The Implications of the North American Free Trade Agreement for Workers

By F. Ray Marshall on February 1, 1993

This article examines the North American Free Trade Agreement's (NAFTA) implications for workers in the United States and Mexico and recommends policies to make any compact between the U.S., Canada, and Mexico more beneficial to the residents of all three countries. Regardless of what happens to NAFTA, the U.S. and Mexican economies are and will continue to be highly integreated.1 We should therefore take advantage of the recent liberalization of the Mexican economy and expanding trade between the United States and Mexico to improve the conditions of most North Americans.

While nobody can say for sure what NAFTA's impact will be, as negotiated it could have serious negative consequences for many U.S. and Mexican workers. The main reason for these negative outcomes is that the United States and Mexico have low-wage economic strategies that not only limit both countries' productive potential, but also will cause U.S. and Canadian wages to devolve toward the Mexican level. Indeed, NAFTA and "free trade" ideologies are natural extensions of a low-wage strategy that not only will cause lower and more unequal wages, but also limit the growth productivity and income levels. To prevent these negative outcomes, the United States and Mexico should adopt high-productivity, high-wage competitiveness policies and make labor and environmental standards part of the NAFTA process. Labor standards and high-productivity strategies would reduce opposition to more open economic relationships and create more complementarity between the U.S. and Mexican economies.

The Basic Arguments

NAFTA's supporters generally defend their position on the basis of the theory of comparative advantage, which postulates that in competitive markets trade produces "plus sum" or mutually beneficial outcomes. Otherwise, trade would not take place. Specialization in products for which each country has a comparative advantage will produce higher joint returns. The United States will lose some low-wage jobs we are told, but will gain more highly paid jobs which Mexican workers, with lower skills and less high-performance work experience, are unable to perform. Wages are much lower in Mexico than in the United States according to this argument, mainly because of lower productivity. So rising productivity will improve Mexican wages and increase their purchases of U.S. goods. And rising Mexican incomes, it is argued, will provide the resources for Mexico to strengthen its labor and environmental protections. NAFTA boosters point out that Mexico has strong labor laws (stronger in many ways than those in the U.S.), but lacks the resources for enforcement.

NAFTA's critics are skeptical of these arguments; they contend that increased trade and investment in Mexico will damage the environment and result in the exploitation of workers, lower wages and large net U.S. job losses. It is hard, according to the agreement's critics, to square the proponents' claims that trade will improve the conditions of Mexican workers, given the experiences of the 1980s, when wages fell by 40 to 50 percent while violations of workers' rights intensified despite raid increases in trade between Mexico and the Untied States. Critics contend, in addition, that often deplorable conditions in maquiladoras provide the best indicators of NAFTA's probable labor and environmental effects.2

What about these arguments? The honest answer has to be that nobody really knows what NAFTA's net impact would be. The conditions between the United States and Mexico are sufficiently unique to make it difficult to predict. It is always hard to separate the impact of something like NAFTA from stronger and more fundamental economic trends and forces. Clearly, however, competitive advantage, not comparative advantage, is the most appropriate conceptual framework where multinational corporations can shift technology and production across national boundaries. NAFTA's supporters argue, incorrectly, that most empirical studies show employment gains to both the United States and Mexico from NAFTA. Most of these "studies" are based on very restrictive assumptions and static econometric techniques for what are surely going to be very dynamic processes. For example, two of the econometric studies the Bush Administration relied on to estimate employment impacts assume full employment in the United States and no shifts of investment between the United States and Mexico, even though (as I argue later) NAFTA is more about investment than about trade. Even so, these studies project only modes U.S. employment gains from NAFTA, from zero to 64,000 jobs over ten years. Other NAFTA advocates forecast larger employment gains. For example, Hufbauer and Schott, in a study for the Institute for International Economics, thought the net employment gain from the agreement would be 130,000 for the United States and 609,000 for Mexico.3 They concede, however, that most of the projected job gains for the U.S. had already taken place in anticipation of the agreement.4 Clearly, therefore, by their own estimates, U.S. job gains from the agreement will be very small.

