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Purpose of the Report
The purpose of this report is to provide information on the negative impact NAFTA has on Mexico. For that goal, this project focuses on how preexisting and post-NAFTA asymmetries between Mexico and United States, and trade liberalization under NAFTA relate to negative results in Mexico's economy. This report examines the impact of NAFTA on Mexico's employment and environment. The first section of this report explains what NAFTA is and some of its objectives. It examines what was promised by NAFTA's proponents and what happened in reality. The next section looks at the effects NAFTA has on labor. It focuses on factors, such as tariff reduction, as well as how those factors relate to labor distortions in the agricultural and manufacturing sectors. The third section of the project deals with the impact NAFTA has on the environment. This section explains the effects from agriculture and maquiladoras on Mexico's environment. It explains how the pollution haven theory and the asymmetries in environmental protection between US and Mexico relate to the increased damage on Mexico's environment.
After series of negotiations Mexico entered the North American Free Trade Agreement (NAFTA) on January 1st, 1994. NAFTA is a trade liberalization agreement between Mexico and its neighbors Canada and United States. Moreover, it was one of the first trade agreements between developed and developing countries. Part of NAFTA's controversy is based on this reason. Proponents of NAFTA have argued that the agreement will result in creation of jobs, a rise in the income, an increase of foreign direct investments, and elevated levels of environmental protection for Mexico. Such arguments are not truly objective because they focus on the positive effects of increased trade and ignore negative aspects of it. In reality, more than a decade later, NAFTA has left a legacy of growing income inequality, suppressed employment levels in agricultural sector, low-waged jobs for production workers and reduced environmental protections. For over a decade, Mexican people have been told to be patient that NAFTA's vast benefits were just around the corner. They are still waiting and end up observing the few benefits created by NAFTA diminished. The time to revisit NAFTA is far overdue and the American, Mexican and Canadian governments should not wait longer.
The first objective of NAFTA was to "eliminate barriers to trade in, and facilitate the cross border movement of, goods and services between the territories of the parties;" In reality under NAFTA, Mexico has reduced its trade barriers on U.S. exports significantly and took apart a range of protectionist rules and regulations. While the United States not only made reductions on goods that are not Mexico's major source of export but also engaged in protectionist measures on those same goods so important for Mexico. The second objective is to "promote conditions of fair competition in the free trade area." In fact, NAFTA is not actually a free trade agreement and definitely doesn't promote conditions of fair competition. The most striking proof is that America was able to keep its agricultural subsidies. (Stiglitz, 2005) It seems that under NAFTA America is not held responsible for not fulfilling its obligations. One of the reasons Mexico had such high tariffs on agricultural imports coming from U.S. before NAFTA was the fact that Mexican farmers couldn't compete against heavily subsidized crops from the U.S. The asymmetry in the agricultural subsidies, infrastructure, environmental protection measures between US and Mexico has significantly impacted Mexico's labor and environment.
THE EFFECTS ON LABOR
Factors leading to labor distortions under NAFTA
According "Fair Trade For All", one of the issues created by the implementation of NAFTA, is due to the fact that the United States had promised Mexico one thing but acted in the opposite way of its claims. In "Fair Trade for All", Stiglitz claimed that the United States pursued an increasingly contradictory set of policies. On one hand, under NAFTA the United States committed itself to lowering barriers to the cross-border movement of goods, capital, raw materials, information, and services. On the other hand US kept its agricultural subsidies and reduced tariffs mostly on sectors that weren't Mexico's source of export.
