Thread: Revisiting NAFTA

http://www.epi.org/content.cfm/bp173#pt2

Revisiting NAFTA
Still not working for North America's workers

By Robert E. Scott, Carlos Salas, and Bruce Campbell; Introduction by Jeff Faux

Table of contents
Introduction | Part 1: United States | Part 2: Mexico | Part 3: Canada

INTRODUCTION

by Jeff Faux

Despite its name, the primary purpose of the North American Free Trade Agreement (NAFTA) was not to facilitate trade among separate sovereign societies. Rather, it was to promote an integrated continental economy and establish the rules to govern it.

As a former foreign minister of Mexico once remarked, NAFTA was "an agreement for the rich and powerful in the United States, Mexico, and Canada, an agreement effectively excluding ordinary people in all three societies." It should, therefore, be no surprise that NAFTA rules protect the interests of large corporate investors while undercutting workers' rights, environmental protections, and democratic accountability. Hence, NAFTA should be seen not as a stand-alone treaty, but as part of a long-term campaign by the conservative business interests in all three countries to rip up their respective domestic social contract.

This report details how this campaign played out in the labor markets of all three nations. It is, of course, not the full and complete measure of the impact of NAFTA. But it is arguably the most important one, because the agreement was sold to the people of each nation on the promise that it would bring large net benefits in better jobs and faster growth. Indeed, supporters claimed the gains would be so large as to more than compensate for the erosion of the average workers' bargaining power and the weakening of citizens' rights to use government to protect themselves against the insecurities of unregulated markets.

Twelve years later, it is clear that the costs to workers outweighed the benefits in all three nations. The process differed from country to country, and given the greater size and wealth of the United States, the impact there has not been as great as it was in Mexico and Canada. But the overall pattern was similar. In each nation, workers' share of the gains from rising productivity fell and the proportion of income and wealth going to those at the very top of the economic pyramid grew.

Americans were promised that NAFTA would generate large numbers of net new good jobs. Instead, over a million jobs that would otherwise have been created were lost, and wages were pressured downward for a large number of workers with less than a college education.

Mexican employment did increase, but much of it in low-wage "maquiladora" industries, which the promoters of NAFTA promised would disappear. The agricultural sector was devastated and the share of jobs with no security, no benefits, and no future expanded. The continued willingness every year of hundreds of thousands of Mexican citizens to risk their lives crossing the border to the United States because they cannot make a living at home is in itself testimony to the failure of NAFTA to deliver on the promises of its promoters.

Canada likewise saw continental integration undercut working families. Except for those at the top, real incomes have virtually stagnated. Canadians were assured that NAFTA and the earlier Canada-U.S. Free Trade Agreement were necessary to save the social safety net of which they are justly proud. Yet a dozen years later, government transfers to individuals have dropped from 11.5% of GDP to 7.8% of the country's GDP, and Canadian government's overall (non-military) program spending fell from 42.9% of GDP in 1992 to 33.6% of GDP in 2001 (see Canadian analysis starting on p. 53).

Defenders of NAFTA have two main responses. One is that its damage to workers is exaggerated. Perhaps. But NAFTA was supposed to make thing a great deal better for workers, not—even a little—worse. The second response is that the problems of inequality are largely the result of domestic policies and have nothing to do with globalization. Yet that ignores the enormous increase in bargaining leverage over workers that the ability to shift production out of the country, and then sell the products back home, gives the transnational corporation. With that leverage, corporate influence over economic policy has greatly expanded in all three nations since the agreement was signed.

The reality is that the denial of social protections in the rules of an internationally integrated market inevitably undermines the protections established in the previously separate domestic economies after decades of political struggle. In that sense, the "vision" of NAFTA is profoundly reactionary: it pushes nations back toward a 19th century ideology in which government's economic function is to protect the interests of investors, while working people—the overwhelming majority in each nation—are left to fend for themselves.

The following three studies add to the mounting evidence of NAFTA's perverse impact on the distribution of income, wealth, and political power in all three nations. For over 12 years, we have been told by NAFTA's champions to be patient, that NAFTA's great benefits were just around the corner. We are still waiting. The time for a continent-wide debate over the future of this agreement, which was negotiated by and for the rich and powerful in all three countries, is now overdue.

Jeff Faux is the founder and former president of the Economic Policy Institute. He is a contributing editor to The American Prospect, and a member of the editorial board of Dissent.

PART 1: UNITED STATES

NAFTA's Legacy
Rising trade deficits lead to significant job displacement and declining job quality for the United States

by Robert E. Scott, Economic Policy Institute

Public officials and economists frequently claim that trade agreements "create more high-paying jobs for American workers."1 Trade is supposed to move workers from low-productivity, low-wage import-competing industries into high-productivity export jobs with better wages. Yet the reverse has been true for U.S. trade with Mexico since the North American Free Trade Agreement (NAFTA) took effect in 1994. In the United States workforce, NAFTA has contributed to the reduction of employment in high-wage, traded-goods industries, the growing inequality in wages, and the steadily declining demand for workers without a college education.

These effects of NAFTA have occurred for two reasons. First, growing trade deficits with Mexico and Canada have displaced production that supported roughly 660,000 (manufacturing only) and 1.0 million (total) U.S. jobs since the agreement took effect in 1994. Export growth since 1994 supported an additional 1 million U.S. jobs, while imports displaced domestic production that would support 2 million jobs.

Second, average wages in U.S. jobs that compete with U.S. imports from Mexico pay 1% to 5% more than jobs in industries that export to Mexico. Therefore, even if U.S. exports to and imports from Mexico had grown equally, the United States would have experienced downward pressure on wages. U.S. imports from Mexico rose faster than exports after NAFTA, which only served to heighten the adverse wage effects. In addition, the U.S. trade deficit with Mexico increased, pushing workers out of traded goods industries into lower-paying, non-traded goods industries. The finding that increased integration has not supported the growth of higher-paying jobs negates a major justification for NAFTA and other proposed regional trade and investment agreements: that NAFTA would generate a gain in high-wage jobs in the United States.

Both import and export jobs have relatively high average wages. The 1 million jobs displaced by NAFTA trade, primarily in manufacturing, would have paid $800 per week or more in 2004. The average job in the rest of the economy paid only $683 per week, 16% to 19% less than trade-related jobs. Growing trade deficits with Mexico and Canada have pushed more than 1 million workers out of higher-wage jobs and into lower-wage positions in non-trade related industries. Thus, the displacement of 1 million jobs from traded to non-traded goods industries reduced wage payments to U.S. workers by $7.6 billion in 2004 alone.

The loss of good jobs in manufacturing and other traded goods industries due to rising trade deficits has surely suppressed average U.S. wages for workers with skills similar to those displaced by trade.2 Before adopting agreements such as the proposed Western Hemisphere free trade agreement—the Free Trade Area of the Americas (FTAA)—and free trade agreements with Korea, Thailand, and Malaysia, it is important to understand the following about what has happened to the jobs and wages after NAFTA took effect.

* Growing trade deficits with Mexico and Canada have displaced production that supported 1,015,291 U.S. jobs since NAFTA took effect in 1994 (see Table 1-1b).
* Contrary to the rhetoric of most government officials and economists, industries that compete with imports from Mexico pay 1% to 5% more than export jobs (see Table 1-4 and Appendix Table 1-A1). This result is quite robust, and is confirmed with six different methods for computing average, trade-weighted wages.
* Workers with at most a high school education were particularly hard hit by growing trade deficits—they held 52% of jobs displaced; these workers make up 43% of the workforce.
* Most of the jobs displaced by NAFTA trade deficits are in the manufacturing sector, which employs a higher share of such workers than any other major industry (see Table 1-5).
* NAFTA displaced into lower-paying jobs 523,305 workers with a high school degree or less.
* Men, who make up 55.2% of the labor force, lost 649,048 job opportunities, or 63.9% of total jobs displaced due to NAFTA deficits.
* Women, who make up 47.8% of the labor force, were especially hard hit by rising imports in apparel: they lost 34,855 job opportunities, 67% of all positions displaced in the apparel sector.
* The 1 million job opportunities lost nationwide are distributed among all 50 states and the District of Columbia, with the biggest losers, in numeric terms: California (-123,995), Texas (-72,257), Michigan (-63,14, New York (-51,582), Ohio (-49,886), Illinois (-47,701), Pennsylvania (-44,173), Florida (-39,987), Indiana (-35,157), North Carolina (-34,150), and Georgia (-30,464) (see Table 1-2).
* The 10 hardest-hit states, as a share of total state employment, are: Michigan (-63,148, or -1.4%), Indiana (-35,157, -1.2%), Mississippi (-11,630, -1.0%), Tennessee (-25,588, -0.9%), Ohio (-49,886, -0.9%), Rhode Island (-4,482, -0.9%), Wisconsin (-25,403, -0.9%), Arkansas (-10,321, -0.9%), North Carolina (-34,150, -0.9%), and New Hampshire (-5,502, -0.9%) (Scott 2005, Table 1-3).

