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LESSONS

FROM
MEXICO
FOR
THE
HEMISPHERE
NAFTA’s
Promise
and
Reality
John J. Audley
Demetrios G. Papademetriou
Sandra Polaski
Scott Vaughan
© 2004 Carnegie Endowment for International Peace. All rights reserved.
The Carnegie Endowment normally does not take institutional positions on public policy issues; the views
presented here do not necessarily reflect the views of the Endowment, its officers, staff, or trustees.
Printed with soy-based ink on recycled paper.
ABOUT THE AUTHORS
John J. Audley is a senior associate at the Carnegie Endowment for International Peace,
where he directs the Trade, Equity, and Development Project. Before joining the
Endowment in April :cc:, he was the trade policy coordinator at the U.S. Environmental
Protection Agency, where he was responsible for developing and presenting EPA positions
on U.S. trade policy.
Demetrios G. Papademetriou is co-director and co-founder of the Migration Policy Institute,
www.migrationpolicy.org. His work concentrates on the North American borders and
migration agenda, immigrant settlement and integration, and migration management
throughout the advanced industrial world. Previously, he was a senior associate at the
Carnegie Endowment for International Peace, where he co-directed the International
Migration Policy Program.
Sandra Polaski is a senior associate with the Carnegie Endowment’s Trade, Equity, and
Development Project. Her work focuses on international labor policy in the context of
trade, development, and multilateral relations. She served from :,,,‒:cc: as the Special
Representative for International Labor Affairs at the U.S. Department of State.
Scott Vaughan is a visiting scholar with the Carnegie Endowment, focusing on the
WTO and NAFTA. He previously held positions with the North American Commission
for Environmental Cooperation, the World Trade Organization, the United Nations
Environment Program, and the Royal Bank Financial Group (Canada).
For print and electronic copies of the introduction and the full-text report in English and Spanish,
visit www.ceip.org/pubs.
s
::
+,
o:
Table of Contents
Introduction
John J. Audley
cuairii oxi
Jobs, Wages, and Household Income
Sandra Polaski
cuairii rwo
The Shifting Expectations
of Free Trade and Migration
Demetrios G. Papademetriou
cuairii ruiii
The Greenest Trade Agreement Ever?
Measuring the Environmental Impacts
of Agricultural Liberalization
Scott Vaughan
This report is the product of each of its primary
authors’ research and years of experience working
in trade policy. In addition, the report was greatly
influenced by research papers prepared by the
following people:
Francisco Alba
Fernando Barceinas Paredes
David Barkin
Frank Bean
George Dyer
B. Lindsay Lowell
Carlos Salas Paez
Edith Pacheco
Martha Ileana Rosas
J. Edward Taylor
Antonio Yúnez-Naude
Eduardo Zepeda Miramontes
El Colegio de México (COLMEX) has been our
research partner from the beginning, and we wish to
thank General Academic Coordinator Jean Francois
Prud’Homme for the exceptional research conducted
by his colleagues. In particular, the work done by
Antonio Yúnez-Naude and his colleagues at the
Programa de Estudios del Cambio Económico y la
Sustentabilidad del Agro Mexicano (PRECESAM)
was essential to our understanding of the relationship
between trade liberalization and agriculture.
We have been privileged to work with an excellent
team of assistants, including Carnegie Junior
Fellows Vanessa Ulmer and Jacob Steinfeld, and
Kristen Dubay, from Duke University. Maria Carlo
helped keep us on schedule by mastering travel
schedules, contracts, and deadlines. Demetrios
Papademetriou at the Migration Policy Institute
(MPI) was assisted by Maia Jachimowicz and Kevin
O’Neil. MPI senior fellow and former head of
the United States Immigration and Naturalization
Service Doris Meissner provided guidance
throughout the project. In addition to our research
team, the following people reviewed chapters and
gave us their time and suggestions: Chantal Line
Carpentier, Paul Miller, Kevin Gallagher, George
Perkovich, Ronald Steenblik, Timothy Wise, and
Deborah Meyers.
The report would not have been possible without
support from the Carnegie Endowment for
International Peace. We would also like to extend
our gratitude to the Charles Stewart Mott
Foundation, the Department of Foreign Affairs
and Trade of the Government of Canada, and the
North American Commission for Environmental
Cooperation for their financial support.
Without the combined efforts of the people and
organizations listed above, this report would not
have been possible. The views expressed in this
report are those of the individual authors.
John J. Audley
Senior Associate and Director
Trade, Equity, and Development Project
Carnegie Endowment for International Peace
Acknowledgments
4 NAFTA’s Promise and Reality
Carnegie Endowment for International Peace 5
…a giant sucking sound…
—ROSS PEROT, 1 994
NAFTA fuels economic growth and dynamic
trade, stimulates investment while creating
productive partnerships, works for small and
medium-sized businesses and provides fairness
and certainty. NAFTA partners promote
environmental protection, and provide greater
job opportunities in North America.
—THE GOVERNMENTS OF THE UNI TED STATES,
MEXI CO, AND CANADA, 1 999
LATI N AMERI CAN AND CARI BBEAN COUNTRI ES
FACE AN ENORMOUS CHALLENGE: How to grow
their national economies, create good jobs, and gen-
erate the revenues necessary to provide basic public
goods such as human health and environmental
protection. Their task is burdened by more than
two decades of weak economic performance that
has failed to create jobs for a workforce expected to
grow by :., percent a year from :cc:‒:c:c. Nearly
one person in ten is out of work. Current per capita
income stands at a meager uss+,sïc, and according
to the Inter-American Development Bank, approxi-
mately :sc million people—one out of every three
people living in Latin America and the Caribbean—
earn less than uss: a day. To compound the prob-
lem, governments throughout the region admit that,
while they may have enacted sound environmental
and public health laws, the laws are rarely enforced,
especially in rural areas.
Hoping to avoid another “lost decade” similar
to the :,ïcs, thirty-four governments from the
Western Hemisphere met in :,,¡ to outline an
ambitious agenda to advance prosperity, democratic
values and institutions, and security throughout
the hemisphere. Negotiating a Free Trade Area of
the Americas (FTAA) was central to their agenda.
According to the heads of state attending the :,,¡
meeting, “Free trade and increased economic
integration are key factors for raising standards
of living, improving the working conditions of
people in the Americas, and better protecting the
environment.”
1
Many officials and observers in
the hemisphere believed that free trade would
remedy ailing economies.
In total, Latin American governments are negoti-
ating or have completed seventeen different
free-trade agreements with member states of the
Organization for Economic Cooperation and
Development (OECD). Most recently, in January
:cc+, the governments of Costa Rica, El Salvador,
Guatemala, Honduras, Nicaragua, and the United
States announced the launch of comprehensive trade
negotiations, which are scheduled to be completed
by the end of :cc+, prior to completion of the
FTAA. According to the U.S. Trade Representative,
Ambassador Robert Zoellick, the U.S.-Central
American Free Trade Agreement (CAFTA) negotia-
tions would further the regional integration the
Central Americans have themselves begun, and
thereby complement efforts to promote the
successful conclusion of the FTAA negotiations.
Twenty-five years ago, Mexico faced a similar eco-
nomic situation, and adopted a similar prescription.
Mexico’s earlier economic strategy of import substi-
tution and a large role for the public sector had
increased jobs and economic output, but it had
also left Mexico with a crushing external debt that
sparked a major economic crisis in :,ï:. Mexican
president Miguel de la Madrid Hurtado responded
by moving Mexico toward an export economy.
Despite considerable domestic opposition, in :,ïo
Introduction
J OHN J. AUDL EY
Mexico joined the General Agreement on Tariffs
and Trade (predecessor to the World Trade
Organization, or WTO). President Carlos Salinas
de Gortari built on de la Madrid’s initial steps
toward liberalization by reducing the size of the
public sector, promoting land ownership reform,
and securing a commitment from the United
States and Canada in :,,: to negotiate a free-trade
agreement.
2
The North American Free Trade
Agreement (NAFTA) went into force in :,,¡,
marking the first major trade deal between
developed and developing countries.
What has Mexico’s experience been after twenty
years of trade liberalization and ten years of
NAFTA? How have the lives of Mexicans changed?
Has the Mexican government developed the
capacity to create conditions that put Mexicans
to work, protect their health and the environment,
and give them real alternatives to migration? In
short, what lessons can be learned by other Latin
American countries from Mexico’s attempt to use
trade liberalization with the United States and
Canada as its engine for economic development?
OUR OBJECTI VES
This report has two objectives. First, we set out
to determine how the quality of life in North
America, particularly in Mexico, has fared as a result
of trade liberalization in North America. While we
touch on the experience of all three countries, we
emphasize Mexico’s experience since the enactment
of NAFTA, as it is more relevant to other devel-
oping countries interested in strengthening their
economic ties with wealthy countries such as
Canada and the United States. Our study is dif-
ferent from those already done by some research
institutions, advocacy groups, and intergovern-
mental organizations because we answer this ques-
tion about the lessons of NAFTA by analyzing what
conventional NAFTA studies pass over. Our analysis
focuses on people, their communities, and the
choices they make as they attempt to negotiate their
social and economic environments. We emphasize
changes in household income, paychecks and pro-
ductivity, rural employment, and agricultural pro-
duction and land use, and the overall effect of these
changes on migration and environmental quality.
We then examine how NAFTA’s trade rules and
institutions played a role in these changes. In short,
while most positive analyses focus on the macro
level and most negative analyses rely only on losses
and not gains, our analysis provides a rigorous and
balanced assessment of NAFTA by focusing on its
effects on people’s lives, livelihoods, and households.
Our second objective is to offer insights to other
countries, particularly in Latin America, that are
interested in strengthening their bilateral and
multilateral economic ties within the region. While
not entirely similar, Mexico’s economic and cultural
history and rich ecosystem are more closely linked
to those of its Latin American neighbors than
to those of the United States or Canada. These
similarities mean that NAFTA’s record can offer
insights to other countries as they consider the
potential costs and benefits of agreements such
as CAFTA and FTAA.
OUR CONCLUSI ONS
■ NAFTA has not helped the Mexican economy
keep pace with the growing demand for jobs.
Unprecedented growth in trade, increasing
productivity, and a surge in both portfolio and
foreign direct investment have led to an increase
of scc,ccc jobs in manufacturing from :,,¡ to
:cc:. The agricultural sector, where almost a fifth
of Mexicans still work, has lost :.+ million jobs
since :,,¡.
■ Real wages for most Mexicans today are lower than
they were when NAFTA took effect. However, this
setback in wages was caused by the peso crisis of
:,,¡–:,,s—not by NAFTA. That said, the produc-
tivity growth that has occurred over the last decade
has not translated into growth in wages. Despite
predictions to the contrary, Mexican wages have
not converged with U.S. wages.
6 NAFTA’s Promise and Reality
■ NAFTA has not stemmed the flow of poor
Mexicans into the United States in search of
jobs; in fact, there has been a dramatic rise in
the number of migrants to the United States,
despite an unprecedented increase in border
control measures. Historical migration patterns,
the peso crisis, and the pull of employment
opportunities in the United States provide better
explanations for the increase in migration than
NAFTA itself.
■ The fear of a “race to the bottom” in environ-
mental regulation has proved unfounded. At this
point some elements of Mexico’s economy are
dirtier and some are cleaner. The Mexican gov-
ernment estimates that annual pollution damages
over the past decade exceeded uss+o billion per
year. This damage to the environment is greater
than the economic gains from the growth of
trade and of the economy as a whole. More
specifically, enactment of NAFTA accelerated
changes in commercial farming practices that
have put Mexico’s diverse ecosystem at great risk
of contamination from concentrations of
nitrogen and other chemicals commonly used
in modern farming.
■ Mexico’s evolution toward a modern, export-
oriented agricultural sector has also failed to
deliver the anticipated environmental benefits of
reduced deforestation and tillage. Rural farmers
have replaced lost income caused by the collapse
in commodity prices by farming more marginal
land, a practice that has resulted in an average
deforestation rate of more than o+c,ccc hectares
per year since :,,+ in the biologically rich regions
of southern Mexico.
Put simply, NAFTA has been neither the disaster its
opponents predicted nor the savior hailed by its
supporters. But while NAFTA’s overall impact may
be muddled, for Mexico’s rural households the
picture is clear—and bleak. NAFTA has accelerated
Mexico’s transition to a liberalized economy without
creating the necessary conditions for the public and
private sectors to respond to the economic, social,
and environmental shocks of trading with two of
the biggest economies in the world. Mexico’s most
vulnerable citizens have faced a maelstrom of change
beyond their capacity, or that of their government,
to control.
In response to the growing challenges facing rural
Mexico, many households have developed survival
strategies to meet basic subsistence needs. These
strategies include a mix of increased cultivation of
basic crops and off-farm employment, often in the
informal sector, and in some cases in maquiladora
plants that have relocated away from the northern
border into the hinterlands. Many rural workers
have nonagricultural activities as their primary
occupations, while relying on sporadic agricultural
work to supplement their incomes. Mexico’s agri-
cultural policies provide commercial farmers with
substantial support, but do not benefit subsistence
farmers. More than ever, families rely on remit-
tances sent home by those who migrate to the
United States, with or without legal status. Finally,
to reduce expenses, rural households also fall back
on more traditional approaches to heating their
homes and feeding their families. The net environ-
mental loss associated with an increase in the
farming of marginal land and illegal logging and
poaching for fuel and food places some of the most
important biological reserves in the hemisphere
at risk of irreparable damage.
Trade agreements do not need to result in this kind
of hardship for the world’s rural poor. Negotiated
properly, they can open doors to new markets while
providing adequate protections from the stress asso-
ciated with exposure to global competition and the
increased pressure on natural resources. Trade
should not be seen as an end in itself; instead, it
should be used as a tool to strengthen economies
through the operation of comparative advantage.
At the same time, governments must respond
to economic opening with effective policies, such
as the deployment of social safety nets and trade
adjustment assistance, and develop and implement
Carnegie Endowment for International Peace 7
programs that protect labor rights and the environ-
ment. As nations consider how best to use trade
agreements to foster development, we offer the
following insights:
■ Developing countries interested in freer trade
should negotiate longer and more gradual tariff
reduction schedules for agricultural products
imported from wealthy countries, and negotiate
special safeguards to protect against the dumping
of subsidized crops. The need for “shock
absorbers” is especially great for the poorest devel-
oping countries where agriculture is a principal
source of employment. Regional and bilateral
trade agreements should not allow developed
countries to duck the crucial issue of producer
subsidies in agriculture.
■ Trade agreements should allow developing coun-
tries to adopt policies that maximize employment
gains from trade by promoting the development
of domestic suppliers and that do not favor
imported components. Whether the suppliers are
owned by domestic or foreign firms is not rele-
vant; what is relevant is whether the suppliers
create jobs.
■ Developing countries should bargain for mean-
ingful financial support for transitional trade
adjustment assistance, from trading partners and
from international donor organizations. Such
adjustment assistance should include training for
workers and subsistence farmers in new skills
and access to credit that allows and encourages
small farmers to develop economically and envi-
ronmentally sound farming practices. Assistance
to the rural poor should be aimed at allowing
them to transition to livelihoods that are sustain-
able in the modern global market—and should
acknowledge that the process of urbanization
will continue.
■ Developing countries should adopt and imple-
ment policies that help distribute the gains from
trade more equitably, through better tax and
minimum wage policies and the expansion of
freedom of association and collective bargaining
rights. They should commit to national action
plans that build environmental infrastructure.
Because these policies may be valued by their
wealthier trading partners, developing countries
may win additional advantages in trade agree-
ments by making these commitments.
■ To minimize the environmental implications
of trade liberalization for agriculture, and the
tendency of export growers to adopt chemical-
intensive production methods, trade agreements
should set standards that allow developing coun-
tries to take advantage of the growing demand
for organic food products.
■ The movement of workers is a powerful social
and economic force, and countries at all levels of
development have good reason to discuss tempo-
rary migration in a variety of contexts, which may
include future free-trade negotiations. However,
given the political sensitivity of the issue, migra-
tion should not be allowed to jeopardize agree-
ments on the movement of goods and capital and
on other ways of providing services.
