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NAFTA’s 20-Year Legacy and the Fate of the Trans-Pacific Partnership

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Recent public opinion polls show broad opposition to the Trans-Pacific Partnership (TPP) among Republicans, Democrats and independents of diverse geographic and socio-economic groups. What possibly could unite such a diversity of Americans otherwise deeply divided along partisan lines? The data compiled in this report on the outcomes of the North American Free Trade Agreement (NAFTA) provide an answer: 20 years of living with NAFTA has created deep default skepticism among Americans about trade agreements. Even before many Americans hear details of how the TPP would expand on the NAFTA model, NAFTA’s two-decade legacy has primed them to oppose the deal.

This is not a story about protectionism, but about lived experience. The data show that NAFTA proponents’ projections of broad economic benefits from the deal have failed to materialize. Instead, millions have suffered job loss, wage stagnation, and economic instability from NAFTA. Scores of environmental, health and other public interest policies have been challenged. Consumer safeguards, including key food safety protections, have been rolled back. And NAFTA supporters’ warnings about the chaos that would engulf Mexico, and a new wave of migration from Mexico, if NAFTA was not implemented have indeed come to pass, but ironically because of the devastation of many Mexicans’ livelihoods occurring, in part, because NAFTA was implemented.

NAFTA was an experiment, establishing a radically new “trade” agreement model. NAFTA was fundamentally different than past trade agreements in that it was only partially about trade. Indeed, it shattered the boundaries of past U.S. trade pacts, which had focused narrowly on cutting tariffs and easing quotas. In contrast, NAFTA created new privileges and protections for foreign investors that incentivized the offshoring of investment and jobs by eliminating many of the risks normally associated with moving production to low-wage countries. NAFTA allowed foreign investors to directly challenge before foreign tribunals domestic policies and actions, demanding government compensation for policies that they claimed undermined their expected future profits. NAFTA also contained chapters that required the three signatory countries to limit regulation of services, such as trucking and banking; extend medicine patent monopolies; limit food and product safety standards and border inspections; and waive domestic procurement preferences, such as Buy American policies.

These same sweeping terms are proposed for the TPP, a massive agreement with 11 Asian and Latin American countries that is premised on expanding the scope of the NAFTA model. It also contains terms that would more deeply infringe on domestic policymaking matters that directly and tangibly affect Americans’ daily lives, from Internet freedom to healthcare costs.

Like the TPP, NAFTA was sold to the U.S. public in 1993 with grand promises. The deal would create hundreds of thousands of good jobs here – 170,000 jobs within the pact’s first two years, according the Peterson Institute for International Economics. U.S. farmers would export their way to wealth. NAFTA would bring Mexico to a first-world level of economic prosperity and stability, providing new economic
opportunities that would reduce immigration to the United States. Environmental standards would improve.

Twenty years later, the grand projections and promises made by NAFTA’s proponents remain unfulfilled. Many outcomes are exactly the opposite of what was promised, as detailed in this report.

This NAFTA legacy now colors the burgeoning debate about the TPP. The Clinton administration’s efforts to expand the NAFTA model – through a Free Trade Area of the Americas (FTAA) and an AsiaPacific Economic Cooperation (APEC) Free Trade Agreement (FTA) – were rejected by key negotiating partners as the early results of NAFTA became apparent. And Congress’ unhappiness with NAFTA’s early outcomes fueled bipartisan opposition in the House of Representatives to handing the president Fast Track authority to push through Congress further FTAs. In 1998, 171 House Democrats and 71 House GOP members rejected President Clinton’s quest to obtain Fast Track authority for the FTAA. Indeed, ever since Congress learned from NAFTA and the World Trade Organization how Fast Track enabled executive branch officials to “diplomatically legislate” through trade negotiations, Democratic and GOP presidents alike have struggled to convince Congress to provide the broad authority. Fast Track has only been in effect for five of the 20 years since Congress voted for NAFTA and the WTO.

