The NAFTA: exports, jobs, wages, and investment - North American Free Trade Agreement - Special NAFTA Issue

The North American Free Trade Agreement (NAFTA) is clearly in our own best interest as a nation. It offers benefits to virtually every sector of the United States economy, as well as to U.S. workers and consumers. It will quite simply remove most barriers to trade between the United States and two of its largest trading partners, permanently opening these markets for the products of U.S. workers.

U.S. firms will be able to compete on an equal basis with Mexican and Canadian firms in these markets--U.S. firms will finally experience the same access to Mexico that Mexican firms have had all along in the United States. In NAFTA, Mexico and Canada have agreed to a level of liberalization that we have so far been unable to achieve with any of our other major trading partners, including Japan and the European Community. The price for this significant new access for us is the elimination of already-low (or non-existent) U.S. tariffs, and a promise to continue current U.S. policies and regulations which generally do not discriminate against Canadian and Mexican firms. Exports have been the dynamo for U.S. economic growth in recent years, and continuous efforts to open new markets must guide U.S. strategy to secure new growth and create new jobs.

NAFTA builds upon the successes of the U.S.-Canada Free Trade Agreement (CFTA) in effect since Jan. 1, 1989. That agreement will have eliminated all tariff and many nontariff trade barriers between the world's two largest trading partners by 1998. The CFTA resulted in an increase in U.S. exports from $72 billion in 1988, the year the agreement was signed, to $90.6 billion in 1992. U.S. services exports to Canada expanded by 84 percent between 1987 and 1992 due to the CFTA.

NAFTA Unleashes U.S. Competitive Advantages--NAFTA is a comprehensive trade agreement that addresses many aspects of doing business in North America (see separate article for particular NAFTA provisions). It will help the United States create 200,000 jobs, increase our exports to Mexico, and maintain our competitiveness in the global market where we must continue to compete with Europe and Japan. NAFTA allows the United States to fully exploit its comparative advantages by eliminating Mexican and Canadian barriers to U.S. exports of goods and services, terminating Mexican requirements that have forced exports of U.S. jobs and investment to Mexico in the past, protecting our creative inventions and intellectual property rights, guaranteeing U.S. firms access to Mexican and Canadian government procurement contracts, and allowing U.S. service providers (already the most dynamic element of the U.S. economy) free and fair access to these markets.

It Levels the Playing Field and Opens New Markets--NAFTA accomplishes every objective that Congress has established for bilateral trade agreements, and in many cases goes even further than current multilateral trade negotiation proposals. It levels the playing field that now tilts toward Mexico.

NAFTA will eliminate tariffs on all U.S. exports of industrial goods to Mexico within ten years, tariffs that average 10 percent (in some cases 20 percent) and apply to 80 percent of U.S. exports. In exchange, the United States will continue the current duty-free treatment Mexico enjoys today, without the NAFTA, on over half of its exports to the United States, and will eliminate most remaining tariffs over five or ten years--tariffs that average out to less than 4 percent. A few products that are particularly import sensitive will see

U.S. tariffs reduced only gradually over a 15-year period as a means of adjustment. As negotiated under the CFTA, trade between the United States and Canada will be completely duty-free by 1998.

These statistics help explain a little known fact: American workers compete successfully with lower-wage Mexican workers every day, and will continue to compete with them regardless of NAFTA, because the United States has so few barriers to keep imports from Mexico out.

This new Mexican market access is a significant achievement and the benefits of tariff elimination are immediate--a full 50 percent of U.S. exports to Mexico will receive duty-free treatment upon entry into force of NAFTA. Without NAFTA, dynamic U.S. manufacturers face high Mexican tariffs that keep them out of the market or increase their costs and damage their competitiveness. Some of the U.S. sectors that will immediately benefit include semiconductors, computer equipment, aerospace equipment, telecommunications equipment, and medical devices.

U.S. exports are expected to continue their dramatic upward trend as Mexico dismantles the remnants of its earlier protectionist regime. As a result of earlier Mexican trade-opening measures, U.S. exports soared, turning a $6 billion U.S. trade deficit with Mexico into a $5 billion surplus. The U.S. International Trade Commission, in its January 1993 study, Potential Impact on the U.S. Economy and Selected Industries of the North American Free Trade Agreement, estimates that "NAFTA is likely to produce net aggregate gains for each of the member countries in both the short term (within one year) and long term (after complete phase-in of NAFTA)."

Strong rules of origin will ensure that this preferential tariff treatment under NAFTA extends only to products of the United States, Mexico, and Canada. The rules will prevent the creation of an export platform in Mexico for products not containing substantial U.S., Mexican, or Canadian content. At the same time, the NAFTA creates a competitive advantage for U.S. products in the Mexican market, because those high Mexican tariffs will still apply to imports from Asian or European countries. Products which do not comply with the specific rule of origin or which are not directly shipped from a NAFTA country to a NAFTA country will be assessed the applicable rate of duty. NAFTA also eliminates the trade distorting elements of Mexican Customs duty programs, which have encouraged foreign investment in processing facilities whose output is destined for the United States. Mexico's maquiladora export-based factories, the largest user of Mexican Customs duty-drawback, will essentially be phased-out and merged into the domestic Mexican economy.