LONG-TERM STRATEGI ES
Free-trade agreements should not be thought of as
an end in themselves; nor should they be loaded
with unrealistic expectations. Instead, they should
be viewed as part of a larger effort toward substan-
tive bilateral and regional cooperation toward
common goals. Migration, labor, and environmental
protection are examples of topics on which deeper
cooperation is sorely needed.
Trade liberalization is facing a crisis of legitimacy
among people around the world, from rural farmers
in Latin America to cotton producers in Africa to
manufacturing workers in the United States and
Europe. Governments can win back public support
for new trade agreements, but they must change
their current tactics. First, they must stop making
8 NAFTA’s Promise and Reality
empty promises that trade liberalization alone will
bring new jobs or clean environments, or stem
the flow of illegal migration. Second, they must
enhance long-term development and avoid unnec-
essary setbacks by strengthening their domestic
economies’ capacity to respond to shocks when
exposed to the global marketplace. The needs of
developing countries must be taken into account
in trade negotiations in meaningful ways that create
real opportunities for development and growth,
so that these countries’ citizens can also become
consumers in the global economy. That, in the
long-term, is how everyone will achieve greater
prosperity.
NOTES
1 Ministerial Declaration, First Summit of the Americas,
Miami, Fla., :,,¡, available at www.ftaa-alca.org/
ministerials/miami_e.asp.
2 Carlos Salinas de Gortari, Mexico: The Policy and Politics of
Modernization (Barcelona, Spain: Plaza & Janes, :cc:). See
especially parts : and :.
Carnegie Endowment for International Peace 9
Carnegie Endowment for International Peace 11
EMPLOYMENT I S THE MAI N SOURCE OF
HOUSEHOLD I NCOME for a large majority of the
population in all the countries of North America.
Therefore, one of the most basic measures of a trade
agreement’s impact on the well-being of real people
is the number of jobs gained or lost as a result of
the agreement, the quality of those jobs, and the
wages paid. A second important and closely related
measure is the effect of trade liberalization on pro-
ductivity, or how much workers actually produce in
any given work session. If productivity rises, workers
can be paid more without driving up inflation or
cutting into business profits. Thus, rising wages can
be sustained over the long term. Rising productivity
that leads to higher wages will expand domestic
consumer demand, stimulating further production
of goods and services and creating a virtuous circle
of growth. A third set of economic issues that must
be addressed in measuring the impact of trade on
average citizens is how the gains from trade are dis-
tributed. There are winners and losers from trade,
and it is impossible to assess the effect of trade on
societies without knowing which groups gained,
which lost, and to what degree they were affected.
Beyond these economic effects of trade on real
people, there is also an important political reason to
study the employment impact of trade. Political
leaders often promote trade in general, and partic-
ular trade agreements such as the North American
Free Trade Agreement (NAFTA), as job creators.
In the United States, for example, then-president
Bill Clinton predicted that NAFTA would create
:cc,ccc U.S. jobs in its first two years of existence.
1
Today, President George W. Bush promotes trade
pacts on the same basis, promising that they will
“generate high-wage jobs for American workers.”
2
When trade pacts are sold to the public and to
legislators on the basis of their potential to create
jobs and raise wages, it is important to revisit those
promises, once time has elapsed and data have
accumulated, to determine actual results. Such
retrospective studies can then be used to guide
future trade policy.
As with other effects of NAFTA, it is not a simple
or straightforward proposition to tally the impact
of the agreement on jobs, wages, and incomes.
Still, there are several aspects of NAFTA’s effects
that can now be estimated with some confidence.
In this chapter, I review the impact of NAFTA on
jobs, wages, and household income in each North
American country. The focus is primarily on
Mexico, however, because the impact of NAFTA
on employment has been much greater there than
in Canada or the United States. I then discuss the
policy implications for countries in the hemisphere
that are confronting choices on trade that may have
similar employment impacts.
one
Jobs, Wages, and Household Income
SANDRA P OL AS KI
(Continued on page )
12 NAFTA’s Promise and Reality
MAI N FI NDI NGS
JOBS
■ NAFTA has produced a disappointingly small net gain in jobs in Mexico. Data limitations preclude
an exact tally, but it is clear that jobs created in export manufacturing have barely kept pace
with jobs lost in agriculture due to imports. There has also been a decline in domestic manufac-
turing employment, related in part to import competition and perhaps also to the substitution
of foreign inputs in assembly operations. About 30 percent of the jobs that were created in
maquiladoras (export assembly plants) in the 1990s have since disappeared. Many of these
operations were relocated to lower-wage countries in Asia, particularly China.
■ Mexican agriculture has been a net loser in trade with the United States, and employment in
the sector has declined sharply. U.S. exports of subsidized crops, such as corn, have depressed
agricultural prices in Mexico. The rural poor have borne the brunt of adjustment to NAFTA and
have been forced to adapt without adequate government support.
■ NAFTA’s net effect on jobs in the United States has been minuscule, given the size of the U.S.
economy and the importance of other trading partners. The best models to date suggest that
NAFTA has caused either no net change in employment or a very small net gain of jobs.
■ NAFTA’s predecessor, the Canada-United States Free Trade Agreement (CUFTA), took effect in
1989 and at first led to substantial net job losses in Canada’s traded sectors. After about five
years, the losses stopped and export manufacturing began to grow again. A decade after the
enactment of CUFTA, manufacturing employment recovered to the levels seen before the trade
pact and has continued to grow modestly since then.
PRODUCTI VI TY
■ Productivity has increased in all three countries over the last decade. NAFTA and CUFTA likely
played a significant role in the observed productivity growth in Mexico and Canada, because
both countries cut tariffs deeply and were thereby exposed to competition from their giant
neighbor. In the United States, NAFTA probably has played a small or negligible role in produc-
tivity growth for two reasons: U.S. tariffs were already low before NAFTA and trade with the
rest of the world plays a much larger role.
■ The desirable growth in productivity may have had the unwanted side effect of reducing the rate
of job growth, since fewer new jobs were created as workers already on payrolls produced more.
WAGES
■ Real wages for most Mexicans today are lower than when NAFTA took effect. This stunning
setback in wages is mainly attributable to the peso crisis of 1994–1995. However, during the
NAFTA period, productivity growth has not translated into wage growth, as it did in earlier
periods in Mexico. Mexican wages are also diverging from, rather than converging with, U.S.
wages.
■ Since the net impact of NAFTA on U.S. employment is small, the impact on overall wages is
also minor. But a widening gap between the wages of skilled and unskilled workers is partly
attributable to trade, and NAFTA as a factor in U.S. trade is thus likely to account for a portion
of the observed growth in wage inequality.
Carnegie Endowment for International Peace 13
■ Overall real wages in Canada were only slightly higher in 2002 than when CUFTA took effect
in 1989, but manufacturing earnings fared somewhat better. This suggests that NAFTA and
CUFTA did not have a negative impact on wages, since earnings in nontraded sectors increased
slower than in manufacturing. As in the case of Mexico, productivity increases in Canada
significantly outstripped wage increases.
I NCOME DI STRI BUTI ON
■ Income inequality has been on the rise in Mexico since NAFTA took effect, reversing a brief
declining trend in the early 1990s. Compared to the period before NAFTA, the top 10 percent of
households have increased their share of national income, while the other 90 percent have lost
income share or seen no change. Regional inequality within Mexico has also increased,
reversing a long-term trend toward convergence in regional incomes.
■ Income inequality in the United States increased during the decade before NAFTA and has
continued to widen. The growing wage gap between high-skilled and low-skilled workers is one
of the causes, and to the extent that trade is a factor in the wage gap, it is also implicated in
growing inequality.
■ Despite relatively more equal incomes in Canada than in either Mexico or the United States,
income inequality has been on a marked upward trend since CUFTA’s entry into force in 1989.
The richest 20 percent of Canadian households have increased their share of national income
during the period, while all others have experienced declines. Only the top 20 percent of
households had higher real incomes in 2000 than in 1989. Because manufacturing wages
performed better than wages in most other sectors, it seems clear that trade-induced wage
changes were not the cause of the observed increase in inequality in Canada. Rather, a
reduction in transfer payments from government, which play an important role in the incomes
of the bottom 40 percent of households, accounts for most of the change. The possibility
that increased trade would weaken the Canadian social safety net was a concern of CUFTA
opponents, but there is no clear evidence to support a causal relationship.
WI NNERS AND LOSERS
■ The experience of each of the NAFTA countries confirms the prediction of trade theory, that
there will be winners and losers from trade. The losers may be as numerous as, or even more
numerous than, the winners, especially in the short-to-medium term. In Canada, it took a
decade for manufacturing employment to recover from the initial displacements caused by
CUFTA. In Mexico, farmers are still struggling to adapt to NAFTA-induced changes.
■ The short-to-medium term adjustment costs faced by the losers from trade can be severe,
and the losers are often those segments of society least able to cope with adjustment, due to
insufficient skills, meager savings, and limited mobility. It must also be recognized that there
may be permanent losers from trade, due to these limitations.
14 NAFTA’s Promise and Reality
Mexico
JOBS
Mexico has an abundance of labor. Very high
population growth rates through the mid-:,¬cs
translated into a demographic bulge in the workforce
through the late :,,cs, as people born during the
earlier high-growth years matured and began to look
for work. In addition, during the :,ïcs and :,,cs,
women joined the workforce at increasing rates, in
part because of the decline in the reproductive rate,
but also out of the need to support household
incomes during recurrent economic crises. Overall,
the Mexican labor force grew from +:.+ million
immediately before NAFTA to ¡c.: million in :cc:,
meaning that Mexico needed almost a million jobs
a year simply to absorb the growth in labor supply.
3
Economic theory suggests that opening to trade will
increase the demand for labor in a labor-abundant
country and therefore will increase the number of
jobs, the wages paid, or both. Clearly, that would
be a desirable effect for a country with a large and
growing workforce such as Mexico. However, in
practice, the effect of a trade pact like NAFTA
depends on many factors, including which tariffs
were reduced or eliminated by each country, at what
pace, and in what sequence. It also depends on
other negotiated provisions of the pact—and related
government policies—that affect decisions about
investment, production, and jobs, and on the overall
balance of gains and losses from the trade agreement
as negotiated.
Thus, it is necessary to look at both the elimination
of tariffs on exports from Mexico to its northern
neighbors (which could increase exports and there-
fore increase jobs) and the elimination of Mexican
tariffs on U.S. and Canadian goods (which could
increase Mexico’s imports from the United States
and Canada and thereby eliminate jobs in Mexico)
to understand the impact of NAFTA’s tariff cuts on
Mexican jobs. The following discussion focuses on
tariff changes between Mexico and the United
States, because trade between Mexico and Canada is
a very small part of Mexico’s total trade.
4
Under NAFTA, the United States cut tariffs on
most Mexican manufactured goods, with the largest
cuts on textiles and apparel, followed by more
modest but still significant reductions on footwear,
chemicals, miscellaneous manufactures, and trans-
portation equipment. The United States also cut
agricultural tariffs and increased quotas, although
one of Mexico’s main agricultural products, sugar,
continues to be restricted through tariffs and quotas.
Other Mexican crops face seasonal restrictions that
are scheduled to end by :ccï. Meanwhile, Mexico
cut tariffs dramatically on both agricultural and live-
stock products and virtually all manufactured goods
from the United States. Some tariffs will be main-
tained on sensitive agricultural products such as
maize and beans until :ccï, but in practice the
Mexican government has already allowed substantial
above-quota tariff-free imports of corn.
The pattern of trade between the two countries
changed in a number of ways as a result of these
cuts. From Mexico’s standpoint, the cumulative
changes resulted in a shift from a net trade deficit
with the United States before NAFTA to a substan-
tial net trade surplus in :cc:. The overall net surplus
masks a growing deficit in agricultural trade with the
United States that is more than offset by a surplus in
manufactured exports from Mexico. Trade in services
shows a small deficit for Mexico (see Figure :).
Manufacturing Employment. Translating these
changes in trade patterns into employment impacts
is not easy, but approximate numbers of jobs can be
determined with reasonable certainty. With respect
to manufacturing, the task is complicated by data
availability. The Mexican government tracks manu-
facturing employment through two separate data
series. One survey covers medium-size and large
manufacturing establishments that account for about
ïc percent of industrial production, but excludes the
maquiladora sector.
5
A separate survey covers
maquiladoras, which are export assembly plants.
Carnegie Endowment for International Peace 15
Overall employment in non-maquiladora manufac-
turing in Mexico was lower in :cc+ than in :,,¡,
except in microenterprises, which are mainly in the
informal sector.
6
Employment in the non-
maquiladora manufacturing sector stood at about
:.¡ million in January :,,¡, declined sharply during
the peso crisis, then began a recovery that produced
an additional ,:,ccc jobs at its peak in May :ccc
before declining again over the past three years. The
recent decline has been caused in significant part by
the U.S. recession. As NAFTA has linked Mexico
more and more closely to the U.S. economy, the
U.S. business cycle has come to play a dominant
role in Mexico’s economic fortunes. In May :cc+
there were :.+ million jobs in non-maquiladora
manufacturing, about :cc,ccc fewer than when
NAFTA took effect (see Figure :).
The maquiladora program was created by Mexico
and the United States in :,os to allow tariff-free and
tax-free imports of materials and components into
Mexico for assembly and re-export to the United
States. It is concentrated in the auto parts, elec-
tronics, and apparel sectors. The growth in
maquiladora jobs is not primarily attributable to
NAFTA, since the program predates that pact, but
NAFTA did provide significant tariff cuts on apparel
and as a result stimulated that subsector of the
maquiladoras. At the same time, NAFTA began a
process of phasing out the unique tax and tariff
advantages of the maquiladora program, while
granting similar treatment to non-maquiladora
manufacturers in Mexico. Many observers expect
the maquiladoras’ share of Mexico’s manufactured
exports to continue to decline over time.
Maquiladora assembly plants added about ïcc,ccc
jobs between NAFTA’s enactment in January :,,¡
and the sector’s peak employment in :cc:. They
then shed about :sc,ccc jobs through May :cc+.
Currently, maquiladoras employ about ssc,ccc more
workers than they did before NAFTA (see Figure +).
Maquiladora plants produce almost entirely for
export, so employment in that sector can be attrib-
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000
2001 2000 1999 1998 1997 1996 1995 1994 1993
1,200,000
1,250,000
1,300,000
1,350,000
1,400,000
1,450,000
1,500,000
2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
Figure 1. Mexico’s Trade Balance with the United States,
by Sector
MI LLI ONS OF DOLLARS
Figure 2. Non-Maquiladora Manufacturing
TOTAL EMPLOYMENT, JANUARY 1 OF EACH YEAR
Services
Agriculture
Manufacturing
Source: Compiled by the U.S. International Trade Commission from offi-
cial statistics of the U.S. Department of Commerce, Bureau of the
Census.
Source: Mexican National Institute of Statistics, Geography, and
Informatics (INEGI), Ministry of Employment and Social Insurance
(STPS), Monthly Industrial Survey (EIM).
16 NAFTA’s Promise and Reality
uted largely to trade (although not exclusively to
trade resulting from NAFTA). By contrast, the data
on non-maquiladora manufacturing employment
blend production for export with production for
domestic markets; therefore, it is difficult to deter-
mine the proportion of employment attributable to
exports. One study suggests that the share of non-
maquiladora manufacturing employment associated
with exports increased by roughly scc,ccc jobs
between :,,¡ and :,,,, and then declined.
7
Of
those jobs, some ¡sc,ccc were based on exports to
the United States.
Only part of the growth in both maquiladora and
non-maquiladora export employment can be attrib-
uted to NAFTA. The peso devaluation of :,,¡‒:,,s
gave a very significant boost to all Mexican exports,
as the dollar bought more than twice the value of
Mexican goods after the devaluation. A study by the
U.S. International Trade Commission (USITC)
found that the peso devaluation of :,,¡‒:,,s had a
larger impact on the growth of Mexican exports of
manufactured goods to the United States than all
NAFTA-related tariff changes combined.