NAFTA is a free trade and investment agreement that provided investors with a unique set of guarantees designed to stimulate foreign direct investment and the movement of factories within the hemisphere, especially from the United States to Canada and Mexico. Furthermore, no protections were contained in the core of the agreement to maintain labor or environmental standards. As a result, NAFTA tilted the economic playing field in favor of investors, and against workers and the environment, resulting in a hemispheric "race to the bottom" in wages and environmental quality in the United States, Canada, and Mexico.

False promises
Proponents of new trade agreements that build on NAFTA and the Central American Free Trade Agreement (CAFTA) frequently claim that such deals create jobs and raise incomes in the United States. For example, the Office of the U.S. Trade Representative has cited "estimates that CAFTA could expand U.S. farm exports by $1.5 billion...[and that] manufacturers would also benefit." They also claim that the agreement will support "U.S. exports and jobs" (USTR 2005). These statements echo claims that were made by prior administrations and many economists more than a decade ago when NAFTA was first proposed. The USTR's office claimed in 1993 that "With NAFTA we anticipate 200,000 more export-related jobs by 1995" and that "wages of U.S. workers in jobs related to exports to Mexico are 12% higher than the national average" (USTR 1993, emphasis in the original). While it is technically true that export wages were higher than the average U.S. wage in all industries, in practice average wages in import industries (in 2000) where job displacement was concentrated were higher than in export industries.3

This section explores these issues and evaluates the effects of growing NAFTA trade deficits on U.S. workers by education, gender, and racial background.

Growing trade deficits after NAFTA
Predictions that NAFTA would lead to job creation and higher wages were based on forecasts that U.S. exports to Mexico would grow faster than imports. Such models assumed that increases in U.S. exports support job creation in the United States, and that increases in imports displace or dislocate U.S. jobs. For example, in one of the most widely cited studies, Hufbauer and Schott (1993, 14-21)4 forecast that "for the foreseeable future" (Table 2.1) U.S. exports to Mexico would increase $16.7 billion, imports would increase $7.7 billion, and the trade balance would improve by $9 billion.5 As a result "a gross total of 316,000 U.S. jobs will be created by NAFTA while a gross total of 145,000 U.S. jobs will be dislocated" (Hufbauer and Schott 1993, 20-21), resulting in a net gain of 171,000 jobs (ibid, Table 2, 16). DRI/McGraw Hill (1992)6 estimated that 160,005 to 221,222 jobs would be created. In these models, improvements in the trade balance support job creation, and declines in the trade balance displace domestic jobs.

U.S. exports to Mexico and Canada actually increased $104 billion between 1993 and 2004, after NAFTA took effect, as shown in Table 1-1a (in constant 2004 dollars). However, imports increased $211.3 billion, and as a result, the trade deficit increased by $107.3 billion, rather than improving as predicted in the studies noted above. The United States had a small but relatively stable trade deficit with Canada and Mexico (combined) in the 1980s and early 1990s, as shown in Figure 1-A. After NAFTA took effect in 1994, the United States developed large and rapidly growing deficits with these trade partners.

Table 1-1A

Figure 1-A

Thus, the projections of growing trade surpluses with Mexico and Canada cited above have proven totally wrong. However, Hufbauer and Schott have changed their analytical methods and still claim that NAFTA resulted in net gains in job opportunities between 1993 and 2004. (See Bias in the Revised Hufbauer-Schott Methodology on p. 6.)

Bias in the revised Hufbauer-schott methodology

Gary Hufbauer and Jeffery Schott, both senior fellows at the Institute for International Economics, have reviewed and evaluated several pre-NAFTA forecasts of NAFTA's expected impacts on employment, and several recent assessments of NAFTA's actual impact (including prior studies by this author). In their 2005 update of their 1993 findings, they restate their 1993 forecast that 171,000 jobs would be gained based on a methodology similar to the one used in this report. they also develop a new ex post assessment that gives asymmetric treatment to the effects from exports and imports. On the export side, they use employment multipliers based on the average annual increase in u.s. exports to NAFTA countries of $12.5 billion per year between 1993 and 2003 and estimate that 100,000 jobs per year were gained. on the import side, they look only at the number of jobs certified as eligible for NAFTA-TAA assistance, "about 58,000 jobs per year." they conclude that the united states experienced a net gain of 42,000 jobs per year (100,000 less 58,000) as a result of NAFTA using these methods (Hufbauer and schott 2005, 40-41).

Use of the NAFTA-TAA estimate in this calculation is incorrect for several reasons. first, Hufbauer and schott erroneously include foreign exports in their analysis. Correcting this error lowers jobs gained due to growing exports to 84,000 per year.* Second, the NAFTA-TAA program not only undercounts job displacement (as noted by Hufbauer and schott), but also ignores jobs that would have been supported with new production but for the increase in imports. comparing the number of jobs supported by exports estimated with input-output multipliers with incomplete NAFTA-TAA data on job displacement based on a completely different methodology is completely inappropriate.

U.S. NAFTA imports increased $21 billion per year (Hufbauer & Schott, table 1.2) between 1993 and 2003. applying Hufbauer & schott's original methodology yields 176,000 jobs displaced annually by growing imports, and net displacement of -92,000 jobs per year from growing NAFTA trade deficits. this result is identical with the findings in table 1-1b of this study that 1,015,000 jobs (92,000 jobs per year) were displaced by growing NAFTA trade deficits between 1993 and 2004.**

Finally, increases in exports do not necessarily lead to the creation of new jobs if they represent parts previously used in assembly plants that relocated to mexico or Canada. If parts production does not increase, no new jobs are created. the only accurate way to account for job gains and losses is to estimate the jobs content of both exports and imports and the net effect on employment in the united states, as Hufbauer and schott did in their 1993 assessment.

The selective use of a new model that underestimates the jobs displaced by imports and overstates jobs gained through increased exports changes the yardsticks that Hufbauer and schott (1993) established in their pre-NAFTA research and yields a biased and inaccurate result. their conclusion that NAFTA resulted in actual gains in U.S. employment stands at odds with the changes in trade flows shown in figure 1-a and table 1-1b. they criticize the multiplier-based estimates of jobs displaced by imports in scott (2003), despite the fact that this technique was employed in their previous study (Hufbauer and Schott 2005, 39, note 61).

The authors claim that their new jobs analysis validates the accuracy of their earlier forecasts of expected job gains from NAFTA (Hufbauer and Schott 2005, 40, table 1., earlier criticism not withstanding. the new Hufbauer-schott analysis is particularly surprising because Hufbauer previously disavowed the 1993 jobs forecast in an interview with the Wall Street Journal: "the best figure for the jobs effect of NAFTA is approximately zero—the lesson for me is to stay away from job forecasting" (Davis 1995).

*Between 1992 and 2003, total exports to NAFTA countries increased $136.1 in current dollars (Hufbauer and schott 2005, 20-21, table 1.2), or about $12.4 million per year. However, this estimate includes foreign exports (or re-exports), goods not produced in the u.s. which do not support production or employment here. re-exports rose from about 6% to 13% of U.S. NAFTA exports in this period. Domestic exports (excluding re-exports) increased only $9.9 billion per year, so using Hufbauer and Schott's own methodology, their estimate of jobs created by exports should be reduced to 84,000 jobs per year.

**Note that the trade data shown in table 1-1a of this report are presented in current, 2004 dollars and therefore differ from Hufbauer and Schott's estimates.

Total U.S. trade with Mexico and Canada has increased rapidly since the agreement took effect, during a period when it has experienced rapidly growing total trade flows and trade deficits. In 1993, more than one-quarter of U.S. imports came from Mexico and Canada, and those countries were the destination for nearly one-third of U.S. exports. NAFTA proponents claimed that it would help U.S. firms compete with low-cost imports from Asia and elsewhere in the world, by lowering production costs in the United States, Mexico, and Canada. According to the Office of the U.S. Trade Representative (1993), "Our competitors are expanding their markets in Europe and Asia. NAFTA is our opportunity to respond and compete...NAFTA will create jobs and improve our competitiveness."7 In other words, U.S. producers would use cheaper labor in Mexico and Canada to compete with producers using goods or inputs from Asia. If this were true, U.S. exports to the rest of the world should have grown faster after NAFTA. However, the growth of U.S. exports to the rest of the world fell 2 percentage points (27%) after NAFTA, as shown in the top panel of Figure 1-B. The growth of U.S. exports to Mexico and Canada fell even faster after NAFTA, declining from 10.9% to 7.0%, a 36% decline (Figure 1-B, top).

Figure 1-B

On the other hand, import growth from Mexico increased 50% (4.3 percentage points), while the growth of U.S. imports from the rest of the world only increased about three-tenths of a percentage point (growth of imports from Canada actually declined slightly), as shown in the middle panel of Figure 1-B. As a result, rapid growth of imports combined with slowing exports to the NAFTA countries to generate a growing U.S. trade deficit w. Mexico and Canada (Figure 1-B, bottom). The growth of the U.S. trade deficit with Mexico and Canada was responsible for about one-fifth of the growth in the total U.S. trade deficit between 1993 and 2004.8 Thus, U.S. exports have grown more slowly since NAFTA took effect, and deeper integration with Mexico and Canada has not suppressed the growth of the trade deficit. These are primary indicators that NAFTA failed to improve the competitiveness of U.S. producers.

