Democratic Primaries: The Resurrection of NAFTA as a Cause Célèbre

• In spite of the at times deceptive salesmanship, NAFTA has never been a win-win situation.

• Bill Clinton’s legacy as the prime NAFTA pusher comes back to haunt Hillary.

• The contention that NAFTA will be heavily modified, if not dropped, is more “pie in the sky,” with the more likely political template, being that once victorious, either one of the Democratic primary contestants will be disinclined to roil the waters with a fight over the pact.

• Some comments on Cuban trade

Presidential candidate Hillary Clinton repeatedly tells the nation that she always has been wary of NAFTA, and would be prepared to suspend compliance with the trade agreement, if need be, should Canada and Mexico oppose reopening the pact to a new round of negotiations. Candidate Obama, while speaking in the same vein, has been less specific, if anything, than even Clinton in calling for the revision of NAFTA. If Obama is occasionally muddled on the free trade issue, he at least is not revising history when it comes to NAFTA, as has been the case with candidate Clinton regarding her own as well as her husband’s record on the subject. On a number of occasions in recent weeks, she has been insisting that she always has been against NAFTA, in spite of the record contradicting such claims. The embarrassing fact is that, over the years, on a number of occasions, she has spoken in support of the trade pact, stressing its importance to the American economy.

Regarding Cuba, Hillary Clinton has insisted that she would not be prepared to enter into discussions with Havana unless a number of pre-conditions were met, including Cuba’s adoption of an open market system. Her critics will attack her on this point, on the grounds that no nation has the right to mandate what economic system or trade policies another nation should embrace unless it has freely affiliated with such a proposal and is not violating its previously established pledges. Cuba has made no such commitment to U.S.-style free trade. In fact, throughout Latin America, there is a distinct counter-trend in the direction back to the region’s traditional economic model, which features a mixed economy composed of strong public and private sectors.

Bill Clinton—NAFTA Man
It was the Clinton administration who single-minded wielded an axe against this traditional Latin American model. With the demise of the Soviet bloc in 1990, the Clinton White House insisted that the era of ideological strife was over and that it had now been succeeded by the dominance of trade issues which would provide a welcomed propellant for future regional relations, and that free trade would provide a win-win situation for all parties. But, in fact, this turned out to be wishful thinking or fudging economic realities. Certainly, there was no question that at the time it was first proposed, NAFTA was at the center of the Clinton White House’s Latin America trade policy.

But, reminiscent of her trip to Kosovo, candidate Clinton has a different memory of what had happened with NAFTA—embarrassingly so. Her flawed memory—as given to Bloomsberg news service—that it was George H. W. Bush who introduced NAFTA and that her husband merely ushered the legislation through congress. While in an interview with Time Magazine, she maintains that “NAFTA was inherited by the Clinton administration.” She does acknowledge in her Bloomsberg interview that NAFTA was “pushed through Congress by the Clinton administration,” as reported by the San Francisco Chronicle. However, be it at Davos or in other settings, candidate Clinton made it clear that she had no problem with NAFTA. Meanwhile, rather than merely “inheriting” the proposed NAFTA legislation from the first Bush, Bill Clinton, in fact tirelessly, if not fiercely advocated NAFTA, making it the trophy piece of his legislative calendar. He frantically worked the phone to the Hill even though he was unable to win a majority of Democratic legislators (102-156) to back this essentially Republican-inspired piece of legislation. No wonder that the victory of NAFTA at the end of 1993 brought more corporate jets parking at National Airport than at any other time in the history of that Washington facility.