8
If one
uses the USITC’s findings on the relative impact
of various factors on changes in Mexican exports to
the United States, NAFTA tariff cuts likely explain
about one-quarter of the total growth in export
manufacturing jobs (maquiladora and non-
maquiladora), or the addition of about :sc,ccc
jobs, while the peso devaluation, lower transport
costs, and other factors account for the rest.
9
The overall reality during the NAFTA years has been
one of strong growth in the volume of manufactured
exports but very disappointing growth in manufac-
turing employment. This unwelcome divergence
between manufacturing output and employment
growth emerged in Mexico in the mid-:,ïcs
but appears to have widened since enactment of
NAFTA.
10
A number of explanations for this
outcome have been advanced. One obvious explana-
tion is productivity growth, which reduces the
amount of job creation for any given level of exports.
While productivity did increase in Mexican manu-
facturing through most of the :,,cs, the gains were
fairly modest, and alone cannot account for the very
slow growth in manufacturing employment.
One factor that likely explains part of the phenom-
enon is that export manufacturing in Mexico is
increasingly based on a production model in which
component parts are imported, then processed or
assembled, then re-exported. In this model, the
spillover effect of such operations on the broader
economy is very limited, because only a narrow
range of processing or assembly operations benefit
the labor market. Forward and backward linkages,
such as the stimulation of businesses that supply
parts and materials, are not created, limiting the
multiplier effect of any growth in exports. This
pattern is quite clear in the maquiladora sector, in
which ,¬ percent of components are imported and
only + percent are produced locally in Mexico. But
the non-maquiladora export sector shows similar
patterns. The intrafirm production carried out by
multinational firms operating in Mexico in sectors
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
1,100,000
1,200,000
1,300,000
1,400,000
2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
Figure 3. Maquiladora Employment in Mexico
TOTAL EMPLOYMENT, JANUARY 1 OF EACH YEAR
Source: INEGI, Monthly Indicators of the Maquila Industry.
such as the auto and electronics industries depends
heavily on imported inputs. It seems probable that
Mexican manufacturers that previously supplied
inputs to large manufacturing firms have lost a
significant share of input production to foreign
suppliers, and thus account for part of the weakness
in manufacturing employment.
11
Another important factor in the decline of
domestic manufacturing employment is that some
Mexican manufactures have been displaced directly
by imports. The limited employment growth that
has occurred in manufacturing for the domestic
market has been mainly in very small firms and
in the informal sector, with low pay and usually
without benefits.
The export manufacturing model in Mexico has also
failed to generate much growth in jobs at the high-
skills end of the spectrum, in areas such as research,
engineering, design, and accounting. One study
of the skills component of manufacturing jobs in
Mexico found that in :ccc the proportion of skilled
labor in the manufacturing sector was only ,.,
percent.
12
The skilled labor component in manufac-
turing was actually less than the average share of
skilled labor in the overall economy, :+., percent.
The limited job creation under the manufacturing
model currently prevalent in Mexico is of particular
concern when put in the context of other changes
that are likely to affect future employment growth
in the sector. Mexico enjoyed the advantage of being
the first low-wage country to strike a free-trade
agreement with the United States. However, as more
free-trade agreements are negotiated, unilateral pref-
erence programs are expanded, and World Trade
Organization (WTO) membership grows, the first-
mover advantage is progressively diluted. The acces-
sion of China to the WTO, in particular, has meant
mounting competition for Mexico’s manufactured
exports, particularly in labor-intensive sectors such
as apparel and electronics. In :cc+, China displaced
Mexico as the second-largest exporter to the United
States (after Japan). It is no accident that Mexico
was the last WTO member to agree to the terms for
China’s accession to the trading organization. The
proliferation of free-trade agreements by the United
States also means that the value of Mexico’s market
access advantages will erode as other low-wage coun-
tries gain similar access. For example, a proposed
free-trade pact with Central America would add
a sizable pool of lower-wage labor to the available
regional labor supply, undermining Mexico’s current
advantage.
Agricultural Employment. As noted above, Mexico
has had a net trade deficit in agricultural goods
with the United States every year since NAFTA
took effect, except the peso crisis year of :,,s,
when the huge devaluation of the peso made most
dollar-denominated products too expensive for
Mexicans. The agricultural trade deficit existed
before NAFTA, but it grew after enactment of
the trade pact and was larger in :cc: than in any
previous year. Tariffs on the most sensitive crops
in both the United States and Mexico have yet to
be eliminated, and so the nature of bilateral agri-
cultural trade will continue to evolve. However,
the pattern to date challenges the conventional
wisdom that agricultural liberalization is good
for the developing country in a trade relationship
with a developed economy. The one bright spot
for Mexico, an increase in exports of fruits and
vegetables, has not kept pace with imports of U.S.
grains and oilseeds. This may be due in part to
greater efficiency among U.S. producers, but it is
also partly due to U.S. subsidies. By one estimate,
U.S. corn was sold in Mexico from :,,, through
:cc: at prices +c percent or more below the cost
of production.
13
The increasing trade deficit has translated into
job losses in agriculture. Agricultural employment
in Mexico actually increased somewhat in the late
:,ïcs and early :,,cs, employing ï.: million
Mexicans at the end of :,,+, just before NAFTA
came into force. Employment in the sector then
began a downward trend, with o.ï million employed
Carnegie Endowment for International Peace 17
(Continued on page )
18 NAFTA’s Promise and Reality
UNDERSTANDI NG THE PESO CRI SI S—WAS I T RELATED TO NAFTA?
T
he story of the 1994 Mexican peso crisis is basically a story of huge capital inflows from
1991 through early 1994, then abrupt outflows in late 1994 and 1995. As was the case in
other developing-country financial crises of the 1990s, the volume and ultimately the
direction of capital flows was partly a function of policy choices by the national government and
partly the result of factors outside the government’s control.
The inflow of capital investment in the early 1990s was a welcome change for Mexico after the
lost decade of the 1980s, when the repayment of huge debt from earlier periods suppressed eco-
nomic growth and living standards. A restructuring of that debt through the U.S.-led Brady plan
of 1989, a series of privatizations in the early 1990s, and a rise in oil prices associated with the
1991 Gulf War together helped shake Mexico out of its economic doldrums. Meanwhile, Mexico
began negotiations with the United States and Canada on what would become NAFTA, increasing
investors’ confidence that Mexican products would have access to the huge U.S. market and that
investments in Mexico would be protected under an ambitious investment clause included in the
new trade agreement. An important additional ingredient in the mix was that Mexico undertook
financial liberalization beginning in the late 1980s that eliminated most capital and exchange
controls, allowing much greater capital mobility.
Together, these policy choices accounted for one side of the attraction that Mexico began to hold
for foreign investment and domestic flight capital. The other side was that the same period saw
an economic recession in most of the developed world, beginning with contractions in Europe
and Japan in 1990 and a downturn in the United States in 1991. Monetary authorities in those
countries cut interest rates to try to revive their domestic economies, making higher returns in
countries such as Mexico even more attractive to investors on a relative basis.
During the period leading up to the crisis, Mexico maintained a relatively fixed exchange rate
regime, known as a crawling parity band, through which the peso was pegged to the U.S. dollar.
14
Investors viewed this type of arrangement positively at the time. To the extent the government’s
monetary policies were seen as credible, the fixed regime created predictability about the
exchange rate and relieved investors of exchange rate risk.
The renewed inflows of capital were dominated by portfolio capital, that is, investment in govern-
ment bonds and corporate stocks and bonds rather than direct investment in plants and equip-
ment. About 60 percent of the portfolio investment was in bonds. As Table 1 shows, portfolio
investment accounted for 63 percent, 76 percent, and 85 percent of capital inflows in 1991, 1992,
and 1993, respectively. It was only in 1994, when NAFTA took effect, that foreign direct invest-
ment (in factories, equipment, farms, and other businesses) surpassed the shorter-term portfolio
investments.
15
Portfolio investment is much more mobile or “footloose” than foreign direct
investment, as the latter entails activities such as actual construction of factories and acquisition
of equipment that may be hard to resell. Investments in Mexican government bonds were particu-
larly short range investments, as most of the bonds were issued for three-month terms.
Table 1. External Portfolio and Foreign Direct Investment in Mexico
MI LLI ONS OF U. S. DOLLARS
Year External Portfolio Investment Foreign Direct Investment
1990 3,369 2,549
1991 12,741 4,742
1992 18,041 4,393
1993 28,919 4,389
1994 8,185 10,972
1995 -10,140 6,963
Source: International Monetary Fund, International Financial Statistics, October 1996.
Carnegie Endowment for International Peace 19
In February 1994, the U.S. Federal Reserve Board raised interest rates for the first time since the
recession of the early 1990s, in what was to be a series of rate increases as the United States
experienced a strong economic recovery. With the interest rate spread between the United States
and Mexico narrowing, portfolio capital flows to Mexico contracted sharply during the next three
months, to less than one-fifth of their previous level. At the same time, new political turbulence
emerged in Mexico, including the uprising of an indigenous group in Chiapas and the assassina-
tion of the presidential candidate of the ruling party. The Mexican government had to roll over
existing debt (the three-month bonds, called CETES) in this difficult environment. At this point,
the government made two fateful decisions. First, it shifted the public debt out of pesos into
dollar-based securities (called tesobonos) as the three-month bonds came due. It thereby agreed
to assume the exchange rate risk (which investors had previously borne) if the peso’s rate of
exchange with the dollar became unsustainable. The second decision was to continue to “ster-
ilize” funds from international exchange transactions—that is, keep them out of the domestic
money supply. Just as some funds had been kept out of the domestic monetary base as they
flowed into Mexico in the early 1990s (and held as foreign exchange reserves), so now the outflow
was covered by those reserves, allowing the Bank of Mexico to intervene to maintain the peso in
its parity band for most of 1994. This allowed the government to prevent a collapse of the peso
and an economic contraction during the first three quarters of 1994, the period leading up to the
Mexican presidential election.
However, by the end of 1994 these reserves were almost exhausted. The government did not
publish data that would allow the exact situation to be known, but investors and speculators
began to expect that the government would run out of reserves and be forced to devalue the
peso. To beat that eventuality, investors scrambled to shift out of Mexican investments and to
trade pesos for dollars in order to do so. In response to the growing demand for dollars and
shrinking foreign reserves, the Bank of Mexico widened the parity band in which the peso could
move from about 2 percent to 15 percent. This was contrary to investor expectations (and,
indeed, government indications) that there would be no devaluation. Coming on top of the other
pressures that had been building, there was a run on the peso. The Bank of Mexico suffered large
reserve losses over the next two days and on December 22, 1994, announced that the peso would
be allowed to float. Within ten days the peso had depreciated 55 percent. Continuing to fall, it hit
a low of 7.64 to the dollar by the end of 1995.
In evaluating the policy choices of the Mexican government with hindsight, it is useful to
remember that until 1994 Mexico was often held up as a model of economic development by U.S.
and multilateral financial institutions. But significant aspects of Mexico’s apparent success in
attracting international capital were built on a factor—low world interest rates—over which Mexico
had no control. Mexico compounded this vulnerability by relaxing all controls over capital flows
through its aggressive financial liberalization policies, so that it had no levers under its control
when investor sentiment changed. The capital inflows were huge compared to the size of the
economy, inflating it like a bubble. The “shock” of the capital outflows was therefore also very
large. The peso crisis became the first financial crisis of globalization, with others to follow. In light
of the Mexican experience, it seems clear that very large capital flows, especially flows of footloose
portfolio capital, can be destabilizing to any macroeconomic policy regime in developing countries.
The United States has recently adopted the position that trade partners must eliminate all existing
capital controls as part of any free-trade agreement. But Mexico’s experience with financial liberal-
ization, which predates NAFTA, clearly demonstrates that this is not a prudent policy for a devel-
oping country interacting with much larger global financial forces. Developing countries would be
wise to resist demands that they eliminate capital controls as part of free-trade agreements.
20 NAFTA’s Promise and Reality
at the end of :cc:, a loss of :.+ million jobs.
16
While not all of that reduction can be attributed
to NAFTA, other forces that affected trade, such as
the sharp devaluation of the peso during :,,¡‒:,,s,
pushed in the opposite direction, toward greater
growth of Mexican exports over imports. In fact,
:,,s was the one post-NAFTA year in which
Mexico had a surplus in its agricultural trade with
the United States, and agricultural employment
did improve modestly for a short period thereafter.
However, once the peso stabilized, the agricultural
trade balance again turned against Mexico and
agricultural employment resumed its decline.
During this period, Mexico was also liberalizing
trade with other partners, so the entire impact
cannot be ascribed to NAFTA. But the WTO has
determined that Mexico reduced its agricultural
tariffs much more for the United States than for
other trading partners.
17
Thus, agricultural trade
liberalization linked to NAFTA is the single most
significant factor in the loss of agricultural jobs in
Mexico (see Figure ¡).
The release of labor from the agricultural sector
largely offset the employment gains in the export
manufacturing sector that occurred after NAFTA
took effect. As noted earlier, it is impossible to
establish precisely what proportion of the :.+ million
gain in export manufacturing jobs (at the peak of
employment in :ccc) and the :.+ million loss in
agricultural jobs between :,,¡ and :cc: was directly
attributable to NAFTA. However, it is clear that the
sum of the effects of the trade pact to date has not
been a strong net gain in overall employment and
may have been a small net loss of jobs for Mexico.
Further, the long-term effects are still uncertain, as
most manufacturing tariffs have now been elimi-
nated, while the most sensitive agricultural tariffs
have yet to come down.
While the evolution of trade-related employment
since enactment of NAFTA is disappointing, the
substitution of manufacturing jobs for agricultural
jobs is generally considered positive for development,
representing a move up the production ladder.
However, as noted above, there are some reasons
for concern about the Mexican manufacturing sector.
These include the limited development of forward
and backward manufacturing linkages that would
multiply job creation, the erosion of Mexico’s
first-mover advantage, and the decline in jobs
in manufacturing for domestic consumption.
Service Sector Employment. NAFTA has had little
direct effect on employment in the service sector,
because most services are not traded and those that
are, such as financial and telecommunications services,
are not very labor intensive. Mexico has had a small
trade deficit in services with the United States, so
any impact on employment is likely to be negative,
although not large. Nevertheless, the service sector
is key to an overall understanding of the Mexican
employment situation, because it is here that most
Mexicans find employment. It is also the epicenter of
the growth in the so-called informal sector. The share
of total employment found in the service sector
increased from s: percent immediately before NAFTA
6,000,000
6,500,000
7,000,000
7,500,000
8,000,000
8,500,000
2002 2001 2000 1999 1998 1997 1996 1995 1994
a
1993
Figure 4. Mexican Employment in Agriculture
EMPLOYEES
Source: INEGI/STPS, National Employment Survey (ENE).
Note: Agriculture actually refers to the primary sector, which also
includes fishing, forestry, and trapping.
a. Data for 1994 not available.
(Continued on page )
Carnegie Endowment for International Peace 21
HOW RURAL HOUSEHOLDS SURVI VE
18
T
he rural economy in Mexico has changed dramatically over the past decade, as a result
of NAFTA, other trade pacts, and changing government policy. These factors have thrust
the rural population into a maelstrom of change beyond its capacity to control. While
some medium- and large-scale farmers have adapted to new market opportunities—often with
the support of the Mexican government or foreign investment—much larger numbers of subsis-
tence farmers have fared poorly. Rural households already suffering from low standards of living
are under increasingly severe strain, while alternative economic activities are often unavailable
or unpalatable.
