Thursday, September 15, 2005

The high price of 'free' trade

NAFTA's failure has cost the United States jobs acrSince the North American Free Trade Agreement (NAFTA) was signed in 1993, the rise in the U.S. trade deficit with Canada and Mexico through 2002 has caused the displacement of production that supported 879,280 U.S. jobs. Most of those lost jobs were high-wage positions in manufacturing industries. The loss of these jobs is just the most visible tip of NAFTA's impact on the U.S. economy. In fact, NAFTA has also contributed to rising income inequality, suppressed real wages for production workers, weakened workers' collective bargaining powers and ability to organize unions, and reduced fringe benefits.
NAFTA is a free trade and investment agreement that provided investors with a unique set of guarantees designed to stimulate foreign direct investment and the movement of factories within the hemisphere, especially from the United States to Canada and Mexico. Furthermore, no protections were contained in the core of the agreement to maintain labor or environmental standards. As a result, NAFTA tilted the economic playing field in favor of investors, and against workers and the environment, resulting in a hemispheric "race to the bottom" in wages and environmental quality.
False promises
Proponents of new trade agreements that build on NAFTA, such as the proposed Free Trade Agreement of the Americas (FTAA), have frequently claimed that such deals create jobs and raise incomes in the United States. When the Senate recently approved President Bush's request for fast-track trade negotiating authority1 for an FTAA, Bush called the bill's passage a "historic moment" that would lead to the creation of more jobs and more sales of U.S. products abroad. Two weeks later at his economic forum in Texas, the president argued, "[i]t is essential that we move aggressively [to negotiate new trade pacts], because trade means jobs. More trade means higher incomes for American workers."
The problem with these statements is that they misrepresent the real effects of trade on the U.S. economy: trade both creates and destroys jobs. Increases in U.S. exports tend to create jobs in this country, but increases in imports tend to reduce jobs because the imports displace goods that otherwise would have been made in the United States by domestic workers.
President Bush's statements—and similar remarks from others in his administration and from members of both major parties in Congress—are based only on the positive effects of exports, ignoring the negative effects of imports. Such arguments are an attempt to hide the costs of new trade deals, in order to boost the reported benefits. These are effectively the same tactics that led to the bankruptcies of Enron, WorldCom, and several other major corporations.
The impact on employment of any change in trade is determined by its effect on the trade balance, the difference between exports and imports. Ignoring imports and counting only exports is like balancing a checkbook by counting only deposits but not withdrawals. The many officials, policy analysts, and business leaders who ignore the negative effects of imports and talk only about the benefits of exports are engaging in false accounting.
NAFTA supporters frequently tout the benefits of exports while remaining silent on the effects of rapid import growth (Scott 2000). Former President George H.W. Bush, whose administration negotiated NAFTA, recently claimed that "two million NAFTA-related jobs have been created in the United States since 1993" (Bush 2002). But any evaluation of the impact of trade on the domestic economy must include the impact of both imports and exports. If the United States exports 1,000 cars to Mexico, many American workers are employed in their production. If, however, the United States imports 1,000 cars from Mexico rather than building them domestically, then a similar number of Americans who would have otherwise been employed in the auto industry will have to find other work.
Another critically important promise made by the promoters of NAFTA was that the United States would benefit because of increased exports to a large and growing consumer market in Mexico. This market, in turn, was to be based on an expansion of the middle class that, it was claimed, would grow rapidly due to the wealth created in Mexico by NAFTA. Thus, most U.S. exports were predicted to be consumer products destined for consumption in Mexico.
In fact, most U.S. exports to Mexico are parts and components that are shipped to Mexico and assembled into final products that are then returned to the United States. The number of products that Mexico assembles and exports—such as refrigerators, TVs, automobiles, and computers—has mushroomed under the NAFTA agreement. Many of these products are produced in the Maquiladora export processing zones in Mexico, where parts enter duty free and are re-exported to the United States in assembled products, with duties paid only on the value added in Mexico. The share of total U.S. exports to Mexico that is represented by Maquiladora imports has risen from 39% of U.S. exports in 1993 to 61% in 2002.2 The number of such plants increased from 2,114 in 1993 to 3,251 in 2002 (INEGI 2003a, 2003b).
Growing trade deficits and job losses
NAFTA's impact in the United States, however, has been often obscured by the "boom-and-bust" cycle that drove domestic consumption, investment, and speculation in the mid- and late 1990s. Between 1994 (when NAFTA was implemented) and 2000, total employment rose rapidly in the United States, causing overall unemployment to fall to record low levels. But unemployment began to rise early in 2001, and 2.4 million jobs were lost in the domestic economy between March 2001 and October 2003 (BLS 2003). These job losses have been primarily concentrated in the manufacturing sector, which has experienced a total decline of 2.4 million jobs since March 2001. As job growth has dried up in the economy, the underlying problems caused by U.S. trade deficits have become much more apparent, especially in manufacturing.
The United States has experienced steadily growing global trade deficits for nearly three decades, and these deficits accelerated rapidly after NAFTA took effect on January 1, 1994. For the purposes of this report it is necessary to distinguish between exports produced domestically and foreign exports, which are goods produced in other countries but exported to the United States, and then re-exported from the United States. Foreign exports made up 11.6% of total U.S. exports to Mexico and Canada in 2002. However, because only domestically produced exports generate jobs in the United States, our trade calculations are based only on domestic exports. Our measure of the net impact of trade, which is used here to calculate the employment content of trade, is the difference between domestic exports and total imports.3 We refer to this as "net exports," to distinguish it from the more commonly reported gross trade balance. However, both concepts are measures of net trade flows.
Although U.S. domestic exports to its NAFTA partners have increased dramatically—with real growth of 95.2% to Mexico and 41% to Canada—growth in imports of 195.3% from Mexico and 61.1% from Canada overwhelmingly surpass export growth, as shown in Table 1. The resulting $30 billion U.S. net export deficit with these countries in 1993 increased by 281% to $85 billion in 2002 (all figures in inflation-adjusted 2002 dollars). As a result, NAFTA has led to job losses in all 50 states and the District of Columbia, as shown in Figure 1. Through September 2003, the U.S. goods trade deficit with Mexico and Canada has increased 12% over the same period last year (U.S. Census Bureau 2003a). Job losses for the remainder of 2003 are likely to grow at a similar rate.oss the nation


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