Significant and growing shares of U.S. exports to Mexico are apparently parts and components that are assembled into final products that are then returned to the United States. The volume of finished goods imported from Mexico—such as refrigerators, TVs, automobiles, and computers—has mushroomed under the NAFTA agreement. Many of these products are produced in the maquiladora export processing zones in Mexico, where parts enter duty-free and are re-exported to the United States, other countries, or other areas in Mexico as assembled products, with duties paid only on the value added in Mexico.9

Trade deficits and employment displacement
The impact of changes in trade on employment is estimated here by calculating the labor content of changes in the trade balance—the difference between exports and imports. If the United States exports 1,000 cars to Mexico, many American workers are employed in their production. If, however, the United States imports 1,000 cars from Mexico rather than building them domestically, then Americans who would have otherwise been employed in the auto industry will have to find other work.

It is also essential to look at changes in the trade balance when assessing the impacts of trade agreements because it is possible that no jobs will be created when some exports increase. For example, if a U.S. firm moves an auto assembly plant to Mexico and closes one in the United States, this could lead to an increase in U.S. auto parts exports to Mexico that would look beneficial in isolation. The U.S. Trade Representative (USTR) and others claimed those increases in exports "create" jobs (Hufbauer and Schott 1993, 20). In fact, if the parts used to be shipped to domestic auto assembly plants, and are now shipped to Mexico for assembly, this is not the case. If the total production of auto parts does not increase, then no new jobs are created. The proper way to correct for this problem is to subtract changes in imports from changes in exports, or in other words, the change in the trade balance.

The United States has experienced steadily growing global trade deficits for nearly three decades, and these deficits accelerated rapidly after NAFTA took effect on January 1, 1994, as shown in Figures 1-A and 1-B. Although U.S. domestic exports to its NAFTA partners have increased dramatically—with real growth of 114% to Mexico and 60% to Canada—growth in imports of 274% from Mexico and 90% from Canada overwhelmingly surpassed export growth, as shown in Table 1-1a (see Appendix on methodology and data sources for further details). The United States' net export deficit with these countries increased from $18.8 billion in 1993 to $126.2 billion in 2004, a 570% increase (all figures in inflation-adjusted 2004 dollars).

The growth of exports to Mexico and Canada since NAFTA took effect supported domestic production that maintained or created 941,459 U.S. jobs, as shown in Table 1-1b. However, the growth of imports displaced domestic production that supported 1,956,750 jobs. Changes in trade thus resulted in a net displacement of 1,015,290 job opportunities between 1993 and 2004, including 560,000 due to growing trade deficits with Mexico, and 456,000 with Canada. Findings from previous studies on the employment impacts of NAFTA by this author (Scott 2003) have been challenged by Hufbauer and Schott (2005). However, their revised methodology for estimating the employment effects of post-NAFTA trade flows is highly flawed (see Bias in the Revised Hufbauer-Schott Methodology, p. 6).

Table 1-1b

This study also provides a more complete measure of the employment impacts of changes in imports than studies and programs that try to identify actual displaced workers. For example, between 1992 and 2002 the NAFTA Trade Adjustment Assistance program (NAFTA-TAA—later merged into the regular TAA program) certified 525,000 workers (about 58,000 jobs per year) that were qualified for assistance as a direct result of rising imports from Canada or Mexico, or because their employer relocated production to one of those countries (Public Citizen 2005). This estimate does not include jobs that were indirectly displaced by rising imports, including those employed in businesses that supplied goods or services used in making the directly displaced imports. This study estimates that growing imports displaced production that would have supported about 178,000 jobs per year, more than three times the number certified by the NAFTA-TAA program. The job displacement estimates in Table 1-1 also include jobs that would have been created if imports hadn't grown, a measure of the opportunity cost of growing imports.

The majority of the net jobs displaced were in the manufacturing sector. Growing NAFTA trade deficits with Canada displaced 270,248 manufacturing jobs; growing deficits with Mexico displaced 388,682 manufacturing jobs, for a total of 658,930 manufacturing jobs displaced (64.9% of the total). The estimate that over 1 million jobs were displaced includes 356,361 positions outside of the manufacturing sector.10 This includes many service-sector support jobs such as accounting, computer programming, and legal and financial services. Many of these support jobs could have been maintained in the United States even though manufacturing production was transferred to Mexico, when those transfers or plant expansions were made by U.S.-based multinationals. However, it is likely that some of those non-manufacturing jobs were displaced by growing trade deficits, especially in plants owned by MNCs based outside of the United States. Thus, the number of manufacturing job-opportunities displaced by growing NAFTA trade deficits provides a lower-bound estimate of total employment displaced by growing trade deficits after NAFTA took effect.11

Growth in trade deficits after NAFTA took effect reduced demand for goods produced in every region of the United States and has led to job displacement in all 50 states and the District of Columbia, as shown in Table 1-2 and Figure 1-C.12 Jobs displaced due to growing NAFTA trade deficits ranged as high as 1.4% of total employment in states such as Michigan, as shown in Table 1-3. Between 2004 and 2005, the U.S. goods trade deficit with Mexico and Canada increased 14% (U.S. Census Bureau 2006), likely causing double-digit growth in job displacement in 2005.

Table 1-3

Figure 1-C

Rapid expansion of the U.S. trade deficit with Mexico, Canada, and the world as a whole since NAFTA took effect in 1994 has contributed to the contraction of U.S. manufacturing industries, which lost 3.3 million jobs between 1998 and 2004 (see also Bivens 2004). This restructuring of domestic output has other costs that are nearly always ignored. For manufacturing workers displaced in import-competing industries, average wages of those who were reemployed were 11% to 13% lower than their pre-displacement wages (Kletzer 2001, 104, Table D2). More than one-third of those displaced workers were not reemployed and apparently dropped out of the labor force altogether. However, the wage experience of post displacement workers varies widely; more than one-third have higher earnings than in their pre-displacement jobs, and more than 25% report wage losses of more than 30%. Kletzer's findings are consistent with the wage analysis presented in the next section.

Trade, wages, and labor force demographics
This section will show that the growth of trade deficits with Mexico and Canada shifts jobs from better paid traded goods industries into jobs in non-traded sectors where wages are significantly lower, on average. It will also show that, for trade with Mexico, average wages in import-competing industries were higher than those in export industries. Thus, the growth in the overall volume of trade (imports + exports) with Mexico substituted lower paying export jobs for higher paying jobs in import-competing industries.

This section also demonstrates that the USTR's (1993) prediction that workers would benefit from NAFTA because wages in export industries were higher than the national average was wrong for two reasons. First, the USTR incorrectly assumed that an improving trade balance would push workers from lower-paying jobs in other industries to higher-paying jobs in export industries. Because the trade deficit increased, rather than decreased, workers were pushed out of traded-goods industries into those lower-paying other sectors. Second, the USTR also assumed that trade expansion moves workers from import-competing industries to export industries with higher wages, but because wages were actually higher in import-competing industries trading with Mexico, pure trade expansion (proportionate increases in exports and imports) actually lowered average wages in that case.

This section analyzes the effects of changing trade flows with Mexico and Canada on wages and worker characteristics of those affected by growing trade deficits (see Appendix for further details on methodology). Average wages by sector were used to estimate average import and export wages. The results of the wage analysis are summarized in Table 1-4a.

The first column in Table 1-4a reports average import and export wages for import and export industries in 2004.13 The second column compares the percent difference between import and export wages for U.S. trade with Mexico, Canada, and NAFTA combined using the three different weighting systems described above. One of the most important findings in this study is that, for trade with Mexico, average wages in exporting industries were lower than in import-competing industries, even after excluding highly paid oil and gas workers (who received average wages of $1,458 per week), as shown in the highlighted numbers in column 4. Average wages in industries that exported to Mexico were $799 per week, wages in import-competing industries were $811 per week, a $14 per week (1.8%) premium.

These results are quite robust, and are replicated using six different trade and employment weights (shown in Appendix Table 1-A1). The average wage comparison for Canada conforms to the standard trade model, with average wages in exporting industries higher than in import-competing sectors.

Wages in industries producing goods traded with Mexico or Canada are also significantly higher than those in the rest of the economy. Wages in import-competing and export industries were 16% to 19% higher than average wages in other non-traded industries, as shown in last few rows of Table 1-4a (denoted "Addendum"). Average wages in all non-traded goods industries were $683 in 2004. A similar non-trade/traded wage gap was found for U.S.-Canada trade as well.

The growth of trade deficits with Mexico (and Canada) implies that even with near full employment in 2000, there were more workers employed in other, non-traded sectors of the economy and that total payments to effected workers were lower than they would otherwise have been for two reasons. First (for trade with Mexico), as trade expanded, imports displaced more jobs in higher-paying industries than exports created in those industries (the reverse was true for trade with Canada). Second, the growth in the trade deficit reduced the demand for labor in trade-goods industries, and at full employment, those workers were employed in other sectors where, on average, they earned much lower wages.