In response, many rural households have adopted complex survival strategies that involve
a mix of increased cultivation of basic crops, some diversification of agricultural production,
increased day labor, and increased off-farm employment, often in the informal sector and in
some cases in maquiladora plants that have relocated away from the northern border and into
the hinterlands. It seems clear that these strategies also involve increased migration to other
parts of Mexico as well as migration to the United States, although reliable data on either type
of migration are not available. Despite the dispersal of work, sometimes to faraway locations,
the families and communities involved maintain some cohesion as social and economic units. For
example, rural households increasingly depend on remittances from household members who
migrate, whether to other parts of Mexico or to the United States. Remittances from the United
States have set records each of the last few years, amounting to US$9.8 billion in 2002 and on
course to reach at least US$12 billion in 2003 at current rates.
19
Rural Mexicans’ diverse survival strategies help to explain some surprising developments
that run counter to economic predictions but are well documented in Mexican statistics. For
example, production of maize on irrigated lands (mainly larger commercial farms) has declined
since cheaper, subsidized U.S. corn was allowed into Mexico and subsidies for water use were
reduced. However, maize production on nonirrigated, rain-fed land (overwhelmingly small subsis-
tence plots) increased when household incomes contracted sharply during the severe recession
that followed the peso crisis in 1995. Production has continued at similar levels, despite imports
of cheaper U.S. corn (see Figures 5–8. Data for 2001 and 2002 are preliminary).
Subsistence farmers produced primarily for their own consumption, although some of the
increase was also destined for local markets. Either the cheaper imported corn did not reach
markets in remote areas due to poor roads and other factors, or the lack of cash income influ-
enced the “grow or buy” decision. An additional factor appears to be the preference for native
varieties of maize over imported corn, among both rural and low-income urban families, which
has helped to sustain the market for traditional maize and for value-added food products using
maize as an input, such as tamales, posole, and sopes.
It also appears that as more rural workers have moved into nonagricultural activities as their
primary occupations, a substantial number continue to perform some work in agriculture.
Mexico’s main statistical agency, the National Institute of Statistics, Geography, and
Informatics (INEGI), began to include a special series of questions in its household survey
in less urbanized areas in the 1990s, designed to elicit more information on rural economic
behavior.
20
The survey showed that about 7 million people were involved in agricultural
activities in 2000.
21
However, when questioned further about their activities during the
previous six months, an additional 1.5 million people who reported their principal employment
as nonagricultural indicated that they had in fact worked in the agricultural sector at some
time during that period.
22
This represents an augmentation of the agricultural workforce by
22 NAFTA’s Promise and Reality
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2001 1997–2000 1995–96 1993–94 1991–93
17,000
17,500
18,000
18,500
19,000
19,500
20,000
20,500
2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
9,000
10,000
11,000
12,000
13,000
14,000
15,000
2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
Figure 5. Maize Imports to Mexico
THOUSANDS OF METRI C TONS
Figure 6. Total Maize Production in Mexico
THOUSANDS OF METRI C TONS
Figure 7. Total Irrigated Maize Production in Mexico
THOUSANDS OF METRI C TONS
Figure 8. Total Rain-Fed Maize Production in Mexico
THOUSANDS OF METRI C TONS
Source: Mexican Secretary of Agriculture, Livestock, Rural Development, Fisheries, and Nutrition (SIAP-SAGARPA), available at
www.siap.sagarpa.gob.mx.
Carnegie Endowment for International Peace 23
about 20 percent for some parts of the year, presumably those times requiring the greatest
labor, such as the times of sowing and harvesting. This part-time agricultural activity by
workers employed elsewhere helps to explain how agricultural production on small farms has
been maintained despite the sharp decline in overall agricultural employment that appears in
the main employment data.
Day laborers, somewhat surprisingly, were more likely to work for small landowners (40 percent
of day laborers) than for larger commercial agriculture or ranching operations (30 percent). The
remaining workers were hired by ejidos, the communities of small-scale farms comprising the
poorest segment of agricultural property owners.
A small proportion of rural households and communities have succeeded in establishing market
niches for resources such as environmental services and ecotourism, and for products that can
be certified as “organic,” “sustainable,” or “artisan,” all of which command more favorable prices
in international marketing schemes (see chapter 3 for further discussion
of these niche activities).
As already noted, remittances from household members who have migrated have become
an increasingly important factor in the overall survival of rural households and the surprising
staying power of rural communities. In addition to international flows, domestic remittances
(transfers from within Mexico) are also an important factor in cash income for rural households.
The remittances are used partly for consumption, but are also used for production purposes. For
example, they allow subsistence farmers to surmount credit constraints to purchase agricultural
inputs that ordinarily would be financed through borrowing. This is particularly important in light
of the collapse of rural credit in recent years.
The portrait that emerges from these varied economic activities is of a population that combines
nonagricultural activities and urban jobs (in Mexico and abroad) with continued agricultural
production and remittances. The evident goal is to sustain the life of rural communities as both
an alternative to and insurance against the precariousness of the informal economy, urban shan-
tytowns, and illegal migration, which loom as the main alternatives for poor rural households.
took effect to s¬ percent in :,,¬. Most of this growth
was due to absorption of labor from the agricultural
sector, which decreased from :s.¬ percent of employ-
ment in :,,+ to :¬.+ percent in :cc: (see Figure ,).
23
As discussed above, displacement of subsistence
farmers, in part because of increased agricultural
imports from the United States as a result of NAFTA
tariff cuts, led rural households to struggle to main-
tain adequate income levels. Mexico has no unem-
ployment insurance program, and so displaced
workers must find alternative employment. Due to
sluggish employment growth in manufacturing, as
well as the limited skills of many agricultural workers,
employment was found (or created) mainly in low-
pay, low-productivity jobs in the service sector such as
domestic work, street vending, and personal services
and repairs. Much of this was in the informal sector,
which comprises self-employment, employment in
microenterprises, and other forms of employment
that do not provide benefits such as health care and
pensions.
24
Overall, the informal sector grew during
most of the :,,cs, with employment in informal jobs
approaching sc percent of all employment in Mexico
in :,,s and :,,o, following the peso crisis and the
subsequent economic contraction. After economic
growth resumed in the late :,,cs, the informal sector
shrank somewhat, but still accounts for about ¡o
percent of Mexican jobs.
25
This reservoir of low-
wage, low-productivity workers shows no sign of
being absorbed by Mexico’s export sector in the
foreseeable future.
WAGES AND PRODUCTI VI TY
Real wages in Mexico are lower today than when
NAFTA took effect. This stunning setback in wages
cannot be attributed primarily to NAFTA, however.
Indeed, wages today are below their :,ïc levels.
Most of the decrease in real wages observed over the
last twenty years can be traced to two periods of
sharp wage declines. The first was during the debt
crisis of the early :,ïcs, when a devaluation of the
peso and contractionary policies designed to achieve
macroeconomic stability and meet the terms
demanded by international holders of Mexico’s debt
led to a sharp drop in wages. The second decline
occurred as a result of the peso crisis of :,,¡‒:,,s.
When the peso was sharply devalued in each crisis,
the cost of imported goods and the rate of inflation
both shot up, while wages were constrained by the
government’s monetary and wage-setting policies.
Wages gradually recovered after each of those
macroeconomic shocks. However, they did not grow
enough in either recovery period to return to pre-
vious levels. This pattern is true of both traded and
nontraded sectors of the economy, as well as for
employees of small, medium, and large firms.
26
While NAFTA is not the cause of the two major
setbacks in Mexican wages, it is striking that a free-
trade agreement that dramatically increased exports
and foreign direct investment has not done more
to increase wages and living standards for average
Mexican workers—or even for workers in most
export firms—relative to pre-NAFTA levels. Trade
theory suggests that a country with an abundance of
low-skill labor (such as Mexico) that opens to trade
will experience increasing returns (wages) to its
low-skilled workers. However, wages for production
workers in both maquiladora and non-maquiladora
manufacturing are still below pre-NAFTA levels.
Some analysts have suggested that, for a variety
of reasons, trade increased the demand for highly
skilled labor in Mexico relative to the demand for
less skilled workers.
27
But even for highly educated
workers in the manufacturing sector (such as profes-
sional, technical, and administrative staff ), real wages
in the late :,,cs were below those in :,,+, with
the only exceptions occurring in a few regions along
the U.S. border.
28
This same pattern holds for other
sectors of the economy. Workers with university
degrees and even postgraduate study received lower
real wages in :ccc than in :,,+.
29
The disappointing
wage performance has occurred despite the fact that
Mexican workers’ productivity has increased since
NAFTA took effect (see Figure :c).
Increasing productivity is a necessary condition for
sustainable increases in wages, since over time an
24 NAFTA’s Promise and Reality
Carnegie Endowment for International Peace 25
economy can only afford to consume what it pro-
duces. But increased productivity is not sufficient to
guarantee wage increases. Wage outcomes will
depend in part on supply and demand in labor
markets, and in part on the quality (and any bias) of
institutions that have been established to determine
how the gains from productivity are distributed. At
present, labor market supply continues to exceed
demand in most categories of labor in Mexico, con-
tributing at least a partial explanation for poor wage
results. In addition, the increasing integration of
global production as a result of liberalized trade and
improved protections for foreign investors has
meant that, for many categories of unskilled and
semi-skilled labor, competition is found not only in
national labor markets but also internationally, as
firms make production and sourcing decisions based
in part on labor costs in various countries. The
accession of China and other low-wage countries to
the WTO has increased the supply of labor that
firms can tap while still being guaranteed access for
their output to the world’s rich markets, including
the United States. Differences in tariffs and trans-
portation costs may not offset larger differences in
unit labor costs. (Unit labor costs reflect the combi-
nation of wages and productivity).
While labor market supply, demand and footloose
global production undoubtedly contribute to the
decoupling of wages from productivity seen in
Mexico, it is also the case that Mexican institutions
have been biased against wage increases. For
example, it has been government policy to hold
down the minimum wage over most of the last two
decades. This has been done both to increase global
competitiveness of Mexican labor and exports and
to meet structural adjustment goals. The minimum
wage determines many other wages in Mexico,
-2%
0%
2%
4%
6%
8%
Services
c
Manufacturing
b
Agriculture
a
Figure 9. Average Annual Employment Growth by Sector,
Before and After NAFTA
Figure 10. Manufacturing Productivity and Real Wages
in Mexico
I NDEX: 1 993=1 00
Source: INEGI/STPS, National Employment Survey (ENE).
a. Primary sector includes agriculture, fishing, forestry, and trapping.
b. Secondary sector includes mining, manufacturing, and construction.
c. Tertiary sector includes transportation, utilities, communications,
trade, financial, and social services. Mexican data are currently under
revision by the STPS and INEGI.
Source: INEGI/STPS, Monthly Industrial Survey (EIM), Economic
Information Bank (BIE), Indicadores Economicos de Coyuntura
Notes: Productivity and wage data cover both production and non-
production workers. The maquiladora sector is not included in this
data series. Wages include salaries, bonuses, and benefits. Data for
1993–2002 are annual averages; 2003 is January–September average.
1984–1993
1993–2002
Productivity
Wages
which are set as multiples of the minimum, and so
the impact is felt beyond the lowest-paid jobs.
Further, unionization and collective bargaining,
among the main institutional mechanisms for deter-
mining how gains from productivity increases will
be distributed between employers and workers, have
been repressed in Mexico through weak labor laws.
In the maquiladoras, for example, it is a widespread
practice for employers to conclude “protection
contracts” with corrupt or nonexistent trade unions.
Since Mexican labor law allows only one union to
hold a contract in a workplace, these contracts pre-
clude efforts by workers or more legitimate unions
to bargain for wage increases. There have been
numerous substantiated allegations of Mexican labor
authorities allowing employers to collude with non-
representative unions to avoid vigorous collective
bargaining.
30
I NEQUALI TY AND POVERTY
Gauging the effects of trade on real people requires
an assessment of trade’s impact on inequality and
poverty, because the gains and losses from trade are
not distributed evenly. Inequality in Mexico is high,
as it is in much of Latin America. This is a cause
for concern because it undermines social stability
and political cohesion. Furthermore, societies with
highly unequal economies have been shown to
reduce poverty less effectively and at slower rates
than more equal societies.
31
Some studies have also
shown that overall growth is reduced over the long
term by highly unequal income distributions, thus
constraining the incomes of all.
32
Income inequality had been declining in Mexico for
several decades up to the early :,ïcs, but it reversed
course after the debt crisis of :,ï: and the resulting
macroeconomic contraction and structural reforms.
Inequality then increased for most of the following
decade, but began to abate again in the early :,,cs,
the years immediately before NAFTA. However,
since :,,¡ inequality has again been on the rise.
Compared to the period before NAFTA, the top
:c percent of households have increased their share
of national income, while the other ,c percent have
lost income share or seen no change.
33
Income inequality in Mexico has a geographic
dimension as well. Historically, Mexico’s southern
states have been poorer, while the regions around
the capital and along the U.S. border have been
relatively more prosperous. From :,¡c to :,ïc,
targeted government policies led to an increasing
convergence in per capita income among regions.
However, following the macroeconomic crisis of the
:,ïcs, the long trend toward convergence in regional
incomes first stopped and then reversed, with
regional inequality widening again in the :,,cs.
34
The share of people living in extreme poverty in
Mexico has followed a similar pattern, shrinking
dramatically during the :,ocs and :,¬cs (from o:
percent to +c percent ) and then increasing after the
:,ï: debt crisis. Like economic inequality, the inci-
dence of poverty increased through the remainder
of the :,ïcs (reaching ¡: percent by :,ï,) and then
began to decline somewhat in the early :,,cs, with
the extreme poverty rate at +: percent when NAFTA
took effect. Poverty surged again during the peso
crisis of :,,¡‒:,,s, to over ¡c percent. Since then, it
has again declined, but at +: percent the proportion
of Mexicans living in poverty is still slightly higher
than the level seen in the late :,¬cs.
35
The United States
JOBS
The impact of NAFTA on the United States’
economy, employment, and the welfare of its citizens
is significantly less than its impact on Mexico or
Canada, for several reasons. The U.S. economy is
much larger than that of either of its neighbors; it
is less dependent on trade because of its huge (and
wealthy) domestic market; and only one-third of its
total trade is with its NAFTA partners. Further, U.S.
tariffs were substantially lower than those of Mexico
and Canada before NAFTA (and its predecessor,
26 NAFTA’s Promise and Reality
CUFTA), and its tariff reductions were proportion-
ately much smaller than the tariff cuts made by
those countries. Since NAFTA has had a much
smaller overall impact on the U.S. economy, its
impact on jobs, wages, and household incomes in
the United States is also much less than in Mexico
and Canada.
The actual impact of NAFTA on U.S. employment
has been sharply disputed by proponents and critics
of the agreement. Widely diverging estimates
have been produced. Generally, analysts on both
sides of the question have approached the task
by estimating the number of manufacturing jobs
supported by a given level of exports and then
multiplying the growth in exports to Canada and
Mexico by that figure to arrive at job gains. Using
this methodology, the U.S. Trade Representative
estimates that ,:¡,ccc jobs have been created due
to NAFTA.
36
Critics, on the other hand, apply
the multiplier formula to imports, as well, with
one study attributing a net loss of ¬oo,ccc jobs
to NAFTA.
37
Advocates of NAFTA resist applying
the multiplier formula to identify jobs lost due
to imports, since it is not certain that all imported
goods substitute for U.S. goods that would have
been produced in the absence of trade.
38
However,
it is clear that NAFTA, like all trade agreements,
has produced both winners and losers, and so esti-
mates that focus only on jobs created and not those
destroyed offer no insight into the agreement’s net
employment effects. Further, this methodology
does not distinguish between changes in trade due
to NAFTA and changes caused by other trade
agreements, such as that creating the WTO, and
does not take into account the impact of exchange
rate fluctuations on trade. Due to these limitations,
the estimates of the employment impact of NAFTA
by both proponents and opponents have been
unpersuasive.
The USITC recently developed a model to
measure the impact of NAFTA and four other
trade agreements on the U.S. economy that
represents an advance over earlier studies.