Furthermore, in order to truly assess NAFTA's impact on employment it is important to look at the reduction on export tariffs from Mexico to U.S. and the reduction in import tariffs on goods coming from US. The increase in Mexico's export levels will relate to an increase in job creation while the increase of Mexico's imports will result in job loss. Since NAFTA took effect, the US cut tariffs on Mexican manufactured goods and some of the agricultural tariffs. Under NAFTA, Mexico has reduced its trade barriers on U.S. exports dramatically on agricultural and manufactured goods and took apart a range of protectionist rules and regulations. On the other hand, United States has made only small reductions in industries important to Mexico's export and still engages in protectionism by keeping its agricultural subsidies. The way trade has been done between US and Mexico changed significantly because of these tariff cuts. (Polaski, 2004)
Labor distortions in agriculture
According to Sandra Polaski, director of "Carnegie Endowment for International Peace", Mexico was experiencing trade deficit in agriculture with U.S. since NAFTA's enactment. The only year when trade deficit wasn't noticed was in 1995 during the peso crisis. The dramatic devaluation of the peso made products from US way too expensive for Mexico's consumers and moved toward trade surplus. The movement toward trade surplus was positive for agricultural employment but once the peso became stable the agricultural employment returned to its previous pattern of trade deficit. The increased trade deficit experienced by Mexico translated into increased job losses in the agricultural sector. Employment in the agricultural sector in Mexico increased at the end of 1980, continued to increase to 8.1 million at the end of 1993 and after NAFTA took affect it entered a phase of continuous reduction. The employment in agriculture felt to 6.8 million in 2004. In fact, the number of workers in the agriculture significantly decreased from 26.8% in 1991 to 16.4% in 2004. Corn producers were the one most affected by NAFTA, with a loss of around 1.013 million jobs (Table 1). Many of the corn producers end up migrating north to the cities looking for jobs in the maquiladoras.
As mentioned before, the existing asymmetry between Mexico and US greatly impacts Mexico's labor. The asymmetries in the agricultural tariff reductions that further translate to job losses for Mexican farmers are also found in the farms area and in the subsidies amount. The US farms are almost four times the area and realize returns more than three times those in Mexico. This translates of U.S. achieving corn production around eleven times the production of Mexico. Although under NAFTA "each party has antidumping and countervailing duty laws designed to offset the unfair competitive advantage that can result from "dumping" and foreign government subsidies" (Zangari, 1994) US continues to dump its corn production into Mexico and maintains its agricultural subsidies. Moreover, under NAFTA the US corn production was sold for nearly half the price of Mexican corn. US direct and heavy farm subsidies per hectare about three times the levels in Mexico also translate in advantage for the US producers. (Wise, 2004) Therefore, under NAFTA US is allowed to engage in dumping practices that distort Mexico's employment and overall economy. The asymmetries between US and Mexico in the agriculture were the reason for employment rates in Mexico's agricultural sector to decrease since NAFTA took effect.
Labor distortions in the manifacturing sector
Labor distortions under NAFTA occur in the manufacturing sector as well. The manufacturing sector in Mexico can be separated as maquiladora and non-maquiladora manufacturing. I will first look at the non-maquiladora manufacturing sector. According to statistics from Mexican National Institute of Statistics, Geography, and Informatics (INEGI) the employment in the non-maquiladora manufacturing in Mexico was nearly 1.4 million in January 1994, decreased dramatically during the peso crisis and reached to 1.3 million in May 2003 lower than when NAFTA was signed.
Maquiladoras are assembly plants that are mostly owned by US producers. They were set up in 1965 to produce goods for export to US under a special program that provided them with decreased import obligations for parts that were processed in those assembly plants. The maquiladora program was the reason for increased job creation in Mexico. Around 800,000 jobs were created from1994 to 2001; noticeable decrease of 250,000 jobs in the maquiladoras employment is currently present.
While the job creation in Mexico decreases since NAFTA, the export levels in the manufacturing sector seem to increase. According to the U.S. International Trade Commission (USITC) NAFTA is only partially responsible for the export growth in Mexico. The USTIC claims that the peso devaluation in 1994 had a greater effect on the growth of Mexican exports of manufactured goods to the America than all tariff cuts related to NAFTA. Moreover, under NAFTA while manufacturing exports increase the manufacturing employment decreases. This can be explained by the maquiladora model Mexico is following. Under this model almost 97% of the component parts are imported from US and only 3% were produced in Mexico. Once completed the finished products are re-exported to US. Those effects can also be noticed in the non-maquiladora sector as well. Many manufacturing companies solely rely on imports from US and further increase its dependency on US. Due to NAFTA Mexican employment rates in the agricultural sector were devastating and even though, NAFTA played important role for job creation in the manufacturing sector, the jobs created are low-waged and are associated with no benefits or future security. The continued increase in immigration to US is itself proof for the failure of NAFTA to increase employment in Mexico.
Another factor that plays important role in the decreased employment in the Mexico's manufacturing sector is the increased US investment access in China. Many of the US owned manufacturing factories prefer to set their assembly plants in China where wages are even lower than those in Mexico. Around 30% of the jobs created by NAFTA in the manufacturing sector were moved to China.
