My Talk at the Center for Latin American Studies on NAFTA

Economic: Brad DeLong's “Afta Thoughts on NAFTA” Monday, Oct. 16, 12 p.m., Women’s Faculty Club

Brad DeLong: “I was a true believer in NAFTA — the North American Free Trade Agreement. Now my faith is not gone, but shaken.” So says Brad DeLong, professor of economics and creator of one of the Web’s most popular blogs on economics (j-bradford-delong.net). DeLong, chair of the political economy major, will address the status of North American Free Trade Agreement and other free-trade negotiations in the Americas in a talk for the Center for Latin American Studies.

DeLong is also a research associate at the National Bureau of Economic Research and was deputy assistant secretary of the Treasury for Economic Policy during the Clinton Administration.

---

Now I have to write up the talk as a whole. Here is a sketch of the argument:

http://www.project-syndicate.org/commentary/delong51: Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success. The key argument in favor of NAFTA had been that it was the most promising road the United States could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop.

Since NAFTA, Mexican real GDP has grown at 3.6% per year, and exports have boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP today. Next year, Mexico’s real exports will be five times what they were in 1990.

It is here – in the rapid development of export industries and the dramatic rise in export volumes – that NAFTA made the difference. NAFTA guarantees Mexican producers tariff and quota-free access to the US market, the largest consumer market in the world.

Without this guarantee, fewer would have invested in the capacity to satisfy the US market. Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.

Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. Likewise, greater efficiency should have been reinforced by a boom in capital formation, which should have accompanied the guarantee that no future wave of protectionism in the US would shut factories in Mexico.

The key word here is “should.” Today’s 100 million Mexicans have real incomes – at purchasing power parity – of roughly $10,000 per year, a quarter of the current US level. They are investing perhaps a fifth of GDP in gross fixed capital formation – a healthy amount – and have greatly expanded their integration into the world (i.e., the North American) economy since NAFTA.

But the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of population and increase, means that Mexicans’ mean income is barely 15% above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago. (Indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico.)

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade. We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.

To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico’s powerful geographic advantages and the potent benefits of neo-liberal policies, should they? Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.

We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. We thus implicitly suggest that Mexicans would be far wose off today without NAFTA and its effects weighing in on the positive side of the scale.

That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.

Comments

[jerry]

What was the basis for your thinking back then that progress was to be "rapid". What is "rapid?"

Your argument back then was apparently, more free trade, and the rest, higher education, less corruption, better wages, better ecology will follow even though there is nothing in the agreement that would measure or mandate such things. How does that align with the micro-economic argument that if you don't measure or incent an activity your pretty crazy for expecting it to increase?

What would your neo-liberal argument contrast with a liberal argument of fair-trade over free-trade in which fair-trade agreements do explicitly measure and incent these activities?

What has NAFTA done to the United States job market? I thought NAFTA was to improve conditions throughout the United States as well. Are US jobs more or less secure due to NAFTA? Is immigration up or down due to NAFTA?

Is the United States experience of NAFTA relevant to you in any manner, or is it fair to summarize that you felt that the United States was strong enough to make this give-away of 200 years of the benefits fighting for the rights of its laborer-citizens to help out Mexico?

What was your basis then for advising a policy that mandated "rapid" change as opposed to say merely a "monotonically increasing" change?

What lessons of NAFTA should we now take to CAFTA?

Your article seems to be lacking in these details. Feel free to resubmit when these deficits are addressed.

[Bupa]

Which part of neo-liberal trade theory says that free trade reduces corruption and state-capture, increases the quality and quantity of education, improves the effectiveness of public sector governance, and conquers every other social and economic ill that hold developing countries back? I missed that part of the literature back in the stone-ages when I was a student of economics.

Did you really believe that one policy will outweigh all others? Are you neo-liberal or neo-conservative... or just insane?

[Jim Bunnell]

http://www.epi.org/content.cfm/bp173

[piotr]

How does Mexico compare to Brasil in the economic growth? Given the similarities between the two countries, the comparison could tell if NAFTA was beneficial.

By the way, the rate of population increase in Mexico dropped quite a bit, I think it is 1.7% rather than 2.5%.

