North American Free Trade Agreement

The origin of the North American Free Trade Agreement (NAFTA) dates back to 1988 when President Ronald Reagan of the United States and Prime Minister Brian Mulroney of Canada initiated the CanadaU.S. Free Trade Agreement (Canada-U.S. FTA). To some extent the Reagan-Mulroney decision was an extension of their philosophical beliefs in free trade and limited government intervention in economic affairs. Both Ronald Reagan and Brian Mulroney are ardent conservatives with strong beliefs in a laissez-faire approach to economics. Additionally, both had been elected on conservative platforms and were anxious to implement their respective campaign promises. Finally, the economies of the United States and Canada were so closely interwoven that Canada-U.S. FTA was a natural extension of existing activities. In fact, it can be argued that Canada-U.S. FTA was a mere institutionalization of a de facto economic union.*

The text of the proposed North American Free Trade Agreement (NAFTA) was submitted to the Congress by President Bush on 18 September 1992. Based on the timetable prescribed in the fast-track legislation under which the agreement was negotiated, the main congressional debate on NAFTA was thus reserved for the enabling legislation to be taken up in the post-electoral Congress. If approved by the three legislatures — Canada, Mexico and the United States — NAFTA will go into effect on 1 January 1994. This chapter examines the debate on NAFTA as it is shaping up in the United States.

There is considerable interest in ascertaining the economic consequences of creating a North American Free Trade Agreement (NAFTA) by including Mexico in the U.S.-Canada FTA which was created in 1989. The NAFTA would be unique in that never before have nations with such divergent levels of per capita income agreed to eliminate their trade barriers. The economic rationale for such an agreement derives from the standard conclusions of international trade theory which show that free trade promotes economic efficiency and growth. In the United States, however, there is concern that such an agreement would further promote intersectoral specialization based on factor intensities and this would produce, by way of Stopler-Samuelson effects, falling real wages for unskilled labor. This is a particularly sensitive issue in the United States since the absolute real income of unskilled workers has been declining since the early 1980s. Numerous studies, such as those by Abowd and Freeman (1991), Borjas, Freeman and Katz (1991) and Wood (1991), attribute a significant proportion of this decline to increased trade. In addition, a NAFTA may create transitional adjustment pressures in many low-wage labor-intensive industries. Thus the primary groups in the United States that are likely to be harmed by NAFTA are the same groups that have already experienced a significant reduction in their real incomes and are now near the bottom of the economic ladder.

Since January 1989, when the Canada-U.S. Free Trade Agreement was signed, the global economic landscape has witnessed dramatic changes. With the collapse of Eastern Europe and communism and the emerging economic powerhouse in the Far East, Mexico became interested in the Canada-U.S. negotiations and there are prospects of a new economic alliance in North America. There are potential ingredients in the emerging North American Free Trade Agreement (NAFTA) for a North American common market. This chapter examines the potential of, and possible problems on the way to, the achievement of NAFTA.

Ordinarily we think of financial crises as having a negative impact on trade flows as well as financial flows. Charles Kindleberger, for example, provides the historical evidence of several centuries to show that periods of crisis in international financial markets have been accompanied by the collapse of international trade as well (Kindle-berger, 1978). The Great Depression of the 1930s is the classic case of a downward spiral in world trade, tied to the collapse of international financial markets. Based upon historical precedent we would predict that the financial crisis of 1982 would also have had a disruptive impact on world trade. Given the fact that the 1982 crisis was triggered by the Mexican government’s inability to service its foreign debt, and that that debt was held mainly in the United States, we would expect the crisis to have been particularly disruptive to Mexican-U.S. trade.

