The Political Economy Of NAFTA/USMCA
The Political Economy of NAFTA/USMCAThe Political Economy of NAFTA/USMCAGustavo A. Flores-Macías and Mariano Sánchez-TalanquerSubject: International Political Economy, Political Economy, Political InstitutionsOnline Publication Date: Aug 2019 DOI: 10.1093/acrefore/9780190228637.013.1662Summary and KeywordsWhen the North American Free Trade Agreement (NAFTA) came into force on January1st, 1994, it created the largest free trade area in the world, and the one with the largestgaps in development between member countries. It has since served as a framework fortrilateral commercial exchange and investment between Canada, Mexico, and the UnitedStates. NAFTA’s consequences have been mixed. On the positive side, the total value oftrade in the region reached 1.1 trillion in 2016, more than three times the amount in1994, and total foreign direct investment among member countries also grew significant ly. However, the distribution of benefits has been very uneven, with exposure to interna tional competition reducing economic opportunity and increasing insecurity for certainsectors in all three countries.Twenty-four years later, the three countries renegotiated the terms of NAFTA and re named it the United States–Mexico–Canada Agreement (USMCA). The negotiation re sponded in part to the need to modernize the agreement, but mostly to President DonaldTrump’s concerns about NAFTA’s effect on the U.S. economy and the fairness of its terms.Although the revised agreement incorporated rules that modernize certain aspects of theinstitutional framework, some new provisions also make trade and investment relations inNorth America more uncertain.Keywords: North American Free Trade Agreement (NAFTA), United States–Mexico–Canada Agreement (USMCA),free trade, trade agreements, North America, Canada, Mexico, United States, Latin American politicsIntroductionWhen the North American Free Trade Agreement (NAFTA) came into force on January1st, 1994, it created the largest free trade area in the world, and the one with the largestgaps in development between member countries. It has since served as a framework fortrilateral commercial exchange and investment between Canada, Mexico, and the UnitedStates. In 2016, the total value of trade in the region reached 1.1 trillion (see Figure 1),more than three times the amount in 1994 (McBride & Aly Sergie, 2018). Total foreign di rect investment among member countries also grew exponentially.Page 1 of 22PRINTED FROM the OXFORD RESEARCH ENCYCLOPEDIA, POLITICS (oxfordre.com/politics). (c) Oxford University PressUSA, 2019. All Rights Reserved. Personal use only; commercial use is strictly prohibited. Please see applicable Privacy Policyand Legal Notice (for details see Privacy Policy and Legal Notice).Subscriber: OUP-Reference Gratis Access; date: 29 August 2019
The Political Economy of NAFTA/USMCATwenty-four years later, the three countries renegotiated the terms of NAFTA and re named it the United States–Mexico–Canada Agreement (USMCA). The negotiation re sponded in part to the need to modernize the agreement, but mostly to President DonaldTrump’s concerns about NAFTA’s effect on the U.S. economy and the fairness of its terms.At the time of writing in early 2019, the new USMCA still requires congressional approvalin the three countries, to take place through an up-or-down vote most likely in 2019 or2020.The objective of this article is to present an overview of the political economy of NAFTA/USMCA. It first presents an overview of the context in which NAFTA was signed and itsmain objectives. Next, it discusses different views on the agreement, including the ex pected benefits and opposition at the time it was signed. Third, it examines NAFTA’s per formance since 1994, with an emphasis on winners and losers across the region. Thefourth section discusses the politics behind the re-negotiation of the agreement and theemergence of USMCA, as well the improvements and setbacks associated with it. The fi nal section concludes.Figure 1. Value of total NAFTA trade flows.Source: Sonneland (2018).The Origins of NAFTAThe 1980s saw major acceleration of efforts to increase world trade. The precursor to theWorld Trade Organization (WTO), the General Agreement for Trade and Tariffs (GATT),experienced its most ambitious round of trade negotiations during the Uruguay round be ginning in 1986. With 123 countries taking part in the negotiations, important advance ments were made regarding cross-national commercial exchanges in industries such asagriculture and textiles, in addition to trade in services, respect for intellectual property,and flows of capital across borders.This major trade impetus took place in part as a reaction to the exhaustion of the stateled developmental model in several parts of the world, which pushed governments to re structure their economies and seek alternative strategies to spur economic growth. In theUnited States and the United Kingdom, for example, President Ronald Reagan and PrimePage 2 of 22PRINTED FROM the OXFORD RESEARCH ENCYCLOPEDIA, POLITICS (oxfordre.com/politics). (c) Oxford University PressUSA, 2019. All Rights Reserved. Personal use only; commercial use is strictly prohibited. Please see applicable Privacy Policyand Legal Notice (for details see Privacy Policy and Legal Notice).Subscriber: OUP-Reference Gratis Access; date: 29 August 2019