[Barkley Rosser]

I have a lot of sympathy with Brad on this one. I am someone who also publicly (not as publicly as him) supported NAFTA when it was up for approval. I will also note that arguments by jerry and others do not hold well, and that in general more free trade-oriented countries have done well growthwise than those engaging in major protectionism in recent decades (and there is also little evidence of any net job loss in the US due to NAFTA).

However, Mexico has not done as well as expected on several fronts. One is that it was reasonable to expect development to move away from the Maquiladora zone on the border, which gained no advantages from the agreement. There should have been a shift of investment to the interior, but this did not happen, and most of the growth continued to be in or near the ugly maquiladora zone.

One factor that I think partly explains what has happened has been the fact that the US did not really keep its end of the bargain up. Both parties were to end or reduce subsidies to agriculturally traded goods, after some time lag. However, for the most important of these, maize (corn), while Mexico ended its subsidies completely (and also ended support for the ejido communalized farms where maize was grown using traditional techniques), the US has in recent years gone the other way, increasing its subsidies for this sector.

The upshot has been a massive outpouring of people off the ejidos and out of the poorest maize producing sector of the Mexican economy (it is also worth remembering that it was in Mexico that maize was first cultivated, thousands of years ago). This mass entry into the urban and industrial labor force has depressed wages in that sector. This has been a serious offset to the hoped-for inreases in wages and incomes for most of the population that has not happened. Presidente Fox complained about this at length, and with great justification in my view, at the Cancun WTO conference, which ended in a disagreement, largely over the ag subsidies in the US, EU, and Japan issue.

BTW, this is not a matter of how great trade restrictions are or any of that. This is a matter of the US not keeping up its end of the bargain to make its markets fully open and not engage in protectionism through subsidies in a key sector for the Mexican economy. We screwed them over by hypocritically engaging in protectionism.

[save_the_rustbelt]

I find it interesting that Prof. DeLong seems to analyze NAFTA only from perspective of Mexico, he barely mentions the U.S.

The workers in Ohio and Michigan who lost their jobs to Mexico have a slightly different perspective.

Clinton told us that displaced US manufacturing workers would soon enough benefit from "high value service jobs." I don't think Clinton was lying, the world was changing faster than anyone thought and US workers got screwed.

NAFTA failed in both directions. But we get to shop at Wal-Mart!

[John Emerson]

The bothersome thing for me is that Mexico is an average country, not a poor country. It looks poor from the US, but it looks rich from almost everywhere in Africa.

[shander]

Maybe they are culturally (a bit of a wink here) dysfunctional?

A take away I got from that walmart jakcet piece was the irony that the "pro-market" conservative was firmly (if unintentionally) pointing out that other factors rather than rational desire for economic maximization impact sucess of markets in their micro level reach.

I'd look to a Jared Diamond sort of explanation. or maybe I'd throw a shot gun of "brain drain" "servilty/aritocracy/fatilism thats seems persistent for 100's of years", "the weather and its dampening of initiative in laboring families" (?smirk?).

Or, even more so, I would point to something entirely external to the North American situation.. the INDustrialization of china...its mind blowing relative populations of close to subusistantce farmers just absoluting wracking the value of any movable stored labor good.

How could Nafta's effect be stripped away and analyzed in terms of benefit to Mexican "middle class" (or what have you)??

I would like to see an examination of the wages of skilled Mexicans in industries where their labor output did not compete against the chinese wages. Perhaps Nurses, guys that knew how to maintain a ciy's powergrid, folks running appliance repair buinesses etc. Even those wages would certainly be impacted by the lower next best job people bucking to take their place.

I'd also think that the answers to widerspread propsperity would not be the rear view mirror approach emphasizing exports or even objects.

As production continually becomes more efficient and perhaps need of more items becomes elective (that second or third winter coat) its really services that are going to be the key... how to find ways to stimulate not investment but turning of money in ways that employ and encourage efficient work and lifestyle (education - health - relaive sobriety) of those at the edges of the economy.

[liberal]

Barkley Rosser wrote, "One factor that I think partly explains what has happened has been the fact that the US did not really keep its end of the bargain up. ... the US has in recent years gone the other way, increasing its subsidies for this sector."

Does the international trade theory that says "free" trade benefits both countries actually say that a subsidy of an industry in one of the countries is bad for the other country?

[sm]

When has the US kept its side of the bargain in any of these free trade deals?