39
The model assumes that there is no net gain or
loss of jobs due to NAFTA. This assumption is
based on trade theory, which suggests that in
full-employment economies, job composition
will shift but there will be no net change in total
employment. Labor market adjustment will occur
by means of rising wages in the sectors that benefit
from trade. However, the model can be used to
estimate the order of magnitude of job gains or
losses by changing the assumption about how
labor markets adjust to changes in trade.
The USITC model estimates that the combined
effects of NAFTA and CUFTA had a positive impact
on total compensation to U.S. workers of approxi-
mately s:c billion in :cc:, compared to a scenario
without the two agreements.
40
As noted, the model
assumes that the entire change occurred through
changes in wages. If one assumed instead that wages
were rigid and that the full adjustment occurred
through increases in the number of jobs rather than
Carnegie Endowment for International Peace 27
2002 2000 1998 1996 1994 1992 1990 1988 1986 1984
27,000,000
27,500,000
28,000,000
28,500,000
29,000,000
29,500,000
30,000,000
30,500,000
Figure 11. U.S. Employment in Manufacturing
EMPLOYEES
Source: United States Bureau of Labor Statistics, Current Population Survey.
Note: Manufacturing also includes mining and construction.
increases in wages, the USITC model would produce
a maximum net gain of :¬c,ccc jobs. However, for
most of the period since NAFTA took effect, the
United States has been at full employment. Under
that condition, it is likely that gains from trade have
translated into higher wages rather than additional
jobs. On the other hand, with U.S. unemployment
rising in the last three years, it is reasonable to
assume that some of the NAFTA/CUFTA impact
would now be seen in increased employment rather
than higher wages. Since wages are not rigid and the
economy is currently not at full employment, this
model suggests that the overall impact of NAFTA on
U.S. employment lies somewhere between a net gain
of :¬c,ccc jobs and no net change.
An important limitation of the USITC model,
which it shares with other methodologies, is that it
does not capture the effect of investment decisions
to relocate production from the United States to
Mexico or Canada. To the extent that those deci-
sions are based purely on market access (tariff and
nontariff ) considerations, the USITC model will
capture them. But NAFTA also included important
protections for U.S. investors that had not existed
before the agreement, and those investor benefits
may also affect decisions on where to produce.
Further research and modeling work is needed
to assess these effects.
Whether the net impact of NAFTA on employment
is a small net positive, as the USITC model sug-
gests, or neutral or weakly negative, as further elabo-
ration, including research on investment impacts,
might show, it is known that about a half-million
U.S. workers lost jobs as a result of the agreement.
While these lost jobs were likely offset by other jobs
gained, the impact on losers is an economic and
political concern. A useful source of information on
NAFTA’s impact on job loss can be found in data
compiled by the NAFTA Trade Adjustment
Assistance (NAFTA-TAA) program. This U.S. gov-
ernment program provides benefits for workers
affected by NAFTA beyond those included in a
general U.S. trade adjustment assistance program.
As of September :cc+, a total of s:s,c,¡ workers
had been certified as having lost employment due
to NAFTA under the NAFTA-TAA program. A
detailed analysis of earlier NAFTA-TAA data showed
that about half of the job losses were due to produc-
tion shifts to Mexico.
41
The apparel industry pro-
duced the greatest number of NAFTA-TAA certified
job losers, about :ï percent of those eligible under
the program, followed by electronics (:+ percent),
automobiles and parts (¬ percent), and fabricated
metals (o percent). Other industries accounted for
s percent or less of those certified eligible.
WAGES AND PRODUCTI VI TY
Because the net impact of NAFTA on overall
employment in the United States is small, the impact
on wages is also likely to be minor at the national
level. Still, important changes have occurred in the
structure of U.S. wages that most studies attribute
in part to trade; consequently, NAFTA is likely to
account for some of those observed effects. The main
structural change is the widening gap between the
wages of skilled and unskilled workers that has been
observed for the last three decades. There is a large
literature that attempts to explain this divergence,
with most economists identifying technological
change as the main driver of this increasing gap. But
most analyses find that trade has also played a role.
While estimates of the impact of trade on low-skill
wage depression vary depending on the methodology
of the study, many researchers attribute about :c
percent of increased earnings inequality to trade.
One study estimates that ¡c percent of the growing
wage gap can be attributed to a combination of trade
and immigration.
42
This is potentially relevant to a
discussion of NAFTA impacts, because immigration
from Mexico to the United States has increased since
the agreement took effect, contrary to many predic-
tions (see chapter : for more discussion). Other
studies look not at overall trade but at the growth
of global production chains, or outsourcing, which
allows U.S. manufacturers to maintain the high-
skilled parts of production processes in the United
States while sending low-skilled operations abroad.
43
28 NAFTA’s Promise and Reality
This would tend to raise skilled wages (or depress
unskilled wages) through the operation of supply
and demand. To the extent that NAFTA reduced
tariff barriers for the cross-border shipment of inter-
mediate goods and provided greater guarantees for
investments, it undoubtedly contributed to the
observed growth of shared production between the
United States and Mexico. However, this trend is
also evident with respect to U.S. production chains
involving many other low-wage countries.
Since the early :,,cs, unit labor costs in U.S.
manufacturing have fallen, because productivity
has grown faster than wages. This decoupling of
productivity from wage increases is seen in all of
the NAFTA countries. In Mexico, the decoupling
began after enactment of NAFTA, and in Canada
it began after CUFTA took effect. In the United
States, the trend began in the :,ïcs, when U.S.
manufactured goods faced a serious challenge
in the U.S. market from European and Asian
imports. While this failure of wages to keep pace
with productivity growth cannot be attributed
directly to NAFTA or CUFTA, it is clear that
increasing economic integration has allowed
employers to capture a greater share of productivity
gains than had been the case in the three countries
during the period when their economies were less
open to trade. It is not surprising that the trend in
Mexico and Canada is so closely aligned with the
advent of NAFTA and CUFTA, respectively, given
that the United States is the dominant trading
partner of each country. The U.S. economy, on
other hand, was more affected by multilateral tariff
reductions effected in successive rounds of General
Agreement on Tariffs and Trade (GATT) negotia-
tions, because two-thirds of U.S. trade is with
partners other than Canada and Mexico. The likely
channels through which this phenomenon operates
are many, including the integration of global labor
markets for certain types of labor through out-
sourcing and production chains, which increase the
available supply of low- and medium-skilled labor
relative to demand. It is also likely that the relative
bargaining power of labor is reduced by the possi-
bility of outsourcing or plant relocation, even
when it does not actually occur.
I NEQUALI TY
Economic inequality in the United States has been
increasing for most of the last two decades. Since
the early :,ïcs, the richest quintile (top :c percent)
of U.S. households has increased its share of
national income from ¡¡ percent to over sc
percent.
44
Meanwhile, each of the other four house-
hold quintiles has seen its share of national income
decrease. The growing wage gap between high-
skilled and low-skilled workers is one of the causes,
and to the extent that trade is a factor in the wage
gap, it is also implicated in growing inequality.
Canada
JOBS
The impact of NAFTA on Canada cannot be under-
stood without combining NAFTA’s effects with those
of its predecessor, the Canada-United States Free
Trade Agreement (CUFTA), which took effect on
January :, :,ï,. NAFTA incorporated the provisions
of CUFTA and also liberalized trade between Canada
and Mexico. But trade with Mexico continues to
be a small share of Canada’s total trade—less than
: percent of Canadian exports go to Mexico and
+.o percent of its imports are from that country.
Therefore, the main impact of NAFTA/CUFTA on
employment in Canada and the Canadian economy
in general can be traced to the phasing in of the
CUFTA provisions.
A recent study by Daniel Trefler of CUFTA effects
on employment advances the level of analysis
relative both to earlier studies of the Canadian
experience and to studies that examine U.S. and
Mexican employment impacts.
45
The carefully
constructed model examines the effects of CUFTA
on employment, wages, and productivity in
manufacturing industries in Canada. It controls
Carnegie Endowment for International Peace 29
for several other factors, such as the business cycle,
that might account for changes. Trefler finds that
in those industries that were most affected by
Canadian tariff cuts and therefore were most
exposed to import competition, employment fell
by :: percent. In the export-oriented industries that
experienced the largest U.S. tariff cuts and therefore
benefited most from the agreement, there was no
increase in employment.
46
Insofar as Canadian tariff
cuts under CUFTA were deeper than U.S. tariff
cuts, the greater impact on import-competing
industries is not surprising; but the lack of any net
job creation in export industries is noteworthy. This
result runs counter to the findings of earlier studies,
which found that employment losses in U.S. and
Canadian industries that compete with imports were
more than offset by employment gains in export-
oriented industries. Those studies suffered from
serious methodological flaws, but the direction of
the results seemed intuitively logical based on trade
theory and they were widely accepted, despite actual
observed net job losses. The Trefler study calls into
question whether a net positive impact on jobs from
trade liberalization can be inferred, at least between
two industrialized countries and in the short-to-
medium term (see Figure ::).
Trefler did find that both groups of industries
experienced fairly strong productivity gains.
47
Over the medium term (in this case, a decade),
employment in the Canadian manufacturing sector
recovered, and by :,,, achieved levels last seen
in :,ï,.
48
Growth continued in :ccc and :cc:,
with manufacturing employment hitting a peak in
:cc: of +.¡ million jobs, about :sc,ccc more than
pre-CUFTA levels, before declining again in the
recession that began that year. In addition, the
manufacturing sector constitutes a slightly larger
share of the Canadian economy (::.¡ percent in
:cc:) than its counterpart in the United States
(:c.o percent the same year), which suggests
that the productivity gains may have helped the
long-term survival of Canadian manufacturing,
although exchange rate movements undoubtedly
played a role as well. The industries that showed
positive employment trends by the late :,,cs
included automobiles and auto parts, electronics,
plastics, and, somewhat surprisingly, apparel.
49
That industry underwent significant restructuring,
with higher-skilled operations becoming a larger
share of employment than sewing and other lower-
skilled jobs.
WAGES
Overall real wages in Canada were only slightly
higher in :cc: than in :,ï,, but manufacturing
earnings fared somewhat better.
50
This suggests that
NAFTA/CUFTA or trade more generally did not
have a negative impact on Canadian wages, since
earnings in nontraded sectors increased slower than
in manufacturing. As in the case of both Mexico
and the United States, productivity increases in
Canada significantly outstripped wage increases, in
both manufacturing and nonmanufacturing sectors
(see Figure :+).
I NEQUALI TY
Incomes in Canada are relatively more equal
than in either Mexico or the United States, but
inequality has been on a marked upward trend
since :,ï,.
51
The richest :c percent of households
increased their share of national income, from ¡c.¬
percent of total income that year to ¡:.ï percent
in :ccc, while all other households experienced
declines in their share. Only the top :c percent
of households had higher real incomes in :ccc
than in :,ï,. The other ïc percent of Canadian
households saw real incomes decline from :,ï,
to :,,¡ and then recover slightly, but not enough
to make up for the earlier decline.
Given the relatively better performance of wages in
manufacturing than in most other sectors, it seems
clear that trade-induced changes in wage income
patterns do not explain the decline in incomes
for ïc percent of Canadian households and the
increasing economic inequality in Canada over the
NAFTA/CUFTA period. However, a significant
30 NAFTA’s Promise and Reality
Carnegie Endowment for International Peace 31
factor in household income in Canada is transfer
payments from the government, particularly to the
bottom ¡c percent of households, and these declined
due to cuts in government funding for social
programs and changed eligibility requirements.
For example, since NAFTA/CUFTA took effect,
the proportion of unemployed workers receiving
unemployment benefits declined from ï¬ percent
to +o percent. This decline is attributable to a
number of factors, including macroeconomic policy.
However, a strong concern of NAFTA/CUFTA
critics was that trade opening to the United States
would put downward competitive pressure on
Canada’s social safety net, which in most cases was
superior to that of the United States. It cannot be
ruled out that liberalization of trade was a factor in
the downward pressure on unemployment insurance
and other social benefits in Canada, or the cause
of widening gaps in disposable household income.
Further studies are needed.
Learning from
the NAFTA Experience
At ten years, the long-term effects of NAFTA on
employment, wages, and incomes in the countries
of North America cannot yet be judged.
52
However, short- and medium-term impacts can
now be assessed on the basis of substantial, accu-
mulating data.
EMPLOYMENT
The most important result of the NAFTA experi-
ence, and the most surprising when compared with
predictions of political advocates and opponents, is
that the trade agreement has produced disappoint-
ingly small net gains in employment in the coun-
tries of North America. In Mexico, employment
destruction in domestic manufacturing and agricul-
2002 2000 1998 1996 1994 1992 1990 1988
2,500,000
2,700,000
2,900,000
3,100,000
3,300,000
3,500,000
2002 2000 1998 1996 1994 1992 1990 1988
80
90
100
110
120
130
140
150
160
170
Figure 12. Canadian Employment in Manufacturing
EMPLOYEES
Figure 13. Manufacturing Productivity and Real Wages in Canada
I NDEX: 1 988=1 00
Source: Statistics Canada, Labour Force Survey.
Note: Manufacturing also includes mining and construction.
Source: Statistics Canada, Canadian Productivity Measures.
Productivity
Wages
32 NAFTA’s Promise and Reality
■ In agriculture, the transition times negotiated by
Mexico were too short, and the government did not
adopt sufficiently vigorous rural adjustment poli-
cies to help subsistence farmers adapt to the new
trade conditions. Developing countries with signifi-
cant employment in subsistence agriculture should
carefully consider the sequencing of liberalization,
to allow the absorption of rural workers into other
sectors that expand due to liberalized access to
foreign markets, before basic crops are liberalized.
■ In negotiations over agricultural trade, developing
countries should also insist on terms, including
special safeguards, that will prevent a wealthier
trading partner from dumping or distorting trade
through domestic or export subsidies.
LEARNI NG FROM NAFTA
■ The experience of NAFTA shows that trade pacts
will shift the composition of jobs, with some
winners and some losers, but cannot be expected
to create a net gain in jobs in economies that are
at full employment, such as the United States and
Canada. In developing economies with surplus
labor, such as Mexico, the NAFTA experience
demonstrates that trade pacts cannot be counted
on to produce much, if any, net employment
growth in the absence of other targeted policies.
Policies to maximize employment gains from trade
would include measures to promote supplier and
support industries as well as terms in the trade
agreement that reward rather than discourage the
use of domestic inputs in the production of
exported goods.
ture has all but swamped job creation in export
manufacturing. In the United States, NAFTA has
had either a neutral or very small net positive effect
on employment. Meanwhile, in Canada, CUFTA
led first to a significant net decrease in jobs in
traded sectors, followed by a slow recovery of
employment to pre-CUFTA levels after ten years,
then a continued increase in subsequent years. The
political and rhetorical claims for trade as an engine
of net job growth are not borne out by experience,
at least in the medium term.
Such claims have always been at odds with the pre-
dictions of trade theory. In theory, if an economy is
at full employment before opening to trade, the
shifting of resources into different productive activi-
ties based on comparative advantage will not result
in a net gain or loss of jobs, but rather in a different
mix of industries and employment. The gains from
trade in a full-employment economy would be seen
in rising wages and incomes, according to basic
trade theory. The United States and, arguably,
Canada have been at full employment during most
of the NAFTA period. Thus, the lack of any
significant job growth due to NAFTA in Canada
and the United States is not at odds with the predic-
tions of economic theory, although it certainly
contradicts the claims of NAFTA boosters. What is
surprising, even from the perspective of economic
theory, is the weak job creation in Mexico, which is
far from full employment.
53
As noted earlier, it is
impossible to determine with certainty the precise
share of agricultural job losses and manufacturing
job gains in Mexico that resulted directly from
NAFTA. However, the trade pact has been the most
important factor in Mexico’s changing pattern of
trade, and the overall growth of jobs in all traded
sectors since :,,+ has been very weak. It is thus
evident that NAFTA has not been a robust job
creator, even for the low-wage, labor-abundant
trading partner.