The Political Economy of NAFTA/USMCAMinister Margaret Thatcher put into practice many of the free-market ideas that hadcome out of neoclassical economics. In other parts of the world, as in Latin America, re placing state intervention in the economy with the invisible hand of the free market be came a way to address the debt crisis that erupted in 1982 following Mexico’s default.1In the United States, President Ronald Reagan was elected in 1980 after Jimmy Carter’sfirst and only term as president. He spoke in favor of a North American trade zone as ear ly as his 1979 presidential campaign, in which he promised to leverage the power of mar ket forces for development by cutting taxes and trade barriers. Four years after Reagan’selection, Brian Mulroney became prime minister of Canada, after the Progressive Conser vative Party won a significant majority in parliament. Riding the conservative wave in theAnglo-Saxon countries, his government came as a reaction to the nationalist governmentsof the Liberal Party during the 1970s, especially under Prime Minister Pierre Trudeau.Reagan and Mulroney were ideologically compatible and receptive to the idea of experi menting with a free trade zone in North America. President Reagan played a major role inovercoming protectionist impulses in the United States, denouncing protectionism as a“cheap form of nationalism” (Reagan, 1998).2 Although Canadians were wary of any part nership with the United States, Prime Minister Mulroney saw an opportunity in Canadi ans’ changing attitudes toward free trade (Golob, 2003; Pastor, 2001, p. 64). In 1986, theUnited States and Canada engaged in negotiations for a bilateral trade agreement, whichwas signed the following year and came into force in 1989. The agreement, which includ ed provisions about the reduction of tariff and non-tariff barriers to trade, was alsoamong the first to include trade in services. It would later serve as the foundation forNAFTA negotiations (Mayer, 1998).As the United States–Canada Trade Agreement was being negotiated, and in the after math of Mexico’s 1986 accession to the GATT, Carlos Salinas de Gortari became Mexico’spresident in 1988, in a highly contested election, amid widespread allegations of fraud,and with the economy experiencing triple-digit inflation.3 Salinas had earned a Ph.D. fromthe Harvard Kennedy School of Government in the United States, where he became ex posed to the pro-market ideas that guided many of his administration’s policies. For Mexi co, the 1980s had been a “lost decade” of economic decline and hard stabilization policiesfollowing the 1982 crisis. In this context, Salinas decidedly deepened a pro-market turninitiated by his predecessor. This adherence to market reform represented a drastic shiftaway from the nationalist stance that had characterized Mexican governments for most ofthe 20th century.4 A significant break in Mexico’s foreign policy also took place, asSalinas’s administration saw an unambiguous partnership with the United States as theway to further Mexico’s interests. The country’s proximity to the United States was rein terpreted as a major advantage that opened unique opportunities for modernization. Forthese to materialize, a free trade agreement was understood as the way to attract muchneeded foreign investment and spur rapid growth by transforming Mexico into an export ing powerhouse oriented toward the U.S. market. In Salinas’s words, free trade would al Page 3 of 22PRINTED FROM the OXFORD RESEARCH ENCYCLOPEDIA, POLITICS (oxfordre.com/politics). (c) Oxford University PressUSA, 2019. All Rights Reserved. Personal use only; commercial use is strictly prohibited. Please see applicable Privacy Policyand Legal Notice (for details see Privacy Policy and Legal Notice).Subscriber: OUP-Reference Gratis Access; date: 29 August 2019
The Political Economy of NAFTA/USMCAlow Mexico to “export goods, not people” to the United States (McBride & Aly Sergie,2018).In 1990, Ronald Reagan’s successor, U.S. president George H. W. Bush, and Mexicanpresident Carlos Salinas de Gortari agreed to start negotiations toward a comprehensivefree trade agreement between the two countries. Canada joined the deliberations the fol lowing year, and on December 17, 1992, President Bush, President Salinas de Gortari,and Prime Minister Mulroney signed the text of NAFTA. In addition to the calculations ofpolitical elites, pro-trade private interests played an important role in the approval of theagreement. Empirical studies show that U.S. industries with large economies of scale inproduction, which stood to gain from access to a regional market, as well as those whichcould move production of intermediate goods abroad to reduce costs, were more likely tolobby in favor of the agreement (Chase, 2003).The signed agreement had clear aims: eliminating tariff and non-tariff barriers to tradeand facilitating the movement of goods and services across member states’ borders. It al so sought to promote fair competition and improve investment conditions by protectingproperty rights. Three main principles guided the agreement: most-favored nation treat ment (if a prerogative is granted to one party, all parties are entitled as well), nationaltreatment (no discrimination between domestic and other parties’ goods for taxation andother purposes), and transparency. Additionally, NAFTA codified agreements on a numberof industries, including agriculture, automobiles, intellectual property, textiles, visa cate gories for labor mobility, and environmental regulations (Ford, 2008).Two other agreements were adopted alongside NAFTA: the North American Agreementon Labor Cooperation (NAALC) and the North American Agreement on Environmental Co operation (NAAEC). Both emerged out of concern in the United States and Canada overweak enforcement of labor rights and environmental standards in Mexico, which jeopar dized NAFTA’s approval in these countries’ legislatures. Under the NAALC, complaints re garding protection for children, minimum employment standards, and prevention of occu pational injuries and illnesses could in principle become grounds for potential trade-sus pension sanctions. The agreement allowed for any civil society group to take a complaintto the Department of Labor in another country, but it had a fairly narrow scope and didnot include provisions regarding several other areas recognized by the International La bor Organization (Aspinwall, 2017). The NAAEC, in contrast, did not allow for civil societygroups of one country to bring complaints before the authorities of another. Rather, it cre ated the trilateral Commission of Environmental Cooperation, whose staff can conduct in vestigations into the alleged violations and publish reports about them. It does depend,however, on member state approval for its activities (Aspinwall, 2017).The elimination of trade barriers in certain sectors, such as beans, corn, and sugar, wasstaged over time to shield domestic industries from sudden disruptions and allow them toprogressively adjust to the new rules. By 2008, however—coinciding with the global fi nancial crisis—all of NAFTA’s final provisions came into force. A decade later, a forcefulPage 4 of 22PRINTED FROM the OXFORD RESEARCH ENCYCLOPEDIA, POLITICS (oxfordre.com/politics). (c) Oxford University PressUSA, 2019. All Rights Reserved. Personal use only; commercial use is strictly prohibited. Please see applicable Privacy Policyand Legal Notice (for details see Privacy Policy and Legal Notice).Subscriber: OUP-Reference Gratis Access; date: 29 August 2019
The Political Economy of NAFTA/USMCApolitical challenge to the principles of multilateralism and free trade embedded in NAFTAbrought the agreement to the brink of collapse.Political OppositionAlthough many hailed the free trade initiative as visionary, there was considerable opposi tion in the three countries from its inception. If the United States–Canada Free TradeAgreement had generated anxiety in the United States and Canada, suspicion was evengreater about the consequences of incorporating Mexico because of major differences inlevels of development, size of the economy, and wages, not to mention language and cul ture. When NAFTA negotiations began in 1990, the size of the U.S. economy was 20 timesthat of Mexico and 10 times that of Canada. Per capita income in the United States was 8times that of Mexico (Pastor, 2001, p. 63).In the two advanced, industrialized democracies, there was generalized apprehensionabout the loss of jobs in manufacturing and agriculture, especially because Mexicanwages amounted to about a sixth of those in the United States (Ford, 2008). Undocument ed labor migration from Mexico generated further unease. To assuage this concern, sup porters saw NAFTA as contributing to reduce labor migration flows by lifting living stan dards in Mexico. The logic was that by boosting economic activity and job-creation intheir country, Mexicans would find it more attractive to stay home than to migrate north(Flores-Macías, 2008).Not surprisingly, the topic of NAFTA was central to the 1992 presidential campaigns inthe United States, which preceded Congressional approval of the agreement. During oneof the debates, independent presidential candidate Ross Perot famously warned that theUnited States should prepare for the “giant sucking sound” of jobs moving across the bor der to Mexico. Although Democratic candidate Bill Clinton won the election and Perotcame in third, the phrase and his challenge to the United States’ longstanding two-partysystem captured well existing concerns for broad sectors in the United States.By signing NAFTA on his way out of the office, President Bush prevented the administra tion of incoming President Clinton, who had endorsed NAFTA but whose constituenciesfavored tougher labor and environmental provisions, from modifying the agreement. Al though they ultimately failed, labor organizations such as the American Federation of La bor–Congress of Industrial Organizations (AFL-CIO), as well as environmental and humanrights groups, lobbied hard to defeat the agreement in