[David A. Spitzley]

I think the discrepancy between expectations and results from NAFTA in Mexico may be related to a second topic that crops up on this blog periodically: the lack of wage growth in the face or substantial productivity growth in the United States. It seems to me that both of these "surprises" are likely rooted in the same issue, namely that we as economists don't have a good model of what determines how expanded economic output gets divided between workers and shareholders.

Notionally capital and labor should be getting paid their marginal product, but the economy-wide persistence of non-zero profits (through product differentiation and other forms of market power) means that there's probably more to be divvied up than is accounted for in the standard story. If so, then gains by workers in the first two-thirds of the 20th century may have been (for example) union-induced shifts of the "excess" profit split towards workers, while the massive spike in income gains for shareholders in the last couple decades may represent the pendulum swinging the other way in the face of global wage competition and deunionization.

Hmm. I should save the permalink for this so I can come back to it after I finish my dissertation...

[otto]

"Now my faith is not gone, but shaken"

The whole argument presented here tends to mislead. You are leading readers to expect a criticism of NAFTA as helping Mexico, but in fact your criticism is more of the NAFTA-is-not-enough variety, which is only shaking your faith in NAFTA if you felt that NAFTA was the silver bullet for Mexican development, rather than merely (merely!) an massive benefit at the margin. Plus Mexico did get democratised in part through the NAFTA engagement, which is not a bad side dish.

And as far as the NAFTA-is-not-enough argument goes, the alternative of massive grants of money for Mexican infrastructure and education, direct involvement of the US in Mexican policy-making etc, on the lines of the EU's expansion to Eastern Europe, this is completely outside what is possible within US electoral politics. How can I put it? You would be asking for a pony.

[bigTom]

I think there is a very large question which needs exploring. The American economies south of the US border all seem to be seriously underperforming. It seems to this non-economist, that economic policies that seemed to work wonders for Asian economies, are widely being seen as failures by the people of the region. In their frustration many of these countries are turning to socialist models, which are unlikely to help. There must be some collection of factors related to these cultures, which makes growth difficult to sustain. Identifying the causes would be a good first step toward fixing the situation.

[piotr]

Just a personal testimony: when Piotr was young and stupid, he read coject and convincing description how NAFTA will lead to blah blah... and invested a non-negligible (for a young and stupid and so-so middle class) amount of money in a mutual fund of government securities of NAFTA countries that was, for yield purposes, skewed quite a bit toward Mexican peso.

Then peso started to slide slowly down, so Mrs. Piotr questioned the wisdom of this investment, but with NAFTA lifting the economic growth of Mexico selling at that point would be misguided -- it was rather a buying opportunity! Women just do not understand economics.

The peso crashed, Piotr will never say a cross word about women and economics, and at the tax time Piotr realized that of 15k losses, IRS counts at least 3k as gain (more precisely, my household received a pile of taxable interest payments that were converted to peso-based securities which halved in value, but thats capital gains and losses, totally independent from interest income on which the tax was due). The only thing that tops paying taxes on your losses is explaining your wife how it happens (or explaining how you did totalized the car).

By the way, was Mexico democratized as a part of consequences of NAFTA? Really? Or as a consequence of social changes that happened in virtually all countries of Latin America? Same with economic growth or the lack of it.

Another by the way. It seems that trade liberalization often leads to totally divergent trends in trade and consumption. Usually, the two were going together, so doubling of exports should be expected to considerably increase personal prosperity of inhabitants of a country. However, if you make exports easier without any other changes in social policies, surprise! exports increase without any other changes in economic and social outcomes (except in the narrow sector involved in exports). But some economist, or at least The Economist, keep lecturing that trade is THE engine of growth.

A naive person could think that USA was interested in Mexico having equitable economic growth, so there would be less pressure for emigration from the dirt-poor parts of that country. But no, while it is OK to locate factories in China, Indonesia etc., if they are located in Mexico, it has to be smack on the border. Imagine an initiative to locate industrial parks in Yukatan, Chiapas and Oaxaca. Naaay. And similarly, a naive person would think that it would be more rational to facilitate production of fruits and vegetables in regions of declining maize production and resulting labor surpluses rather than importing illegal laborers to USA. Naaay.

The most hilarious NAFTA-related piece of news I have ever read was about anti-dumping action of US government against Mexico undercutting our domestic production of straw brooms.

