NAFTA and Mexico: Where did it all go Wrong?

The US presidential race have frequently discussed the opposition to free trade. Dean Hochlaf analyses the NAFTA (North American Free Trade Agreement) and discusses its implications on development.

The surge of support for Donald Trump and Bernie Sanders in the US presidential race, has exposed the extreme polarization of American society. However, despite the chasm between the two radically different candidates, there is one recurring theme which is emanating from both campaigns. That is the growing opposition to trade, and in particular the North American Free Trade Agreement, the free trade deal between the USA, Canada and Mexico.

The assertion is that this deal and trade in general have been devastating for the American worker. Theoretically the purpose of trade is to allow nations to specialise in an area of production where they have a comparative advantage, the good that they produce at the lowest opportunity cost. They then trade the surplus, and both nations enjoy more of each good at a lower cost. However, in reality, trade can create losers. With lower labour costs and relaxed regulations, it became more profitable for American corporations that specialised in labour intensive manufacturing, to relocate production facilities to Mexico, and sell the finished goods in US markets. The belief that this is responsible for the decline in once thriving industrial centres, has been a source of discontent for American voters. However, despite the rhetoric of presidential candidates, and the appeals to mercantilism, one strand from the debate is missing. How have these deals impacted Mexico?

Woody Wood / Creative Commons License

Woody Wood / Creative Commons License

 

Evidence suggests, that whatever grievances Americans are expressing as a result of NAFTA, it pales in comparison to the negative consequences the trade deal has had for Mexico. If the purpose of trade is to improve economic performance by improving efficiency, then NAFTA has failed for Mexico. Per capita growth has stalled to just over a percentage point, wages have fallen and unemployment has risen. National poverty is at almost the same level since the deal was struck in 1994, whereas in South America we have seen significant reductions.

A large reason for this, is although Mexico has more favourable conditions for labour intensive production, it still isn’t a viable competitor to the USA. American farmers, for example, benefit hugely from state subsidies. They are able to sell cheaper food produce south of the border, thanks to the free trade deal, and this has driven Mexican producers out of business. Unfortunately, the cheaper production has not been reflected in consumer prices which have risen. The UN has advocated a state of emergency, to deal with the malnutrition and obesity epidemics which have subsequently plagued Mexico, and which have plunged 19 million Mexicans into food poverty. Mexican agriculture has been left devastated by NAFTA.

Manufacturing fares better in terms of growth, but industrial production hasn’t been kind to Mexico either. Industrial activity with little regulation has had negative repercussions for the environment, with pollution contaminating rural areas and rivers, which are a source of important natural resources. The lack of labour laws and diminished union powers has harmed Mexican workers. Despite productivity rising by almost 50% since the advent of NAFTA, real wages have declined. This in turn is stimulating an exodus from Mexico to the United States, which only serves the cynical agenda of populist demagogues who use xenophobic and racist rhetoric to demean Mexican workers as a means of winning votes.

Jim Winstead

Jim Winstead / Creative Commons License

 

The presence of large, powerful US corporations has also altered the political economy of Mexico. NAFTA was signed in the aftermath of the dissolution of the Soviet Union and the symbolic triumph of free markets. Even capitalist theories, such as Keynesianism, which advocates government intervention to correct market failure, were in decline. The political, social and economic environment of the subsequent two decades were unfavourable to policies which encouraged interventionist practices. This prevented the Mexican government from implementing appropriate regulation or even making purchases to save flailing industries.

It is unfortunate in the current climate of American politics, that it is politically expedient to only reflect on domestic hardships. It doesn’t bode well for international relations when a nation only looks inwards. Trade, if implemented well, can be a crucial tool in the development process which benefits both the developing and developed world. Rushing through trade reform, or only assessing the impact of reform on a singular party does not lead to a prosperous economic environment. There is now, a clear need and desire for changes to NAFTA, so that it starts working in the interest of the wider economy and population. If these changes are made as an appeal to American populism, rather than as a sincere attempt to ensure economic benefits are spread to the people of Mexico, it is difficult to see how NAFTA will be a viable trade framework in the near future.

 

 


The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.

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