Congress (Lustig, 1991), whichhighlighted the need for the side agreements for NAFTA’s eventual approval.Historical animosities also played a role in generating opposition. Canadians had beenwary of their relationship with the United States throughout the 20th century: at leasttwo prime ministers paid dearly for their efforts to reach free trade agreements with theUnited States (Pastor, 2001, p. 64).5 For Mexicans, the relation was fraught with mistrust.Not only did the United States annex half of Mexico’s territory during the Mexican–Amer ican war, but the United States had also occupied Mexico several times as recently as thePage 5 of 22PRINTED FROM the OXFORD RESEARCH ENCYCLOPEDIA, POLITICS (oxfordre.com/politics). (c) Oxford University PressUSA, 2019. All Rights Reserved. Personal use only; commercial use is strictly prohibited. Please see applicable Privacy Policyand Legal Notice (for details see Privacy Policy and Legal Notice).Subscriber: OUP-Reference Gratis Access; date: 29 August 2019
The Political Economy of NAFTA/USMCAearly 20th century. Moreover, the adoption of free-market policies by the then-dominantInstitutional Revolutionary Party (PRI) had already led to a major split in the party andthe formation of the leftist Party of the Democratic Revolution (PRD). Spearheaded byCuauhtémoc Cárdenas—the son of 1930s President Lázaro Cárdenas, a symbol of the eco nomic nationalism of the Mexican Revolution—Mexico’s political left vigorously opposedthe terms of NAFTA as a sacrifice of national interests at the altar of international capital.During the NAFTA negotiations, Cárdenas himself cited the perils of institutionalizingMexico’s role in the North American region as that of supplier of cheap labor for foreigncorporations (Cárdenas, 1991).Although NAFTA was ratified by the three countries’ legislatures and entered into forceon January 1st, 1994, it has remained controversial since.6 On that same day, as the threegovernments celebrated the agreement, an indigenous guerrilla organization, the Zap atista Army for National Liberation (EZLN), launched an uprising in the state of Chiapasin southeastern Mexico, listing the new trade agreement among its grievances. In theUnited States, opposition has also taken the form of protests by the anti-globalizationmovement, including violent demonstrations at the WTO ministerial conference in Seattlein 1999. Over the next two decades, NAFTA remained a contentious topic in all threecountries, emerging intermittently in electoral politics and facing resistance from a vari ety of social movements, from Mexican peasant organizations to unionized U.S. workers.7Performance Over 24 Years: Average Gains, Un even ResultsMost analysts agree that, on average, NAFTA has brought economic benefits to the threecountries, although these have been more modest for the United States and Canada thanfor Mexico (Caliendo & Parro, 2015). The stock of foreign direct investment (FDI) in Mexi co grew sixfold during this period, from 15 billion to more than 100 billion, while FDIfrom Mexico to the United States grew by more than 1,200% (Villarreal & Fergusson,2017, p. 20). Although some of the liberalizing measures Mexico adopted in the 1980sand 1990s contributed to these trends, NAFTA helped guarantee their continuity andboost investor trust (Villarreal & Fergusson, 2017, p. 21). In certain industries, such asautomobile production, the ability to move goods smoothly across borders enabled sub stantial efficiency gains in supply chains. For the average consumer across the threecountries, the adoption of NAFTA brought greater access to quality products at lowerprices.An accurate evaluation of the effects of NAFTA, however, must consider not only its over all trade and investment gains, but also the agreement’s distributional consequences. Inthis sense, NAFTA’s record has been decidedly mixed. Because of the many factors thatexplain economic performance, it has been difficult to establish a counterfactual trajecto ry for growth, employment, and industrial development in the absence of NAFTA. Againstthe backdrop of steady commercial and investment growth, the sudden opening to for Page 6 of 22PRINTED FROM the OXFORD RESEARCH ENCYCLOPEDIA, POLITICS (oxfordre.com/politics). (c) Oxford University PressUSA, 2019. All Rights Reserved. Personal use only; commercial use is strictly prohibited. Please see applicable Privacy Policyand Legal Notice (for details see Privacy Policy and
The Political Economy of NAFTA/USMCA Gustavo A. Flores-Macías and Mariano Sánchez-Talanquer Summary and Keywords When the North American Free Trade Agreement (NAFTA) came into force on January 1st, 1994, it created the largest free trade area in the world, and the one with
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NAFTA Chapter 11 Investor-State Cases TABLE OF NAFTA CHAPTER 11 INVESTOR-STATE CASES & CLAIMS February 2005 Key **Indicates date Notice of Intent to File a Claim was filed, the first step in the NAFTA investor-state process when an investor notifies a government that it intends to bring a NAFTA Chapter 11 suit against that government.
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