Since its implementation in 1994, NAFTA has been the subject of intermittent, if heated debate by those in favor and those opposed to the trade pact. Neoliberal supporters have lauded it for expanding Mexico’s commercial sector and have attributed the wage increases since witnessed in that country to NAFTA’s functioning. Critics, on the other hand, have attacked the agreement, saying that it has mainly benefited its two developed members—Canada and the U.S.—and that it has helped inflate the international inequality gap. While there are those who insist that NAFTA critics are distorting NAFTA’s utility, the question still remains whether or not it has been a boon to the average Mexican worker, and part of the cause of the country’s grossly underperforming economy. The labor debate has been centered around factory labor and the characteristics of the manufacturing industry. An important aspect of NAFTA is that 1994 was not the beginning of the free market system. The maquila system was initiated years before NAFTA came into effect and it may be useful to investigate its record of success (there were also failures) as opposed to NAFTA’s. Additional areas of interest are whether the maquila had a relatively better record at job creation than NAFTA, and whether it should have been awarded more resources and emphasis by the NAFTA nations.

The Maquila System
The Maquila system was initiated in the 1960’s to fill the employment void created by the ending of the Bracero program. During the World War II years, the Bracero program allowed for the seasonal migration of thousands of Mexico’s agricultural workers to the U.S. to cover the domestic farm workers shortage. The maquila idea was a component of the government’s Border Industrialization program, which was initiated in 1965. It was intended to stimulate employment within Mexico and find an alternative to dependence on migration to the United States. The rules of the system were as follows: “maquiladoras could temporarily import raw materials, capital equipment, and replacement parts free of duty, provided they were re-exported” (MacLachlan and Aguilar 317). As long as the final product was exported again, manufacturers and subcontractors could freely import unfinished goods tax free for further production, which would be done by the Mexican labor force.

The problem with the maquila program is that it has served as an almost completely isolated system. There are very few backward and forward linkages with the domestic Mexican economy. As Gonzáles-Aréchiga and Ramirez assert, the transfer of technology beyond the plant’s gate is minimal. Mexico’s maquila system could be better categorized as a component of the international production system rather than as an intrinsic function of development for the Mexican economy. The international companies that export production to Mexico maintain control, and the “relocation of operations to plants located in countries such as Mexico is because they offer fiscal incentives, government supports, and, essentially, workers who are cheap and docile” (Delgado-Wise and Covarrubias 660). Between 80 and 90 percent of the export value comes from the imported component and very little is integrated from the domestic Mexican economy. The benefits that Mexico gains from the maquila system are generally exclusively restricted to the wage earnings of the workers. This makes it impossibly difficult to cultivate a dynamic local economy when such a big portion of the rewards are gobbled up by the external owners. This series of consequences is now referred to as the labor export-led model. The Mexican labor force is being indirectly exported because although the people do not physically leave the country, other than wages, none of the yields of production come back to benefit Mexico.

The Development of the Maquila System
Maquila’s have actually been in decline since the 1980’s. They are stalling out now more than ever due to various reasons. Mexico has a strong peso and this increases costs for the many external firms inclined to take advantage of the maquila system. Secondly the economic slowdown in the United States is having multiple repercussions. The decreasing value of the dollar exacerbates the first problem and secondly, multiple U.S. plants are closing. Around 350 maquila plants closed in a year and a half period due to the U.S. recession in 2001. Nearly 240,000 Mexicans, or one-fifth of the industry’s workforce were left out of a job; this trend is likely to continue. Mexico will slowly lose its place on the production frontier. The Asian Tigers, and soon increasingly Africans, will have the undisputed comparative advantage of a highly skilled labor force that is willing to work for scarcely better than slave wages. They also have gained competitive advantages by coming full circle with the manufacturing process, with capacities for production, packaging and shipment, while Mexico is not sufficiently diversifying its production process, at its loss.

When is “cheap” not enough?
Whether or not a given industry in Mexico is modernizing may make little difference in the long run. Latin America in general cannot continue to successfully market cheap labor as a reason for investment. The region undoubtedly will be beat out by its eastern competitors. According to a thesis found in the popular study Fair Growth Economic Policies for Latin America’s Poor and Middle-Income Majority, by well-known economists Nancy Birdsall, Augusto de la Torre and Rachel Menezes, China’s share of exports leaped ahead under the third phase of a WTO agreement on textiles, and the export of its finished garments grew from 15 to 45 percent between 2001 and 2004. India and Pakistan also saw increases in the 20 percentile ranges, but “Mexico’s exports of the same products dropped 11%, and CAFTA saw an overall decline of 5.5% in exports in this category.” Its industry will have to find a new development or market strategy but this will be hard without some sort of protectionism. Seeing as how the bulk of the technology and resources are concentrated in the U.S. Canada, any dispassionate observer would have to worry about a developing country successfully finding a niche in the global market.