A number of studies based on more realistic assumptions forecast net employment losses for the United States that range from 290,000 to 900,000 over ten years. Estimates by the Economic Policy Institute, for example, put the probable U.S. job losses from NAFTA at 550,000 after ten years.5

Although most of the debate has been about NAFTA's impact on jobs, liberalizing trade and investment will affect wages and incomes as well as employment. Most wage assessments forecast losses for unskilled U.S. workers and gains for those with the highest skills. A very good 1992 study by the Office of Technology Assessment (OTA) concluded that NAFTA would produce downward pressure on U.S. wages and labor standards, with less well-educated workers likely to lose one percent of real wages annually. The OTA concluded, in addition, that there would be increased shift of production to Mexico and accelerated migration from Mexico to the United States.6 Robert McCleery and Clark Reynolds, for example, estimate NAFTA's probable wage effects by the year 2000 under various scenarios. Assuming free trade and capital movements (the most realistic scenario), average compensation for high-wage workers in the United States would increase by 4.0 percent and that of low-wage workers would fall by 2.9 percent. Improvements in U.S. productivity could reduce the low-wage losses to 0.5 percent and increase the gains of high-wage earners to 5.5 percent.7

Because of the size and conditions of the Mexican labor force, one of the most important of NAFTA's immediate impacts probably will be on immigration, not on general economic conditions. The aggregate general economic effects on the United States are likely to be small at first because the Mexican economy is relatively small — with a Gross Domestic Product (GDP) of less than four percent of the United States'. However, the impact on the U.S. economy will be highly concentrated in certain industries (auto parts, textiles and apparel, electronics, electrical machinery, furniture, and fixtures) and work forces (low-income U.S. workers and those displaced from high-impact industries). By contrast, at almost 90 million, Mexico's population is over one-third that of the United States and is still growing. More significant for competitiveness purposes, manufacturing employment in Mexico was 12.8 million in 1989, or 77.6 percent of the U.S.'s 16.5 million. And Mexico's work force will increase at about one million a year, at least two-thirds of the projected employment growth in the United States between 1990 and 2005. As noted earlier, it is unlikely under present conditions that Mexico will be able to sustain enough growth to simultaneously absorb this growing work force and the mounting numbers who would be displaced from marginal rural and urban industries. Mexican emigration to the United States will contribute to the growing polarization of U.S. incomes, though it could reduce surplus supplies in Mexico and contribute to modest improvements in the wages of Mexican workers. On balance, however, NAFTA will probably widen income gaps in the United States and Mexico.

U.S. NAFTA boosters oppose including immigration in that agreement even though they admit the compact's net effect will be to augment an already large flow of undocumented workers from Mexico to the United States that displaces workers in the United States and puts downward pressure on wages in those labor markets where they are concentrated.8 It is therefore difficult to understand why some trade experts advocate rules for commodities or intellectual property but not for workers or immigration. For example, a generally good study of NAFTA by Hufbauer and Schott admits:

Even assuming rapid economic growth until the end of the century, Mexico will not be able to provide jobs at attractive wages to all those entering the labor market. Illegal immigration into the United States will thus continue on a large scale... In our view the best policy towards this thorny problem has three components: leave the U.S. immigration law as it is and do not discuss immigration in the NAFTA talks; keep U.S. border enforcement outlays no higher than present levels; and allow economic prosperity in Mexico to ameliorate the flow of immigrants over the next several decades.9

These authors offer no explanation for their strange conclusion that we should make no effort to stem the flow of undocumented workers. And other than minimizing the importance of negative impacts on workers, it is hard to understand why the same principles should not apply to labor as to environmental, trade, or other standards.

How to Achieve a Better Agreement

Support for NAFTA in the United States would be enhanced, and the agreement would be more effective, if it contained the safeguards outlined in this paper and if the United States adopted a strategy to make its economic development more complementary with Mexico's. Such a strategy would include an adjustment program to encourage a more equitable sharing of the benefits and costs of change; heavier investments in restructured learning systems, especially K-12; education and job training for the non-college bound; an industrial extension service to help companies — especially small businesses — adapt leading-edge technology and reorganize work through the creation of a Civilian Technology Development Corporation; tax policies that would both encourage investment instead of consumption and encourage companies to invest more in productive assets in the United States instead of shifting production to low-wage places; massive infrastructure investments, especially in transportation, communications, and information systems; and national health and family policies. Since capital and technology are highly mobile, the best way to improve the conditions of the American people is to give high priority to investments in human resources and physical and information infrastructures.10

Making immigration part of the NAFTA process could provide the joint solutions that are required to control undocumented immigration and to protect immigrants and low-income workers from the most egregious forms of exploitation on both sides of the border. There are, in addition, labor market actions (like training, labor law enforcement, and work reorganization) that can reduce American companies' dependence on low-wage foreign workers while improving the wages of the most disadvantaged U.S. workers. The realities of bargaining are such, however, that a failure to address labor and immigration as part of the NAFTA process will greatly weaken the ability to ever achieve joint approaches to these problems. Environmental and labor standards therefore should be included in the agreement, but at a minimum these matters should be a condition for accepting the commercial aspects of the treaty, whether or not they are all part of a comprehensive agreement.

