NAFTA's Footloose Plants Abandon Workers

by Tim Koechlin

 AS THE NOVEMBER 1993 CONGRESSIONAL VOTE on the North American Free Trade Agreement (NAFTA ) neared, President Clinton, economists and corporate lobbyists promised that NAFTA would mean lower prices, higher wages and more jobs. NAFTA advocates dismissed opponents' concerns that NAFTA would enhance the power and profits of multinational corporations as paranoid and naive, proclaiming that workers and consumers would be NAFTA's true winners.

Fifteen months after NAFTA took effect, the concerns of NAFTA critics have been borne out:

 While it is too early to determine NAFTA's precise effects on workers, it is abundantly clear that workers in the United States, Mexico and Canada are worse off because of NAFTA. On balance, jobs have been destroyed and the wages and security of employed workers in all three countries have been undermined. The crash of Mexico's currency and economy will make things much worse, especially for Mexican workers.

Trading away jobs

As the trade numbers for the year-old NAFTA were reported in January 1995, NAFTA's proponents declared the agreement a great success. Exports from the United States to Mexico have grown, as they predicted, and, as they never tire of repeating, exports mean jobs. But claims of this sort are shamefully deceptive. Generally, exports do create domestic jobs. But, conversely, imports destroy domestic jobs. What NAFTA supporters conveniently overlook is that U.S. imports from Mexico have grown more quickly than U.S. exports to Mexico.

Take automobile trade. Secretary of Commerce Ron Brown and USA*NAFTA, the leading pro-NAFTA corporate lobby, point to a "boom" in U.S. vehicle exports to Mexico as evidence that NAFTA is creating good jobs for U.S. workers. U.S. vehicle exports to Mexico increased by nearly 40,000 in 1994. But auto imports from Mexico increased by nearly 70,000. This post-NAFTA result represents an acceleration of the southerly shift in auto jobs. The "Big Three" U.S. automakers employed some 29,000 workers in Mexico in 1985. By the end of the decade they employed three times that number of Mexican workers.

In the aggregate, too, NAFTA is facilitating and accelerating the relocation of jobs to Mexico. Net exports of merchandise - the difference between U.S. exports of goods to Mexico and U.S. imports of goods from Mexico - have declined precipitously in the past two years. In 1992 (the "base year" for many NAFTA projections) the United States ran a $5.4 billion merchandise trade surplus with Mexico. Net exports declined to $1.7 billion in 1993, and $1.35 billion in 1994.

Since the devaluation of the peso - which makes U.S. goods more expensive in Mexico, and Mexican goods cheaper in the United States - the U.S. trade surplus has dissolved altogether. In recent months, the United States has begun to run a trade deficit with Mexico. In January 1995, imports from Mexico exceeded U.S. exports to Mexico by half a billion dollars, and preliminary estimates suggest that the deficit in February was about the same.

NAFTA supporters were fond of pointing out that sustained net exports mean jobs, but the now-plummeting net export figures translate into job losses. Economists typically assume that $1 billion of net exports means 15,000 to 20,000 U.S. jobs. This suggests that since NAFTA went into effect on January 1, 1994, trade with Mexico has cost U.S. workers something like 30,000 jobs - and, given the Mexican crisis, greater U.S. job loss is sure to follow.

 NAFTA-related U.S. job loss is likely to get worse for another reason. U.S. exports of capital goods to Mexico grew by 23 percent during the first eight months of 1994. Clearly, U.S. exports of capital goods - machinery used to produce other goods - create U.S. jobs in the short term. But much of this productive capital will be used to produce goods for the U.S. market. In the long term, these expanding Mexican exports to the United States will displace jobs held by more costly U.S. workers.

 Despite the efforts of NAFTA proponents to put a positive spin on a bad situation, NAFTA has not delivered the goods. Widely cited projections that NAFTA would create jobs were premised on the assumption that the U.S. trade surplus with Mexico would grow immediately after NAFTA's passage and then stabilize. Gary C. Hufbauer and Jeffrey J. Schott of the Institute for International Economics projected an annual trade surplus of $9 billion, and the creation of up to 170,000 U.S. jobs between 1990, when NAFTA talks were initiated, and 1995. But net exports are declining and U.S. workers are paying the price.