The outcomes of NAFTA-style trade agreements signed during those years – from 2002 to 2007 – only have reinforced public and policymaker understanding that the underlying model does not work for most Americans. Consider the U.S.-Korea Free Trade Agreement (FTA), the text of which provided the U.S. opening proposals for the TPP. There has been a stunning decline in U.S. exports to Korea, a rise in imports from Korea, and a widening of the U.S. trade deficit since the Korea FTA took effect. U.S. average monthly exports to Korea since the FTA are 12 percent lower than the pre-FTA monthly average, while monthly imports from Korea are up 3 percent. The monthly trade deficit with Korea has ballooned 49 percent compared to the pre-FTA level. These losses amount to tens of thousands of additional U.S.
job losses.

Now the same business interests (and indeed many of the same officials who served in the Clinton administration during the NAFTA debate and who now lead Obama administration trade policy) are flooding the U.S. public and policymakers with the same sorts of rosy projections for the TPP that were used to sell NAFTA and the Korea FTA. The difference is the availability of two decades of empirical data that show how the NAFTA model has actually performed:

  • Rather than creating the promised hundreds of thousands of U.S. jobs, NAFTA has contributed to an enormous new U.S. trade deficit with Mexico and Canada, which had already equated to an estimated net loss of one million U.S. jobs by 2004. This figure, calculated by the Economic Policy Institute (EPI), includes the net balance between jobs created and jobs lost. Much of the job erosion stems from the decisions of U.S. firms to embrace NAFTA’s new foreign investor privileges and relocate production to Mexico to take advantage of its lower wages and weaker environmental standards. EPI calculates that the ballooning trade deficit with Mexico alone destroyed about seven hundred thousand net U.S. jobs between NAFTA’s implementation and 2010. This toll has likely grown since 2010, as the non-oil U.S. trade deficit with Mexico has risen further.
  • More than 845,000 specific U.S. workers have been certified for Trade Adjustment Assistance (TAA) as having lost their jobs due to imports from Canada and Mexico or the relocation of factories to those countries. The TAA program is quite narrow, only covering a subset of jobs lost to trade, and is difficult to qualify for. Thus, the NAFTA TAA numbers significantly undercount NAFTA job loss.
  • NAFTA has contributed to downward pressure on U.S. wages and growth in U.S. income inequality. NAFTA’s broadest economic impact has been to fundamentally transform the types of jobs and wages available for the 63 percent of American workers without a college degree. Most of those who lost manufacturing jobs to NAFTA offshoring and import competition found reemployment
    in lower-wage jobs in non-offshorable service sectors. They added to the glut of workers seeking jobs in these growing sectors, pushing down wages. There is broad consensus among economists that recent trade flows have been a significant contributor to the historic rise in U.S. income inequality; the only debate is about the degree of trade’s responsibility.