And do not try to joke about promoting democracy in Mexico; PRI's fortunes declined due to incredible corruption of the latest president from that party, plus the internal divisions that split a big chunk of party away, plus it ceased to be fashonable in Latin America to ruthlessly supress opposition and to blithely falsify elections.

So perhaps NAFTA was a foolproof prescription for prosperity across North America, but as people say in software design, you can make it foolproof but not damnfoolproof.

[Barkley Rosser]

sm,

The US has kept lots of trade deals made with the European trading partners dating back to the GATT negotiations of the late 1940s, the Kennedy Round of tariff reductions of the 1960s, and some later agreements as well. I think the difference is one of a power imbalance: Wesern Europe has the power to match the US, Mexico does not.

piotr,

I think the straw broom deal involved Panama, not Mexico.

liberal,

I don't think trade theory gives a definite answer about the effect of a subsidy in one country on the other, but in this case it certainly can be seen to have hurt the Mexicans and also been against the spirit, and I suspect the letter as well of NAFTA. I do not blame them one iota for kvetching.

[jerry]

"The whole argument presented here tends to mislead. You are leading readers to expect a criticism of NAFTA as helping Mexico, but in fact your criticism is more of the NAFTA-is-not-enough variety, which is only shaking your faith in NAFTA if you felt that NAFTA was the silver bullet for Mexican development, rather than merely (merely!) an massive benefit at the margin. Plus Mexico did get democratised in part through the NAFTA engagement, which is not a bad side dish."

Ooh! White-Man's Burden! No wonder we didn't care about incentivizing or measuring the actual effects! Best of which is that now we have 3rd world countries to colonize in our own country! Woohoo!

[piotr]

December 13, 1996, Friday
By JULIA PRESTON (NYT); Business/Financial Desk
Late Edition - Final, Section D, Page 1, Column 5, 724 words

DISPLAYING ABSTRACT - Mexico raises import tariffs on eight American products, responding sharply to recent decision by Washington to punish Mexican straw-broom makers with higher duties; trade duel brings first tariff increases between two countries since North American Free Trade Agreement went into effect in January 1994

To read this archive article, upgrade to TimesSelect or purchase as a single article.

[Walt]

In defence of Brad only addressing Mexico: it was a talk at the Center for Latin American Studies.

[save_the_rustbelt]

"...In defence of Brad only addressing Mexico: it was a talk at the Center for Latin American Studies...."

True enough, but it is a three party trade agreement, so it should be analyzed as such.

[Barkley Rosser]

piotr,

I stand corrected vis a vis the straw broom issue.

[wjd123]

"We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. We thus implicitly suggest that Mexicans would be far worse off today without NAFTA and its effects weighing in on the positive side of the scale.

"That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one."

What associated reforms? NAFTA was an agreement to remove tariffs without reforms. Unlike the EU where reforms come first and then trade, NAFTA agreed to trade and then the mere hope of reforms.

The NAFTA approach is unrealistic for integrating two political economies. Unlike the EU, there is no effort to standardize political economies to the point where "ought implies can."

There was no effort to improve Mexico's infrastructure, or to insist on political reform. Therefore I don't agree that neo-liberal economist are blameless in and increase in corruption and crime.

After all before one recommends changes to the political economies of nations one has the ethical duty to try to understand the possible ramifications.

That Mexico wouldn't have the ability to control increased corrupution and crime seems obvious.

[Hector M. Padilla]

Why is it that in Mexico there has been in an important number of the economic and political desicion making systematical errors for the last 30 year? Time and again the point is missed. Basically because there
is an "overpowering" amount of noise in the enviroment or to put it bluntly: corruption.
Now, to overcome the systematic missing of the point a Center has to be established, and it has to be essential, meaning a clearly articulated Vision of where Mexico can be in 20 or so years,(there is non now)and the objectives on the short and long term to obtain and the measurable results that can be accountable. This is precisely what Mr. Calderon is doing and starting in the right direction. It follows that a significant reduction in the "overpowering
noise" would follow, so that the policies can hit closer to the center and receive
the feedback in time.
Nafta is the way to go, a world table needs
at least 3 legs and Mexico wants to be part of one, but it can contribute significantly by being an international logistics hub with
Foreign Trade Zones in the maritime and
terrestrial ports, this could help bring the
south economic prosperity and transform Mexico into a globalized economy.