NAFTA Provides Equal and Fair Treatment in Mexico for U.S. Products--Every credible economic study concludes that NAFTA, because of new opportunities for U.S. products to be exported to Mexico, will result in a net gain of new jobs in the United States by 1995, with consensus centering around the figure of 200,000 jobs. Some 284 economists, including 12 Nobel laureates, seconded this view when they wrote President Clinton, "the agreement will be a net positive for the United States, both in terms of employment creation and overall economic growth. Specifically, the assertions that NAFTA will spur an exodus of U.S. jobs to Mexico are without basis."

The NAFTA provides no incentive to move U.S. jobs to Mexico in order to supply the U.S. market while using cheaper Mexican labor because U.S. import barriers are already extremely low while Mexico encourages investment aimed at producing goods for export. If "cutting and running" was a compelling strategy for a U.S. company to follow it would already have done it. The elimination of the insignificant remaining U.S. import barriers cannot affect U.S. import or investment flows in a meaningful way. However, NAFTA will eliminate still-significant Mexican investment restrictions that have required foreign companies to invest and produce in Mexico and to export from Mexico--usually to the United States--and U.S. products will receive the same treatment in Mexico as Mexican products.

With very few exceptions, Mexico will no longer be able to control the amount of a product that can be imported. This will eliminate the cost and uncertainty involved in applying for permission to import and will expand the volume of U.S. exports in previously-restricted sectors.

NAFTA will also terminate other Mexican restrictions that forced companies to build products in Mexico in order to sell there, that required companies to export goods from Mexico (usually to the United States), or that made companies buy parts and components from Mexican suppliers (even though an American export might be less expensive and higher-quality). The U.S. automotive industry is the single largest immediate beneficiary of these barrier reductions, and will have the opportunity to export an additional $2 billion worth of goods to Mexico in the first year of NAFTA.

U.S. Can Compete with High Wages--Contrary to assertions by opponents of the NAFTA, the jobs which NAFTA is predicted to create would not be won through a concomitant reduction in U.S. wage levels. Most studies which address the issue also conclude that the NAFTA is unlikely to have any significant effect on overall U.S. wage levels in either direction.

In spite of low wage rates in Mexico, the United States continues to run a trade surplus there but has a persistent trade deficit with high-wage Japan. The main U.S. competition in our domestic and foreign markets comes from high-wage developed countries like Japan and the European Community. If wage rates alone determined competitiveness or the location of investment, neither the United States or Mexico would have many factories because wages are significantly lower in other parts of the world. No trade agreement will change the direction of economic forces which are constantly reducing the contribution of labor to overall costs of production, nor should governments seek to do so for higher productivity is the basis of higher wages.

America's competitiveness with high wages is a result of our comparative advantages: the productivity of our workers and our highly developed and cost-efficient transportation and communications networks, flexible capital markets, access to technology, and a stable and educated work force. These are factors that the United States enjoys in abundance and which offset lower nominal wages that can be found elsewhere.

While Mexico is undeniably an important destination for U.S. foreign direct investment, high-wage developed countries have long been the major foreign recipients of such investment in manufacturing. Of total U.S. direct investment abroad for manufacturing in 1992 of $187.3 billion, over 70 percent was in Japan, Canada, and the European Community and less than 5 percent was in Mexico. Clearly, U.S. manufacturers simply do not mainly invest overseas to exploit lower manufacturing wages.

Foreign Manufacturing Investment in Mexico is Stable--Further evidence of the importance of factors other than wages in manufacturing investment decisions can be found. According to the General Accounting Office, over the past decade foreign direct investment in Mexico in the non-traded services and retail sector (products that are usually consumed where they are produced) has steadily increased, but such investment in the manufacturing sector has been relatively stable, at the same time as real wages in Mexico fell due to the economic slump brought on by the debt crisis--just the opposite of what NAFTA opponents fear. According to Mexican government investment statistics, between 1980 and 1992, the service and retail sector's share of cumulative approved foreign direct investment in Mexico rose from 17 to 48 percent. Over the 1989-92 period, the service and retail sector received 87 percent of foreign direct investment while the manufacturing sector received 12 percent. By the end of 1992, only 51 percent of cumulative foreign direct investment approvals in Mexico were in manufacturing, down from 78 percent in 1980.

While NAFTA provisions make investment conditions in Mexico more fair and balanced for U.S. companies, in themselves they are not likely to increase United States investment in Mexico in the manufacturing sector.

