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• The Debate
• The North American Free Trade Agreement
• Effects of the NAFTA on Labor
• The Statistics
• Conclusion
• Bibliography

Since the end of the eighties and the beginning of the nineties, there has been a surge in the creation of trade agreements all over the world. The one encompassing the largest area and affecting the greatest number of people is the North American Free Trade Agreement (Text of the NAFTA, Organization of American States). The three major countries of North America signed this regional trade agreement in 1993: Mexico, the United States, and Canada. The North American Free Trade Agreement or the NAFTA, is it became popularly called, was an effort that was initiated by the United States. At first, there existed the CFTA agreement between the United States and Canada. Later the U.S. Administration saw it as beneficial if the country of Mexico entered the free trade agreement. In August of 1990, then Mexican President Carlos Salinas de Gortari formally applied to enter a free trade arrangement with the United States. Six months later, Canada announced that it too would join the negotiations for a tri-national trade agreement (Coote, p. 7). The agreement was signed and approved by the governments of the three countries and the NAFTA came into effect on January 1, 1994.

Interdependence and Free Trade, These are the two most fashionable words spoken by economists and world leaders today. The majority of the nations of the world are involved one type of trade agreement or another and nearly all of the countries in the world are members of the World Trade Organization. With this surge in interdependence and trade agreements however, there have surged many problems and issues that cause much controversy and discordance. One of the main issues that has caused controversy, especially in the United States is the issue of labor. The NAFTA had a tough time getting approval from the Congress of the United States and the American people because of the labor issue. It caused a huge labor scare where critics warned that hundreds of thousands of American Jobs were going to be lost to cheap Mexican labor. However five years later, it has been proven that the labor scare that NAFTA produce was unfounded. It is true that the United States lost many jobs but it gained more jobs in return. What critics of NAFTA failed to understand is that trade agreements like NAFTA, where manufacturing jobs are shifted from the developed world to the developing world, are necessary. They are necessary not only to develop the developing world but also to continue in America’s path of development. America has long since passed the industrial revolution. Employment in the United States is now more related to the service industry than manufacturing. The growth of the service industry in the United States while the stagnation of the manufacturing industry shows us that the United States is entering another stage of development. Mexico on the other hand is becoming industrialized and its manufacturing sector is rapidly growing. More people are being employed in manufacturing jobs as less and less people are working in agricultural production. Mexico too is passing into another stage in its development. Mexico is being industrialized while the United States is leaving the industrialized phase and entering a new era where the service business dominates. Trade agreements like the North American Free Trade Agreement between the developed world and the developing world facilitate this transition in economies. As markets are opened in the developing world, manufacturing increases in thes countries helping them to develop. At the same time these markets are open to help the expansion of the service industry of the United States with the creation of more and more jobs in this sector. It is a mutually beneficial arrangement which aids both countries in their respective development paths.

Adam Smith , often considered the father of Capitalism, tells us in his Wealth of Nations that labor should be divided among those best suited for the specific task, and that each should work only at what he or she does best to be the most efficient possible. The United States, with its educated masses and high capital corporations is less suited o do hard labor than the developing world such as countries like Mexico. The developing world on the other hand has a large, unskilled population that is better equipped to handle the job of production. The United States has transformed itself into an industrial society, while the developing world, taking Mexico and the NAFTA as an example has transformed itself into a manufacturing society. With the North American Free Trade Agreement, Adam’s Smith view on division of labor is proving itself in that the United States and Mexico are respectively engaged in the type of industry that best suits each country.

The North American Free Trade Agreement was designed to eliminate all trade barriers between the three countries. It was designed to promote conditions of fair competition and increase investment opportunities. It also was designed to establish effective procedures for the resolution of disputes and promote further trilateral, regional, and multilateral co-operation. It provides for the gradual phase out of tariff and non-tariff barriers in a period of 10 to 15 years (Coote 8). It was an agreement that was designed to keep up with the emerging liberalism in the world economic system after the end of the cold war. Mexico, having gone through multiple recessions and with its biggest trading partner, the United States, it could not afford to be left out of a trade agreement.