[Patrick Schoenfelder]

This is an interesting discussion.

Examination of the after effects of NAFTA indicates that Mexico has probably been a loser, Canada a huge winner, and the US has more or less had a draw -- if you have lost your job in manufacturing you lose, if you paid less for your Chevy Suburban you win.

This is not surprising, since the actual history of free trade shows that it generally benefits developed nations but not developing or undeveloped nations. Every developmental success story, from the US to South Korea, has been marked by the use of high levels of tariff or other barriers. During the Cold War, the US tolerated assymetric trade arrangements with so-called "frontline" states from Western Europe to Singapore, South Korea, Taiwan, and Japan, allowing them to protect their markets with tariff or non-tariff barriers while opening large segments of our markets to their products. In addition we provided them with generous infusions of capital in the form of aid. The EU has followed a somewhat similar policy, with more emphasis on aid and less on allowing protection, in developing Spain, Portugal, Finland, Italy, Greece, and their poster child Ireland.

The Canadians had an experienced work force with high levels of education, strong infrastructure, a large investment pool, and social and government structures to support trade and development of industry to take advantage of NAFTA. Mexico had a poorly skilled work force, poor infrastructure and capital resource markets, and a semi-functional government system plagued by all the problems of corruption, cronyism, and inefficiency. Once China was granted most favored nation status, the ability of Mexico to compete for lowest common denominator unskilled labor died, and with it the success of NAFTA.

In conclusion, if the US as a nation wishes to encourage development in Latin America, for whatever reason, they need to be willing to extend the advantage to Latin American countries in the form of aid or protections while opening our own markets, rather than allowing banks, investors, and especially our heavily subsidized agriculture systems to destroy local economic structures without offering replacements.

[Barkley Rosser]

wid123,

You are wrong about the EU. The Common Market was a free trade agreement before it was a economic community with common regulations.

I do hope that Peter Schaeffer does not froth at the mouth too much here on brad delong about the Mexicans. His vomitorious outpouring over on marginal revolution of racist claptrap was absolutely repulsive.

[wjd123]

Barkley Rosser,

You wrote:

"You are wrong about the EU. The Common Market was a free trade agreement before it was a economic community with common regulations."

Here is what I wrote--and note that the subject is associated reforms:

"What associated reforms? NAFTA was an agreement to remove tariffs without reforms. Unlike the EU where reforms come first and then trade, NAFTA agreed to trade and then the mere hope of reforms."

I didn't say anything about the Common Market. The Treaty that brought the EU into existence was the Maastricht Treaty of 1992. The EU's focus, and all the treaties that have followed, has been about common values, laws, and rights, not trade per se.

http://www.stopvaw.org/6Jul2004.html

The EU with its associated reforms transformed the Common Market. I see this as a true paradigm shift.

However, your point is well taken in the sense that the EU evolved from the Treaty of Rome.

I have been arguing that associated reforms are necessary in trade agreements, otherwise economic morality is lost.

My point was that Mexico wouldn't be able to live up to EU type associated reforms because it just didn't have the resources in it's political economy--ought equals can.

Under the EU system a country is first brought up to a level where it can live up to associated reforms and then tariffs are removed with membership.

Why do I prefer this system over NAFTA? It preserves economic morality, rules and regulations for an international economy. That implies international governments like the EU.

I'm for normal trade relations with Mexico and Central America. I'm against agreements which imply that tariffs can't be reimposed particularly when every ones political economy isn't on the same page or at least same chapter.

DeLong is right in believing that without an assurance against tariffs, trade and investments are slowed.

I'm right in believing that without the carrot and stick of tariffs or the enforcable sanctions of government you can't protect economic morality from greed and the necessities of unbridled competition.

[Patrick Schoenfelder]

The EU, or the "Common Market" as it was known then, did in fact begin as a simple tariff free zone, but included only seven countries. It did maintain stiff tariff barriers against outside countries at the time, including other Western European countries. Initially, all original countries except Italy were on a similar economic footing, although West Germany was beginning to pull away from the others.