Total wage gains and losses for all trade-affected jobs are estimated in Table 1-4b (bottom half). The growth of exports to Mexico and Canada generated total wage premiums of almost $2.6 billion and $3.0 billion, respectively. However, the growth of imports eliminated wage premiums of about $6.7 billion for Mexico and $6.5 billion for Canada. Thus, there is a nationwide loss of $7.6 billion in wage premiums that would have been earned had trade been balanced. Net losses associated with pure substitution of export jobs for import job opportunities for trade with Mexico equaled $-323 million, as shown in column 2.

Table 1-4

Demographic impacts of growing trade deficits
The models used in this study were extended to examine the effects of growing NAFTA trade deficits on different demographic groups, including breakdowns by education levels, gender, wage distributions, and race (see Appendix for details). These results were then consolidated for the entire period of analysis, and aggregate results are reported in Table 1-5.

Table 1-5

Education
Workers with a high school degree or less were particularly hard hit by rising NAFTA trade deficits. The manufacturing sector, which produces most traded goods, employs a much higher-than-average share of such workers in the labor force. The shares of workers with different levels of educational attainment in the total U.S. labor forces are shown in column 1. The number and shares of workers with these levels of education displaced by growing trade deficits with Mexico and Canada after NAFTA took effect are shown in columns 2 and 3, respectively. Finally, the educational attainment of workers displaced by growing trade deficits after NAFTA is compared with national averages in column 4. For example, growing trade deficits displaced 3.4% more workers with less than a high school degree and 5.2% more workers with exactly a high school degree. Workers with some college or more took a proportionately smaller hit, as those workers tend to be less intensively employed in traded goods than in the rest of the economy.

Wages in traded goods industries were significantly higher than in non-traded industries, as shown above. Workers with a high school degree and below are particularly hard hit by growing trade deficits with Mexico and Canada, because larger-than-average shares of these workers are pushed out of high-wage jobs in traded goods industries.

Within manufacturing in particular, 51.5 % of workers have a high school degree or less, while such workers made up only 42.9 % of the labor force as a whole. Hence, the manufacturing sector employs 20.1% more of these workers than other sectors of the economy. As noted above, nearly two-thirds of the jobs displaced by growing trade deficits with Mexico and Canada were in manufacturing, which is one of the best sources of good jobs with good benefits for workers with a high school degree or less.14 These workers were especially hard hit by job displacement associated with rising NAFTA trade deficits.

Gender
Males were 63.9% of the workers displaced by growing trade deficits with Mexico and Canada, while they made up only 55.2% of the total labor force, an 8.7 percentage point gap, or 15.8% more than other sectors of the economy. Likewise, only 36.1% of displaced workers were female, though women made up 47.8% of the labor force. Female workers were particularly hard hit within several specific industries, such as the apparel sector, where they held two-thirds of jobs displaced (35,000). The results are at least partially explained by the fact that two-thirds of the employment displaced by these growing trade deficits were in manufacturing, as noted above. Manufacturing employs a higher-than-average share of men, but employment of women and workers from minority groups is much higher in sectors such as apparel production.

Wage distribution
Jobs were sorted into five different wage ranges, based on the distribution of weekly wages in each industry (see Appendix). The bottom wage groups shown in Table 1-5 make up 93% of the labor force, broken into segments that cover 16% to 30% in each group. The top earners, those making more than $30.83 per hour (about $64,000 per year), made up only 7% of the workforce. Growing NAFTA trade deficits displaced fewer jobs in the lowest-paying wage group (less than $7.23/hour), 4 percentage points (24%) less than the share of such workers in the national labor force, as shown in the last two columns in Table 1-5. On the other hand, 31.8% of net jobs displaced paid between $7.23 and $11.99 per hour (the second-lowest wage group), 1.2 percentage points more than the national average (30.6%), or 4% higher. The largest losses, on a proportional basis, were absorbed by workers in the top wage group, who earned more than $30.83 per hour, and their share of the net job displacement was 7.8%, 0.6 percentage points (9.4%) more than the national average (7.2%). These results reinforce the findings in Table 1-4a, which showed that jobs displaced by growing trade deficits pay more than other jobs in the economy.

The interaction of gender, wage, and education results in Table 1-5 are consistent with changes in wage inequality observed since 1989. For example, between 1989 and 2003, the 90/50 wage gap increased more for men (12.5 percentage points) than for women (7.7 percentage points) (Mishel, Bernstein, and Allegretto 2005, Table 2.16). Growing trade deficits after NAFTA also displaced more higher-paying jobs for men, which apparently contributed to this gap. The divergence in wage trends for men and women was particularly strong after 2000. The total U.S. trade deficit increased 21% ($95 billion) between 2000 and 2003. The male 90/50 gap increased 2.3 percentage points while the female 90/50 gap was unchanged in this period.

This demographic analysis is consistent with other results in this study: growing trade deficits after NAFTA took effect had a large negative impact on male workers lacking post-secondary education, reducing the supply of relatively good jobs and pushed them into lower paying positions. For example, in manufacturing, the most trade-impacted sector of the economy, workers with less than a high school degree earned $0.75 per hour (8.3% more) than comparable workers employed in other industries. Likewise, high school educated workers earned $1.27 per hour (10.5%) more in manufacturing than in other sectors.15

Manufacturing has higher productivity than other sectors of the economy (U.S. Department of Labor 2006a), and higher unionization rates (U.S. Department of Labor 2006b), allowing workers to earn a higher share of the higher marginal product of their labor in this sector. NAFTA-related job displacement pushed the majority of those workers into lower paying jobs, hurting those least able to afford it.

NAFTA and the economic environment in North America
Many factors have contributed to the growth of U.S. trade deficits with Mexico, Canada, and the rest of the world since 1993. This section examines some of the other causes of these deficits to provide a broader perspective on NAFTA's role in their growth.

The United States, Canada, and Mexico were engaged in a process of integration that began well before NAFTA took effect. Formal extensions of U.S. economic integration with Canada began with the 1965 Canada-U.S. auto pact and continued with the 1989 Canada-U.S. Free Trade Agreement (C-USFTA). In Mexico, integration began with economic reforms adopted following its massive debt crisis in the mid-1980s (the petro-dollar crisis), followed by Mexico's accession to GATT in 1986 (Faux 2006, 40-41).16 These reforms included market opening, deregulation, and sale of state-owned enterprises required by the International Monetary Fund (IMF) in exchange for bail-out assistance. Proponents of NAFTA from the Clinton Administration have argued that the main purpose of the agreement was to lock these reforms in place within Mexico to provide a more stable environment for continued integration. In the view of former Clinton economic advisor Gene Sperling, "NAFTA helped Mexico make a strong economic recovery in the second half of the 1990s because it prevented the government from pulling back on its important economic reforms and resorting to protectionism as it did after the 1982 peso crisis" (Sperling 2005, 46).

Others have argued that NAFTA provided a unique set of guarantees to foreign investors that stimulated the construction of thousands of new factories dedicated to export production largely destined for U.S. markets (resulting in substantial plant closures in the United States). While it is difficult to completely disentangle the particular effects of NAFTA from the broader process of regional integration, it is clear that if NAFTA had not been passed by the United States, this integration process would have continued.

Between 1980 and 1994 U.S. trade with Mexico was roughly balanced, as shown in Figure 1-A. The United States did develop a sizeable trade deficit with Canada in this period, but that deficit was largely eliminated by 1994 as well. After NAFTA, there was an abrupt structural shift in these trends. The U.S. trade deficit with both Mexico and Canada began to decline after NAFTA and followed a steadily declining trend thereafter.

A number of factors contributed to changes in these trade patterns, chief among them were shifts in bilateral exchange rates, changes in real manufacturing wages relative to those in the United States, and the growth of foreign direct investment (FDI). However, each of these was related, at least in part, to the implementation of NAFTA.

Mexico has experienced large, periodic swings in its real (inflation-adjusted) exchange rate, as shown in Figure 1-D.17 Both bilateral (dollar/peso) and multilateral indexes are shown. These shifts have been closely linked to financial crises, especially the petro-dollar collapse in the 1982, after the decline of oil prices, and the peso crisis of 1994-95. The peso lost about two-thirds of its value relative to the U.S. dollar in 1982, appreciated steadily from 1987 to 1993, and fell about 50% in 1994 in the post-NAFTA financial crisis. The multilateral and bilateral peso-dollar series diverge in the post-NAFTA era due to the sharp rise in the U.S. dollar during this period. The cost of these calamities for Mexico's economy and its workers has been exacerbated by a steadily upward drift in the peso's real, multilateral value since the mid-1980s.

The over-valued peso has been intentionally used as an external constraint on inflation, and in that regard it has worked extremely well (Blecker 2005). Inflation fell from around 100% per year in the Salinas era to 7% just prior to the 1994 collapse and to 3% in 2005. However, this policy has been very costly for most workers in Mexico. Weak labor demand and rapid structural change, including the loss of more than 1 million jobs in the rural economy (see Mexico analysis starting on p. 33 in this report), have led to stagnant or falling real wages and rising global trade and current account deficits in Mexico. Since NAFTA took effect, the over-valued peso reduced the cost of consumer goods from China and around the world for Mexican consumers, leading to surging imports. Mexico experienced rapidly growing current account deficits between 1995 and 2000 as a result of peso appreciation, but these deficits have receded following a substantial peso depreciation that began in 2002.

