As the ten-year anniversary of the North American Free Trade Alliance (NAFTA) passed a few weeks ago, Americans found themselves asking this question: did it work?
So far, the evidence suggests, we have benefited little from NAFTA. The flow of trade and investment has indeed increased; the ratio of United States trade with Canada and Mexico to its total trade has grown from one-fourth to one-third. However, sheer amount of exchange is a weak measure of progress. NAFTA has destroyed US manufacturing jobs, promoted “brain drain” from the United States as companies move abroad, and increased our dependence on foreign imports. The US trade deficit with Canada and Mexico - the ratio of imports to exports - has grown significantly in the NAFTA years, and estimates of jobs lost because of NAFTA range from 700,000 to nine million. Most of this is a result of relaxed trade relations with Mexico; Canada, whose economy is much closer to being our equivalent, has not played a large role in these losses. The bottom line is that NAFTA has benefited individual companies by making it easier to tap cheap Mexican labor and has left those not blessed with capital and an entrepreneurial spirit behind, at the mercy of government subsidies and retraining programs.
Some have made the argument that lost jobs in manufacturing are being replaced by jobs created in other sectors. This may be true; however, the new jobs are mostly high-profile, biased towards individuals with not only high levels of training but also sheer talent. These jobs are poor substitutes for a significant proportion of the population. It is also true that, NAFTA or no NAFTA, technology will soon make the menial aspect of manufacturing obsolete, forcing current factory employees to look for other work anyway. However, the rapid switch to cheap foreign labor does not give enough time for most people to transition, to retrain or to train their children in more sophisticated professions: it brings down wages, while education costs have only been getting higher.
How about the long run? A significant effect of free trade is to encourage each nation to emphasize the production of goods and services in which it has a comparative advantage-– that is, which it can produce at a cost whose ratio to the costs of producing other goods is lower in that nation than in others. This means increased specialization and dependence on a limited number of industries. This specialization may be only temporary; however, it is reasonable to expect a fairly long phase in which nations will be highly specialized. We can already see specialization happening under NAFTA as Mexico relies more and more heavily on manufacturing and assembly, while the United States relies on service industries. While, economically speaking, this may be efficient, it is a rather precarious position for any nation in a world of not just economic, but also political competition. Dependence on foreign fuel has severely impaired our ability to deal effectively with threats from Middle Eastern nations and terrorists; dependence on foreign manufactured imports from certain nations may turn out to be dangerous in a similar way. While mutual dependence can be a good bargaining position, being independent and depended upon is infinitely better—and that status, which we have held with respect to most nations for the last several decades, is endangered by free trade.
Are the apparent failures of NAFTA so far, and the worrisome foreign policy prognosis, temporary features or reason to give up on free trade altogether? The goal of free trade is the creation of a more globalized economy-- pulling other nations up to our level of wealth and commercial sophistication with the hope that eventually trade will become truly mutually beneficial. Ultimately this would mean effective dissolution of all borders and the disappearance of economic and political enmity between nations. More immediately, an optimal free trade situation would effect similar wage rates in all nations involved. Until similar wages are achieved, job loss will be a sacrifice on our part rather than a worthwhile bargain.
A bit of sacrifice for the sake of world prosperity may not be so bad-- more so than any other nation, we can afford it. However, sacrifice is meaningless if there is no chance for improvement. What are the real prospects of wage equalization through free trade? Representative Richard Gephardt argued ten years ago that NAFTA will do little to benefit Mexico-- one of its prime stated goals. With government constraints on wage increases, meant to attract investment by keeping labor cheap, free trade by itself would not benefit the majority of Mexican workers. Mexican law and law enforcement must be reformed before the sheer volume of trade can have any effect. Indeed, ten years into NAFTA, Mexican wages have not risen (and in fact have decreased in proportion to US wages). Moreover, by loosening trade restrictions the United States has given up a prime tool for coercing the Mexican government into instituting legal reforms.
This issue becomes particularly relevant if we consider NAFTA a first step towards free trade with the entire world—including developing nations with lousy economies and lousier governments. Mexico’s most prominent sin so far is keeping its own people in poverty. But spreading the free trade policy may eventually require our workers to lose their jobs to nations guilty of far more serious human rights abuses and enmity towards the United States: free trade will mean little if restricted to the tiny handful of nations that have strayed fully clear of these offenses.
Is it reasonable to expect that the accumulation of opportunity and wealth spurred by free trade will eventually lead to a regime with improved economic and human rights policies and improved attitudes towards the United States? The answer is no. An improved economy merely convinces a nation’s politicians that their actions have been beneficial. In a corrupt regime, wealth accumulating from free trade benefits only business tycoons; it does not trickle down to the hard-working among the poor, kept down by artificially low wages, high taxes, or other forms of market distortion. Thus, free trade does not enhance small-scale entrepreneurship and social mobility, which are prerequisites for making any nation a good partner in free trade.
Ultimately, free trade is about carefully chosen, responsible partnership. A government must understand the prerequisites of free trade and be willing to do good by its own people, and by those allies willing to take an economic risk, before it can become a worthwhile partner. NAFTA supporters did not recognize that the Mexican government, with its destructive wage policies, failed to meet these criteria, and rushed on with a free trade policy. They were wrong—- and we are lucky that the resulting damage was not more significant.
Lia Oksman is a sophomore in Tumbull College.