North American Free Trade Agreement: Facts vs. Fiction

By Schnepper, Jeff A. | USA TODAY, November 1993 | Go to article overview

North American Free Trade Agreement: Facts vs. Fiction


Schnepper, Jeff A., USA TODAY


THE NORTH AMERICAN Free Trade Agreement (NAFTA) is a multilateral agreement intended to create a more open market for commerce and investment among Mexico, Canada, and the U.S. The trade accord's potential impact on the American economy is enormous. Critics identify the key issue as the degree to which jobs will or will not be lost to Mexico. Opponents of NAFTA fear what Ross Perot calls "a giant sucking sound" as American jobs are sifted off to low-pay Mexico. The objective of this column is to analyze the arguments both for and against NAFTA, and to segregate facts from fiction.

Many economists expect NAFTA to produce moderate job growth in both the U.S. and Mexico. Former Secretary of Labor Lynn Martin estimated that the accord would generate 100,000-180,000 more US. jobs than would be lost. A recent Congressional Budget Office study put the number at 35,000-170,000.

For example, assume NAFTA produces a surge in the Mexican economy, which seems a reasonable prediction. Roads would have to be built, buildings constructed, and bridges put up. New machinery would be required to do the work. Mexican consumers soon would have better jobs and improved earning power, eventually leading to their purchasing more cars, appliances, and other products, many made from steel.

The U.S. steel industry would benefit from direct demand for structural and rail steel and indirect demand from automakers and other companies producing goods for the Mexican economy. This would create more American jobs and lead to a win-win situation.

Mexican wages on the rise

It has been argued that, if NAFTA passes, U.S. businesses automatically will flock to Mexico because of its low wages. However, despite the fact that most Mexican workers are poorly paid, wages already have risen rapidly for skilled labor in the industrial sector. According to University of Michigan economist William Moller, Jr., those workers averaged $3.80 an hour in 1992 and their pay is growing at a rate of nine percent per year.

When such possible expenses as water main breaks or electricity failures are factored in, the real cost of labor in Mexico increases to $8-10 an hour. According to Bananex, a Mexican bank, wages in Mexico have grown more than 5007o since 1985.

The assertion that people with higher wage bills inevitably will gravitate to areas where the wages are lower is simplistic and not necessarily correct. In 1992. the U.S. had a manufacturing surplus of $7,500,000,000 with Mexico, after deficits in the 1980s. In terms of over-all trade, the U.S. exported about $40,000,000,000 to Mexico and imported $35,600,000,000, giving the U.S. a positive trade balance.

Without NAFTA, the Mexican economy will suffer a substantial hit to its growth. A recession and a major peso devaluation would be expected, and heavy foreign borrowing would be required to cover an otherwise unsustainable payment deficit.

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