The NAFTA was mostly designed to take advantage of Mexico’s Maquiladora Program. The jobs that resulted due to the NAFTA went mostly to the maquiladoras. Maquiladoras are assembly plants located in Mexico that are most of the time owned by foreign investors instead of Mexican companies. These maquiladoras import the parts from other countries and just assemble the finish product. Mexican law allows the companies also to bring in machinery and equipment from the outside. The supplies that are needed to create the finished product are not taxed since they are destined for export. The finished product containing the supplies has to be exported out of Mexico within a six-month period. The tariffs that apply to the export from Mexico of the finished product is the value added to the product according to it’s processing in Mexico. This includes the value of the labor, electricity, other parts, etc. The maquiladoras can bring as many foreign workers as they want but hourly wageworkers have to be Mexican. Maquiladoras employ mostly Mexican workers but can bring as many foreign workers as they want. The only exception is that foreign workers can’t be hourly wage earners. All hourly wage earners have to be Mexican. There are over 500,000 Mexican workers employed in the 1,600 border maquiladoras.

Today, five years after the agreement came into effect, the benefits of the North American Free Trade Agreement are plentiful and obvious. Before NAFTA came into effect however, it was a highly controversial issue in all three countries for a variety of issues. Among these issues two are the ones that stand out the most: what were the possible effects of such a trade agreement on the environment and what effects was NAFTA going to have on labor in the three countries. Today, five years after the implementation of the North American Free Trade Agreement, these debates still continue.

There are many sides to the labor dispute that erupted because of NAFTA and it is a dispute that continues even today. Canada and the United States have two of the strongest economies of the world and are developed both industrially and technologically. Mexico on the other hand is still considered a developing country. Its economy is roughly the size of the economy of the American State of Illinois. It is still lagging in production technology and quality standards. It has a large unskilled labor force with over half its population living in poverty. These are two very disparate environments and it was the first time that any of these two groups of countries were going to be joined in a trade agreement.

It is first necessary to know the impacts that the NAFTA has had on both Mexico and the United States. The U.S. Government in a report issued by the United – States – Mexico chamber of commerce reports that since the passage of NAFTA, 18 million jobs were created and 7 million jobs were lost in the United States. The creation of these roughly eleven million jobs has led unemployment to go down from 8.5 million down to 6 million unemployed. These figures are not totally dependent on the North American Free Trade Agreement considering that the U.S. economy is seeing one of its greatest booms in its history. But it goes to show that NAFTA did not affect the overall U.S. job market as a whole.

Mexico’s increase in employment though is more linked to NAFTA than in the United States. rates have also risen dramatically since the North American Free Trade Agreement went into effect. Since 1995, employment in Mexico has risen from 9.9 million workers to 12.2 million. Employment in the Maquiladora sector of the Mexican economy has grown 10.9 percent from 1998 and has grown 100% since the inception of the NAFTA.

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Adam Smith tells us that the workmen, or the laborers, want to get as much money as they can and in the opposite, the masters, or the employers, seek to want to give as little money as they can. (Smith p. 83) It is therefore natural for the employer to seek lower wages. If it is necessary to go to other countries, they can. These multinationals go to these underdeveloped countries such as Mexico to take advantage of the cheap labor the country has to offer. The country has cheap labor to offer because it is underdeveloped and most of its labor is poor and uneducated. They can afford to work for less because it takes less to maintain themselves. If wages are higher in a country then things are more expensive. If the overall wages are lower, then products’ prices are lower. Therefore the argument that the workers are not paid enough is unfounded. On the contrary, these are jobs that the Mexican people would otherwise not have.

These statistics go to show that the trade agreement was indeed beneficial to both countries. However several sectors of the economies of each nation benefited more than others. In the United States, there was not increase in the number of manufacturing but there has been a steady increase in the number of those employed in the service industry. With the opening of new markets like that of Mexico, the rapidly emerging service industry can take advantage of brand new markets that will help it to grow. Meanwhile manufacturing is exported to these countries where its labor force can produce with greater efficiency and maximizing profits. It is true that Mexico gained the most jobs but it is proportional to the populations and the work force of each country.

In Mexico, the majority of these jobs went to the manufacturing sector. The Secretaria de Trabajo y Prevision Social, equivalent to the Department of Labor of the United States shows how much the manufacturing sector has grown in Mexico. 2,870,908 people were employed in the manufacturing sector in 1995. In August of 1999 it had jumped to 3,829,440 people employed in the manufacturing sector. It is Mexico’s largest economic activity second only the the commerce a work force of approximately 10,000,000 it is quite a growth spurt. (Secretaria de Trabajo y Prevision Social, Estudio y Estadisticas, www.stps.gob.mx.)

In the United States though manufacturing has not been growing at all. It has remained stagnant throughout much of this decade and a greater part of the 1980’s. The month where it has reached the highest number of workers this year is the month of October with 18,202,000 workers. This mark however has been passed numerous times in various preceding years dating back to 1988. From 1994 and onward, from the date the North American free Trade Agreement was implemented, employment in the manufacturing sector has been hovering around the 18,000,000 mark, many times going below and many times going above but generally in that area (Department of Labor, Bureau of Labor Statistics).