Several factors have contributed to Mexico's large and growing trade surplus with the United States since NAFTA took effect despite the growing over-valuation of the peso over the long term. The real value of the peso fell sharply in the critical early years after NAFTA took effect, as shown in Figure 1-D. The sharp decline in the relative costs of production provided an incentive for firms to move plants to Mexico to produce for export to the United States. Wage suppression and rapidly growing capital inflows also stimulated the growth of Mexico's exports to the United States, as noted below.

Figure 1-D

A sharp fall in the Canadian dollar since 1991, two years after the C-USFTA took effect, also dramatically lowered the costs of production in Canada, relative to the United States, as shown in Figure 1-E. These periods of devaluation in both countries occurred near the dates when free trade agreements were implemented with each country. In Mexico, a pre-NAFTA surge in FDI bid up the peso, but this also resulted in widening global (and bilateral) current account deficits. A substantial share of its imports in this period was capital goods that were used in the rapid build-up in export production capacity in this period. However, Mexico's inability to finance these deficits ultimately led to the 1994-95 peso crisis. Blecker (1997) argues:

The peso had to be devalued in order to implement the Mexican strategy for export-led growth that NAFTA was intended to promote—a strategy that was pushed on Mexico by the U.S. government and the U.S. corporate interests that stood to profit from this trade agreement.

Other authors claim: "rather than causing the peso crisis, it appears that NAFTA facilitated a quick resolution and contributed to Mexico's more rapid growth in the late 1990s by locking in Mexico's commitment to open markets" (Burfisher, Robinson, and Thierfelder 2001, 133). While there is no disputing the fact that NAFTA locked Mexico into a "neoliberal" development model (Faux 2006; Salas, Part 2 in this report), Mexico has not experienced more rapid growth after NAFTA. As Salas shows in Part 2 of this report (Table 2-1), Mexico experienced real, average annual GDP growth rates of 6.6 % per year or more between 1950 and 1980. Aside from the lost decade of the 1980s (after the petro-dollar crisis of 1982), Mexico experienced its lowest average growth rate after NAFTA took effect, falling to 2.8% per year between 1994 and 2003.

Figure 1-E

The real exchange rate is only one determinant of the relative costs of inputs purchased by export-oriented producers in Mexico and Canada. NAFTA created an integrated, regional economy. In many cases, U.S. firms have shifted production of relatively labor-intensive activities employing relatively high-wage workers, such as motor vehicle assembly, to Mexico (and Canada), and exported components made with lower-cost labor to these new locations. Labor is the most costly input to production in such plants, so the U.S. dollar-cost of labor in Mexico and Canada is a major determinant in plant location decisions by multi-national companies (MNCs).18 Hourly compensation costs in U.S. dollars in Canada and Mexico fell sharply after the C-USFTA and NAFTA took effect (Figure 1-F).

Dollar costs of manufacturing wages in Mexico have remained well below their 1994 peak, as shown in Figure 1-F (declining 27% between 1993 and 2004). This reflects general weakness of labor demand in Mexico, which is linked to the broader consequences of NAFTA in that country (see Salas, Part 2 in this report, and Audley et al. 2003). Dollar costs of labor in Canada also began to fall shortly after implementation of C-USFTA in 1989, declining 19% between 1991 and 2004), although they have increased in the past two years as the Canadian dollar has gained value.

Declines in the real value of currencies and manufacturing wages in Mexico and Canada after their entry into regional FTAs with the United States greatly increased their attractiveness to foreign investors. NAFTA also prohibited governments from imposing restrictions such as local content requirements and local R&D sourcing and provided an expansion of investor rights in the NAFTA investment chapter, thus reducing the costs of and risks associated with foreign investment. As a result, the flow of FDI into each country rose rapidly after NAFTA. FDI in Mexico soared more than four-fold in the decade after NAFTA, relative to the prior decade, as shown in Figure 1-G.

FDI in Canada was already growing in the 1980s. After a brief falloff following the U.S. recession in 1990, the FDI growth rate doubled after NAFTA took effect (Figure 1-H).

The confluence of falling real exchange rates and wages in Canada and Mexico, combined with rapidly growing inward FDI, set the conditions for rapid growth of exports to the United States. Some of these changes were well underway before NAFTA took effect, including economic liberalization in Mexico and the growth of inward FDI in both countries. However, the investor protections provided in NAFTA and the fact that Mexico's economic reforms were "locked in" by NAFTA certainly accelerated these trends. Furthermore, both Mexico and Canada experienced sharp devaluations in the period immediately following implementation of the agreements. The similarity of these patterns reflects the failure of both the C-USFTA and NAFTA to address exchange rate and trade balance issues. All of these factors combined to bring about the sharp shift in trading patterns (shown in Figure 1-A) from relatively stable bilateral trade balances in the 1980s to steadily growing deficits in the post-NAFTA era. There is no credible argument that NAFTA has not contributed substantially to the growth of these deficits.

Slumping U.S. labor markets
Employment in the manufacturing sector, the most trade-impacted segment of the economy, has been especially hard hit since the 2001 recession. Between January 2001 and December 2003, 2.9 million manufacturing jobs were eliminated in the United States. At least one-third of the jobs lost just between 2000 and 2003 were due to rising net manufacturing imports alone (Bivens 2004). Job losses in manufacturing exceeded those in the non-farm economy as a whole in this period (2.2 million jobs).

Trade Deficits Cause Manufacturing Job Loss

In a recent Brookings Institution study, Baily and Lawrence (BL) (2004) claim that "whatever NAFTA's employment effects may have been, it is simply implausible to blame it for unemployment in 2001 and beyond." They examine the 2000-03 period, when 2.9 million manufacturing jobs were lost in the United States. Overall, they find that manufacturing job loss suffered between 2000-03 was driven only minimally (about 11%) by a rising trade deficit.

Bivens (2006) shows that BL's findings are the result of a fundamentally flawed model. In their model, BL estimate the employment effects of changing trade flows relative to productivity growth. In other words, the employment effect of a change in exports is estimated as a function of the growth in exports less productivity growth, and likewise, the employment effect of a change in imports is estimated as a function of the import growth less productivity growth. In their model, imports displace domestic employment only if they grow faster than manufacturing productivity. This methodology confounds and disguises the employment effects of trade by co-mingling them with productivity effects. Bivens clearly demonstrates that once these factors are disentangled, the impacts of trade on manufacturing employment are much larger than BL claim.

The economic logic that should be used to estimate the employment effects of trade is straightforward. Increases in imports displace production that could support domestic job creation, and growing exports support more domestic employment. When unemployment is increasing, if the volume of imports grows more than exports, then trade has contributed to job loss.

Between 2000 and 2003, U.S. merchandise imports increased $150.6 billion (BL 2004, 227, Table 1). Yet BL conclude that "imports offset" the loss of manufacturing noted above, by "429,000 jobs, and thus had a positive effect as judged by this baseline." To the casual reader, this suggests that rising imports were not responsible for job loss. Once the effects of imports and productivity growth are disentangled, it is clear that Baily and Lawrence have used a misleading baseline.

Likewise, BL's assertion that it is "implausible" to blame NAFTA for unemployment after 2001 is indefensible, because of the growth of U.S. trade deficits with Mexico and Canada. Between 2001 and 2003 , the U.S. trade deficit with both countries increased $15.8 billion, accounting for 16.5% of the growth of in the total U.S. trade deficit. Bivens (2004) estimated that the growth in the U.S. trade deficit in this period displaced 935,000 manufacturing jobs. Thus, growth in the U.S. trade deficit with Mexico and Canada was responsible for the displacement of about 150,000 manufacturing jobs in this period.

During a recession, growing trade deficits can contribute to unemployment, as well as the movement of workers from traded to non-traded sectors of the economy. Some authors have argued that NAFTA cannot explain any part of the recent rise in unemployment. This claim simply is not consistent with basic national income accounting and the analysis presented here (see Trade Deficits Cause Manufacturing Job Loss, above).

Despite the recovery of the economy since 2001, the labor market has been hit with a prolonged slump. Between February 2001 and July 2005, if job growth would have kept up with the growth in the working-age population, 3.2 million more jobs would have been added to the domestic economy (Bernstein and Price 2005). The displacement of jobs by growing trade deficits with NAFTA and other countries has apparently contributed to the suppression of job growth since 2001.

Growing U.S. trade deficits with Mexico, Canada, and the rest of the world are only one cause of some disturbing trends, including: 1) the disappearance of manufacturing jobs, 2) the rise in income inequality, and 3) the decline in wages for many workers in the United States. Other major factors include deregulation and privatization, declining rates of unionization, sustained high levels of unemployment, and technological change. Within NAFTA, the Mexican peso crisis in 1994-95, continued devaluation of the peso, and falling dollar wages in Mexico clearly contributed to the growth of the deficit, as shown above. In addition, rising NAFTA deficits developed during a period in which overall U.S. deficits soared. Between 1993 and 2004, the $107 billion (nominal) increase in the U.S. trade deficit with Mexico and Canada was 21% of the $500 billion increase in the overall U.S. goods trade deficit. Clearly, growing NAFTA trade deficits were part of a much larger story.