When examining the issue of foreign direct investment in Mexico one has to consider the "magnet effect" that U.S. investment may have on Mexican imports. U.S. companies in Mexico know, prefer, and order U.S.-built products, parts, and components for use in their operations.

Investment for local consumption--There is more evidence that recent foreign investment in Mexico has been for local consumption (like services and retail) or in local production facilities for local consumption--not in manufacturing facilities producing products for export back to the United States. (It is worth remembering that some firms had to invest in Mexico because that was the only way to gain access to or serve the Mexican market, a situation NAFTA ends.)

In 1990, according to Bureau of Economic Analysis statistics, 65 percent of the sales of goods by majority-owned Mexican affiliates of U.S. companies were for the local market and only 30 percent of their sales were to the United States. This figure could lead one to conclude that these companies' exports to the United States were a by-product of the investment primarily aimed at producing for the Mexican market. Even that level of sales to the U.S. market could lessen with NAFTA's termination of Mexican requirements to export or produce locally.

These figures also help explain why the United States has a trade surplus with Mexico, and why the majority of U.S. exports are indeed consumed in Mexico. The U.S. Trade Representative has reported that 84 percent of the growth in U.S. exports to Mexico in the last five years was in products for Mexican consumption, not re-export to the United States. The maquiladora program is simply not typical of the U.S.-Mexico trade relationship.

Even though NAFTA will create far more and better jobs than it will cost, the Administration realizes some workers may be negatively affected. Some job loss may occur in sectors in which U.S. businesses are not competitive, whether because of technology, wages, or productivity. However, these lost jobs will be few in number, particularly when compared to the number of jobs lost in the U.S. economy overall as a result of technological advances, defense conversion, and corporate downsizing. To address that issue, the Administration is crafting a comprehensive, fully-funded program to help those who lose their jobs regardless of the cause. The Administration will propose in the next few weeks, separately from NAFTA, legislation that speeds displaced workers (for whatever reason) into re-employment. Unemployment insurance, job-search assistance, counseling, and retraining will be delivered at one-stop centers. The program will provide income support for displaced workers who need extended retraining and are making satisfactory progress in full-time training programs.

Consumers Benefit Too--While workers will see more net jobs, consumers will see the benefits of free trade reflected in lower prices for a variety of products, as a reduction in tariffs and increased economies of scale allow manufacturers to cut costs. Consumers and workers will continue to enjoy the protection afforded by high environmental, health, and safety standards in the United States whether they apply to food, the workplace, or consumer protection. The NAFTA fully preserves the ability of federal and state and local governments to establish whatever non-discriminatory standards at the level they deem necessary to ensure the health and safety of U.S. consumers and workers.

NAFTA and the Future--NAFTA, together with its supplemental agreements on labor and environment cooperation, will increase U.S. exports, support current and generate new jobs, and improve U.S. competitiveness around the globe--and require little change on the part of the United States. Nothing about doing business in Mexico will be the same, which is one of the key benefits of NAFTA, because doing business in Mexico until now has been so difficult. Miles of red tape, in the form of import licenses, investment approvals, customs forms, and disclosure requirements, will disappear as a result of NAFTA. Costs associated with international business, from tariffs to shipping and communications to insurance, will all be reduced through the operation of the NAFTA. Gone too will be Mexican requirements to export (and the United States is the most likely market), to purchase Mexican instead of U.S. parts, or to manufacture in Mexico instead of in the United States. NAFTA eliminates barriers and introduces certainty, finally giving U.S. firms the same fair access to Mexico that they have long had in the United States.

NAFTA Is Clearly In Our National Interest

Without NAFTA, it will be business as usual with Mexico. U.S. firms will continue to face high tariffs, numerous import licensing requirements, export obligations, investment requirements, lack of access to government procurement contracts, inadequate intellectual property protection, vague and unpublished rules and regulations, and a complete lack of certainty about the conditions of doing business in Mexico. Workers will not gain the predicted 200,000 jobs from additional U.S. exports to Mexico.

NAFTA is a symbol of America's leadership in the global economy, and its willingness to face the challenges and changes that tomorrow will bring. It is a reflection of the President's commitment to create more and better jobs for Americans, to prepare the U.S. economy for the challenges of the global market. NAFTA is clearly in our national interest as we prepare for the 21st Century.

Worker Adjustment Assistance

* Even though NAFTA will create far more and better jobs than it will cost, and the agreement is designed to minimize the loss of production and jobs, the Administration realizes some workers may be negatively affected.

* The President and Labor Secretary Reich are crafting a comprehensive, fully-funded program to help those who lose their jobs, whether as a result of defense conversion, corporate downsizing or trade agreement.

* The Administration will propose legislation that speeds displaced workers (for whatever reason) into re-employment. Unemployment insurance, job-search assistance, counseling, and retraining will be delivered at one-stop centers. It will aim to provide income support for displaced workers who need extended retraining.

COPYRIGHT 1993 U.S. Government Printing Office
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