Evaluation Of The Impact Of NAFTA On Manufacturing

Analysis prepared by COHA Research Associate Jacob Hill

The Tail End of Free Trade: A Preliminary Evaluation of the Impact of NAFTA on the Manufacturing Sector

In this, the fourteenth year of the North American Free Trade Agreement (NAFTA), it is of the utmost importance--in terms of its continued application in the future--to look back and examine the economic impact of free trade on the U.S. and Mexico over the last decade and a half.

A major component of the exercise will be NAFTA's impact on the proliferation of the maquiladora sector, which repeatedly has resulted in a precipitous drop in manufacturing jobs in the U.S. and Mexico as well as a reliable precedence for the weakening of labor standards in much of the third world.

Human Rights Abuses in Mexican Manufacturing

One of the most drastic and disturbing results of NAFTA has been a boom in the Mexican maquiladora sector. In the U.S. and the developed world, these manufacturing units would deservedly be known as sweatshops. The maquiladoras operate within Latin America because of the abundance of cheap labor and the poor conditions being tolerated.

Due to the removal of protective tariffs by free trade pacts, raw components are imported to the maquiladoras without being taxed. Additionally, the machinery involved in the maquiladora process is also allowed to enter Mexico tariff-free under NAFTA's terms. Then, Mexican laborers work to turn the raw goods into finished products, adding value to the goods. The end products are then exported to developed nations, with minimal tax levied that is based only on the value added during production.

Although one could argue that within the capitalist model, Mexico's comparative advantage would be its inexpensive labor, the human rights abuses often associated with the maquiladora process thus brings with them a heavy economic disadvantage. The sweatshop problem has been well known since the inception of NAFTA.

In 1995, just a year after the implementation of the free trade agreement, The New York Times reported on the exploitation of Mexican young girls by the maquiladoras. U.S. companies, often working through third parties, pay children as young as 14 years of age wages under 40 cents per hour. Maquiladoras located within walled and barbed wired free trade zones are not only exempt from import taxes, but are also exempt from state and local imposts for up to 10 years.

Once a corporation structure is set up as a free trade zone and secures a manufacturing contract with a large multinational company, the owner of the facility maximizes profits by informally sanctioning a number of abuses, including offering low wages, tolerating dismal safety standards, refusing to provide health benefits and insisting upon unpaid overtime.

One of the primary problems with the current system of production is that the prevailing economic conditions in the countries housing the maquiladoras are so marginal that the only jobs available are in such sweatshops. For instance, since the passage of NAFTA, over one million Mexican corn farmers have lost their jobs.

With such high rates of unemployment, workers are forced to either leave their homes and villages to migrate to more prosperous countries (hence the spike in illegal immigration to the U.S. since the establishment of NAFTA and other bilateral Latin American free trade agreements) or take low-paying jobs featuring a range of abuses in the maquiladoras.

Many of the maquiladora workers come from the rural areas of Mexico which, according to the World Bank, have experienced "stagnation of growth, lack of competitiveness in the international market, [and] an increase in poverty" since the advent of NAFTA.

As a result, sweatshop workers possess almost no leverage to negotiate improved labor rights. Refusing to work overtime, taking breaks (in spite of the fact that they are required by un-enforced law), illness, visits to the doctor, and pregnancy rests have all been recorded as reasons for job terminations in the maquiladora sector.

There also have been instances of free trade zone managers forcing workers under their jurisdiction to knowingly deceive representatives of governmental labor monitoring groups. Nevertheless, everyday realities frequently force workers to work under these abhorrent conditions, as jobs are scarce and employees are extremely expendable.

Tens of thousands of other impoverished laborers are fully prepared to eagerly occupy any jobs vacated by workers seeking greater labor and human rights or economic benefits.

Faux Worker Protection

While under NAFTA's side agreements, there are mechanisms in place to protect workers, they are more often than not simply facades.

Company unions may be required by free trade zone managers in order to allow such corporations to claim that they are compliant with regulations allowing for union representation, these, in reality, are entirely management-controlled and allow only minor shifts in policy, acting more as a "smoke and mirrors" show than an actual vehicle for enlightened worker protection.

Additionally, some Latin American countries actually have very strong workers' rights guarantees. Some analysts argue that Nicaragua's labor rights laws, for example, are actually stronger than those in effect in the U.S., but they are rarely enforced.

The problem with this situation arises when one contrasts the advantages of free trade zones for the countries in question with the disadvantages for both labor and the national economies that are involved.

As mentioned above, countless steps are being taken to ensure that labor costs in the maquiladoras are kept as low as possible. The philosophy of management is that any intervention by the authorities in favor of the workers would only cost the corporations more money; increases in safety monitoring, healthcare, or augmented wages are all expensive propositions.

If the governments of Latin America were to press free trade zone operators to implement these labor standard changes as an act of common equity, foreign-owned maquiladoras would most likely either leave the Americas altogether in favor of lower cost locations in Asia, or take the matter before a NAFTA dispute panel.

Thus, it is not necessarily in the interest of regional governments to enforce those labor standards on the books, because they can be blackmailed with the threat that any attempt to enforce them would most likely be met with an eventual pullout of foreign investment from the country. This would not only devastate the effected nations' economies, but would also leave those presently working in the maquiladoras unemployed, with few remaining options at hand.

Proliferation of Maquiladoras

According to the Economic and Financial Review, there is a direct correlation between the spread of the maquiladora industry and the inauguration of NAFTA. During the first six years after the signing of the trade pact (1994-2000), there was a 110 percent growth in the Mexican sweatshop industry.