The Case for Including Labor Standards in NAFTA

While many details must be worked out, experience and logic suggest that a workable system of trade-linked labor standards could be established. The U.S. Congress included labor standards in every major trade act of the 1980s. Efforts to perfect the implementation of these laws, along with the International Labor Organization's experiences, provide insights into how an effective system of trade-linked labor standards might be implemented. A failure to include labor standards in NAFTA would either require that U.S. standards be waived or unilaterally enforced, neither of which would be desirable as a trilateral enforcement. In any case, the U.S. definitely should not permit the labor standards in its trade laws to be weakened by the NAFTA negotiations.

Labor standards are critical components of more effective development policies, just as they were vital elements of the policies and institutions industrialized democracies adopted to produce the longest period of relatively equitably-shared prosperity in history between 1945 and 1973. Labor standards (whether enforced by government regulations or collective bargaining) improved economic efficiency by removing worker (or public) subsidies to firms that could not pay a living wage or provide acceptable minimum working conditions, thus forcing those companies to compete by increasing efficiency rather than by reducing labor standards. This, in turn, allowed countries to protect and develop human resources — their most valuable assets. These adjustment processes were facilitated in most industrialized democracies by public and private policies to complement market forces and shift resources to more competitive uses.

The systems put in place in all democratic industrial societies during and after the Second World War not only promoted prosperity and economic justice, but, by improving wages and other benefits, increased consumer demand and stimulated global economic growth.

A major problem in the 1990s and beyond is the fact that the organizations, institutions and policies that led to what economic historians probably will regard as the "golden age" for the United States and other industrialized market economy countries, have been weakened by a complex constellation of forces, especially internationalization and technological change. Intensified international competition has made it more difficult for countries or labor movements to enforce national regulations to limit the adverse effects of competitive markets.

While it has become very difficult to stimulate demand within a country, a global expansion of demand is absolutely essential to the restoration of an open, expanding, sustainable and just world economy. It is highly unlikely, though, that adequate aggregate demand will come entirely from an expansion of trade or development in or between the developed countries alone.11

With the right kinds of policies and arrangements, major opportunities for global expansion could come from a restoration of growth in Mexico and other developing countries to the levels these achieved in the 1970s. Indeed, the slowdown in the less developed countries' (LDCs) growth during the 1980s was an important reason for economic stagnation in the more developed countries (MDCs).

Some basic international labor rights have been overwhelmingly accepted by the international community. There can be no legitimate objection to basic labor standards that were included in all major U.S. trade laws during the 19809s, which include freedom of association and collective bargaining, or restrictions on trade in goods produced by forced labor, under discriminatory conditions, where young children are exploited, or under unreasonable conditions of employment (especially violations of minimally acceptable health and safety conditions or wages limited only by "market" forces).

Trade-linked labor standards should, however, avoid any suggestion of a universal minimum wage level. Wage differentials are far too great to make that a practical idea. In the short run, low wages are the main competitive advantage of Mexico and other developing countries. Low wages alone, though, rarely constitute the basis for economic development, as suggested by the fact that there is no correlation between international wage levels and rates of economic growth. As noted earlier, moreover, free trade alone will not revitalize developing economies; countries must develop strategies to maintain and improve wages. While having low wages because of under-development is legitimate, strategies to gain competitive advantage by suppressing wages and violating basic standards are not. That is why freedom of association and collective bargaining are such basic standards. Workers must be able to organize and bargain to improve their conditions on terms compatible with their countries' economic development.

The rational for trade-linked international labor and environmental standards is thus the same as for enforceable labor or environmental protections in domestic markets.12 The moral reason is to limit the exploitation of workers and the environment. The efficiency reason is to prevent workers and future generations, through substandard conditions, from subsidizing inefficient companies. The elimination of these subsidies will encourage enterprises to be more efficient by internalizing costs and preventing health, environmental, or safety problems and by shifting resources to more productive uses. A major economic advantage of trade-linked labor standards in a more knowledge-intensive global economy is to make it possible for workers in the developing countries to maintain their families, thus facilitating human capital formation, and to provide purchasing power for higher aggregate global demand.

