The North American Free Trade Agreement (Nafta) was intended, among other things, to improve Mexico’s economy (and thus reduce illegal immigration). In fact, it worked to the detriment of Mexico. Joe Stiglitz analyses what went wrong.

Understanding why Nafta failed to live up to its promise can help us to understand the disappointments of trade liberalisation. One of the main arguments for Nafta was that it would help close the gap in income between Mexico and the US, and thus reduce the pressure of illegal migration. Yet the disparity in income between the two countries actually grew by more than 10% in Nafta’s first decade. Nor did Nafta result in a rapid growth in Mexico’s economy.

Growth during that first decade was a bleak 1.8% on a real per capita basis, better than in much of the rest of Latin America but far worse than earlier in the century (in the quarter century from 1948 to 1973, Mexico grew at an average annual rate per capita of 3.2%). President Vicente Fox promised 7% growth when he took office in 2000. In fact, in real terms, growth during his term of office averaged only 1.6% a year – and real growth per capita has been negligible. In fact, Nafta made Mexico more dependent on the US, which meant that when the US economy did poorly, so did Mexico’s.

Unfair trade

Not only did Nafta not lead to robust growth, it can even be argued that in same ways it contributed to Mexico’s poverty. Poor Mexican corn farmers now have to compete in their own country with highly subsidised American corn (though the relatively better-off Mexican city dwellers benefit from lower corn prices). A fairer trade agreement would have eliminated America’s agricultural subsidies and its restrictions on imports of agricultural goods, such as sugar, into the US. Even if the US did not eliminate all its subsidies, Mexico should have been given the right to countervail – that is, to impose duties on US imports to offset the subsidies.

But Nafta does not allow that. While it eliminated tariffs, it allowed a whole set of non-tariff barriers to stand. After Nafta was signed, the US continued to use non-tariff barriers to bar Mexican products that had begun to make inroads in its markets, including avocados, brooms and tomatoes. When, for instance, Mexican tomato exports to the US began to increase in 1996, Florida tomato growers pressured Congress and the Clinton administration to take action. If Mexico could be shown to be selling tomatoes below cost, it could be charged with dumping, and anti-dumping duties could be imposed. But Mexico was not dumping tomatoes. The reason that Mexico could be charged with selling below cost was because prices were measured in a deliberately lopsided fashion. Mexico did not want to risk a trial, so agreed to raise its price.

US consumers and Mexican tomato growers were hurt, but Florida tomato producers got what they wanted – less competition from Mexican tomatoes. The one part of Mexico’s economy that was successful, at least in the years immediately after Nafta, was the area just south of the border. So-called maquiladora factories sprang up, supplying US manufacturers such as General Motors and General Electric with low-cost parts. Employment grew 110% in Nafta’s first six years, compared with 78% over the previous six years. (Elsewhere, employment stagnated.) Advocates of Nafta are quick to take credit for these successes, while arguing that the failures are not Nafta’s fault and that matters would have been far worse without the agreement.

There is, of course, no easy answer to this sort of counterfactual argument, which supposes an imaginary alternative. But careful studies shed some light. One can ask whether, given the expansion of the US economy and the dramatic fall of real wages in Mexico after 1994 in comparison both to the US and to its competitors in Asia, one would have expected an increase in Mexican exports to the US comparable to what was observed. The answer, based on standard economic models, is yes. Nafta seems to have added little, if anything.

Equally telling is what happened after the first flush of Nafta. After the early years of growth in the maquiladora region, employment there also began to decline, with some 200,000 jobs lost in the first two years of the new millennium.

Some of the factors that had led to growth, such as the strong US economy, had waned. But there was a more fundamental problem. Not only was the US growing faster than Mexico in the years after Nafta, but so was China. Trade liberalisation is important for growth, but not as important as Nafta supporters had hoped. Nafta gave Mexico a slight advantage over other US trading partners, but Mexico, with its low investment in education and technology, has had a hard time competing with China, which invests twice as much (as a percentage of GDP) in research.

Focus on tariffs

Countries often hope that trade agreements will boost foreign investment and create jobs. But when companies make investment decisions they look at many factors, including the quality of the workforce, infrastructure, location, and political and social stability. Tariffs play only a limited role, as China’s success makes clear. By focusing on tariffs, Nafta diverted attention from other things that needed to be done to make Mexico competitive.

Indeed, reduced tariffs have created their own problems. Prior to Nafta, tariffs made up 7% of Mexico’s tax revenue; after Nafta, the figure dropped to 4%. Mexico’s public expenditures of about 19% of GDP – more than a third financed by oil revenues – are markedly lower than those of Brazil or the US, and are insufficient to finance needed public investment in education, research and infrastructure.

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