Runaway investment

Economists defended NAFTA on the basis of classical trade theory, which argues that free trade makes the economic pie bigger. But allusions to trade theory are misleading because, as Jeff Faux and Thea Lee of the Economic Policy Institute note, "the fundamental purpose of NAFTA is to facilitate the shift in investment to Mexico." For starters, NAFTA is full of provisions eradicating Mexico's traditional restrictions on foreign investment. The reduction of trade barriers also has the effect of promoting investment in Mexico, because it allows investors to exploit low Mexican wages and lax environmental standards without sacrificing access to the huge U.S. market.

The liberalization of trade and investment between Mexico and the United States in recent years - culminating with NAFTA - has sparked a direct foreign investment boom in Mexico. In 1988, U.S. direct investment flows to Mexico totaled $579 million. Between 1989 and 1993, these direct investment flows averaged more than $2 billion a year. Last year, U.S. multinationals invested more than $4 billion in Mexico, a seven-fold increase in just six years. This investment spurt, much of it at the expense of investment in the United States, means fewer U.S. jobs and lower U.S. wages.

 There has also been a foreign investment surge from multinationals based outside of the United States. These corporations, which invested a then-record $1.4 billion in Mexico in 1993, invested $4 billion in 1994. Some of this investment has come at the expense of U.S. investment and jobs, as non-U.S. multinationals, like their U.S. counterparts, increasingly use Mexico as a cheap platform from which to service the U.S. market.

 NAFTA also has hurt U.S. workers by enhancing corporate power and undermining corporate accountability. By making the threat of relocation increasingly viable, NAFTA gives mobile corporations an upper hand in their negotiations with workers, communities and governments. A 1992 survey by the Roper Organization of 455 top manufacturing executives found that, if NAFTA was implemented, 24 percent would use the threat of relocation as a bargaining chip to keep wages down.

Corporations have delivered on that promise. In August 1994, for example, unionized workers at Leviton , a Warwick, Rhode Island-based electrical outlet manufacturer, overwhelmingly voted to accept a two- year wage freeze and to surrender overtime pay on 12-hour shifts rather than taking the risk that their jobs would be exported. A Leviton manager warned employees that a vote against the concessions would be "the beginning of the end." Thousands of workers have endured real wage declines because of pressures that come with NAFTA, including accelerating capital mobility, intense import competition and undermined worker bargaining power.

 Some pay a higher price for free trade than others. Mexicans and U.S. residents with the lowest incomes are paying more than their fair share of NAFTA's costs. "NAFTA's First Year," a report issued by the Alliance for Trade Responsibility, the Citizens Trade Campaign and the Trade Research Consortium, concludes that NAFTA has been especially hard on women and people of color, who are disproportionately represented in labor-intensive industries such as textiles and apparel. But NAFTA has also destroyed thousands of high-tech jobs. The AFL-CIO report "NAFTAmath" points out that U.S. imports of electronics, computer products and telecommunications equipment from Mexico in 1994 exceeded exports by about two to one.

The end of the Mexican miracle

NAFTA already looked like a bad deal for U.S. workers before the December 20, 1994 devaluation. But the subsequent free fall of the peso and broader economic crisis has turned NAFTA into a disaster for workers on both sides of the border. Austerity and depression in Mexico mean that the typical Mexican will become poorer and less able to buy U.S. products. Preliminary estimates indicate that Mexican imports fell by 26 percent from December 1994 to February 1995. David Wyss, research director at the private consulting firm DRI/McGraw Hill, told the Senate Budget Committee that the crisis in Mexico could reduce growth in the United States by four-tenths of a percent, at a cost of up to 350,000 jobs.

 For Mexican workers and peasants, this crisis is an unspeakable tragedy. Higher interest rates, dramatic cuts in government spending and a weak currency mean fewer jobs, lower wages and more poverty. Since the new year, hundreds of thousands of Mexicans have already been thrown out of work. The Mexican government has made it national policy to ensure that real Mexican wages will fall even more, by requiring that wages not increase as fast as inflation.

One group is likely to benefit from the unraveling of the Mexican economy: Mexican-based exporters, including multinationals operating in Mexico. Declining Mexican wages and a weak peso mean lower production costs and more competitive exports. While workers on both sides of the border watch their paychecks shrink, employers in Mexico's maquiladoras are likely to enjoy growing profits. Recognizing this, Nike, which has many of its production facilities concentrated in Southeast Asia, announced within days of the peso's fall that it would open assembly plants in Mexico. Other corporations are sure to follow in Nike's footsteps, trampling the interests of underpaid Mexican workers and those who lose their jobs in the United States.