Lessons from NAFTA:
A decade of free trade in North America

Jayati Ghosh

The first day of January 2004 was the tenth anniversary of NAFTA 
— the North American Free Trade Agreement — which brought the 
economies of the United States, Canada and Mexico together. This 
ambitious trade deal was at that time proclaimed as the way 
forward for developing countries that were fortunate enough to be 
"chosen" as special trade partners by the all-powerful United 
States.

Even now, it is being presented as something which has worked to 
the advantage of Mexico and an example for other countries, 
especially in Latin America, to emulate through the Free Trade 
Agreement of the Americas. 

But, the decade's experience suggests that it is mainly the 
corporations that lobbied for the agreement that have benefited, 
while most of the other promises made earlier have turned sour 
for most of the people in the region.

NAFTA brought together three very different economies: the rich 
and powerful United States; developed Canada with its extensive 
social security system and workers' protection; and developing 
Mexico with its regional inequalities and backwardness.

The people were promised that the agreement would not just boost 
trade and investment in the region, it would create millions of 
new and better jobs and raise living standards. 

Consequences

Of course, it was clear from the start that some would gain more 
than others, particularly because of the way in which the final 
agreement was structured.

The US administration refused to make any commitments with regard 
to agricultural subsidies, and retained the right to 
protectionist measures against surges of imports from Canada and 
Mexico.

Despite this, it was able to push through very significant 
liberalisation of rules in Canada and Mexico with regard to 
investment and intellectual property, which greatly increased the 
power of US capital in these countries. 

NAFTA did result in increased trade and investment flows within 
the region. Total trade among the NAFTA countries more than 
doubled between 1993 and 2002, growing much more rapidly than 
trade with countries outside the region. Foreign direct 
investment by NAFTA investors in the three countries jumped from 
$137 billion in 1993 to nearly $300 billion in 2000.

However, the gains of these expansions have been concentrated 
among corporations, whose profits have increased many fold, and 
among favoured (typically urban) consumers with purchasing power. 
In each NAFTA country, the net effect upon workers as a whole has 
been negative.

In Canada NAFTA has significantly reduced the bargaining power of 
workers vis-a-vis capital and has contributed to the erosion of 
social security systems that were among the best in the world. 
Real wages of Canadian workers have come down by 20 per cent over 
the decade.

Unemployment insurance and other social security provisions have 
been scaled back. Health care provision and other public 
utilities like water and electricity have been cut or privatised. 

US corporations benefit

In the United States, NAFTA has brought about big increases in 
profits for certain corporations, especially those involved in 
making automobile and auto components, and agribusiness 
companies, which have seen profits rise by two to three times 
since NAFTA took effect.

Part of the reason for this unprecedented increase in 
profitability is the newfound ability of corporations to move to 
the cheapest locations in the region or simply to threaten to 
move in order to contain workers' wage and other demands. 

But corporations have also benefited greatly from the provisions 
in NAFTA that allow companies to receive compensation for 
supposed restrictions on their expansion affected by the actions 
of governments.

NAFTA rules limit each country's domestic policies to deal with 
issues ranging from environmental health and food safety to 
banking and truck safety regulation. Under the investor rights 
guaranteed in the agreement, investors are allowed to demand 
compensation for "indirect expropriation". 

This has been interpreted to include any government act, 
including those directed at public health and the environment, 
which can diminish the value of a foreign investment. These cases 
are adjudicated by special tribunals, bypassing the legal system 
of all three countries. Already, suits with claims amounting to 
more than $13 billion have been filed by large companies. 

While the result of such provisions has been an alarming increase 
in environmental pollution, especially in the newly 
industrialising border areas of Mexico, it has definitely allowed 
US companies to reduce their operating costs and thereby increase 
their profits. 

Unemployment is currently low in the US only because of the 
strong fiscal impetus provided by the Bush administration over 
the past two years, which has created more service sector jobs. 
However, despite the economic growth of the 1990s, real wages in 
the US are still below 1972 levels, while income inequality has 
skyrocketed because of the shift from manufacturing jobs to 
employment in services, where wages are usually much lower. 

Disastrous for Mexico

It may appear that Mexico therefore must be the country to have 
benefited from NAFTA — but precisely the opposite is true. The 
most disastrous effects of NAFTA are to be found in Mexico, with 
grave lessons for other developing countries tempted to enter 
into such trade deals with more powerful developed economy 
neighbours. 

In the early years of NAFTA, there was some increase in both 
manufacturing output and employment because of investment by US 
companies to take advantage of lower labour costs. However, 
import penetration because of the trade liberalisation imposed by 
NAFTA destroyed the domestic manufacturing sector which had 
catered to the home market, so that even in the days of the boom, 
net manufacturing employment barely increased. 

Meanwhile, the overcrowding and environmental destruction 
characteristic of the exporting areas, the insecure conditions 
and worker harassment are hardly examples of the so-called 
benefits of free trade. 

In Mexico, the manufacturing sector has not generated enough jobs 
to counter the effect of job loss in the other sectors, 
especially agriculture. Even in the service sector, small Mexican 
businesses, including petty retailers, have been badly hit by 
reduced access to credit, as all but one of major banks on Mexico 
have been sold to major US-based multinational banks that are not 
interested in such low margin activities. 

However, it is agriculture that has experienced the worst effects 
of NAFTA, and underlined the unfair nature of the original 
treaty. The US continues with, and has even increased, its huge 
agricultural subsidies which allow large agribusiness 
corporations to sell produce in Mexico at prices well below 
actual costs.

Meanwhile, NAFTA has eliminated 99 per cent of Mexico's 
agricultural tariffs. As a result, since 1994 the amount of US 
commodities dumped on the Mexican market has increased by 15 
times. Other agricultural imports have also skyrocketed.

The resulting collapse in crop prices in Mexico has completely 
destroyed the viability of Mexican farming, even subsistence 
maize farming which was the mainstay economic activity in most of 
rural Mexico. Around 1.5 million farmers are affected badly.

At least 1000 people leave the Mexican countryside every day in 
search of work opportunities or simply the means for basic 
survival. They clog Mexico City as street vendors, or add to the 
flow of legal and illegal migrants to the US (now estimated to be 
more than 150,000 people every year), because they have no other 
means of subsistence left.

All this explains why the new slogan of several movements across 
the region is: "ten years of NAFTA is enough!"

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People's Democracy, Communist Party of India (M)