Granted, NAFTA has brought business to Mexico. Acknowledging that one cannot applaud the agreement for advancing the technological expertise of the sector is the task of Carlos Salas, who, in his article, The Decline of a Decent Job, asserts that “In 1980, 80% of FDI was directed to manufacturing. In 2004 this proportion was only 52%, and limited to a small number of industries. In the manufacturing sector itself, 31% of non-maquila manufacturing exports came from the automobile industry.”

Wages have increased slightly since the implementation of NAFTA, but they pale when placed in context with the amount of increased productivity and inflation rates. In 2003, the “International Labour Organization (ILO) has detected a ratio of 1:11 between the earning of Mexican manufacturing workers in general (direct maquila, disguised maquila, and other industrial sectors) and workers in the same sector in the United States.” Another phenomenon that analysts have discovered in recent years is the increasing rate of precarization of labor. This is a condition that refers to increased employment insecurity, poverty, and social marginalization, which is staging a dramatic presence in Mexico as employment conditions deteriorate and wages cease to be able to sustain families. Of the supposed 2.8 million ‘work positions’ that were created between 2000 and 2004, 65% came without benefits and 49% of the hiring contacts were sealed by only a verbal agreement. The informal sector and micro enterprises with five or fewer workers are proving to be the best options for many Mexicans, however unsatisfactory they may be. Between 1988 and 2003, 50% of the jobs created in Mexico were in the informal sector and over the same period the number of poor households increased from 12.9 to 15.9 million. This shift in employment statistics may also be in part attributed to the fact that between 1980 and 2004 there was a 15.6 percent drop in manufacturing wages. These developments have underscored the institution behind the migration of Mexicans to the U.S.

Where have all the people gone?
“According to the United Nations Population Division, in the years between 2000 and 2005 a net annual average of 400,000 Mexicans left the country to set up residence in the United States” (Delgado-Wise, 2007). According to another article published in the International Migration Review author, Delgado-Wise, referring to labor issues, estimates “that 69.2% of the Mexican manpower was forced to seek employment in the so-called informal sector or directly in the U.S. economy.” Remittances to Mexico from the U.S. have been steadily increasing for many years, but the number of remitted dollars after 2001 has been increasing much more dramatically than ever before. Information from the Banco de Mexico in 2006 measures that in 2005 total remittances sent to Mexico equaled about 20 billion dollars. But this trend is not without its costs. A menacing problem social scientists have been discovering is that Mexico is now suffering from a significant brain drain. According to the National Employment Survey in 2002, the average schooling of migrants is greater than that of nonmigrants, reawaking a process whereby the national talent bank is being depleted.

Mexico, and not just its manufacturing workers, is in a very precarious situation today, and with the hostile-sounding campaign slogans that are being articulated by the two Democratic presidential candidates on the subject of NAFTA and the hurried references to the U.S.-Mexican immigration issue, bilateral ties between the two countries are not likely to witness much harmony in the near future. Presidential candidates Obama and Clinton have threatened, if need be, to suspend the application of NAFTA if Canada and Mexico are not willing to somewhat renegotiate its terms so that the United States will have more protections for its workers.

Mexico’s Maquila system is fast deteriorating, but if the U.S. insists on renegotiations aimed at getting back the manufacturing jobs lost in Ohio, Mexico is going to suffer much more dramatically and the U.S. as well may end up undergoing significant consequences. This is because if its relative wealth and mobility gaps increase any further—in spite of its own economic slow-down—no South-of-the-border walls of any height are going to keep Mexicans from reaching where they must go to get their living wage.

