened with NAFTA.
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