When the Common Market began its expansion to include the rest of Western Europe, it adopted a policy of aid and regulation of its sister economies, in particular pumping hundreds of billions of dollars into Spain, Ireland, and Portugal and slightly lower but significant amounts into Finland, Italy, and Greece for education, infrastructure, and capitalization. Since the beneficiaries are all experiencing excellent growth -- Ireland is rapidly on its way to having the largest per capita income in Europe and perhaps in the world -- these programs have to be labeled a success. Neoliberals who seek a softer edge to the impact of internationalist economic policies on developing countries often use the EU record as the model for how to run a successful transition to modern 21st century economies.

[Bupa]

Patrick Schoenfelder raises some very good points.

True, all of the countries Patrick cites were much wealthier when they joined the EU than Mexico was when NAFTA was adopted.

However, the EU kept growing. The new member states of Central Europe are of similar levels of development in many respects as Mexico. The World Bank calls them all "middle income countries". The Central European countries received less aid than the likes of Greece and Portugal but did have to adopt a body of laws, institutions and policies in line with those of the EU known as the acquis communautaire. These cross-cutting economic reforms came with lots of technical assistance and the goal of joining the EU provided a strong incentive to keep the multi-dimensional economic reform on track. The free trade aspect was also interesting. It was assymetrical...i.e. the EU countries eliminated most tariffs upfront while the Central European countries gradually did so over a number of years.

While the free trade was important for stimulating FDI and domestic investment, the other economic reforms were probably much more important.

Not all of this is replicable in the case of Mexico and the US, but surely there are some lessons to be learned from the EU/Central European example.

[jerry]

Brad,

I am curious as to the freetrader's thoughts regarding:

1) Worldbank says countries with no minimum wage and no restriction on worker hours (slave labor countries) are the best to do business with.

http://davidsirota.com/index.php/2006/10/18/wolfowitzs-world-bank-rewards-countries-that-crush-workers/

"According to a scathing letter released by Sens. Durbin, Dorgan, Sarbanes, Biden, Dodd and Akaka:

“This year’s edition [of the World Bank’s major report] appears to discourage countries from upholding established standards of worker rights as set by the International Labor Organization…The report ranks countries on various indices of the ease of doing business including ‘Employing Workers.’ In this category, countries which do not have a minimum wage and do not restrict the number of hours an employee can work are ranked high. Rewarding lax or non-existent labor standards contradicts ILO policy, which encourages countries to establishe a minimum wage and regulate housr of work and to pass and enforce laws protecting freedom of association and collective bargaining…The mission of the World Bank is to alleviate poverty. We fail to see how praising countries for failing to guarantee a minimum wage and overtime pay lifts people out of poverty.”

2) US Companies threaten China if China allows workers to unionize.

http://www.workingforchange.com/blog/index.cfm?mode=entry&entry=43A28077-E0C3-F084-D786D3B271A32E01

10.13.06
Tom Friedmanism now punishing China for trying to stop sweatshops
The New York Times reports that "China is planning to adopt a new law that seeks to crack down on sweatshops and protect workers' rights by giving labor unions real power for the first time since Beijing introduced market forces in the late 1970s." That's great news - but here's the kicker: the new law is "setting off a battle with American and other foreign corporations that have lobbied against it by hinting that they may build fewer factories in China."

So let's step back and look at this: China takes a step towards social progress - a step to end the systematic workplace and human rights abuses perpetrated on its people by big companies. And the response from Corporate America is threats to pick up and go somewhere else.

This story very clearly indicts all the "free trade will bring social progress" mantras we keep hearing from people like Tom Friedman and the Washington Beltway. "Free" trade deals do not have environmental, labor, wage or human rights protections in them. Because of that, such standards are not global. That means when an individual country decides to try to raise its own living standards, companies can just pick up and go elsewhere. Put another way - this trade policy deliberately serves to encourage economic punishments for countries that try to improve the lives of their citizens.

[wjd123]

bupa,

It's to early to tell, but my fear is that the EU has admitted to many new members,and that when it comes to maintaining standards, ought won't equal can.

I think the EU should have focused on one state, say Poland, and grown from there. A prosperous Poland is good for everyone in the area while a bunch of sputtering EU economies in the area helps no one.

[Barkley Rosser]

wid123,

You seem to be acting like the EU was just
sprung like a genie out of thin air with the Maastricht Treaty. No, it was the result of a long evolution out of the previous Common Market and EEC. By the time the EU came along, free trade had long been in place among its members.