One thought on “Democratic Primaries: The Resurrection of NAFTA as a Cause Célèbre

  • March 31, 2008 at 7:34 pm

    Larry, once again you have it almost all wrong. In an early part of your article, you say “In fact, throughout Latin America, there is a distinct counter-trend in the direction back to the region’s traditional economic model….” You left out one word between “traditional” and “economic”. That word is “failed” – just as your hero in Venezuela is proving once again. (You would think after 400 years of dictatorship and economic failure upon failure, that you and the people of Venezuela would have learned something.)

    You really do not understand Mexico, starting with the old Maquila program, which was a very limited attempt at free trade, originally initiated illegally by some bold bordertown businessmen, and only reluctantly sanctioned years later by the corrupt PRI government in Mexico City. It was nothing more than a product assembly program, horribly exploitive of cheap Mexican labor. All production had to be sent back to the US. None of the production could be sold in Mexico, because before NAFTA, Mexico totally protected its own manufacturers (except for the automotive industry), made up entirely of fat cat political cronies, who produced inferior, expensive products and services. Is Mexico better after NAFTA? Of course it is. But to compete in the real world, Mexicans had to bring their business practices into the 21st Century. That took time, and resulted in laying off tens of thousands of needless workers left over from the days when our inefficient businesses were government owned or government protected. The banks in Mexico City alone eliminated 40,000 jobs after they were re-privatized. The very fact that Mexico has maintained its overall employment base and that wages have increased slightly during this process of “corporate right-sizing” is a testimony to the advantages of free enterprise.

    In the past few years, the Mexican economy has finally begun to mature. The peso has stabilized. Inflation is under control. Products and services are better and more cost effective. For example, private financial institutions in Mexico now offer 30 year, fixed rate home mortgages in pesos at 9%, and have expanded middle class home ownership for hundreds of thousands of families. In case you don’t know, no other Latin American economy has accomplished this privately funded boon to homeowners. Only a handful of sophisticated countries throughout the world have a privately funded home mortgage market. With this evolution in our financial services sector alone, Mexico has taken a giant stride into the First World.

    Wal-mart is now Mexico’s biggest non-government employer. They and other multi-nationals have been in the leadership of erasing the racist, classist hiring and promotion practices that plague Mexico and all of Latin America. Wal-mart is a meritocracy. They don’t care if you look like an Indian or who your father was. They just care about competence and hard work. Wal-mart and American companies like Wal-mart, by being equal opportunity employers, are actually precipitating the first meaningful social revolution in Mexico’s modern history.

    Wal-mart has not only vastly expanded the quality and choice of products available to Mexican consumers, they have brought down the prices and forced all of their competitors and suppliers to become more efficient. Mexico’s economic minister recently credited Wal-mart as being a significant factor in bringing Mexican inflation under control. He was wrong. It was not Wal-mart, it was the free enterprise system.

    People in the USA consistently misunderstand NAFTA. The American automotive industry was allowed to manufacture in Mexico before NAFTA, and many US consumer products were being assembled on the border. The US imposed no import duties on Mexico. But American and Canadian companies could not own businesses in Mexico or even sell to Mexico without incurring very high import duties. NAFTA OPENED UP MEXICO TO FREE ENTERPRISE. NAFTA in itself did not materially increase Mexico’s ability to take jobs from America, but did impose the beginnings of fair labor laws and a greater sense of environmental responsibility. And if the jobs had not gone to Mexico, they would have gone to China. And if American companies are denied the right to manufacture offshore, then the American consumers will all buy Toyotas or Lenovo computers and eventually there will be no more American companies.

    Mexico has a long way to go to recover from, as you say, its “traditional economic model” that tragically repressed its people and economy (along with the rest of Latin America) for centuries. However, Mexico is a far more civilized and sophisticated society than any of you gringos seem to understand, and people here are working hard to advance themselves by simply becoming more productive. NAFTA allowed American companies to do business in Mexico, and American companies have led the march in creating more and more economic opportunity for the vast majority of non-elite Mexicans. Thank you NAFTA.


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