NAFTA’s Promise and Reality

Source: The Carnegie Endowment for International Peace

Note: The following articles are a reprint from the Carnegie Endowment for International Peace Website. This information is of interest to those who are concerned about the impact of Free Trade Legislation. The Carnegie Foundation is also affiliated with the Conference on Foreign Relations (CFR) www.ceip.org

Below are some excerpts from the report which the OCinsight editorial staff finds significant. The complete extensive report can be viewed at the end in pdf format.

 

....Economic inequality in the United States has been
increasing for most of the last two decades. Since
the early 1980's, the richest quintile (top  percent)
of U.S. households has increased its share of
national income from .. percent to over ..
percent. Meanwhile, each of the other four household
quintiles has seen its share of national income
decrease. The growing wage gap between high skilled
and low-skilled workers is one of the causes,
and to the extent that trade is a factor in the wage
gap, it is also implicated in growing inequality....

 

....Productivity has increased in all three countries over the last decade. NAFTA and CUFTA likely played a significant role in the observed productivity growth in Mexico and Canada, because both countries cut tariffs deeply and were thereby exposed to competition from their giant neighbor. In the United States, NAFTA probably has played a small or negligible role in productivity growth for two reasons: U.S. tariffs were already low before NAFTA and trade with the rest of the world plays a much larger role. The desirable growth in productivity may have had the unwanted side effect of reducing the rate of job growth, since fewer new jobs were created as workers already on payrolls produced more. ....

....In all three countries, the evolution of wages and
household incomes since NAFTA took effect has
been toward greater inequality, with most gains
going to the upper .. percent of households and
higher-skilled workers. While this trend is clearly
compounded of many factors, more open trade
appears to be implicated as one element—along
with continental and global competition over the
location of production—that restrains wage growth.
Whether productivity gains lead to higher wages also
depends on the nature and quality of the institutions
that determine the distribution of productivity gains
within a society between the return to workers as
higher wages and the return to investors as higher
profits. Institutions that govern the ability of workers
to organize unions and bargain collectively over wages
are important determinants of distribution, as are government
mechanisms such as minimum wage policies. ...

 

...It must also be recognized that there may be permanent
losers from trade, due to limitations of education,
skills, geographic isolation, and other factors.
Because the impacts of trade are uneven, governments
should establish mechanisms that help offset
the losses suffered by those in declining sectors....

 
.....In evaluating the policy choices of the Mexican government with hindsight, it is useful to
remember that until 1994 Mexico was often held up as a model of economic development by U.S. and multilateral financial institutions. But significant aspects of Mexico’s apparent success in attracting international capital were built on a factor—low world interest rates—over which Mexico had no control. Mexico compounded this vulnerability by relaxing all controls over capital flows hrough its aggressive financial liberalization policies, so that it had no levers under its control when investor sentiment changed. The capital inflows were huge compared to the size of the economy, inflating it like a bubble. The “shock” of the capital outflows was therefore also very large. The peso crisis became the first financial crisis of globalization, with others to follow. In light of the Mexican experience, it seems clear that very large capital flows, especially flows of footloose portfolio capital, can be destabilizing to any macroeconomic policy regime in developing countries. The United States has recently adopted the position that trade partners must eliminate all existing capital controls as part of any free-trade agreement.But Mexico’s experience with financial liberalization, which predates NAFTA, clearly demonstrates that this is not a prudent policy for a developing country interacting with much larger global financial forces. Developing countries would be wise to resist demands that they eliminate capital controls as part of free-trade agreements......
 

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