Regarding trade and wages, while other factors just mentioned have played some role, a large body of economic research has concluded that trade is directly responsible for at least 15% to 25% of the growth in wage inequality in the United States (U.S. Trade Deficit Review Commission 2000, 110-1. In addition, trade has also indirectly contributed to growing wage inequality. For example, the decline of manufacturing employment, which results, in part, from growing trade deficits, has contributed to falling unionization rates, since unions represent a larger share of the workforce in this sector than in other sectors of the economy. Growing trade deficits with Mexico and Canada after NAFTA have contributed to this problem.

Conclusion
Growing trade deficits with Mexico and Canada after NAFTA took effect reduced employment in high-wage, traded-goods industries, resulting in a substantial loss of wage income for such workers. This contributed to growing inequality in wages and falling demand for workers without a post-secondary education, males in trade-related production, and minorities. NAFTA has also hurt workers in Mexico and Canada in many different ways, as documented elsewhere in this report. Without major changes in NAFTA to address unequal levels of development and enforcement of labor rights and environmental standards, continued integration of North American markets will threaten the prosperity of a growing share of workers in the United States and throughout the hemisphere. Negotiation of additional NAFTA-style agreements, such as the proposed Korean, Malaysian, and Thai Free Trade Agreements, will only worsen these problems. Workers have good reasons to be concerned as NAFTA enters its second decade.

The author thanks David Ratner and Gabriela Prudencio for research assistance and Robert Blecker, Josh Bivens, and Lee Price for comments on earlier drafts.

Appendix: Methodology and data sources

by David Ratner

The trade and employment analyses in this report and presented in Tables 1-1 through 1-5 are based on a detailed, industry-based study of the relationships between changes in trade flows and employment for each of approximately 200 sectors of the U.S. economy. The definitions of industries used by the Bureau of Economic Analysis (BEA) in the U.S. Department of Commerce changed during the period of this study. The U.S. Census Bureau's Standard Industrial Classification (SIC) system was used to categorize different sectors of the economy until from 1993 to 1997. The North American Industry Classification System (NAICS), which was developed in the late 1990s, was used for the 1997 to 2004 period. It was not possible to develop a consistent data series using either format for this study. Hence, the analysis is broken down into consecutive periods using SIC and NAICS data, and aggregated for presentation here.

This study separates exports produced domestically from foreign exports—which are goods produced in other countries, exported to the United States, and then re-exported from the United States. Foreign exports made up 14.9% of total U.S. exports to Mexico and Canada in 2004. However, because only domestically produced exports generate jobs in the United States, employment calculations here are based only on domestic exports. The measure of the net impact of trade which is used here to calculate the employment content of trade is the difference between domestic exports and total imports. This measure is referred to in this report as "net exports," to distinguish it from the more commonly reported gross trade balance. Both concepts are measures of net trade flows.

The number of jobs supported by a million dollars of exports or imports for each of 200 different U.S. industries is estimated using a labor requirements model derived from an input-output table by the U.S. Bureau of Labor Statistics. This model includes both the direct effects of changes in output (for example, the number of jobs supported by $1 million of auto assembly) and the indirect effects on industries that supply goods used in the manufacture of cars. The indirect impacts include jobs in auto parts, steel and rubber, as well as service industries such as accounting, finance, and computer programming. This model estimates the labor content of trade using empirical estimates of labor content and trade flows between U.S. industries in a given base year (an input-output table for the year 2000 was used in this study) that were developed by the U.S. Department of Commerce and the Bureau of Labor Statistics. It is not a statistical survey of actual jobs gained or lost in individual companies, or the opening or closing of particular production facilities (Bronfenbrenner and Luce 2004 is one of the few studies based on news reports of individual plant closings).

Nominal trade data used in this analysis were converted to constant 1996 dollars using industry-specific deflators (see next section for further details). This was necessary because the labor requirements table was estimated using price levels in that year. Data on real trade flows were converted to constant 1996 dollars using export and import price deflators from the National Income and Product Accounts (BEA 2006). Use of constant 1996 dollars was required for consistency with the other BLS models used in this study. The trade statistics were translated into 2004 dollars for presentation in Table 1 using import and export price series obtained from the BLS (2006).

Trade in services was not analyzed in this study because such data are not available in sufficient detail to match with labor content multipliers used here, and because many international services transactions reflect payments for factors of production other than labor (profits, intellectual and copy rights, for example).

Demographic analysis

Wages
Average weekly wages in 2004 in each industry were estimated using the BLS ES202 establishment survey (BLS 2005a) for this table. Three different weighting techniques were used to estimate the average wages in industries exporting goods to Mexico and Canada, and average wages in domestic industries that compete with imported products. The results are shown in Table 1-A1. These weights were used to estimate average wages for imports and exports in all industries (column 1), and for all industries excluding crude oil, natural gas, and petroleum refining (column 2).

Table 1-A1

The first column in Table 1-A1 reports average import and export wages for all goods traded and all industries, using the three sets of weights for all industries. Column 2 reports average import and export wages for all industries except oil, gas and petroleum refinery products.19 The United States is a net energy importer, and domestic products are not available to meet total demand for imports of petroleum and natural gas products. Thus, it would not be appropriate to include average wages in these sectors with jobs displaced by imports. Since average wages in these energy sectors are quite high, average wages estimated without these industries are significantly lower, as shown in Table 1-A1. For this reason, the results in column 2 are the best indicator of export and import wages.

Trade flows were used as weights to calculate the first set of estimates shown in the top section of Table 1-A1 ("Trade weighted"). In other words, if the value of auto imports was 10% of total imports, then 10% of the average import wage was based on wages in that sector.

The second set of estimates in Table 1-A1 ("Total jobs weighted") uses weights based on total direct and indirect labor content in each of the roughly 200 detailed industries, using detailed, industrial-level employment impacts (see Estimation and Data Sources, below, for further details). The aggregate totals of those employment impacts over all industries are reported in Table 1-A1. The share of total jobs supported by exports, or displaced by imports, was then used to calculate the average wages for exports, imports, and net exports. The results reported in Table 1-4 were estimated using total jobs weighted.

The third set of estimates was based only on the direct labor content in each about 100 industries that were directly involved in goods trade ("Direct jobs weighted").

The finding that import wages are higher than export wages for trade with Mexico is quite robust, and is replicated in each of the six possible comparisons shown, for each of the three trade- and job-based average wage estimates, using wages in all industries, and all industries except for oil, gas, and petroleum refinery products. The average wage comparison for Canada conforms to the standard trade model, with average wages in exporting industries higher than in import-competing sectors.

Education, gender, wage, and racial analysis
The models used in this study were extended to examine the effects of growing NAFTA trade deficits on different demographic groups using Census data on worker characteristics by industry (see Estimation and Data Sources, below). The detailed, SIC- and NAIC-based estimates of employment displacement resulting from growing trade deficits at the detailed industry level were also used to estimate the impacts on demographic sub-groups. The total number of jobs supported or displaced was apportioned according to the share workers of each demographic group within in that industry.20 The total impact on employment of changes in net exports, by sector, for each demographic group (calculating the net impact of trade on employment in that sector) was summed across all industries and both time periods.21

Wage data shown in Table 1-5 are derived from CPS ORG data, which provides detailed microdata including demographic information for individual workers. Wage data reported in Table 1-4 are based on establishment payroll statistics. The publicly available BLS data provide only average compensation levels by industry. The establishment data provide more accurate and reliable information about mean wages for each industry, but distributional data are not reported in publicly available establishment data.

Estimation and Data Sources

Data requirements
Step 1. Trade data was obtained from the USITC Dataweb (2005) in two different formats. For 1993-97, trade data is available in three-digit SIC-based classifications. As a result of the switch to NAICS-based classifications, trade data for 1997-2004 is downloaded in four-digit NAICS format. Consumption imports and domestic exports are downloaded for each year.

Step 2. To conform to the BLS Employment Requirements tables (BLS 2005b), trade data must be converted into the BLS industry classifications system. For SIC-based data, the BLS classification system consists of 192 industries. For NAICS-based data, there are 184 BLS industries. The data are then mapped from SIC or NAICS classifications onto their respective BLS classification.

The trade data, which are in current dollars, are deflated into real 1996 dollars using a combination of published and estimated price deflators. Price deflators for 2003 and 2004 are estimated using a combination of industry producer price indices and commodity price indices (from the Bureau of Labor Statistics 2005c). We assume that labor content in the production of computer equipment is more closely related to nominal prices than real prices. Therefore, we keep the price deflator for the computer industry constant over the period.

Step 3. BLS real domestic employment requirements tables are downloaded from the BLS. These matrices are input-output tables industry by industry that show the employment requirements for $1,000,000 in inputs in 1996 dollars. So, for the i-th industry, the entry is the employment indirectly supported in industry i by final sales in industry j and where i=j, the employment directly supported.

