April 4, 2008

Democratic Primaries: The Resurrection of NAFTA as a Cause Célèbre

By Larry Birns and Shannon Holdeman

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.

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.

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.

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.

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.”

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). 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.

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.

This analysis, which was edited down for space considerations, was prepared by The Council on Hemispheric Affairs Director Larry Birns and Research Associate Shannon Holdeman. The Council on Hemispheric Affairs is an independent, non-profit, non-partisan, tax-exempt research and information organization. For the full article visit: www.coha.org.

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