The experience of Mexico also suggests that a
developing country with a high proportion of its
labor force in low-productivity agriculture should
negotiate very long transition periods for the
phaseout of tariffs on basic crops. The negative sit-
uation currently faced by Mexico also demonstrates
that a developing country must use that transition
time aggressively to prepare the rural population
for the wrenching adjustment it will face. Policies
should be adopted to shift farmers to competitive
e
m
p
l
o
y
m
e
n
t
Carnegie Endowment for International Peace 33
w
a
g
e
s
■ Increased productivity appears to be a likely gain
from trade, based on the North American experi-
ence. However, if such productivity gains are
to be shared with workers as rising wages, the
institutions and public policies that affect wage
outcomes should be strengthened. Countries with
weak laws and institutions related to freedom
of association and collective bargaining should
address these problems in conjunction with trade
liberalization. Minimum wage policies may need to
be reconsidered; dispute resolution mechanisms,
such as arbitration, could also be strengthened.
crops, to develop alternative sources of employ-
ment in rural areas, and to invest heavily in educa-
tion to prepare the population for more modern
occupations. Another important factor for Mexico
was that some of its most important basic crops,
such as maize, were exposed to competition from
subsidized U.S. crops that are sold at artificially
low prices, sometimes below the cost of produc-
tion. Further, U.S. policy on agricultural subsidies
changed significantly in ways that were not fore-
seen during the NAFTA negotiations, most
notably in the passage of a farm bill in :cc: that
increased subsidies. Successful competition will be
impossible for the developing country under such
circumstances.
PRODUCTI VI TY
The one employment area where a clear positive
impact has been seen during the NAFTA period is
the growth of productivity in all three North
American countries. At least in Mexico and
Canada, which cut tariffs deeply and were exposed
to competition from their giant neighbor, NAFTA
likely played a significant role in the observed pro-
ductivity growth. In Canada, increased productivity
may have contributed to a medium-term revival
and perhaps even long-term survival of the manu-
facturing sector.
However, the strong productivity growth in the
United States and somewhat weaker growth in
Mexico and Canada may have had the unwelcome
side effect of reducing the pace of job creation in
the three countries, as workers produced more and
fewer new jobs were created.
Throughout North America, there has been a
decoupling of productivity growth from wage
growth over the last decade.
WAGES
Real wages for most Mexicans are lower today than
when NAFTA took effect. This stunning setback in
wages is mainly attributable to the peso crisis of
:,,¡–:,,s. However, during the NAFTA period,
productivity growth has not translated into wage
growth, as it did in earlier periods in Mexico.
Mexican wages are also diverging from, rather than
converging toward, U.S. wages, as trade theory
would suggest.
Carnegie Endowment for International Peace 33
Because the net impact of NAFTA on U.S. employ-
ment is small, the impact on overall wages is also
likely to be small. But a widening gap between the
wages of skilled and unskilled workers is partly
attributable to trade, and NAFTA as a factor in
U.S. trade probably accounts for a portion of the
observed growth in wage disparity within the
United States.
Overall real wages in Canada were only slightly higher
in :cc: than when CUFTA took effect in :,ï,, but
manufacturing earnings fared somewhat better. This
suggests that NAFTA/CUFTA did not have a negative
impact on wages, since earnings in nontraded sectors
increased slower than in manufacturing. As in the case
of Mexico, productivity increases in Canada
significantly outstripped wage increases.
In all three countries, the evolution of wages and
household incomes since NAFTA took effect has
been toward greater inequality, with most gains
going to the upper :c percent of households and
higher-skilled workers. While this trend is clearly
compounded of many factors, more open trade
appears to be implicated as one element—along
with continental and global competition over the
location of production—that restrains wage growth.
Whether productivity gains lead to higher wages also
depends on the nature and quality of the institutions
that determine the distribution of productivity gains
within a society between the return to workers as
higher wages and the return to investors as higher
profits. Institutions that govern the ability of workers
to organize unions and bargain collectively over wages
are important determinants of distribution, as are gov-
ernment mechanisms such as minimum wage policies.
I NCOME DI STRI BUTI ON
Income inequality has been on the rise in Mexico
since NAFTA took effect, reversing a brief down-
ward trend in the early :,,cs. Compared to the
period before NAFTA, the top :c percent of house-
holds have increased their share of national income,
while the other ,c percent have lost income share or
seen no change. Regional inequality within Mexico
has also increased, reversing a long-term trend
toward convergence in regional incomes.
In a trend that predates NAFTA, income inequality
in the United States has been increasing for most
of the last two decades. The growing wage gap between
high-skilled and low-skilled workers is one of the
causes, and to the extent that trade is a factor in the
34 NAFTA’s Promise and Reality
i
n
c
o
m
e

d
i
s
t
r
i
b
u
t
i
o
n
■ Countries opening to trade should first strengthen
social safety nets to assist those who lose as a
result of trade-induced economic restructuring.
Developing countries negotiating with wealthier
trading partners should seek financial assistance
from these countries, as part of the trade
package, for transitional adjustment programs.
Developed countries should strengthen their trade
adjustment or general social safety net programs
with a view to addressing the uneven conse-
quences, for citizens, of opening to trade.
LEARNI NG FROM NAFTA
■ If the gains from trade are to be shared widely
throughout a country, the institutional mecha-
nisms that govern how costs and benefits of
economic change are distributed may need to be
strengthened. Government measures that affect
income distribution, such as tax and transfer
mechanisms, should be reviewed and fortified
to deal with the impact of trade opening.
Carnegie Endowment for International Peace 35
wage gap, it is also implicated in growing inequality.
Incomes in Canada are relatively more equal than
in either Mexico or the United States, but inequality
has been on a marked upward trend since CUFTA’s
entry into force in :,ï,. Because manufacturing
wages have performed better than wages in most
other sectors, it seems clear that trade-induced wage
changes are not the cause of the observed increase in
inequality. Rather, a reduction in transfer payments
from the government, which play an important role
in the incomes of the bottom ¡c percent of house-
holds, accounts for most of the change. The weak-
ening of the Canadian social safety net, which
generates these transfer payments, was a concern of
CUFTA opponents, but there is currently no clear
evidence to support a causal relationship.
The experience of each of the NAFTA countries
confirms the prediction of trade theory that there
will always be winners and losers from trade. The
number of losers may equal or even surpass the
number of winners, especially in the short-to-
medium term. In Canada, it took a decade for man-
ufacturing employment to recover from the initial
displacements caused by CUFTA. In Mexico, rural
farmers are still struggling to adapt to NAFTA-
induced changes. The short-to-medium term adjust-
ment costs faced by the losers from trade can be
severe, and the losers are often those segments of
society least able to cope with adjustment, due to
low skills, meager savings, and limited mobility. It
must also be recognized that there may be perma-
nent losers from trade, due to limitations of educa-
tion, skills, geographic isolation, and other factors.
Because the impacts of trade are uneven, govern-
ments should establish mechanisms that help offset
the losses suffered by those in declining sectors.
Trade adjustment assistance should provide income
support to workers and small farmers during transi-
tional periods, as well as funds for training for new
occupations. Such policies are highly desirable com-
plements to trade pacts. A trade adjustment assis-
tance program exists in the United States, and a
broad social safety net in Canada serves many of
the same ends, although both countries’ plans have
critical gaps that should be addressed and both
plans need financial strengthening. In Mexico,
budget constraints and policy choices have pre-
cluded the establishment of even the most basic
unemployment insurance. The harsh impact of
agricultural trade liberalization on Mexican subsis-
tence farmers has not been offset by appropriate
government policies.
NOTES
1 William J. Clinton, Remarks at the Signing Ceremony for
the Supplemental Agreements to the North American Free
Trade Agreement, September :¡, :,,+. Public Papers of the
Presidents of the United States, vol. :, :,,+ (Washington,
D.C.: U.S. Government Printing Office, :,,+).
2 Remarks by the President at the Signing Ceremony for Chile
and Singapore Free Trade Agreements, September +, :cc+,
available at www.whitehouse.gov.
3 Maria Elena Vicario, Sandra Polaski, and Dalil Maschino,
North American Labor Markets: A Comparative Profile
(Washington, D.C.: Secretariat of the North American
Commission for Labor Cooperation, forthcoming). The
authors’ calculations are based on data from the Mexican
National Institute of Statistics, Geography, and Informatics
(INEGI) and the Ministry of Employment and Social
Insurance (STPS).
4 In :cc:, ï, percent of total Mexican exports went to the
United States, while :.¬ percent went to Canada; o+ percent
of total Mexican imports were from the United States and ¡.:
percent were from Canada. (The data for Canada are from
Statistics Canada, National Income and Expenditure
Accounts; for Mexico, from INEGI, System of National
Accounts; and for the United States, from the Bureau of
Economic Analysis, National Income and Product Accounts.)
5 INEGI, Monthly Industrial Survey (EIM). This survey also
excludes microenterprises (small businesses with fewer than
five employees that operate in the informal sector).
6 Ibid.
7 Enrique Dussel Peters, “Industrial Policy, Regional Trends
and Structural Change in Mexico’s Manufacturing Sector,”
in Kevin J. Middlebrook and Eduardo Zepeda, eds.,
Confronting Development: Assessing Mexico’s Economic and
Social Policy Challenges (Palo Alto, Calif.: Stanford University
Press, :cc+).
8 The Impact of Trade Agreements: Effect of the Tokyo Round,
U.S.-Israel FTA, U.S.-Canada FTA, NAFTA, and the
Uruguay Round on the U.S. Economy, publication no. +o::
(Washington, D.C.: U.S. International Trade Commission,
August :cc+), available at www.usitc.gov.
9 Ibid.
10 Rogelio Ramirez De La O, “What Has Changed in the
Performance of Employment and Wages in Mexico after
NAFTA?” paper prepared for the Third Seminar on Income
and Productivity of the North American Commission on
Labor Cooperation (February :ccc), available at
www.naalc.org/english/publications.
11 This effect could be amplified by a tendency in Mexican
monetary policy to overvalue the peso as a means of control-
ling inflation. This disadvantages Mexican producers when
they try to export, while imposing less of a burden on U.S.
multinationals using Mexico as an assembly platform, since
the movement of components into Mexico and of finished
products out will largely cancel out or at least smooth out
the exchange rate effects.
12 These figures are for overall manufacturing. The definition
of unskilled here is possession of up to twelve years of formal
education, while skilled is defined as possession of thirteen
years or more. José Romero and Alicia Puyana, The Mexican
Economy after Two Decades of Trade Liberalization, :cc:.
Paper on file with the author.
13 United States Dumping on World Agricultural Markets,
Cancun Series Paper no. : (Minneapolis: Institute for
Agriculture and Trade Policy, :cc+), available at
www.iatp.org.
14 Very gradual downward adjustments in the peso were
allowed through this crawling parity band in which the peso
was allowed to depreciate against the dollar at a very small
preannounced rate, which was c.ccc¡c pesos per dollar for
most of the period. This regime resulted in an exchange rate
of :., pesos to the dollar in :,,c, depreciating to +.¡ pesos to
the dollar in early :,,¡.
15 International Financial Statistics (Washington, D.C.:
International Monetary Fund, October :,,o).
16 North American Labor Markets (see note +), based on INEGI
National Income and Expenditure Survey (ENIGH) and
STPS/INEGI National Employment Survey (ENE).
17 World Trade Report :cc+ (Geneva: World Trade
Organization, August :cc+), available at www.wto.org.
18 This section draws on two papers commissioned for this
report: David Barkin and Edith Pacheco, The Changing
Meaning of Work in Rural Latin America, July :cc+; and
Antonio Yúnez-Naude and Fernando Barceinas Paredes,
The Agriculture of Mexico after Ten Years of NAFTA
Implementation, July :cc+ (see acknowledgments).
19 John Authers, “Mexicans Send More Than s: Billion Back
Home in July,” Financial Times, September :,, :cc+, based
on data from the Bank of Mexico. Remittances from the
United States provide more foreign funds than either foreign
direct investment or tourism.
20 INEGI, ENIGH, special “module” with questions on agri-
cultural activity during the preceding semester of the survey.
The survey, conducted during the second trimester of every
odd-numbered year during the :,,cs, was designed to
improve understanding of rural labor patterns by inquiring
about agricultural employment for those people whose prin-
cipal occupation was nonagricultural. Data prepared by
Edith Pacheco and David Barkin.
21 Differences between agricultural employment data discussed
here and elsewhere in this paper arise because this series
includes the economically active population aged twelve
years and older, whereas the main employment data is for
the economically active population aged fifteen years and
older.
22 ENIGH special module for rural households (see note :c).
23 North American Labor Markets (see note +).
24 There are a variety of definitions of the informal sector. The
definition used here was developed for STPS by Clara
Jusidman in :,,+. It takes into account establishment size,
the position held, and the industry involved.
25 North American Labor Markets (see note +).
36 NAFTA’s Promise and Reality
26 Carlos Salas and Eduardo Zepeda, “Employment and Wages:
Enduring the Costs of Liberalization and Economic
Reform,” in Kevin J. Middlebrook and Eduardo Zepeda,
eds., Confronting Development: Assessing Mexico’s Economic
and Social Policy Challenges (Palo Alto, Calif.: Stanford
University Press, :cc+).
27 See, for example, Raymond Robertson, “Trade Liberalisation
and Wage Inequality: Lessons from the Mexican
Experience,” World Economy, vol. :+, no. o (June :ccc), pp.
ï:¬‒¡,.
28 Carlos Salas and Eduardo Zepeda, Wages and Productivity in
Mexico: Theoretical and Empirical Issues, July :cc+, paper
commissioned for this report, on file with the author.
29 The Mexican Economy (see note ::), based on data from the
Ministry of Labor and Social Welfare National Employment
Survey.
30 The labor side-agreement to NAFTA includes provisions for
public petitions to any of the member governments if labor
rights violations occur in any of the other NAFTA countries.
Several petitions have been filed alleging interference with
freedom of association and collective bargaining rights in
Mexico. The petitions were filed with the U.S. National
Administrative Office, the body that administers the agree-
ment for the United States. While expressing its findings in
diplomatic terms, the National Administrative Office found
significant shortcomings in this area in many cases (see
www.dol.gov/ilab/programs/nao).
31 See, for example, Martin Ravallion, “Can High-Inequality
Developing Countries Escape Absolute Poverty?” World Bank
Policy Research Working Paper no. :¬¬s (Washington, D.C.:
World Bank, :,,¬). The World Bank web site provides a useful
summary of research on this topic at www.worldbank.org/
poverty/inequal/abstracts/index.htm.
32 Dani Rodrik, Where Did All the Growth Go? External Shocks,
Social Conflict and Growth Collapses (Cambridge, Mass.:
Kennedy School of Government, Harvard University, :,,¬)
provides a political-economic model. Other models are
cataloged at the World Bank web site (www.worldbank.org/
poverty/inequal/abstracts/index.htm).
33 North American Labor Markets (see note +). Data based on
INEGI, ENIGH, and The Mexican Economy (see note ::).
34 Gerardo Esquivel, Sources of Regional (Non) Convergence in
Mexico (Washington, D.C.: World Bank, :cc:), available at
www.worldbank.org.
35 Diana Alarcon and Eduardo Zepeda, “Economic Reform or
Social Development? The Challenges of a Period of Reform
in Latin America,” Journal of Development Studies, forth-
coming.
36 U.S. Trade Representative, NAFTA at Eight, May :cc:,
available at www.ustr.gov.
37 Economic Policy Institute, NAFTA at Seven, April :cc:,
available at www.epinet.org.
38 Apparel imports, for example, come from many countries
because of the quota system that exists under the global
Agreement on Textiles and Clothing. Apparel imports from
Mexico may have displaced imports from other countries
rather than U.S. production.
39 The Impact of Trade Agreements (see note ï). The USITC
model is based on a computable general equilibrium model
but uses actual trade flows and other macroeconomic and
microeconomic data from the U.S. economy for the period
:,¬ï‒:cc:. It controls for such factors as exchange rate
shocks to isolate the effects of NAFTA tariff changes. It also
takes into account the phased-in nature of the agreement
and the growing share of trade in the U.S. economy.