The Case Against Trade-Linked Labor Standards

Critics argue that the movement to link trade and workers' rights is an arrogant attempt by labor movements and inefficient industries in the developed countries to impose their labor standards on other countries. As noted, this is not the case. Almost all countries, including the United States, Canada, and Mexico, accepted the ILO's purposes when they joined that organization. Moreover, on paper, Mexico's labor laws are in many ways superior to those of the United States. Actually, in a more competitive global economy, failure to adopt enforceable standards will by default allow countries that exploit their workers to impose their standards on others. Put another way, we cede the right to set our own standards if we do not regulate the goods coming into the United States. This is so because a basic principle of highly competitive markets seems to be that bad standards tend to drive out the good. Competitive markets make it difficult for employers who want to have good standards to do so, even though in the long run it is possible to show that good labor practices enhance economic efficiency.

Some critics argue that trade-linked labor standards would be difficult to enforce. I am, however, convinced by logic and U.S. experience that basic labor standards would be no more difficult to enforce than most other trade rules. Nevertheless, the history of most social legislation suggests that, once these standards are adopted, they will have to be carefully monitored to ensure effective enforcement.

Critics also argue that Mexico's lax enforcement of labor standards is due to inadequate resources, not an absence of will. This is, however, a highly questionable assumption, given Mexico's open violation of workers' rights in order to attract capital and reduce real wages.13 Nevertheless, a case can be made for the establishment of a "social fund" to help Mexico improve its labor and environmental protections. The basic measure of a country's conformance with trade-linked labor standards is not necessarily the level of those standards, but whether they are making satisfactory progress toward improving standards. This is the test imposed by U.S. trade-linked labor standards.

It should be added that in Europe a similar process is even more advanced, as the European Community (EC) nations move toward a common market. The social charter, buttressed by a European Court, Parliament, and a full panoply of laws, regulations, advisories, and directives, is shaping a consensus in that continent on labor standards that will give a strong impetus to the movement to evolve toward universal rules that link trade and labor standards, perhaps by the next round of the General Agreement on Tariffs and Trade (GATT) talks. The Europeans understand better than we that minimum labor standards are important components of high-performance strategies to compete by raising productivity, quality, and skills instead of by depressing wages and working conditions. They also have established EC-wide funds to help low-wage countries bring their standards up to the levels of the most advanced countries.

How Trade-Linked Labor Standards Might Work

Experience with the development and enforcement of national and international labor standards suggests some general principles.

  1. Labor standards should be defined with as much simplicity and precision as possible. IN general, the basic standards outlined earlier should be the ones developed for enforcement purposes. It could be stipulated that countries should strive for a longer list of standards like those adopted by the ILO, but such a list is too general to form the basis for an enforcement program. Enforcement could also specify a relatively small number of criteria to be used to determine whether or not industries or countries were violating basic labor standards.
  2. Procedures would need to be established for collecting information on the extent to which labor standards were actually being followed in particular situations. In some cases, violations are easily determined, but, as is true of the enforcement of all rules, in some cases judgments have to be made. The development and dissemination of information on labor conditions is not a well-developed part of U.S. enforcement processes. We therefore should concentrate on a much more effective system.
  3. Procedures would have to be established for receiving complaints or allegations that companies, industries, or countries were violating standards. An important procedural question is the determination of the parties eligible to file complaints.
  4. Decisions are also needed about the nature and scope of remedies. It probably makes sense to apply remedies to specific industries and situations, not to whole countries. It would, in addition, probably be wise to give countries willing to make good-faith efforts to correct their practices both the time and the technical assistance to do so.

I believe dispute settlement mechanisms containing labor and environmental representatives would be better than leaving the resolution of disputes entirely to trade experts, who, as U.S. and GATT experiences demonstrate, are likely to minimize the importance of environmental and labor matters. An alternative would be to permit countries to enforce unilaterally their own legitimate labor and environmental standards, with trilateral commissions to resolve disputes. A model for such a mechanism could be the dispute settlement procedures of the 1987 U.S.-Canada Free Trade Agreement (FTA). The FTA created the bilateral U.S.-Canada Trade Commission, which has consultation and mediation responsibilities. If the Commission is unable to resolve a dispute, it can either be taken up by a bilateral blue ribbon panel or a binational binding arbitration panel.14

Summary and Conclusions

We should proceed on an international basis to build support for trade-linked labor standards. We should stress the positive plus-sum aspects of linking trade and labor rights and overcome the fear that our objective is to protect MDCs' standards at the expense of economic development in Mexico and other countries. We should not oversell the importance of labor rights in addressing the problems workers face everywhere. These standards are important and necessary, but, as noted, other policies also are needed for an open, expanding, prosperous, and just world economy.

End Notes

1 Stanley Weintraub, Free Trade Between Mexico and the United States (Washington, D.C.: Brookings Institution, 1984).

2 See Dan La Botz, Mask of Democracy (Boston: South End Press, 1992).

3 Gary Hufbauer and Jeffrey Schott, North American Free Trade: Issues and Recommendations (Washington, D.C.: Institute for International Economics, 1992), p. 110. These authors summarize seven other studies in Tables 3-4, p. 58.