So, you are still wrong. Free trade came first, way first, and then reforms later. I am not aware of anyone who has argued that the US should form an EU-style economic union with Mexico. The differences really are huge, although Mexico could probably use some of the sorts of reforms that would be involved.

[Bupa]

wid123,
The EU certainly does look like a snake that swallowed an ostrich egg. There are all kinds of repercussions that haven't worked themselves out both in the old and the new members. (I certainly would never have endorsed your Poland-only strategy -- Poland was a laggard in reform precisely because they had a "too big to fail" mentality... i.e. they knew that the EU would never take in its neighbors without also taking them).

But we are digressing pretty far from the point of the discussion.

Brad seems at a loss to explain why NAFTA didn't turn Mexico into a undisputed success story.

My point is that there is a lot more to successful economic development than free trade with a large neighbor. The example of Central Europe shows this clearly.

My example is not completely fair. For many years Central Europe has had higher education outcomes, lower levels of corruption, lower levels of income inequality, and many other advantages over Mexico. On the other hand it had the enormous challenge of transforming from non-market to market economies which Mexico did not have.

However, the main development partner for Central Europe (the EU) has taken a much more comprehensive approach to reform than the US has with Mexico.

Perhaps there are some lessons to be learned if people more intelligent the me (like Brad, for instance) reflect on this.

[dale]

Barkley,
I believe Jeff Faux, author of Global Class War, has put forth the case for an EU type relationship between the NAFTA nations.

[andres]

Barkley: "I will also note that arguments by jerry and others do not hold well, and that in general more free trade-oriented countries have done well growthwise than those engaging in major protectionism in recent decades (and there is also little evidence of any net job loss in the US due to NAFTA)."

I would dispute your first point, given that the countries which adopted major protectionism after WWII were mainly in Africa and Latin America, which had unrelated pathologies leading to low growth performance, or were the Asian Tigers, who did not have such pathologies and who, with the one exception of Hong Kong, where substantially protectionist well into the 1980's. Keep in mind that (with the one exception of total autarky) the importance of trade policy, though not trivial, is still overrated.

As for your second point in parenthesis, you would have to dismantle quite a bit of the research of EPI. As mentioned by Jim Bunnell in an earlier comment, the most recent EPI publication on NAFTA is at

http://www.epi.org/content.cfm/bp173

so I'd be interested in knowing why you disagree with it.

[andres]

Barkley: "I will also note that arguments by jerry and others do not hold well, and that in general more free trade-oriented countries have done well growthwise than those engaging in major protectionism in recent decades (and there is also little evidence of any net job loss in the US due to NAFTA)."

I would dispute your first point, given that the countries which adopted major protectionism after WWII were mainly in Africa and Latin America, which had unrelated pathologies leading to low growth performance, or were the Asian Tigers, who did not have such pathologies and who, with the one exception of Hong Kong, where substantially protectionist well into the 1980's. Keep in mind that (with the one exception of total autarky) the importance of trade policy, though not trivial, is still overrated.

As for your second point in parenthesis, you would have to dismantle quite a bit of the research of EPI. As mentioned by Jim Bunnell in an earlier comment, the most recent EPI publication on NAFTA is at

http://www.epi.org/content.cfm/bp173

so I'd be interested in knowing why you disagree with it.

[Barkley Rosser]

andres,

The Scott et al study shows that in 1993 a third of US exports went to Canada and Mexico and a fourth of imports came from them. However, after NAFTA, one fifth of the increase in the trade deficit was due to these countries.

Offhand this does not exactly make it look like NAFTA is the great culprit in the increasing trade deficit of the US. Of course between 1993 and 2002, the US was growing more rapidly than many of its major trading partners (not true about China of course), and this generally tends to lead to imports rising more than exports...

[Barkley Rosser]

Peter,

If you were to declare that immigration should be forbidden (or severely restricted) from African countries, and then provided us a list that included such items as reported lower IQs, higher rates of illegitimacy, greater corruption, authoritarianism, and the like, there is no question that you would be roundly denounced as a racist. I think you need to think carefully about the kind of crap you are polluting the blogosphere with, Mister.