40 In The Impact of Trade Agreements (see note ï), the USITC
estimates that U.S. labor income would have been s¡c
billion less if not for the effects of five trade agreements,
including the Tokyo and Uruguay rounds of the General
Agreement on Tariffs and Trade (GATT), NAFTA, CUFTA,
and the United States-Israel Free Trade Agreement (p. ++,).
Separately, the study finds that :s percent of the total
impacts attributable to all five agreements were contributed
by NAFTA and CUFTA (pp. ++:‒++).
41 Mary Jane Bolle, NAFTA: Estimated U.S. Job “Gains” and
“Losses” by State over  ⁄ Years (Washington, D.C.:
Congressional Research Service, February :, :ccc).
42 George J. Borjas, Richard B. Freeman, and Lawrence F.
Katz, “How Much Do Immigration and Trade Affect Labor
Market Outcomes?” Brookings Papers on Economic Activity,
vol. : (:,,¬), pp. :‒o¬.
43 Robert C. Feenstra and Gordon H. Hanson, Global
Production Sharing and Rising Inequality: A Survey of Trade
and Wages (University of California, San Diego, and
National Bureau of Economic Research, :cc:).
44 North American Labor Markets (see note +). Data derived
from the Current Population Survey, U.S. Bureau of the
Census.
45 Daniel Trefler, The Long and Short of the Canada-U.S. Free
Trade Agreement (University of Toronto, Canadian Institute
for Advanced Research, and National Bureau of Economic
Research, December +, :cc:), available at
www.chass.utoronto.ca/~trefler/fta.pdf.
46 The study actually showed a + percent employment loss in
the export industries, but it was statistically insignificant.
47 However, the average annual productivity gains during this
period were significantly less than those observed in the
:,ocs and :,¬cs.
48 North American Labor Markets (see note +). Data based on
Labour Force Survey, Statistics Canada.
49 Ibid.
50 Ibid. Data based on Survey of Employment, Payrolls, and
Hours, Statistics Canada.
51 Ibid. Data based on Survey of Consumer Finances, Statistics
Canada.
52 For CUFTA, fourteen years of experience and data are avail-
able.
53 The basic trade model assumes that capital and labor are
immobile. In the real world of capital mobility, international
investors may shift production of labor-intensive products to
a labor-abundant country such as Mexico if they are assured
of access to a rich market such as the United States.
Additional labor would be employed, creating net employ-
ment growth.
Carnegie Endowment for International Peace 37
Carnegie Endowment for International Peace 39
THE POLI TI CAL PASSI ONS SURROUNDI NG
THE UNI TED STATES’ RATI FI CATI ON of the
North American Free Trade Agreement (NAFTA),
and the exaggerated claims about the trade agree-
ment’s effects, in many ways confused, rather than
informed, the discussion about NAFTA’s aim. The
U.S. debate’s progression from the understandable
hyperbole that accompanies the “selling” of politi-
cally contentious policies to dire “if NAFTA
ratification fails” scenarios was particularly unfortu-
nate. Such rhetoric virtually guaranteed that any
subsequent assessment of the agreement’s value
would be burdened by unrealistic expectations in
areas that were strictly secondary to NAFTA’s goal
of promoting trade and cross-border investment by
reducing tariffs and other barriers.
Migration may well be one of these areas—although
it could hardly be of greater consequence for the
Mexican public and, in some ways, the U.S. public.
Indeed, an evaluation of NAFTA through the lens
of migration is fraught with immense difficulties.
Concurrent major economic events in both Mexico
and the United States since NAFTA came into
effect—ranging from the Mexican economic crisis
of the mid-:,,cs and the peso’s devaluation to
remarkably strong U.S. economic growth later in
that decade—as well as migration’s deep and struc-
tural roots in the two countries’ historical relation-
ship, confound the process of isolating and
accurately measuring NAFTA’s precise effects on
migration from Mexico to the United States. Such
an evaluation must nonetheless be attempted, if for
no other reason than the fact that free trade and
migration are so intimately linked in the public’s
mind. My evaluation will assess whether NAFTA
lived up to predictions of the trade treaty’s effect on
migration, and explore what can be learned from
NAFTA when migration is under consideration in
future trade negotiations.
A Review of Key Findings
and Observations
Ten years ago, both U.S. and Mexican officials
argued passionately that NAFTA, by encouraging
job growth in Mexico, would reduce illegal immi-
gration from Mexico to the United States. So far,
these hopes seem dashed. Although Mexican job
opportunities in the export sector increased (mostly
in manufacturing), net job gains have been modest
at best, and, depending on the timing of the meas-
urement, even flat. Furthermore, average wages in
the two countries have hardly begun to converge.
In part because of these factors, but also because of
robust U.S. demand for low-wage labor and other
structural forces, illegal immigration from Mexico
has risen sharply since :,,¡ despite increasingly
two
The Shifting Expectations
of Free Trade and Migration
DE ME T RI OS G. PAPADE ME T RI OU
vigorous border enforcement efforts that com-
menced at roughly the same time as NAFTA.
Indeed, by most estimates, the population of unau-
thorized Mexican immigrants in the United States
more than doubled between :,,c and :ccc (with
most of that growth after :,,¡), and has continued
to grow strongly in the new century.
Is NAFTA, then, responsible for this increase in
migration, as some of its critics had predicted? I do
not believe so. The analysis points instead to a
picture in which the financial crises and restruc-
turing in Mexico that both preceded and followed
the trade agreement’s enactment, the continuing
inability of Mexican job creation efforts to keep up
with the million or more new workers entering the
Mexican labor force annually, the booming U.S.
economy, and the strong migration networks tying
the two countries have had a far more powerful
effect on migration than NAFTA.
The overarching lesson from the analysis is clear:
NAFTA-like free trade and investment agreements
neither neutralize nor cause the forces that drive
people to migrate. NAFTA has neither rescued nor
gutted the Mexican economy, and net changes in
employment during a short but eventful ten years
have not been significant enough to offset the pres-
sures and incentives for migration. Policy makers,
then, should not expect free-trade agreements to
“solve” migration problems. The economic and
social realities that drive migration will endure
through and behave independently of such agree-
ments. In the end, acknowledging these realities and
engaging in the sensible and coordinated—even
joint—management of migration may be the only
viable option.
Migration management cannot be focused exclu-
sively on controls, however. Managing the migration
spigot more effectively implies recognition and
regulation of the demand for more permanent
immigration and temporary work visas in both
countries—in other words, it requires the more
thoughtful expansion of legal migration channels
and taking joint responsibility for the immigration
process itself. This is the only way to do better in the
migration area at least until the economic growth
that trade agreements and other policy initiatives can
deliver in the longer run can modulate the demand
on both sides of the migration divide.
On NAFTA’s tenth anniversary, however, one addi-
tional question is still relevant. Are free-trade negoti-
ations and agreements a valid forum for addressing
migration per se? The NAFTA negotiators’ answer
was a very timid “maybe.” The agreement completely
ignored the larger issue of low-skill labor migration
while allowing professionals in sixty-three occupa-
tional categories to accept employment anywhere
within the NAFTA space. But such “largesse” was
apparently just a short-lived occurrence. In subse-
quent U.S. free-trade agreements with Chile, Jordan,
and Singapore, as well a Canadian agreement with
Costa Rica, the United States and Canada have
retreated from this approach. This clearly indicates
how difficult the negotiations on the movement of
“natural persons” for the purpose of employment are
likely to be in negotiations over the Free Trade
Agreement of the Americas (FTAA), the Central
American Free Trade Agreement (CAFTA), and the
World Trade Organization (WTO).
I argue that the only viable solution to fundamental
disagreements over migration in the foreseeable
future lies in bilateral and, gradually, regional coop-
eration. To the extent that NAFTA-like exercises
make such cooperation more viable—as NAFTA has
done in many ways—free-trade agreements can
become down payments on the long-term invest-
ment in “habits of cooperation.” Indeed, trade
agreements should not be seen as the last word on
either bilateral or regional relationships, but as part
of an ongoing process of engagement. To borrow
loosely from Winston Churchill’s views about the
promise of a united Europe, broad relationships
between and among neighbors are living things that
grow and adapt in response to shifting on-the-
ground conditions. NAFTA-like agreements can
thus make important contributions to the growth
40 NAFTA’s Promise and Reality
of more successful “living things,” which can in turn
set the stage for further cooperation on migration
and other deeply divisive issues.
A final observation may still be of value as the
Western Hemisphere’s leaders attempt to conclude
the Free Trade Area of the Americas’ negotiations
by the :ccs deadline. The failure to stem illegal
immigration across the U.S.-Mexican border aptly
demonstrates that people will continue to capitalize
on the economic promise of migration whether
or not their government approves. In the case of
NAFTA, sharp growth in the movement of goods
and capital has proven to be no substitute for the
movement of people. When the NAFTA partners
decide to focus more squarely on workable
approaches to managing migration, and look for
additional bargaining chips in trade or other negoti-
ations, smarter policies that work with, rather than
against, both the market mechanism and human
nature need to be an important guidepost to any
serious effort.
NAFTA’s Mobility Provisions:
Political Climate and Outcome
NAFTA put in place a common set of rules of
conduct on trade, commerce, and investment for
three countries already engaged in the exchange
of large amounts of goods and the movement of
significant numbers of people. In fact, citizens of
each party to the treaty have long made important
contributions to the economic lives of the other two
countries, from the labor of Mexican workers dating
back more than a century in the United States (and
beginning much more recently in Canadian agricul-
ture) to the exchange of executives and specialists of
multinational corporations, as well as students and
professionals of all types.
It was not clear at first how open the three parties
would be with regard to the movement of people.
The Office of the U.S. Trade Representative was at
best noncommittal on the issue, while many of its
negotiators viewed openings in migration as an
acceptable price to pay for openings in the trade
and investment environment that their principal
constituent—the U.S. business community—
demanded. Arrayed against that position were
the principal domestic agencies that led the actual
negotiations on mobility, as well as the U.S. State
Department’s Bureau of Consular Affairs. These
agencies brought to the negotiating table not only
the technical expertise necessary to conduct the
negotiations but also the sense, reinforced through
frequent consultations, that the U.S. Congress
would not support too great a widening of mobility.
Complicating the issue further were two additional
facts. Canada and the United States already had
agreed, under the Canada-United States Free Trade
Agreement of :,ïï (CUFTA), to make provision for
the movement of business persons, investors, and
about sixty classes of professionals. These individuals
could cross the border without visas for often
unspecified periods of time and were encumbered
by only a few procedures—a fact grounded in part
in the special treatment of each other’s citizens that
goes back to the middle of the nineteenth century.
In many ways, CUFTA’s mobility provisions were
thus an evolutionary step forward in a relentlessly
integrating bilateral economic bloc, as well as the
product of a United States that was more confident
and “open” than at any time since. The fact that
Canada already had in place a mature and well-
administered immigration system, that in many
ways paralleled that of the United States, also
created a climate of confidence in the Canadians’
ability to deliver on their obligations.
In contrast, bringing Mexico on board by matching
the mobility provisions of CUFTA was in many
ways revolutionary, in that Mexico had little in the
way of an immigration “system” and it was not clear
how quickly or efficiently it could meet any of its
obligations in this regard. The reality that the visa
refusal rates of Mexicans attempting to enter the
United States exceeded +c percent of applications,
Carnegie Endowment for International Peace 41
42 NAFTA’s Promise and Reality
almost exclusively on grounds that the applicant
would seek unauthorized employment in the United
States, was an additional complication.
Mexico’s initial position on labor mobility was quite
different from the views of its northern neighbors.
Mexico was interested in opening a broad dialogue
on all forms of migration between itself and its two
prospective partners. However, Mexico also made
it clear that it was not willing to jeopardize the
broader economic relationship by insisting on this
position. “Migration” was swiftly taken off of the
negotiating table by the United States when the
administration of President George H. Bush con-
cluded that proceeding with any substantial migra-
tion provisions could sink the overall agreement in
the U.S. Congress. Mexico proved compliant and
the issue became moot when Mexico removed parts
of the Mexican petroleum sector from the negoti-
ating table.
1
With the United States and Mexico having thus
agreed to protect their most politically sensitive
“sectors,” U.S. negotiators still faced a political
dilemma on mobility. The CUFTA mobility provi-
sions had created the “TC” visa, which essentially
had tracked the U.S. immigration legislation of the
time (the “H” nonimmigrant visa as it stood at the
time). The H visa category, however, had been
reconfigured dramatically in new legislation in :,,c.
Although the CUFTA provisions were grand-
fathered in, extending these provisions to Mexico
would modify U.S. law in an area where the U.S.
Congress guards its primacy with considerable zeal.
In the end, NAFTA adopted a slightly refined set of
the CUFTA mobility provisions, with one major
exception: Mexico accepted inferior treatment for its
professionals relative to that granted to the profes-
sionals of the two other parties to the agreement.
Canadian and U.S. businesspersons, investors, and
professionals were provided a rules-based system and
predictable access to the entire NAFTA space by
means of the harmonization of standards, proce-
dures, and most licensing and certification require-
ments. Mexicans, however, would still be required
to obtain a visa prior to U.S. entry (but not for
entry into Canada). More significantly, in another
bow to U.S. congressional sensitivities, Mexican
professionals would have to meet certain additional
procedural requirements, and the total number of
visas available to them could not exceed s,scc in any
year until :cc¡.
Mexico has come nowhere near that number of
entries at any time during the last ten years, for two
major reasons. First, the temporary employment of
Mexican professionals under the resulting one-year,
but nominally renewable without limit, “NAFTA”
or “TN” visa entails a significant amount of paper-
work. As a result, many U.S. immigration attorneys
of Mexican TN visa applicants advise them to make
the extra effort (and pay the additional fees
required) to obtain the H-:B visa, which “guaran-
tees” them a six-year residence. The H-:B visa holds
another distinct advantage over the TN visa: It does
not require its holders to demonstrate to the U.S.
immigration authorities that they do not intend to
abandon their Mexican residence, that is, that they
do not intend to become U.S. “immigrants”—a
requirement that becomes more problematic the
longer the worker remains in the U.S. Second, there
is no evidence to indicate that the Mexican govern-
ment has sought to publicize widely the availability
of the TN visa or argue strongly (that is, engage
the issue at the higher political levels) for removing
some or all of its unequal provisions. The best expla-
nation for this passivity is Mexican official ambiva-
lence about the TN visa’s possible acceleration of
the already substantial “flight” of talented Mexican
professionals to the United States under other visas:
a variant of the “brain drain” set of concerns.
2
A brief analysis of temporary worker flows among
the three NAFTA partners shows a significant
increase in both NAFTA and non-NAFTA workers.
Most striking is the growth of temporary Canadian
and U.S. professional workers in Mexico. With
NAFTA, the Mexican government established for
the first time a formal process for admitting foreign
Carnegie Endowment for International Peace 43
professionals, thus allowing both domestic and
foreign companies to tap the United States’ and
Canada’s formidable comparative advantage in high-
skill services (see Tables :–+).
Notably, there was hardly any discussion about
NAFTA’s modest openings in the authorized move-
ment of certain types of professionals in the NAFTA
ratification debates in the United States. Instead, a
substantial part of that debate focused on whether
NAFTA would lead to a significant decrease in the
unauthorized movement of people across the U.S.-
Mexican border. United States and Mexican govern-
ment officials echoed each other in their claims that,
by promoting economic growth in Mexico through
increased trade and foreign investment, NAFTA
would reduce the pressure for illegal immigration
across the United States’ southern border. Mexican
president Carlos Salinas Gortari repeatedly expressed
the hope that Mexico would export goods, not
people.
3
The U.S. attorney general at the time, Janet
Reno, argued:
We will not reduce the flow of illegal immigrants
until these immigrants find decent jobs, at decent
wages, in Mexico. Our best chance to reduce illegal
immigration is sustained, robust Mexican economic
growth. NAFTA will create jobs in Mexico—jobs for
Mexican workers who might otherwise cross illegally
into America.
4
The logic underlying these arguments was not new.