4 Michelle Mullestadt, "Free Trade Benefiting U.S. Now, Experts Say," Austin American Statesman, August 8, 1992, p. E-1.

5 Jeff Faux and Thea Lee, The Effect of George Bush's NAFTA on American Workers: Ladder Up or Lader Down? (Washington, D.C.: Economic Policy Institute, 1992).

See also Clyde V. Prestowitz, Jr. and Robert B.Cohen, with Peter Morici and Alan Tonebar, The New North American Order (Lanham, MD: University Press of America, 1991), p. 48; Timothy Koechlin, Meherene Larudee, Samuel Bowles, and Gerald Epstein, paper presented at public hearing in Boston, September 11, 1991; Roberto Salinas-Leon, "A Mexican View of North American Free Trade," Foreign Policy Briefs (Washington, D.C.: Cato Institute), May 21, 1991; Raul Hinojosa-Ojeda and Sherman Robinson, "Alternative Scenarios of U.S.-Mexican Integration: A Computable General Equilibrium Approach," Working Paper 609 (Oakland, CA: Oakland University of California, Department of Agriculture and Resource Economics, Division of Agriculture and Natural Resources,) April 1991.

6 Rose Guteld, "Free Trade Accord May Hurt Workers in U.S., Study Says," The Wall Street Journal, October 1, 1992, p. B-6.

7 Cited in Hufbauer and Schott, op cit., Table 6.3, p. 112.

8 Those who oppose more effective immigration controls usually argue that the undocumented workers' positive benefits to the American economy outweigh the negative. They often cite studies such as those during the 1980s by the Rand Corporation (Kevin McCarthy and R.B. Valdez, Current and Future Effects of Mexican Immigration in California, Santa Monica: Rand Corporation, 1985) and the Urban Institute (Thomas Muller and Thomas Espenshade, The Fourth Wave: California's Newest Immigrants, Washington, D.C.: Urban Institute Press, 1985), which assessed the impact of immigration on California and Los Angeles. The Rand study concludes: "Overall, Mexican immigration has probably been an economic asset to the state in that it has stimulated employment growth and kept wages competitive. Potential displacement effects have been relatively minor, except perhaps among low-skilled, native-born Latinos." (emphasis added) Note that this conclusion assumes a low-wage development strategy and minimizes negative effects on low-income U.S. workers.

The generally optimistic tones of both the Urban Institute (UI) and Rand are contradicted by their own facts. Both studies show that the undocumented workers depressed wages in the labor markets where they were concentrated. Similarly, the UI study found that recent immigrants had absorbed fully two-thirds of the 645,000 jobs added in the Los Angeles labor market during the 1970s.

These studies also reveal other negative effects from immigration: depressed wages in labor markets with heavy concentrations of immigrants attracted manufacturing firms to Los Angeles, displacing employment elsewhere in the U.S.; displaced blue collar workers were forced to move out of Los Angeles County (p. 53); public benefits paid to Mexican immigrant households "outweighed taxes paid by a factor of nearly 2 to 1" (p. 143); and there is strong evidence, despite the studies' contrary claims, that black blue collar workers were displaced by Hispanics. For elaboration, see Ray Marshall, "Immigrants," in Human Capital and America's Future, David W. Hornbeck and Lester M. Salamon, eds. (Baltimore, MD: Johns Hopkins Press, 1991), pp. 95-138.

9 Hufbauer and Schott, op cit., p. 129.

10 For an elaboration of this theme, see Ray Marshall and Marc Tucker, Thinking for a Living: Education and the Wealth of Nations (New York: Basic Books, 1992).

11 John Sewell and Stuart Tucker (eds.), Growth, Exports, and Jobs in a Changing World Economy: Agenda 1988 (Washington, D.C.: Overseas Development Council, 1988).

12 See Steve Charnovitz, "The Influence of International Labour Standards on the World Trading Regime," International Labour Review, September-October 1987.

13 See Dan La Botz, op cit.

14 George E. Brown, Jr., J. William Goold, and John Cavanaugh, "Making Trade Fair," World Policy Journal, Spring 1992, p. 321.

Dr. F. Ray Marshall holds the Audre and Bernard Rapoport Centennial Chair of Economics and Public Affairs at the LBJ School of Public Affairs at the University of Texas at Austin. Dr. Marshall served as U.S. Secretary of Labor from 1979-1981. He holds a Ph.D. in Economics from the University of California at Berkeley.