The benefits and/or costs of NAFTA notwithstanding, the three member-states of the agreement are independent nations with individual, and sometimes conflicting, perspectives. Furthermore, their partnership in NAFTA notwithstanding, the bilateral issues between the countries remain strong and in force. Part III of this volume examines these specific issues. In Chapter 8, Ricardo Grinspun analyzes the impact of the Canada-U.S. Free Trade Agreement — and potentially of NAFTA — on the Canadian manufacturing sector. He maintains that some provisions of the Canada-U.S. FTA will not be fully implemented until the end of the decade, and therefore it is too early to pass final judgement on the effects of the agreement on the Canadian economy. Nevertheless, Grinspun uses the experience of the first four years of the agreement to reach certain conclusions. He argues that the Canada-U.S. FTA cannot be evaluated independently from the general economic policies of the Canadian government and that ‘a better way to picture the Canada-U.S. FTA is as one element in the overall economic policy of the government.’ Using this approach, Grinspun concludes that ‘the Canadian government has done it all wrong’, and that ‘the Canada-U.S. FTA has both costs and benefits; however the economic policies of the government have created a situation where Canada is paying the costs of the agreement but is unable to realize the gains to be had from it’.

The Canadian government’s decision in 1985 to embark on discussions leading to a bilateral free trade arrangement with the United States followed years of debate in academic and policy-making circles on the potential merits and disadvantages of this path (Macdonald Report, 1985; Whalley with Hill, 1985; Doern and Tomlin, 1991). Influential analysis showed that a key sector that would benefit from further trade liberalization was manufacturing. Manufacturing in Canada, as in other places, is characterized by a high market concentration and has the potential for increasing returns to scale. The view was that Canadian manufacturing is suffering from low productivity and poor technological performance due to limitations of the Canadian market and the inability to exploit the returns to scale. Free trade with the United States would provide major benefits to Canadian manufacturing in terms of rationalization of production, lower manufacturing costs, secure access to the main export market, increased international competitiveness, efficiency gains, domestic deregulation and more emphasis on market signals in the allocation of resources (Wonnacott, 1985).

Approximately two years have passed since Canada, Mexico and the United States commenced discussions on an agreement to significantly reduce trade barriers and create a more unified North American market place. Working groups and negotiators for the three parties are involved at this moment in the process of defining the terms and conditions the final agreement will take. One has only to glance at a daily newspaper to catch up with the latest changes that have been whispered to the press.

On 5 February 1991 the leaders of Mexico, the United States and Canada simultaneously announced that their governments would enter negotiations to form a trilateral free trade area. The proposed North American Free Trade Agreement (NAFTA) will encompass a population of 360 million people with a total product of more than $6 trillion. It aims toward unrestricted trade in goods and services among the three countries, but not a common external tariff or unrestricted labor mobility as in the European Community.

In September 1990, President Carlos Salinas de Gortari informed President Bush that Mexico would like to negotiate a free trade agreement. The following June, after much heated debate, Congress granted the president fast-track negotiating authority.

This chapter presents an evaluation of the level of intra-industry trade between Mexico and the United States. The calculated indexes of intraindustry trade indicate a rapid increase in this type of trade during the 1982–90 period. Additionally, the current level of intra-industry trade between the two nations is quite high when compared with similar indexes of other nations. These results help to explain the apparent ease with which the United States adjusted to increased Mexican imports during the 1980s. Furthermore, the high level of intra-industry trade indicates that after NAFTA has been implemented there should be no major dislocation of productive activities in either of these countries as a result of the expansion in trade.

This chapter will compare the usage and perceptions of a selection of foreign exchange risk management products among large U.S. and Mexican companies. Some significant differences in the utilization of products, perspectives on key factors in product selection, and attitudes to innovation can be found. The chapter will also explore factors that may influence these differences.

The chapters presented in this part examine the role and significance of the North American Free Trade Agreement in relation to cross-border and industry-specific issues. In Chapter 15, James Lane studies the issue of labor turnover and job training in the maquiladora industry. Using exit polls of maquiladora workers, he measures the impact of the training that workers receive in these plants on employee turnover in each plant. Lane’s survey of a sample of 121 maquiladora plants in the San Diego area resulted in 39 usable responses. His research lead him to conclude that the correlation between labor turnover and training is function of the type of training. For example, he found no correlation between labor turnover and classroom training. On the other hand, he found negative correlation between labor turnover and on-the-job training and positive correlation between employee turnover and other training.

Exit polls of maquiladora workers have indicated the value the worker has placed upon the training they have received at the plants. Yet there have been no studies examining the effect of that training upon worker turnover. This chapter will examine that relationship in an effort to determine the possibility of using training programs as a method of slowing turnover.

