NAFTA (North American Free Trade) re-negotiations are underway with Canadian Prime Minister Justin Trudeau visiting Washington and Mexico over the last week in an apparent effort to manage U.S. President Trump’s growing protectionist proclivities. The Canadian Prime Minister has called for stronger labor rights and environmental standards. He has also advocated for chapters protecting the rights of women and indigenous peoples. Improved labor standards means not just improved working conditions for Mexican workers but also better wages—this latter aimed at reducing the imbalance between Mexico’s cheap labor market and those of its northern neighbours, a disparity held to be responsible for the flow of American and Canadian firms southward. Trudeau’s pronouncements indicate recognition that NAFTA has not adequately taken into the account the interests of those who have been the “losers” in the agreement.
Trade Deals are about Interests and Power
Like other “free trade” deals, NAFTA was driven by an exclusionary logic. Its negotiators regarded improvements in employment and living standards as by-products of the deal, not its primary purpose. The primary purpose was to stimulate economic growth by making North American corporations internationally competitive. Blind faith in the magic of the market involved the assumption that employment growth would automatically arise from this process. It has not.
Free trade agreements are not about free trade—they are about managed trade with the resulting deals reflecting the reality of power distributions both within countries and among them. It is probably useful to remember that negotiation of the original NAFTA agreement was a highly exclusionary affair in which the trade negotiators of all three countries closely consulted their respective private sectors, while the views of labor and civil society organizations were either ignored or only grudgingly incorporated. Negotiators addressed some of these societal concerns in superficial and largely ineffective ways through the labor and environmental side agreements. Mexico was authoritarian at the time the original deal was struck. Hence, there was very little chance that the politically excluded, particularly Mexico’s indigenous farmer and workers, would have an impact on the resulting agreement. As it turned out, neither did American and Canadian labor unions and civil society organizations.
A Fair Trade Deal is Unlikely
An inclusionary NAFTA was not possible in 1994 and it is probably not possible now. One of the biggest follies of the original NAFTA agreement was the belief that a trade deal involving Mexico, a country with a much lower per capita income, a much higher level of inequality, and searing challenges of poverty and deprivation, could produce a social outcome beneficial to all three countries. Mexico’s weak labor unions (controlled tightly by the state and repressed if necessary), were one important factor in the low cost of labor that spurred the flow of North American firms southward. In addition, however, the very high level of underemployment (disguised unemployment), estimated at between 50 and 60 percent of the economically active population, meant that there were enormously more Mexican workers seeking jobs than there were jobs available. What was needed, of course, was sustained high levels of economic growth to absorb this surplus labor and to push up wages. This is what the “experts” on NAFTA predicted would happen following its signing. It did not. Economic growth in Mexico was only 1.3 percent per year between 1993 and 2013. Hence, the U.S. and Canada have lost manufacturing jobs (although not all of this loss can be blamed on NAFTA, of course) as their firms sought to reduce labor costs, while a sufficient number of new jobs have not been forthcoming. Mexico has lost manufacturing jobs as well through a combination of the flow of the lowest wage jobs to even lower-wage areas (China, Central America) and through trade liberalization, which hurt both older import substitution activities and agriculture. As noted in a recent paper, corn producers in southern Mexico were especially vulnerable. Labour precariousness has increased in all three countries.
A re-negotiated trade deal that requires Mexico to raise wages and improve labor conditions will likely have very little impact. This is because NAFTA has not alleviated and may have increased the numbers of Mexican workers desperately seeking employment—a fact that puts downward pressure on wages. Indeed, the country’s labor laws have long been successfully ignored by employers and unenforced by the state for precisely this reason. Moreover, despite the arrival of electoral democracy, trade unions in Mexico remain weak; workers are harassed or dismissed if they attempt to enforce the labor rights that are on the books.
To make matters worse, job growth and better wages are confined largely to the big multinationals located in northern Mexico. These companies, as I explain in my most recent book, purchase most of their inputs from outside the country and have therefore failed to stimulate the growth of new companies and new employment opportunities. Meanwhile, the majority of jobs are in the country’s small and medium enterprise sector, where both productivity and wages are much lower. These firms produce for the domestic consumer market. Given their precariousness, they would be unlikely to comply with labor regulations requiring increased wages and the state would be unlikely to compel enforcement given the anticipated negative impact on employment. At the same time, a NAFTA requirement compelling improved working conditions and improved wages in the export firms of northern Mexico would worsen the already substantial wage dispersion in Mexico, thereby contributing further to an already high level of inequality. Such an initiative would also be fiercely resisted by the private sector, both Mexican and multinational.
The Powerful Winners
We need to remember who the winners are in all of this: Business interests in all three countries. A few powerful Mexican conglomerates have become big exporters (for example, Cemex, construction materials; Femex, beverages). U.S. and Canadian companies from auto parts to cookie producers have moved production to Mexico to lower production costs by taking advantage of cheaper Mexican labor. Big American agribusiness has gained control of the Mexican market for grains, particularly corn, decimating Mexico’s indigenous farmers. American and Canadian mining interests, have invested heavily in mineral extraction in Mexico. These mining companies have conflicted with environmental and human rights activists, particularly in indigenous communities. An inclusive and fair trade would have to substantially alter the original assumptions about the purpose of the deal, abandoning the primary goal of increasing competitiveness and economic growth at all costs and adopting social welfare as the top priority. Such a trade deal would also have to involve a shift in the balance of power between society and the powerful business interests that have been its major beneficiaries, a scenario that is not very likely.