Under NAFTA, the increase employment in manufacturing sector was largely offset by the job losses in the agriculture and the better US access to China.
EFFECTS ON ENVIRONMENT
NAFTA's negative impact doesn't end with Mexico's labor it also extends to the environment. I decided to look at two different sectors, the maquiladoras and agriculture, impacted by NAFTA that further translate to degrading effects on Mexico' environment. But before I get into details I want to take a look at The Pollution Haven theory and the preexisting asymmetry in the environmental protection between NAFTA's partners which give an explanation why the agricultural and maquiladoras sectors have been affected. In 1994, NAFTA was assumed to be the "greenest" trade agreement ever entered in. Despite those assumptions it seems that NAFTA failed to safeguard Mexico's environment.
Factors that can be applied to the impact NAFTA's has on Mexico's environment.
The first factor that relates to NAFTA's detrimental impact on Mexico's environment is the Pollution Haven theory. This theory is most widely associated with the effects of trade on the environment. According to this theory, rising trade and declining restrictions on the movement of capital and goods between an industrialized and a developing country will lead pollution-intensive companies to relocate production to areas in which regulations and/or enforcement of environmental laws are more lax. (Wise, 2004) Following this theory, concerns were raised that NAFTA would create a movement of pollution-intensive industries from the US and Canada to take advantage of Mexico's weaker environmental enforcement.
The second factor associated with NAFTA's negative impact on Mexico's environment is the preexisting asymmetry in the environmental protection between US and Mexico. According to the book "NAFTA: Issues, industry, sector profiles and bibliography" a report by one IPAC ( infrared processing and analysis center) in September 1992 concluded that free trade can be considered fair trade only if environmental regulations and enforcements are comparable in all three countries. Unfortunately in NAFTA's case this wasn't accounted for. The proof is that Mexico entered into NAFTA with a vast of environmental disabilities. Mexico's infrastructure was significantly behind compared to United States infrastructure. Therefore, the increased levels of pollution problems associated with Mexico's infrastructure were due to asymmetry in the environmental protection between NAFTA's partners.
The impact of those factors can be clearly seen in the maquiladoras and the agricultural sectors. Jennifer Clapp is CIGI Chair in International Governance and Professor of Environmental Studies at the University of Waterloo. She is also the author of "Toxic Exports: The Transfer of Hazardous Wastes from Rich to Poor Countries" book. According to her article "Piles of poisons" in the maquiladoras the theory of pollution haven explains the first negative impact on the environment, the doubling of hazardous waste imports into Mexico since 1994. She claims that most of this waste comes from the US. According to the Texas Center for Policy Studies the US-to-Mexico waste flow elevated from 143,800 tones in 1995 to 230,865 tones in 1999. These imports mostly consisted of electric arc furnace dust (EAD), lead acid-batteries, containers from hazardous waste, and accumulators.
Clapp believes that considerable increase in the number of maquiladora plants under NAFTA correlates to the increased hazardous waste in Mexico. The number of such factories in Mexico increased from 1704 in 1990 to 3297 in 1999. Around 60% of maquiladoras plants produce high quantities of hazardous waste. Therefore, the increased number of maquiladoras can mean only more toxic waste creation in Mexico. Moreover, nearly 20% of the toxic waste in Mexico is associated with the maquiladoras.
The third factor that decrements Mexico's environment is attributed to the insufficient management of hazardous waste. According to Mexico's government statistics only 12% of the hazardous waste created in Mexico is accurately handled. Two different agreements were upheld by NAFTA: the 1983 La Paz Agreement on US-Mexico Cooperation and Mexico's 1988 General Law for Ecological Equilibrium and Environmental Protection. These agreements deal with the hazardous wastes generated in foreign-owned companies and especially the maquiladoras plants. According to those agreements wastes generated in foreign-owned firms have to be returned for disposal in the country where the raw materials were made. Although environmental protection agreements are in place, current statistics point out that around 30 percent of maquiladoras return their toxic waste to the US, which is way below what is needed to guarantee appropriate management of hazardous wastes generated in Mexico. Due to the lack of proper environmental protection infrastructure, Mexico has inadequate ability to properly manage this waste. (Clapp, 2002)
The maquiladoras are not the only source of environmental distraction associated with the effects of NAFTA. The agricultural sectors also face harsh environment protection problems.In order to achieve success of their crops large corporations often employ practices that involve extensive pesticides use on their products. However, these practices have an overwhelming devastating effect on both the land and the workers. Pesticides contain toxins that can have severe polluting effects on the environment. These poisons eventually end up into the water supply, contaminating surrounding habitats and drinking water. Additionally, these pesticides can be a source of serious health problems and birth defects in humans, and very likely will have analogous effects on animal species whose food and water supplies will be equally infected.
