Mexico and the World
Vol. 3, No 1 (Winter 1998)
http://www.profmex.org/mexicoandtheworld/volume3/1winter98/nafta_justthefacts.html

Wall Street Journal, June 20, 1997

In the Debate About Nafta, Just the Facts Please

By Sidney Weintraub

The North American Free Trade Agreement has passed its third anniversary and so, according to its original enabling legislation, the Clinton administration must deliver a status report to Congress by July 1. The sensational trashing of Nafta by its op ponents has not lead up during its first three years and this mandatory report will bring the effects of Nafta back under the spotlight of domestic politics.With the potential for an expanded Nafta still alive, the report is also likely to be used in the continuing debate on free trade. Here’s a look at some of the most common concerns that the report is likely to address and a look at the facts.

Argument. NAFTA has led to a loss of hundreds of thousands of jobs because business prefer to shift labor costs to Mexico where workers can be paid less.

Facts. The U.S. has created more than two and a half million jobs a year since Nafta has been in effect and current U.S. unemployment, at 4.9%, is full employment by any reasonable calculation. The U.S. economy as a whole can't be losing jobs i f it is at full employment.

Argument. OK, but the new U.S. jobs are menial, poorly paying jobs.

Facts. To cite the 1997 report of the Council of Economic Advisors: "Most of the new positions created in the 1990s are good jobs," by which they mean jobs in manufacturing and higher paying services, not just hamburger flipping. Protectionists ge nerally fail to point out that salaries in export industries pay some 13% more than those in manufacturing generally.

Argument. When jobs are lost, individuals and families have little to fall back on because of the "inadequacy of adjustment assistance" — retraining and financial help in seeking employment — provided in the Nafta legislation.

Facts In the entire period of Nafta’s existence, the Department of Labor has certified some 125,000 people as being adversely affected by U.S. investment in, and imports from, Canada and Mexico. This number is about equal to the number of new jobs created in the U.S. every two weeks. About 10,000 of those who were certified took advantage of the benefits in the Nafta legislation.

Argument. It is undeniable that the U.S. bilateral trade deficit with Mexico last year was $15 billion.

Facts. The significance of the argument is unclear. Mexico, in 1995, went through a deep depression. Gross domestic product fell by almost 7% and, under these circumstances, its imports inevitably declined and its exports increased because the do mestic market collapsed. The single most important determinant of the annual trade balance between Mexico and the U.S. is the relative state of the two economies. This is evident in the accompanying graph, which shows how closely U.S. exports to Mexico track that country's economic growth: U.S. exports to Mexico started their upward movement again in 1996 when the Mexican economy resumed its growth. This year, Mexico is likely to become the second largest U.S. export market, after Canada, overtaking Ja pan.

Argument. But the extra imports from Mexico must have led to a loss of U.S. jobs. Facts. How could they, if the U.S. was at full employment? What the extra imports did was increase the choice for U.S. consumers and producers.

Argument. The Mexican economy collapsed in 1995 because of Nafta.

Facts. Mexico's economy was done in by a combination of two main developments: a series of political tragedies, including the assassination of the main presidential candidate, and a mismanaged monetary policy. Nafta contains nothing in its text ab out exchange-rate issues.

Argument. Mexico deliberately rigged its industrial policy to attract foreign investment in order to become a platform for export to the U.S.

Facts. Had Mexico wished to be a platform for shipment to the U.S., it would have undervalued the peso to stimulate exports. It did the opposite because priority was given to reducing inflation.

Argument. When Mexico realized that its exchange rate was overvalued, it rigged a devaluation to stimulate exports.

Insert GraphFacts. It is outrageous to assert that the Mexican authorities deliberately put the country through its worst economic tragedy since the Great Depression, and in the process ended the political monopoly of the ruling party, in order to arrange a temporary improvement in its trade balance with the U.S.

Argument. Real wages in Mexico have declined because export expansion demands this outcome.

Facts. Real wages did decline in 1995 because Mexico went through a catastrophic year economically. Unemployment also rose. Mexico's economy grew by more than 5% in 1996 and employment and wages also rose. The economy continues to expand in 199 7.

Argument. NAFTA limited Mexico's economic options in 1995, thereby making the depression worse than it otherwise would have been.

Facts. NAFTA did require that Mexico deal with its problems by overall macroeconomic measures and not by restrictions on imports from the U.S. The result was recovery in a single year, compared with the four years it took after the economic down turn in 1982, when the main medicine was import restrictions and capital controls.

Argument. The U.S. had to lend Mexico $20 billion at the beginning of 1995 to rescue the peso.

Facts. Yes, it did, and other lines of credit coming to a potential total of more than $50 billion were authorized. Early this year, Mexico repaid, with interest, all the money it drew down under the U.S. line of credit, and is on schedule in rep ayments of other credits. Most of the potential $50 billion never was used. Mexico was able to borrow in world money markets within six months of its collapse in early 1995, whereas it took more than six years after 1982 when the recovery policy was bas ed on import and capital restrictions.

Argument. Whatever its economic policies, Mexico is not a democracy and the U.S. therefore should not participate with it in a comprehensive free-trade agreement. Facts. This argument comes at precisely the moment that Mexico is moving to legitimate democracy under which opposition parties regularly win elections and may take over the government of Mexico City, the largest jurisdiction in the countr y, in July. A more open Mexican economy has helped open its political system.

Sidney Weintraub, who holds the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C., is the author of "NAFTA at Three: A Progress Report."