For those who do not read Marginal Revolution, Mr. Schaeffer went off the deep end ranting and raving at great length and along these sorts of lines while advocating a really serious wall to keep all those awful Mexicans out.

I will respond here to one of your hysterical items (several of them are off-based, but I am not going to lower myself into getting into debates about IQs and such like). Rising incomes in Mexico are bringing about a demographic transition, and birth rates are declining. Your forecast of the US being taken over is just silly. I suggest you stop losing so much sleep and engaging in so much noxious hyperventilating over this. Your remarks are truly and deeply offensive, and if you cannot see why, then you have a serious problem.

[andres]

Barkley: Ok. If I recall correctly, however, the main point of the Scott et al study by EPI is not that NAFTA led to an increased trade deficit for the US, but that it led to a large net job loss on the part of the US (where only the immediate effects on traded goods industries are studied; it goes without saying that trade-related job losses are absorbed by the service/non-tradeables sector, so this argument is not the same as the naive claim that NAFTA led to higher unemployment), as well as to decreased labor income in Mexico for at least the seven years after NAFTA.

So again, I'm interested in why you disagree with the above claim of Scott et al.

[Barkley Rosser]

andres,

Their entire argument is based on trade deficits: more trade deficit equals net job loss, a zero sum game view of the universe.

Given that there was more increase in trade deficits, hence implicitly more net job loss, from other parts of the world after NAFTA, it does not follow that NAFTA was any particularly serious source of such outcomes.

[wjd123]

Barkley Rosser,

You write:

"You seem to be acting like the EU was just
sprung like a genie out of thin air with the Maastricht Treaty. No, it was the result of a long evolution out of the previous Common Market and EEC. By the time the EU came along, free trade had long been in place among its members.

"So, you are still wrong. Free trade came first, way first, and then reforms later."

I thought I had explained your misinterpretation of my thought. Let me try once more.

The Common Market led the way in internationalism through free trade. It evolved into the EU much latter, with the signing of the Maastricht Treaty. There was no springing out of thin air, however the Maastricht Treaty moved the Common Market to a new paradigm in that it recognized that the moral sphere would have some sway over the economic sphere.

I was objecting to DeLong's use of the term "associated reforms" in that the side agreements with Mexico on labor and the environment were not enforceable.

I went on to make two additional points that reforms--Maastrich type--were only possible if Mexico had the ability to make them, in my words "ought" had to equal "can."

I then went on not to recommend a Maastrich type treaty with Mexico but to recommend trade that would protect our economic morality and encourage Mexico's economic morality to grow through the use of the carrots and sticks of normal trade relations.

I don't believe a Masstrich type treaty will evolve out of NAFTA, at least not until our economic morality is ruined.

I'm conservative on free trade in that I want it done in a way that preserve our economic morality. I'm liberal on free trade in that I want in done in a way that international governments can protect and increase our civil rights. For instance, EU laws offer woman more protection against discrimination in the work force than any of its member nations.

From my perspective of the moral sphere having some sway over the economic sphere, neo-liberal economists who signed off on NAFTA were reactionary.

You're simply misunderstanding my way of thinking.

[wjd123]

bupa,

Part of the answer is that NAFTA failed to protect those at the bottom. Without rules and regulations that could be enforced, economic morality, they were powerless to protect themselves.

Notice the fact that the poor are rejecting free trade governments throughout Central and South America because they don't see any improvement in their lives.

One correction on the EU. My one state strategy isn't a Poland strategy. Thus, I said "say Poland." I simply don't know enough about the political economies of the new members states to recommend one to go first.

[Gritsforbreakfast]

If NAFTA were a truer expression of free trade and neoliberalism, I'd think we could better judge if neoliberalism failed Mexico. Lots of protections were left in NAFTA, most prominently the maquiladora plants, which are a product of protectionism and regressive labor policy, not any "neoliberalism" as I understand it. As mentioned in this string, continued US agricultural subsidies have been a HUGE driver in depopulating rural Mexico and us easily the largest factor driving mass emigration to the US.

I recently responded to DeLong's post in this vein here:

http://huevosrancherostx.blogspot.com/2006/10/has-neoliberalism-failed-mexico.html

and discussed a Dallas fed report on the maquiladoras here:

http://huevosrancherostx.blogspot.com/2006/10/decline-in-mexican-textile-jobs.html