Export processing zones (EPZs) have a dual nature: they are both an administrative instrument for providing free-trade status to a nation’s manufactured exports as well as industrial parks specialized in manufacturing for export (World Bank, 1992). In the absence of an economy-wide, ‘market-friendly’ (World Bank, 1991) environment for growth — a favorable entrepreneurial climate, macroeconomic stability, extensive external links and broad state support for human capital and infrastructure — EPZs have been employed with varying success by less developed countries (LDCs), including several of the most protectionist, inward-oriented ones, as a selective policy tool in their attempts to earn foreign exchange, increase employment and ultimately induce industrialization. The use of EPZs to shift to a more open, competitive, free-trade strategy for growth and domestic development has been characterized as a ‘post-Listian’ breakthrough to the extent that it represents a radical departure from the restrictive strategy of import-substitution industrialization (ILO/UNCTC, 1988, p. 155). Perhaps the term ‘anti-Listian’ might be more appropriate to describe the 180-degree policy shift that the EPZ-assisted open border strategy of industrialization can represent.

The two geographically closest trading partners to the United States are Canada and Mexico. On 1 January 1989 the United States and Canada entered into a free trade agreement which will phase in the free flow of goods and services between the two countries over the next ten years. Free trade between Mexico and the United States progressed significantly when Mexico signed the General Agreement in Tariffs and Trade (GATT) in 1986. The culmination of this liberalization came on 12 August 1992 when the North American Free Trade Agreement (NAFTA) was concluded, and which could go into effect on 1 January 1994. The agreement will eliminate tariffs between Canada, the United States and Mexico over fifteen years.

As a result of relaxations on trade restrictions, economic reform in Mexico and the pending U.S.—Mexican free trade agreement, there will be increased opportunities for cooperation between U.S. and Mexican apparel manufacturers. Some see Mexico’s entry into NAFTA as the first step toward a Western hemisphere-wide free trade agreement. Such a concept envisions a Western hemisphere trading bloc that could dominate global trade. Complementing the present Canada—U.S. FTA with the unique advantages offered by Mexico, a globally competitive apparel-manufacturing industry is possible. Indeed, the combination of labor and market power could result in an apparel industry that will compete effectively in a global market. However, it is essential for both U.S. and Mexican apparel producers to understand and act on these opportunities. This chapter will address the market opportunities for increased apparel trade between the United States and Mexico and the potential for the development of a globally competitive apparel industry.

The prospect of the enactment of the North American Free Trade Agreement, which would result in the elimination of both tariff and nontariff barriers to trade between Canada, Mexico and the United States, has ignited concern within the textile and apparel industry. Historically this has been one of the most highly protected industrial sectors, and debates are taking place regarding the manner and extent that North American free trade will impact on the industry.

The primary purpose of this volume is to provide a balanced view of the prospects and problems of a North American free trade agreement. The preceding chapters have analyzed NAFTA from a historical perspective to labor issues, from national perspectives to bilateral issues, and from broad macroeconomic perspectives to bilateral issues. The perspective left for this final part is that of the environment. In Chapter 22 John J. Audley presents the environmentalist’s view of NAFTA. First he examines recent environmental concerns over trade policy, and how those concerns have been translated into substantive objectives for trade negotiations. He then presents a critique of the ‘green language’ in NAFTA, based on the objectives identified by environmentalists. The chapter concludes with an examination of the negotiated outcome of NAFTA.

Historically the public debate surrounding trade policy has boiled down to a discussion about jobs. Trade advocates have argued that increased trade in U.S. goods creates jobs for U.S. workers. Organized labor has argued that trade agreements pit higher-paid U.S. workers against lower-paid workers from developing countries. The resulting trade policy has been based less upon available statistical evidence than on the ability of interest groups to influence the political process surrounding negotiations.

Much seems to have changed in the few weeks since the preceding chapters were written. In the United States, President Bill Clinton is now in office and in charge of the country. Both in the United States and elsewhere in the world, government leaders, business executives, and the masses alike are gradually getting used to the new style, if not yet the substance, of his administration.