A sector in which the United States has seen a steady rise of the level of employment is in the service occupation industry. United States has seen a steady increase in the number of employment over the past two decades. Beginning in 1982 with 13,154,000, the service industry employment number now stands at its highest point in 1999 with 18,450,000 people employed in this sector. This is tremendous growth for an industry and it goes to show us that it is steadily and quickly surpassing what has been America’s largest business for decades and decades (Department of Labor).

This data goes to show that Mexico and many other countries in the developing world are taking over the manufacturing. They are being able to do this by opening up their markets and having a relatively cheap labor force. It is very possible that trade agreements like the one that the United States has with Mexico will be the norm in the coming decades. Already negotiations are under way for a hemisphere wide trade agreement linking all of North America, Central America, and South America. All these countries will basically be geared towards manufacturing just like Mexico and their markets will be open to the American service industry and to the products that were manufactured elsewhere but are sold by the United States. This is also happening all over the world with more and more trade arrangements being negotiated between the first world and the third and developing worlds. Many people would think it will have this will have a negative effect. That the multinationals’ ploy to exploit cheap labor will underdevelop the developing world and will keep them in a fixed position without growth for decades to come. Also that these situations will continue the practice of cruel labor conditions in these countries where no strict policies to protect workers are set in place. However this is not the case. Wages in these manufacturing plants such as maquiladoras which are increasing in the number they employ generally pay 16% higher wages than those assembly plants that do not export (US-Mexico Chamber of Commerce, NAFTA at Five Years). Mexican companies that export more than 80 percent of their production, pay 40 percent more than other Mexican companies. Mexico is gaining not only with more jobs but higher paying jobs. These jobs are not just at the border. Production has increased dramatically in other regions of Mexico. In fact, maquiladora jobs pay almost 5 times the minimum wage in Mexico (United States – Mexico Chamber of Commerce). With higher and higher wages, the Mexican population will increase their standards of living as well as education. This will open the way for a higher skilled labor force that will make it possible for Mexico to continue on the path of development that it is on. The dictates of these negotiated labor agreements also prevent harsh treatment of employees. This makes sure that workers are not abused but rather treated humanely. Workers have better standards in these maquiladoras and export oriented businesses than most other factories in Mexico (U.S. – Mexico Chamber of Commerce)

Critics of the NAFTA said that the agreement was not going to be beneficial because it was going to underdevelop Mexico while at the same time making American jobs disappear. The opposite has proved to be the case however. Yes, the United States has lost many jobs, but it has gained many more as a result of the North American Free Trade Agreement. The economist Adam Smith probably would have opposed such trade agreements because he did not favor preferential treatment between nations. However, I believe that these trade pacts will be necessary to expedite the transition and the development of countries like Mexico. Smith probably never envisioned that the United States would stop being a manufacturing society and would turn the service sector as its major source of employment. But if he knew, he probably would have supported this shift because it would have symbolized his idea of division of labor where people more suited to manufacture like the work force in Mexico would manufacture and the people more suited to engage in the service sector like the new work force in the united states which is highly educated and capital intensive would work in the service sector. The North American Free Trade Agreement, like any other arrangement has its pros and its cons but I believe that the pros far outweigh the cons. It was a movement for growth instead of restraining the inevitable development of these countries.

Coote, Belinda. 1995. Poverty and Free Trade in Mexico. Oxford, UK: Oxfam

Globerman, Steven . 1994. "The Economics of NAFTA" in Alan Rugman, 1994. Foreign Investment in NAFTA. Columbia SC. University of South Carolina Press

Smith, Adam. 1976. An Inquiery into the Nature and Causes of the Wealth of Nations.

Oxford, UK: Oxford University Press

Department Of Labor. Bureau of Labor Statistics. www.stats.bls.gov Table A-4, Selective Employment Indicators

Secretaria de Trabajo y Prevision Social. Estadisticas Laborales. Trabajadores Asegurados Permanentes Por Gran Division de Actividad Economica Registrados en el IMSS. www.stps.gob.mx

United States – Mexico Chamber of Commerce. "The North American Free Trade Agreement at Five Years : What It Means for the U.S. and Mexico" www.usmcoc.org /naftafor.html

United States – Mexico Chamber of Commerce. "The North American Free Trade Agreement: Five Years Linking U.S. and Mexican Markets" http://www.usmcoc.org/nafta5_eng.html