Besides the human rights abuses inherent in the operation of the maquiladoras, the primary problem with this category of growth is that it is not economically sustainable. According to Fidel Aroche, in his article "Vertical Integration and Comparative Advantages," although the manufacturing sector in Mexico has grown, the processes in place will not ensure long-term growth for Mexico because the industry is based on imported inputs with hardly any existing connection to the rest of the country's productive machinery.

Thus, the majority of the growth is in unsustainable industries based on the exploitation of labor and the "race to the bottom" among wages in developing nations. According to a 2006 report by the Economic Policy Institute (EPI), the maquiladora industry is "stuck in a trap of low productivity growth, reduced skills, and sustained by low wages."

Moreover, for better or for worse, Mexico is losing the "race to the bottom." The aforementioned report goes on to state that, in fact, "the number of maquiladora companies has diminished since 2000, which is the result of various companies leaving the country to go to other countries with wages even lower than those in Mexico."

Manufacturing in the U.S.

There is no denying the fact that NAFTA has generated an impressive net growth regarding exports from the U.S. Since the pact's inception, according to the EPI, U.S. outflows to Mexico have increased 114 percent and exports to Canada have risen 60 percent. On the other hand, imports from Mexico to the U.S. have risen by 274 percent, while those from Canada have grown by 90 percent.

As a result, the U.S.'s combined $20.6 billion trade deficit to Mexico and Canada in 1993 has ballooned in the post-NAFTA era by 538 percent to $110.6 billion in 2004 (figures provided in inflation-adjusted 1996 dollars by the EPI). This deficit is a signal of a growing U.S. dependence on the health of external economies and has affected several of the nation's key historic industries.

According to David Raney of the Alliance for Responsible Trade, the five major industrial groups which produce the U.S.'s most important exports (chemicals, plastics, electrical machinery and equipment, transportation equipment, and computers/electronic equipment) now have negative trade balances, which have increased at a staggering rate since NAFTA's ordination.

There is a direct correlation between the growth of the U.S.'s trade deficit and the rise in unemployment throughout the U.S. manufacturing sector over the last 13 years. According to international trade and macroeconomics expert Dr. L. Josh Bivins, growing trade deficits are responsible for 34 to 58 percent of the decline in manufacturing unemployment.

When one looks at the whole picture, NAFTA is responsible for a 77 percent increase in jobs supported by domestic exports and a 147 percent increase in jobs displaced by imports.

During the first 10 years of NAFTA, 942,459 jobs were created in the U.S. by the agreement, but 1,956,750 jobs have been nullified by it, resulting in an overall net loss of more than 1,000,000 jobs.

A report by Public Citizen found that workers in the U.S. who have lost high-wage jobs with benefits in the manufacturing sector have only been able to find "new work in service sector positions that typically pay 23-77 percent less than their previous wages and offer few or no benefits."

Among the hardest hit in the U.S. have been Latino workers. According to the report by the Labor Council for Latin American Advancement, 47 percent of the total number of workers who received federal assistance under a program for workers certified as having lost jobs in 1999 as a direct result of NAFTA, were Latino.

In addition to harming U.S. workers by causing job losses, NAFTA also has tended to tie the hands of labor unions, resulting in weakened pay rates and benefits. According to a report by the Hemispheric Social Alliance, it was clear to many labor organizers from the initial formation of NAFTA that the trade pact would cripple workers rights.

Predictably, the Clinton administration responded with toothless side agreements (such as the North American Agreement for Labor Cooperation) that did almost nothing to effectively bolster labor's influence or sense of security.

In fact, NAFTA has given U.S. employers the opportunity to move their operations outside of the U.S. with much greater ease. As such, the threat of moving jobs outside of the country has, on numerous occasions, been used by management in the U.S. to bargain for lower wages, poorer conditions as a result of give-backs, and to stave off union organizing drives.

From the signing of NAFTA until 1999, there was a steady increase in the number of employers using relocation as a negotiation tactic. According to a report filed by NAFTA expert Kate Bronfenbrenner for the U.S. Trade Deficit Review Commission, at some point during 68 percent of all union organizing drives in 1999, the threat of closing and/or moving production out of the U.S. was used by employers as a methodology to restrict worker's rights.

In 18 percent of such campaigns, Mexico was specifically cited as the final destination for jobs being moved outside of the U.S.

Reevaluation of Policy

As NAFTA lives on, it is critical to look back and reconsider the free trade policies that have been relentlessly pursued since the Clinton White House and the Democratic Leadership Council took on as their own what essentially was a Republican Party trade posture.

The evidence is overwhelming: NAFTA has damaged the manufacturing industry in the U.S. and Mexico.

As the maquiladora industry thrives (even in light of recent whittling) and human rights are continuously eroded in sweatshops across the globe, it is the responsibility of the U.S., the world's most insatiable consumer, to call attention to this injustice in the manufacturing sector and correct it through trade policies that affirm human dignity, such as the fair trade movement and regulations created by the U.S. government to monitor whether equitable labor rights are being respected, as well as under what conditions foreign goods and services are being imported into this country.

Furthermore, the labor movement that helped make the U.S. into the economic superpower it is today must be allowed to function without intimidation or manipulation.

Free trade agreements which spawn sweatshops and undermine the autonomous status of laborers the world over, and compromise future trade pacts, must make a greater effort to benefit all citizens, not just the corporate and banking sectors which normally are the primary beneficiaries of the U.S. economic order.

ENDS

The Council on Hemispheric Affairs, founded in 1975, is an independent, non-profit, non-partisan, tax-exempt research and information organization. It has been described on the Senate floor as being "one of the nation's most respected bodies of scholars and policy makers." For more information, please see our web page at www.coha.org; or contact our Washington offices by phone (202) 223-4975, fax (202) 223-4979

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