    • According to the U.S. Bureau of Labor Statistics, two out of every three displaced manufacturing workers who were rehired in 2012 experienced a wage reduction, most of them taking a pay cut of greater than 20 percent.
    • As increasing numbers of workers displaced from manufacturing jobs have joined those competing for non-offshorable, low-skill jobs in sectors such as hospitality and food service, real wages have also fallen in these sectors under NAFTA. The resulting downward pressure on middle-class wages has fueled recent income inequality growth.
  • Soon after NAFTA’s passage, the small pre-NAFTA U.S. trade surplus with Mexico turned into a massive new trade deficit and the pre-NAFTA U.S. trade deficit with Canada expanded greatly. The inflation-adjusted U.S. trade surplus with Mexico of $2.5 billion and the $29.6 billion deficit with Canada in the year before NAFTA have morphed into a combined NAFTA trade deficit of $177 billion.10 The rosy job-creation promises made at the time of the NAFTA votes were predicated on NAFTA improving the U.S. balance of trade. The reality has been the opposite.
  • U.S. manufacturing and services exports to Mexico and Canada grew slower after NAFTA took effect. Since NAFTA’s enactment, annual growth in U.S. manufacturing exports to Canada and Mexico has fallen 62 percent below the annual rate seen in the years before NAFTA. Even growth in services exports, which were supposed to do especially well under the trade pact given a presumed U.S. comparative advantage in services, dropped precipitously after NAFTA’s implementation. Annual growth of U.S. services exports to Mexico and Canada since NAFTA has fallen 49 percent below the pre-NAFTA rate.12 Indeed, the overall growth of U.S. exports to countries that are not FTA partners has exceeded combined U.S. export growth to countries that are FTA partners by 30 percent
    over the last decade.
  • Despite a 239 percent rise in food imports from Canada and Mexico under NAFTA, the average nominal price of food in the United States has jumped 67 percent since the deal went into effect. This is the opposite of the outcome promised when NAFTA passage was debated. Then, some NAFTA proponents acknowledged that the deal would cause the loss of some U.S. jobs, but argued that U.S. workers would win overall by being able to purchase cheaper imported goods.
  • The reductions in consumer goods prices that have materialized have not been sufficient to offset the losses to middle-class wages under NAFTA. U.S. workers without college degrees (63 percent of the workforce) have likely lost an amount equal to 12.2 percent of their wages under NAFTA-style trade even after accounting for the benefits of cheaper goods. This net loss, calculated by the Center for Economic and Policy Research, means losing more than $3,300 per year for a worker earning the median annual wage of $27,500.
  • During the NAFTA debate, scores of U.S. corporations promised to create specific numbers of jobs if NAFTA passed. Public Citizen catalogued these pledges, the failure to meet them, and even the record of the same firms’ relocation of jobs to Mexico and Canada, in a comprehensive report.
  • Scores of NAFTA countries’ environmental and health laws have been challenged in foreign tribunals through the controversial “investor-state” system. More than $360 million in compensation to investors has been extracted from NAFTA governments via investor-state tribunal challenges against toxics bans, land-use rules, water and forestry policies and more. More than $12.4 billion are currently pending in such claims. These claims include foreign investor challenges of medicine patent policies, a fracking moratorium and a renewable energy program.
  • The average annual U.S. agricultural deficit with Mexico and Canada in NAFTA’s first two decades reached $975 million, almost three times the pre-NAFTA level.19 U.S. food processors moved to Mexico to take advantage of low wages and food imports soared. U.S. beef imports from Mexico and Canada, for example, have risen 133 percent since NAFTA took effect, and today U.S. consumption of “NAFTA” beef tops $1.3 billion annually.
  • Imports of food into the United States from Mexico and Canada have risen more steadily and to a greater degree than U.S. food exports under NAFTA. Over the last decade, U.S. food exports to Mexico and Canada have actually fallen slightly while U.S. food imports from Mexico and Canada have more than doubled. This stands in stark contrast to the promises made to U.S. farmers and ranchers that NAFTA would allow them to export their way to newfound wealth and farm income stability.
  • The export of subsidized U.S. corn did increase under NAFTA’s first decade, destroying the livelihoods of more than one million Mexican campesino farmers and about 1.4 million additional Mexican workers whose livelihoods depended on agriculture. The mass dislocation exacerbated the widespread instability and violence of Mexico’s spiraling drug war.
  • The desperate migration of those displaced from Mexico’s rural economy pushed down wages in Mexico’s border maquiladora factory zone and contributed to a doubling of Mexican immigration to the United States following NAFTA’s implementation.
  • Though the price paid to Mexican farmers for corn plummeted after NAFTA, the deregulated retail price of tortillas – Mexico’s staple food – shot up 279 percent in the pact’s first 10 years.
  • Real wages in Mexico have fallen below pre-NAFTA levels as price increases for basic consumer goods have exceeded wage increases. A minimum wage earner in Mexico today can buy 38 percent fewer consumer goods as on the day that NAFTA took effect. Despite promises that NAFTA would benefit Mexican consumers by granting access to cheaper imported products, the cost of basic consumer goods in Mexico has risen to seven times the pre-NAFTA level, while the minimum wage stands at only four times the pre-NAFTA level.
  • Facing displacement, rising prices and stagnant wages, over half of the Mexican population, and over 60 percent of the rural population, still fall below the poverty line, despite the promises made by NAFTA’s proponents.