NAFTA Needs More Than Fine Tuning

Early this week President Clinton will deliver a report to Congress evaluating the first three years of North American Free Trade Agreement. The report is likely to praise NAFTA in general and salute the rapid growth of U.S. exports to Mexico in particular.

But workers at Johnson Controls in Milwaukee won’t be cracking open the champagne. The company told its 160 employees last fall that it was closing up shop and moving operations to Mexico. Not even a voluntary $2-per-hour pay cut or new ideas for productivity improvements would be enough to compete with workers earning $6 a day.

After more than three years of NAFTA, the results are far from promising. Overall, the U.S. trade deficit with Mexico reached a record $17.5 billion for 1996, surpassing the $15.8 billion recorded in 1995. While the peso collapse plays a role in these deficits, the long-term trends were clear before the implosion of the Mexican economy: Mexico is expanding as a site for cheap labor and stagnating as a consumer market for U.S. products.

NAFTA has accelerated these trends by guaranteeing security for investors during turbulent economic and political times. In contrast, Mexican workers have borne the brunt of a catastrophic economic adjustment and, given the increased integration of the two economies, U.S. wage earners likewise have felt a strong downdraft on their own paychecks.

What about the 23% jump last year in U.S. exports to Mexico that NAFTA proponents so frequently point to? This ostensible good news obscures a far-reaching change in the nature of U.S.-Mexico trade: The vast majority of U.S. export growth has been in “revolving door” exports--goods shipped to Mexico for assembly and then shipped back to be sold in the United States.

The value of these “industrial tourists” has more than doubled during the life of NAFTA and last year accounted for about two-thirds of U.S. exports to Mexico. To paraphrase Pogo, “We have met the market and it is us.”

Rather than reflecting Mexican consumers clamoring for U.S. goods, this export surge results from the rapid expansion of maquiladoras and other export-oriented assembly plants. When Guess Inc. moves 1,000 jobs from Los Angeles to Tijuana, for example, its L.A. suppliers ship their goods to Mexico, boosting U.S. exports.

Maquiladora employment alone has soared by 60% since NAFTA’s passage, from 550,000 jobs in November 1993 to 875,000 jobs in April 1997.

Mexican auto exports have also skyrocketed. Mexico exported 770,000 cars and trucks to the United States last year, more than double the pre-NAFTA total and more than the combined totals of Germany, South Korea, Sweden and the United Kingdom. In contrast, the U.S. exported about 91,000 vehicles to Mexico in 1996.

Despite a close to a 40% gain in manufacturing productivity since NAFTA was passed, Mexican workers have not shared in the gains. Hourly wages adjusted for inflation have plummeted by more than 20%, depressed by government policies to attract investment, employer collusion, few labor rights and the collapse of the Mexican economy. The minimum wage in Mexico is now about $3.30 a day, less than one-third its 1980 level. Income polarization rather than economic well-being for most Mexicans has accompanied that country’s current economic recovery.

What do low Mexican wages have to do with wage earners in the U.S.? On one level, maquiladora workers earning less than $1 an hour won’t be buying many Ford Tauruses anytime soon. Ironically, the inability of Mexican workers to share in their rising productivity throttles the very consumer market NAFTA was meant to open.

On another level, the threat of moving production to Mexico has become a growing factor in what Americans earn. In a study of 600 union campaigns, Cornell University researchers concluded that 62% of employers in manufacturing and transportation made threats to close all or part of their plants rather than deal with the unions, at times explicitly threatening to move to Mexico.

Trade is not a zero sum game and expanded trade between the United States and Mexico could clearly benefit both countries. The pattern of trade that has developed under NAFTA, however, reflects the strong investment and weak labor guarantees in the trade agreement itself. As a result, Mexico is moving more rapidly in the direction of becoming an export platform rather than a consumer market. NAFTA needs to be fixed before it can be expanded.