Step 4. (Demographic data) CPS ORG data for 2000 is used to estimate demographic data by industry for sex, race, educational categories, and wage categories (U.S. Census Bureau 2001). Educational categories are as follows:
Less than high school
High school
Some college
College +

Wage categories are determined following Mishel et al. (2005) Table 2.32 from CPS ORG and adjusted for inflation to 2000:
$7.22/ hour
$11.99/ hour
$17.81/ hour
$30.84

Analysis

Step 1. Job equivalents

BLS trade data is compiled into matrices. Let T1989 be the 192x2 matrix made up of a column of imports and a column of exports. T2002 is defined as the 184x2 matrix of 2002 trade data. Define E1989 as the 192x192 matrix consisting of the domestic employment requirements tables. Finally, let E2002 be the 184x184 matrix made out of the 2002 domestic employment requirements table. To estimate the jobs displaced by trade, perform the following matrix operations.

[J1989] = [T1989]·[E1989]

[J2002] = [T2002]·[E2002]

J1989 is a 192x2 matrix of job displacement by imports and exports and 192 industries. J2002 is a 184x2 matrix of job displacement by imports and exports and 184 industries.

The employment estimates for retail trade, wholesale trade, and advertising were set to zero for both NAICS and SIC industry-based analyses. We assume that goods must be sold and advertised whether they are produced in the United States or imported for consumption.

Step 2. Demographic breakdown

Define D1989 as the 192x15 matrix of demographic shares by 192 industries. Define D2002 as the 184x15 matrix of demographic shares by 184 industries. Compute

[F1989] = [J1989]T[D1989]

[F2002] = [J2002]T[D2002]

Then, F1989 and F2002 are the 2x15 matrices of job displacement with imports and exports in the rows and demographic categories in the columns.

Step 3. State-by-state analysis

Employment by industry data is obtained for the BLS CPS files for 2000. Define St2000 as the 184x51 matrix of state shares of employment in each industry. Calculate:

[Stj2004] = [St2000]T[J2004]

Where is the 51x2 matrix of job displacement/support by state.

Step 4. Average wage calculations

In order to estimate a measure of wages in import and export industries, several weights were used. First, data were collected from the Quarterly Census of Employment and Wages (BLS 2005a, commonly known as the ES-202), a census of establishments that are covered under state or federal unemployment insurance laws. The ES-202 has data on establishments by six-digit NAICS industry codes. We aggregate the 2004 data to three- and four-digit NAICS industries and convert total wages and employment to the BLS 184 industry classifications.

To derive estimates for average weekly wages in each industry, total annual wages is divided by total annual employment and then further by 52. This measure of average weekly wages is then applied to different weights in order to estimate a wage for import and export industries. These weights include: trade, total job equivalents, and direct job equivalents.

Endnotes
1. http://www.whitehouse.gov/news/releases ... 310-1.html.

2. The growth of the trade deficit with Mexico after NAFTA took effect eliminated about 1,015,000 jobs in manufacturing and other trade-related industries between 1993 and 2004. Whether employment in the total economy increased or fell in this period depended whether the economy is at full employment, a situation where additional employment cannot be created. In these circumstances, trade deficits create a reallocation of employment from trade-related industries to other sectors. However, the U.S. economy has only sporadically been at full employment and certainly was not at the endpoint of this study: 2004. Therefore, the higher trade deficits correspond to lost job opportunities.

The total U.S. goods trade deficit, in particular, increased from $133 billion in 1993 to $666 billion in 2004, an increase of $533 billion (all figures in nominal dollars). The U.S. trade deficit with Mexico and Canada increased from $16 billion to $116 billion in this period (in nominal dollars—hence these data are different from the trade data reported in Table 1a, which are expressed in constant dollars), and increase of $100 billion. The growing trade deficit with NAFTA countries thus explained slightly less than one-fifth of the overall growth in the U.S. trade deficit in this period.

3. These findings based on EPI analysis of CPS Outgoing Rotation Survey data. See Appendix for details.

4. Lee (1995, 10-11) cites Don Newquist, chair of the [U.S.] International Trade Commission, who claimed that NAFTA would create "more jobs, increased exports, and higher wages" (Newquist 1993). Rudiger Dornbusch (1991) wrote: "If you are concerned about good jobs at good wages, freer trade with Mexico will deliver just that: more good jobs for Americans as Mexico prospers and becomes a major market for American goods in the way that Spain did for the European Community."

5. The phrase "foreseeable future" is from Hufbauer and Schott (1993, 16, table 2.1), which is based on a $9 billion improvement in the U.S. trade balance with Mexico. The text provides more specific predictions of NAFTA's trade impacts of "$7 billion to $9 billion annually through the 1990s and perhaps $9 billion to $12 billion annually in the following decade." This suggests that the employment gains from NAFTA could increase after 2000.

6. See Schoepfle and Perez-Lopez (1992) and Schoepfle (1993) for summaries of these and other forecasts of the employment impacts of NAFTA.

7. Hufbauer and Schott also claimed that NAFTA would "make North American firms more competitive in world markets" (1993, 116).

8. Between 1993 and 2004, the U.S. trade deficit with Mexico and Canada (combined) increased $103 billion (in nominal terms), and the U.S. trade deficit with the rest of the world increased by $431 billion. The total U.S. trade deficit increased $534 billion in this period, and NAFTA was responsible for about one-fifth of the total.

9. Or, in the case of domestic consumption of products made in the maquilas, Mexican tariffs on the foreign content would be applied on exit from the zones. The maquiladora share of Mexico's total imports increased from 25% to 35% between 1993 and 2004 (U.S. Department of Commerce 2005, Table 56 and International Monetary Fund 2005). Likewise, the maquiladora share of Mexico's total exports increased from 42% to 47% in this period, maquila imports increased 320%, and exports increased 300%. Non-maquila imports increased only half as fast (160%), and exports about four-fifths as fast (240%). U.S. exports to Mexico declined from 64% to 56% of Mexico's total imports. On the other hand, U.S. imports from Mexico increased from 77% to 82% of its total exports. This calculation compares total U.S. exports to Mexico, as reported by the United States, with total imports into the maquiladora plants, as reported by Mexico.

The number of maquiladora factories increased from 2,143 in 1993 to 3,703 in 2000. (see Salas, Figure 2-J). However, between 2000 and 2004, the number of maquiladora plants fell by nearly 900, in the wake of the U.S. recession and the surge in its imports from China. Mexico's exports from all locations recovered in 2004, growing 13% to 16%.

10. Source: Unpublished results from this study. Data available upon request.

11. The manufacturing-only estimate excludes jobs displaced in other commodity sectors including energy and agriculture. In addition, to the extent that production in the United States is displaced by output from Mexico generated by firms based in other countries, more service-sector job displacement was likely experienced.

12. See Appendix for computational details.

13. These estimates exclude jobs in oil, gas, and petroleum refinery products, as explained in the Appendix. Estimates reflect weighting by the total number of jobs displaced in each sector.

14. Average annual compensation in manufacturing in 2002 was $56,154. Other major sectors with higher wages were mining ($74,455), information ($71,279), finance, insurance, and real estate (FIRE, $68,831), and government ($56,886). Among these sectors, only mining (18.7%) had fewer college graduates than manufacturing (22.3%). Manufacturing and mining lagged well behind information (39.9%), government (38.1%), and FIRE (38.1%) (Mishel et al. 2005, Table 2.28, 173).

15. Source: CPS ORG data and Economic Policy Institute (see Appendix). Workers with less than a high school education earned $9.74 per hour in manufacturing and $8.99 per hour in non-manufacturing jobs in 2000, on average. Likewise, high school educated workers earned $13.33 in manufacturing and $12.06 in non-manufacturing jobs.

16. Faux notes that in order to prevent the election of leftist presidential candidate Cuahtémoc Cárdenas in 1988, "the government...simply stopped counting the votes" as admitted by then President Miguel De La Madrid. Faux notes that the threat that this "might have set back Salinas's plan to open up the country to foreign investment made Washington nervous." He cites Robert Rubin (2004) who said, "Salinas once told me that the best thing about NAFTA was that in the next crisis it would prevent Mexico from going back to the old statist protectionist days." See also Hufbauer and Schott (2005, 1).

17. Source: Blecker (2005).

18. Bronfenbrenner (1997a and 1997b) has argued that firms also use the threat of plant closure and factory relocation to Mexico as a way to thwart union organizing campaigns, and as a bargaining chip in labor negotiations, which reduces the bargaining power of unions and puts downward pressure on wages and benefits in the United States.

19. The average weekly wage was $1,723 in crude oil and natural gas, and $1,194 in petroleum and coal products. These energy products were 12.2% of imports from Mexico (91% crude oil and natural gas) and 18.4% of imports from Canada (85% oil and gas) in 2004.

20. A match was made between industries defined according to the CPS sectoring plan (which differs from both BLS and SIC/NAICS sectoring plans). In a limited number of cases, exact matches were not possible. In those instances, demographic characteristics for closely related sectors (e.g. other sectors within the same broad industry) were used as proxy weights.

21. The SIC-based data cover the period 1993 to 1997, and the NAICS-based estimates cover the 1997 to 2004 period.

References
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PART 2: MEXICO

Between unemployment and insecurity in Mexico
NAFTA enters its second decade

by Carlos Salas, Institute of Labor Studies and El Colegio de Tlaxcala

One of the objectives stated in the preamble of the official text of the North American Free Trade Agreement (NAFTA) is to guarantee sustained growth of the member countries—particularly in Mexico— such that Mexican workers would enjoy increases in both the amount and quality of employment and earnings.

