3.5: At Home and Abroad - Understanding Effects of Neoliberalism through the Case of NAFTA/USMCA

Learning Objectives

By the end of this section, you will be able to:

• Recognize the influence of neoliberal ideas on a major North American regional trade agreement
• Evaluate the impact of trade liberalization on different constituents such as workers and consumers

The Rise of Regional Trade Agreements

One characteristic of the neoliberal world that emerged in the 1990s was the emergence of many regional trade agreements (RTAs). Signed by two or more governments, such agreements advance the neoliberal goal of global prosperity through free(r) trade. Examples include the Central American Common Market (CACM), Economic Community of West African States (ECOWAS), and European Economic Area (EEA). Worldwide, there were only 50 RTAs in force in 1990, but by 2017 this number had jumped to over 280 (World Bank, 2018).

There is no single template for RTAs. They may cover a large number of countries, such as the 30 countries which are party to the EEA, or the seven which are part of the Asia-Pacific Trade Agreement (APTA). RTAs may focus narrowly on the lowering of tariffs, which are taxes on imports, or they may be more comprehensive agreements comprising dozens of trade-related policy areas. Yet by attempting to smooth the flow of goods and services over borders, RTAs all share a common goal: economic integration.

 

Figure \(\PageIndex{1}\): A few of the world’s free trade areas in 2009, which are governed by regional trade agreements (public domain; Emilfaro via Wikimedia Commons)

A significant RTA which affects the countries and inhabitants of North America is the United States-Mexico-Canada Agreement (USMCA), previously known as the North American Free Trade Agreement (NAFTA). (Hereafter the term NAFTA will be used.) The debates over its merits and flaws highlight the broader debates about trade agreements worldwide and, by extension, the reign of neoliberal ideas.

Negotiations for NAFTA began in 1991, and the trade agreement entered into force just three years later, in 1994. Its big achievement was bringing Mexico into a trade zone with the United States and Canada, which had already struck a trade agreement during the previous decade. In a 1992 U.S. presidential candidate debate, Ross Perot made a famous argument against NAFTA, warning that if, “You implement that NAFTA, the Mexican trade agreement, where they pay people a dollar an hour, have no health care, no retirement, no pollution controls, et cetera, et cetera, et cetera, and you’re going to hear a giant sucking sound of jobs being pulled out of this country” (in the U.S. Commission on Presidential Debates, 1992).

This position was rebutted by U.S. Democratic Party candidate Bill Clinton, who argued, “On balance [NAFTA] does more good than harm if, if we can get some protection for the environment so that the Mexicans have to follow their own environmental standards, their own labor law standards, and if we have a genuine commitment to reeducate and retrain the American workers who lose their jobs and reinvest in this economy,” (Ibid.)

President Clinton then went on to sign NAFTA into law in 1994, heralding decades of trade integration on the continent. Trade volume between the three countries ticked steadily upward following the signing of NAFTA, more than tripling over the early years of the trade agreement (1993 to 2007)  from 297 billion USD to 930 billion USD (Office of the United States Trade Representative). The rise in trade volume is not debated, but there remain many other areas of contention. Decades into the NAFTA era, let’s consider the impact of this agreement on three areas: employment, economic growth, and the environment.

Employment

Perhaps the most emotional, and tangible, aspect of the debate over any trade agreement is its effect on the worker. For the vast majority of people, a job is one’s livelihood and the foundation for supporting others such as children, elders, and life partners. Hence the effect of NAFTA on employment has been closely watched, while at the same time has been challenging to pin down. The impact of a trade agreement on jobs must take into account many factors, from its effect on specific industries to whether displaced workers gain the skills to find new and perhaps better employment. The auto industry is one area where NAFTA-related shifts in jobs is evident: the U.S. auto sector lost about thirty percent of its jobs during the first twenty years of NAFTA (from 1994 to 2013), while Mexico saw jobs in its auto sector more than triple during the same period (Hufbauer et al., 2014). Canada also saw a bump in auto and manufacturing-related employment during the first decade of NAFTA (Schott, 2006).