Statistics from Mexico's National Institute for Statistics, Geography, and Information Systems (INEGI) indicate how environmental degradation has overwhelmed any benefits from trade led economic growth. Kevin Gallagher is Assistant Professor at the Department of International Relations, Boston University. In his work "Mexico, NAFTA, and Beyond "he claims that "According to INEGI, major environmental problems got worse since trade liberalization began in Mexico. Mexico's levels of soil erosion, municipal solid waste, and urban air and water pollution all worsened. Rural soil erosion grew by 89%, municipal solid waste by 108%, water pollution by 29%, and urban air pollution by 97%."This show that detrimental effects on Mexico's environment not only deepen but they can effect Mexico's growth. Furthermore, according to Gallagher statements INEGI approximates that the financial costs of this environmental degradation are almost $36 billion each year, or 10% of Mexico's GDP. The environmental damage far overcomes the value of economic growth, which has been just 2.5% annually, or $14 billion per year. (Gallagher, 2004)This leads to another negative development, the cutbacks in environmental protection programs. Due to the overwhelming difference between economic growth and environmental destruction costs Mexico's faced and increased budget deficit and were required to cut on environmental protection spending.
CONCLUSION AND RECOMMENDATIONS
Based on the findings in this project NAFTA failed to restrain the use of agricultural subsidies, which have resulted in significant job losses in the agricultural sector, creation of low-waged, no security jobs in the manufacturing sector and accelerated environmental degradation. As we can see since NAFTA took effect increased trade, declining restrictions, the failure to decrease the existing asymmetry between its partners and the lack of environment protection infrastructure in Mexico attributed to increased negative impact on Mexico's employment and environment. Due to NAFTA Mexico's major export sector, which is the agriculture, was destroyed in order to enable US framers export their highly subsidized crops to Mexico. Moreover, I believe that the cost of degradation to the environment far exceeds Mexico's growth due to the fact that NAFTA failed to put in place appropriate system that can help Mexico to protect its environment. Based on this research I can claim that NAFTA was a failure for Mexico, the costs far overcome the benefits created. In order to achieve the opposite NAFTA should be revisited and improved on number of factors. Governments of Mexico, United States and Canada should take measures to decrease the negative impacts NAFTA has on Mexico's employment in the agricultural and manufacturing sectors and create environmental mechanisms that can promote cleaner environment for Mexico. Some of the recommendations to increase employment in Mexico are full removal of US farming subsidies, increasing protection of small farmers in Mexico, increasing level of education for Mexican people. The steps necessary to increase environmental protection are the following: NAFTA's requirements to create and preserve environmental standards should be revisited; discussions on environmental impact should be reopened; the way parties report and track the creation, movement and disposal of hazardous waste should be improved.
- Polaski, S. ( 2004). MEXICAN EMPLOYMENT, PRODUCTIVITY AND INCOME. Washington DC: CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE.
- Clapp, J. (2002, March 22). Piles of Poisons in Mexico. Retrieved November 20, 2009, from Basel Action Network: http://www.ban.org/Library/piles_of.html
- Gallagher, K. P. (2004, September 17). Free Trade and the Environment: Mexico, NAFTA, and Beyond. Retrieved November 20, 2009, from TUFTS University: http://www.ase.tufts.edu/
- Stiglitz, J. E. (2005). FairTrade for All. New York: Oxford University Press Inc.
- Wise, A. N. (2004). The Environmental Costs of Agricultural Trade Liberalization: Mexico-U.S. Maize Trade Under NAFTA. Heinrich Böll Foundation.
- Wise, T. A. (2004). The Paradox of Agricultural Subsidies: Measurement Dumping, and Policy Reform. Medford, Mass., Global Development and Environment Institute.
- Zangari, B. (1994). NAFTA: Issues, Industry, Sector Profiles and Bibliography. Commack, New York : Nova Science Publishers, Inc.