Mexico's economic policy, based on an open-market economy and accentuated by entry into NAFTA, has resulted in the poor performance of the national economy in terms of creating quality jobs and addressing the erratic and feeble growth of labor income.

Mexico's global trade deficit is growing despite the increase in its trade surplus with the United States. The race to the bottom—brought about by the decision to distort the competitive performance of the export sector by paying low wages to the majority of Mexican workers—has brought benefits solely to large companies, the financial sector, and a reduced layer of administrative and professional workers earning high salaries.

This chapter will show that:

* Since NAFTA took effect, Mexico has experienced a continual increase in the precarious nature of employment.
* Real wages and salaries have followed an erratic growth pattern and, in most sectors, have never returned to levels achieved at the beginning of the 1990s.
* The agricultural sector has suffered a large and steady loss of employment.
* Corporate earnings have grown while inequality in income distribution has followed a volatile trend.
* Mexico's primary structural problem is growing dependence on global imports.
* Growth in foreign direct investment (FDI) does not necessarily translate into growth of good-quality employment.

Faced with these circumstances, the way forward for Mexico is clear: the development project must be transformed at a fundamental level providing benefits for the working population, and guaranteeing sustained growth in production, earnings, and standards of living. The NAFTA model has clearly failed to achieve its goals in these areas.

In order to transform the development model, Mexico must reshape its development strategy to include the following elements: growth in the domestic market along with export activity; the full participation of both the private and public sectors in economic activity; and, a deeper, more extensive democracy permitting the participation of all citizens in defining the country's development plan. As the starting point for this transformation, NAFTA must be revised in order to create a social fund that stimulates the development of infrastructure and employment in the country as a whole and especially in Mexico's most marginalized regions. Only a vast development program can abate the disparities existing among the nation's diverse regions.

Additionally, an exhaustive revision of NAFTA's chapter on agriculture is needed and the Commissions for Labor and Environmental Cooperation must be endowed with the power and authority needed in order to effectively monitor and enforce compliance with Mexico's labor laws, according to the logic of the International Labor Organization's (ILO) Proposal for Decent Work.

A brief overview of the history of economic development in Mexico
For more than 20 years, the Mexican economy has experienced profound economic changes that have affected male and female workers alike.

The development model began to change with the foreign debt crisis. As has been shown (Salas 2003), there was a radical change in economic policy originating from the crisis of the growth model based on the domestic market (the so-called "import-substitution model")1, which arose from Cardenas presidential period at the end of the 1930s. This policy was based on a closed-market economy model that imposed elevated tariffs on some imports and prohibited the import of many types of goods, a restriction that could be circumvented by special permits. Nevertheless, an efficient program to substitute the imported inputs that domestic industry depended upon did not accompany this protection of domestic producers. As a result, domestic production relied on the availability of foreign currency to buy needed inputs abroad.

Foreign currency, in turn, was obtained through international trade in agricultural products and from extractive industries. However, by the mid-1970s, the agricultural sector entered into a crisis (SolÃ*s 1981). The discovery of large petroleum-rich zones and their exploitation beginning in the mid-1970s postponed an imminent crisis by facilitating accelerated foreign indebtedness. When the price of petroleum fell in the beginning of the 1980s, it was impossible to avoid a larger debt crisis, which occurred effectively in 1982.

Nevertheless, it is important to point out that despite its limitations in the long-run, the domestic-market-oriented model was able to maintain high per capita GDP growth rates that were accompanied by a reduction in the inequality of income distribution and an increase in income from work (Altimir 1983; Hernández Laos 1999).

The import-substitution model was gradually dismantled beginning with the government of Miguel de la Madrid (1982-8. The change to the growth strategy led to a phase of privatizations and re-privatizations, changes to the laws, abandonment of income redistribution mechanisms, liberalization of foreign trade, and greater labor flexibility (Salas and Gallahan 2004; Zapata 1997). In 1986, the process of opening the market was consolidated with Mexico's entrance into the General Agreements on Tariffs and Trade (GATT) (Calva 2000).

By diminishing direct state participation in the economy and reducing per capita social spending (Chávez 2002), the market opening has heightened the economic polarization that characterizes developing countries (Dussel 1997).

The government of Carlos Salinas (1988-94) presented access to foreign markets as a means for the country to ascend into the First World (Aspe 1993). As an instrument to achieve this goal, and in order to assure foreign investors of the long-term durability of the open-economy model, NAFTA was signed in 1993.

The following sections examine in some detail the evolution in Mexico of two key elements of the export-based economic project: the export-import sector and foreign investment. Later we examine how the economic dynamic has impacted job creation as well as the characteristics of these jobs.

The evolution of the economy beginning in the 1990s
One of the elements that diehard NAFTA supporters use to affirm the trade agreement's success is the performance of the Mexican economy since the crisis of 1995, emphasizing that between 1997 and 2000 the Mexican economy grew rapidly (Figure 2-A).

Figure 2-A

Nevertheless, this performance is irregular. In fact, the International Monetary Fund's (IMF) predictions for the next two years are not very optimistic, and have forecast that annual growth will range between 3.5% and 3.7% (IMF 2005).

A brief examination of the evolution of GDP over a longer time interval reveals significant differences in growth rates and patterns between the periods when the import-substitution model was in effect and when the current open economy model entered into force, as shown in Figure 2-B.

Figure 2-B

While the economy did expand during the 1990s, performance in this period cannot compare to the record of growth in the 1950-80 period. This contrast is even more pronounced when examining the rate of growth of per capita GDP (Figure 2-C). Note that recent rates are scarcely half of what they were in the 1960-80 period.

Figure 2-C

The economy's evolution, while it has not translated into generalized benefits for the population, has improved firm profits. The results of Mariña and Moseley (2001) show that the rate of profit for the economy as a whole recovered after the crisis in 1986 but never achieved a sustained increase, let alone one matching the levels observed in the 1970s (Figure 2-D). Therefore, to date, there is no evidence of a cyclical recovery in profit rates.

Figure 2-D

In order to understand the mechanics of the evolution of the Mexican economy, Figure 2-E disaggregates the gross domestic product (GDP) into its component parts: private consumption, government spending and changes in inventory stocks, fixed investment, exports, imports, and net exports. This permits an examination of the contribution of each of the diverse components to the change in GDP. GDP growth is equal to the sum of growth in its component parts in each year.

Figure 2-E

Figure 2-E shows that during the first year NAFTA was in force, the growth of the economy was driven by growth in private consumption and imports were growing more rapidly than exports.Thus, net exports actually reduced GDP growth in 1994. Following the devaluation crisis that exploded at the end of 1994 (Blecker 1996), exports drove growth during the 1995-96 recovery period, as private consumption was weakened by both the high costs resulting from the devaluation and also the increase in interest rates.

The net contribution of foreign trade to the economy's performance was temporary. Exports momentarily became less expensive in international markets due to the magnitude of the devaluation. However, imports began to grow vigorously to sustain this level of production—a recurrent phenomenon in the Mexican national economy—and net exports once again began to retard economic growth.

The recovery and consequent growth from 1997 until 2000 was sustained by domestic demand, particularly in private consumption. Private investment also grew, which helped the economy recover its dynamism. The initial impulse may have originated in inventory accumulation and government spending, but the investment growth slowed, in part as a reflection of the financial structure and a tight monetary policy.

The trade balance problem
The first efforts to re-structure Mexico's industrial production occurred before NAFTA was signed. The goal was to transform the country into an exporter of consumer and intermediate goods.2

Despite having a trade surplus with the United States ($45 billion in 2004), when trade with Europe and Asia is taken into consideration, the balance turns into a deficit ($8.3 billion for 2004). Exports are mostly manufactured products that absorb a significant amount of imported inputs. Consequently, when the economy grows, so does the trade deficit. Figure 2-F shows the relationship between the rate of growth of GDP and the rate of growth of imports (the so-called implicit (average) income elasticity of import demand) and demonstrates that, beginning in 1980, the need to import more in order to grow had heightened to such an extent that a 1% increase in GDP increased import demand by 2.66%. The strong dependency of internal growth on imports is explained by the destruction of domestic productive chains (Aroche 2002), a phenomenon due in part to market opening and to many industrial sectors being uncompetitive.

Figure 2-F

Between 1991 and 2004 total exports (including those of the maquiladora export assembly sector3) grew at an average annual rate of 12%; particularly during the last 10 years—the period since NAFTA came into force—the proportion of maquiladora exports as a share of total manufactured exports grew considerably, as shown in Figure 2-G. Nevertheless, this was a process that had already begun before NAFTA was signed. At this point, it is important to note that despite being considered in the official data as part of exports, when it comes to foreign currency earnings, maquiladora activity generates only limited value-added in Mexican territory. The majority of this value-added corresponds to the wages paid and only a small part of it results from tax payments or payments for inputs. The following paragraphs will examine total exports, which include maquiladora activity.

Figure 2-G