Figure 3.4.2: The Chevrolet Silverado Crew Cab has been made in Mexico since 2005. During the NAFTA era, Mexico became a global power in auto manufacturing. (CC BY-SA 2.0; RL GNZLZ via Flickr)

In all, the United States experienced net job losses due to NAFTA. In the two decades after NAFTA went into force, about 203,000 job losses annually were attributed to increased trade with Mexico, compared with an annual jobs gain of 188,000 (Hufbauer et al., 2014). This represents a net job loss of about 15,000 jobs annually. Those U.S. jobs which were gained reported higher wages, on average 7 to 15 percent more, but this was in a context of overall wage stagnation. In Mexico, the employment market bifurcated. Some workers experienced wage gains, but these depended on proximity to northern markets and workers’ skill levels. Higher skilled workers who found jobs in northern Mexico, closer to trade activity, fared much better than those with lower education levels living in southern Mexico (Hanson, 2003).

Economic Growth

Neoliberals posit that more trade brings greater prosperity. This appears not to have been the case for NAFTA and poverty in Mexico, where poverty levels have remained the same since 1994 (Chatzky et al., 2020). Due to NAFTA the United States saw some very small gains in its overall economy, equal to approximately 0.001 to 0.041 percent of Gross Domestic Product (GDP), or 0.1 to 3.6 billion USD (Congressional Budget Office, 2003, p. 22).

One hope for NAFTA was that it would bring about wage convergence and lessen overall economic inequalities across Canada, Mexico, and the United States. This has not been the case. In 2022, U.S. GDP per capita was about 65,000 USD, compared to 45,000 USD in Canada and 10,000 in Mexico. If anything, GDP per capita across the countries have diverged over time. GDP per capita in the United States was about five times greater than Mexico’s in 1994, and this broadened to over six times greater by 2022.

Country	GDP per capita in 1994 (in constant 2015 USD)	GDP per capita in 2022 (in constant 2015 USD)
Canada	32,087.00	44,910.40
Mexico	8,186.00	9,755.60
United States	41,215.30	62,866.70

Table 3.4.1: Comparison of Gross Domestic Product (GDP) per capita of NAFTA/USMCA countries, in 1994 and 2022 (public domain; Data source: World Bank via Congressional Research Service, The United States-Mexico-Canada Agreement (USMCA), 2023)

Environment

NAFTA was significant as the first RTA signed by the United States to include an environment chapter. However, one critique is that the language in this chapter is vague and non-binding. For example, neither NAFTA nor the USMCA include language regarding climate change. When NAFTA was being renegotiated as the USMCA, prominent environmental groups such as the Sierra Club and 350.org protested various environmental shortcomings in the draft agreement, such as weak enforcement measures and pathways for fossil fuel industries (oil, gas, auto) to lobby for weaker environmental regulations.

Perhaps unsurprisingly, the environmental record of NAFTA has been mixed. While the trade agreement created a Commission for Environmental Cooperation and a process for claims to be made against violators of environmental regulations, public participation has waned over time. In one survey of NAFTA’s environmental legacy, “Available data suggest that urban air quality, potable water access, and access to sanitation have all shown improvements since 1990. Less positively, we conclude that groundwater depletion and degradation has resulted,” (Gladstone et al., 2021, p. 29). Within the NAFTA framework, disputes may only be initiated if an environmental violation is thought to bring a trade benefit to one country over others, hence larger global concerns such as climate change remain unaddressed.

The Future of NAFTA/USMCA

In considering the effect of NAFTA/USMCA on member countries, it is impossible to ignore the broader context in which these countries are embedded. The 1990s until the present have been a time of dynamic change in the global economy, most notably with the rise of China. Workers in many industries – auto, textiles, manufacturing – across the United States, Canada, and Mexico were impacted by Chinese competition. Rising tensions in U.S.-China economic relations, along with the COVID-19 pandemic, have also affected NAFTA in complex ways. There is much discussion in the United States of "friendshoring”, or substituting Chinese trade partners with U.S. allies. The disruptions of COVID-19 have also pushed producers to consider supply chain resilience, with many diversifying and considering the merits of “nearshoring” to closer locales. In both of these scenarios, Canada and Mexico stand to benefit.