The idea that free trade and foreign investment can
act as development catalysts, and thus as at least
partial substitutes for migration, had given birth to
bilateral public policy cooperation as early as :,os,
Table 2. Flow of Temporary Workers and NAFTA Professionals to Canada from the United States and Mexico,
Fiscal Years 1994 and 2001
Type of Entry FY1994 FY2001
United States Mexico United States Mexico
Non-NAFTA Workers 16,791 5,207 15,613 11,011
Management 1,053 4 592 11
Professional 8,058 104 7,895 162
Skilled and Technical 4,896 28 4,879 83
Intermediate and Clerical 856 4,848 658 10,465
Elementary and Laborers 396 13 332 35
Not Stated 1,532 210 1,257 255
NAFTA Professionals 6,385 34 8,236 101
Source: Unpublished data provided by Citizenship and Immigration Canada.
Note: Numbers reflect individuals granted work authorization.
Table 1. Flow of Temporary Workers
a
and NAFTA Professionals to the United States from Canada and Mexico,
Fiscal Years 1994 and 2001
Type of Entry (Visa Category) FY1994 FY2001
Canada Mexico Canada Mexico
Non-NAFTA Workers
b
23,992 24,885 61,437 113,586
Treaty Traders and Investors (E1/E2) 3,123 278 3,704 3,354
Workers with Specialty Occupations (H1B) 3,527 3,256 16,454 14,423
Intracompany Transferees (L1) 6,482 2,632 22,838 15,723
NAFTA Professionals (TN) 24,826 11 92,915 2,571
Source: The Yearbook of Immigration Statistics, Bureau of Citizenship and Immigration Services, various years.
a. Numbers include trainees, visitors for whom employment is incidental to the purpose of their visit, spouses and children. They reflect admissions,
not individuals. In some cases, an individual may enter the country several times.
b. Includes the following temporary worker visa categories: E-1, E-2, H-1A, H-1B, H-2A, H-2B, H-3, J-1, L-1, O-1, O-2, P-1, P-2, P-3, Q-1, and R-1.
44 NAFTA’s Promise and Reality
with the establishment of the Border Industrialization
Program (BIP).
5
BIP factories along the Mexican side
of the border were allowed to import inputs tariff-free
for assembly in Mexico and then re-export finished
products to the United States, also without tariffs,
beginning the maquiladora phenomenon that would
become so significant by the beginning of the
NAFTA era. BIP was not, as it turned out, an effec-
tive substitute for migration, and some analysts argue
that it may in fact have fueled unauthorized migra-
tion to the United States.
NAFTA’s effect on trade and foreign direct invest-
ment (FDI) vastly exceeded that of BIP. Over the
eight-year period from :,,¡ to :cc:, FDI from
the United States increased about ::c percent,
from usss billion to uss:o billion (see Table ¡).
6
Yet, like BIP, NAFTA did not bring about a decrease
in migration from Mexico; in fact, there is no indi-
cation that such migration may even be cresting.
The explanation for this phenomenon is that
NAFTA’s effects on migration to date have been
caught up in the crosscurrents of several much larger
trends and forces. The first is the extensive history
of migration between the two countries, which has
bound Mexican workers to low-wage, low-value-
added labor markets in the United States. The
second is a demographic surge of new entrants into
Mexico’s labor market, which is only now beginning
to show signs of exhausting itself. The third is the
fact that NAFTA is only one part of a two-decade
restructuring of the Mexican economy that, so far,
has served only to promote migration.
Migration Networks and
the Inertia of Migration
Migration from Mexico to the United States—as
it increased throughout the twentieth century—
grew geographically dispersed and, as a social and
economic force, more permanent in nature. The
recruitment and social networks tying the two coun-
tries are by now so deeply embedded that migration
is an entrenched part of both countries’ economies
and societies. By the :,¡cs, well after most other
immigration flows to the United States had begun
to include large numbers of women, migration from
Mexico continued to involve largely the circular
movement of male Mexican laborers from the rural
states of central Mexico to the U.S. Southwest. In
the mid-:,scs, at the peak of the special Mexico-
United States agricultural labor arrangement known
as the bracero program (which lasted from about
the early :,¡cs to :,o¡), more than a half-million
Mexican workers were migrating per year to the
United States. Yet enough workers were migrating
outside the program’s parameters that the United
States deported more than + million Mexicans
between :,sc and :,ss without seriously impeding
the ability of U.S. farmers to employ Mexican labor.
Permanent Mexican immigration to the United
States, relative to the more typical pattern of repeated
short trips northward for seasonal work, was still
relatively uncommon in the mid-twentieth century
despite the fact that the United States’ admissions
system for permanent immigrants in some ways
Table 3. Flow of Temporary Workers and NAFTA Professionals to Mexico from the United States and Canada, Fiscal Years
1994 and 2001
Type of Entry FY1994
a
FY2001
United States Canada United States Canada
Non-NAFTA Workers 1,173 49 8,743 3,029
Investors 341 22 7,342 2,333
Intracompany Transferees 832 27 1,401 696
NAFTA Professionals 2,628 240 46,335 3,890
Source: Mexican National Institute of Migration (Instituto Nacional de Migración, INM).
Note: Numbers reflect work authorizations.
a. 1994 data collection began in April.
Carnegie Endowment for International Peace 45
favored Mexico (and Canada). Specifically, the First
Quota Act of :,:: established a national origin-based
quota system for the Eastern Hemisphere, while the
Western Hemisphere remained unaffected. It was not
until the :,os amendment to the Immigration and
Nationality Act that a ceiling of ::c,ccc annual slots,
effective from :,oï to :,¬ï, was designated for the
Western Hemisphere, with Mexico and Canada the
de facto beneficiaries. Permanent admissions from
Mexico yet averaged only some ¡s,ccc per year
through the :,ocs, in large part due to the preference
of Mexican workers for circular migration and rather
strict procedural U.S. rules, most notably a labor
certification requirement.
7
Thus, in :,oc Mexicans
accounted for only o percent of the total foreign-born
population in the United States.
8
Over time, these temporary and permanent move-
ments built intricate and durable networks that
generated increasing migration flows from Mexico to
the United States. In the :,scs and early :,ocs, some
bracero workers “leaked” out of the agricultural
sector and into permanent employment. Each per-
manent immigrant multiplied the potential immigra-
tion from Mexico by enabling family reunification,
by arranging jobs for family members and friends,
and, in some instances, by financing the unautho-
rized migration of other migrants and by providing
a temporary social safety net for them.
9
By the late
:,¬cs, these networks had matured and had begun to
spread. They no longer connected only agricultural
areas, but attracted migrants from other parts of
Mexico, including some urban areas, and sent them
to major cities in the United States, particularly in
the Southwest, but also in the Chicago and New
York metropolitan areas. Mexican migrants filled an
increasingly broad range of jobs, moving from the
agricultural sector into food processing, low-value-
added manufacturing, and personal services. With
the capping of certain permanent immigrant admis-
sions from the Western Hemisphere in :,•, demand
for family immigrant visas began to exceed supply.
Legal permanent immigration from Mexico con-
tinued to grow through the :,ïcs, averaging os,scc
admissions per year from :,ïc through :,ïo. With
opportunities for legal admissions remaining grossly
inadequate to meet demand, illegal immigration
from Mexico continued to grow.
In :,ïo, the U.S. Congress passed the Immigration
Reform and Control Act (IRCA). Among other
things, IRCA provided for the legalization of unau-
thorized immigrants who could show they had been
resident in the United States since January :, :,ï:,
or had worked in U.S. agriculture for a specified
time. IRCA also created a system of graduated sanc-
tions for employers who hired undocumented
immigrants “knowingly.” From :,ï, to :,,¡, almost
:.s million Mexicans received permanent residency,
: million of these thanks to IRCA’s legalization pro-
visions.
10
The law led to an initial decrease in the
stock of unauthorized immigrants, but one of its net
effects was to lay the foundation for increased immi-
gration in the future. With IRCA’s border control
provisions essentially unfunded until the mid-:,,cs
and its controversial employer sanction provisions
deeply underenforced, illegal immigration resumed.
Compounding the problem was IRCA’s failure
Table 4. Foreign Direct Investment in Mexico, 1994–2001
THOUSANDS OF DOLLARS
1994 1995 1996 1997 1998 1999 2000 2001
a
United States 4,954 5,394 5,178 7,281 5,106 6,747 10,622 15,989
Non-Maquiladora 4,127 4,203 3,959 5,878 3,196 4,303 8,039 14,585
Maquiladora 827 1,191 1,219 1,403 1,910 2,444 2,583 1,404
Other Countries 5,678 2,833 2,511 4,645 2,677 5,418 3,042 2,914
Non-Maquiladora 5,610 2,657 2,314 4,368 2,477 5,084 2,642 2,677
Maquiladora 68 175 197 278 200 334 400 237
Source: Secretariat of the Economy, Mexico (Secretaría de Economía).
a. January–September.
to make provisions to address continuing labor
demand by widening legal migration channels.
Further, the large number of now-legal Mexican
immigrants provided the foundation for increased
legal family reunification, but many also likely facili-
tated the illegal immigration of friends and family.
The integration of Mexican workers into expanding
segments of the U.S. labor market had been steadily
increasing for well over fifty years prior to NAFTA.
In contrast, NAFTA’s provisions to integrate the
goods-and-services markets of the two countries
have been in effect for only ten years. Thus, it is
no surprise that free trade has had little effect on
the twin pillars of Mexican migration to the United
States: intricate networks of social ties and labor
market interdependence.
Rapid Demographic Change
Throughout the :,ïcs and leading up to NAFTA’s
implementation, Mexico’s demographic changes
were putting increasing pressure on the sputtering
Mexican labor market. While the rates of Mexican
infant mortality and mortality in general steadily
decreased, birthrates continued to rise, peaking in
:,o+. They did not begin to decline significantly
until after :,¬¡, when the Mexican government
began aggressive family-planning initiatives.
Through the :,ïcs and early :,,cs, this demo-
graphic momentum translated into a need to absorb
an ever-increasing number of new entrants into the
workforce each year. In :,ïï, the annual increase
in the population between ages fifteen and sixty-five
years reached :.¡ million, and growth in the
working-age population plateaued at that figure
through :cc:.
11
However, this growth will gradually slow: The pop-
ulation of school-age children has begun to decrease
and will continue to do so through at least :c:c.
Mexico’s National Population Council (Consejo
Nacional de Población) estimates that the growth
in the population of economically active people—
those who are working or looking for work—has
peaked: The active workforce grew by o.¬ million
people between :,,s and :ccc, but is expected to
grow by only s., million between :ccc and :ccs,
and s.¡ million between :ccs and :c:c.
12
An ever-
larger working-age cohort has meant that even
during periods of steady growth, Mexico’s economy
has faced an uphill battle in generating jobs (and
wages) sufficient to maintain the standard of living
of its people. Only now are the cohorts of young
people entering the labor market becoming smaller,
giving the economy a chance to catch up.
To demonstrate the power of this demographic
momentum during the NAFTA era, consider that
when Mexico’s real gross domestic product (GDP)
was growing at an enviable annual rate of o.o
percent in :ccc, it was only adding about s:s,ccc
jobs in the formal sector; it added about ¬cc,ccc
in :,,,, also a good year for the national economy.
However, Mexico’s working-age population grew by
more than twice as many people in those same two
years. Although estimates of the annual growth of
the actual workforce vary, it is clear that even in its
best years, the Mexican economy left hundreds of
thousand of new entrants to the labor force (as well
as their unemployed and underemployed predeces-
sors) to choose between the informal sector and, if
they had the wherewithal, migration.
13
Also relevant to Mexico-United States migration is
Mexico’s continuing process of rural out-migration.
Mexico, like many developing and middle-income
countries, is experiencing a relentless process of rural
out-migration and urbanization—a process that
most economists and historians consider a natural
part of economic development.
14
In :,¬c, ¡:.+
percent of the Mexican population lived in rural
areas. By :,,c, this figure had dropped to :ï.¬
percent, and urbanization continued in the :,,cs,
with the rural population accounting for :o.s
percent of the total population in :,,s and :s.¡
percent in :ccc.
15
Agricultural employment grew
briefly in the late :,ïcs and early :,,cs before
46 NAFTA’s Promise and Reality
resuming its downward trend. In some cases, indi-
viduals migrated directly to the United States; others
chose migration to metropolitan areas in Mexico
instead. In the latter case, however, when Mexico’s
cities could not generate sufficient opportunities for
these migrants, many of them wound up under-
taking another migration—this time to the United
States. Both of these processes—the demographic
transition and urbanization—thus provide further
reason why it would have been unrealistic to expect
NAFTA to have reduced migration pressures in only
its first ten years of existence.
Economic Crises, Structural
Change, and Emigration
The year :,ï: marked a watershed in Mexico’s eco-
nomic history, and thus also in its migration
behavior. That year’s economic crisis and the two
decades of economic restructuring that have fol-
lowed it increased migration to the United States
substantially.
The decision to emigrate—and to return—involves a
complex array of factors. Most obvious is the avail-
ability of jobs and relative wages in Mexico and the
United States—in the latter case, as determined both
by the wages themselves and by the exchange rate.
For example, Taylor and Yúnez-Naude found that a
:c percent devaluation of the peso increased migra-
tion by :s percent in a traditional migrant-sending
village in Mexico.
16
Thus, the devaluation of the
peso and the attendant collapse of Mexican employ-
ment and wages brought about a sudden, significant
change in the migration “equilibrium” between the
two countries. Just as important, the crisis, and the
slow recovery that followed, shook confidence in the
Mexican economy, leading many Mexicans to con-
clude that migration to the United States represented
their best chance of survival and progress.
Of course, an individual’s decision to migrate is not
just shaped by his or her own earning prospects, but
also by family needs and priorities, among other
factors. The resources sent home by migrants can
serve as a form of insurance, by diversifying a
family’s sources of income, and as a source of
financial capital for families who have no access to
credit. These two functions of migration were par-
ticularly important as Mexico transitioned from a
policy of heavily protected, state-led import substi-
tution industrialization (ISI) to an open, free-market
economy.
17
This process of structural change,
almost by definition, requires and rewards risktaking
and new investment. As people lost jobs in sectors
that had previously been sheltered or subsidized by
the state—many of them moved or were forced into
the informal sector—the insurance and capital func-
tions of migration became even more important.
More and more families drew on the social networks
that tied them to the United States for assistance
with sending a family member northward.
The result of the :,ï: crash and the restructuring
that followed led to a clear increase in illegal immi-
gration. Apprehensions of would-be unauthorized
migrants along the border spiked immediately after
the :,ï: crash, both in absolute terms and per
officer hours (see Figures : and :). They declined
only in :,ï¬. That drop was in large part caused
by two factors: (:) IRCA’s legalization provisions—
especially its requirement that the applicant’s pres-
ence in the United States be continuous—resulted
in a decrease in circular border crossings; (:) IRCA’s
employer sanctions created enough initial uncer-
tainty as to whether unauthorized immigrants
would be able to find jobs as to deter, temporarily,
potential crossers. After IRCA’s effects subsided,
apprehensions (and, it is believed, illegal entries)
rebounded and continued their rising trend.
The economic changes of the :,ïcs and early :,,cs
also brought about a change in migration patterns
within Mexico. Although rural-to-urban migration
continued, Mexico City and the area around it was
no longer the nation’s chief magnet for internal
migrants. As the ISI-supported industries around
the capital disappeared and the middle class they
Carnegie Endowment for International Peace 47
48 NAFTA’s Promise and Reality
had supported receded in importance in the new
economic environment, as the medium-size cities of
Mexico’s northern border states and the maquiladora
assembly factories located in those cities became
more attractive. Nevertheless, the jobs that migrants
found in the border states were not always substi-
tutes for the jobs once found around Mexico City.
The maquiladoras employed mostly women, paid
poorly compared with many other manufacturing
employers,
18
and had extremely high worker
turnover. For energetic young men looking for a
steady job and a way up, the maquiladoras proved
no substitute for heading north.
NAFTA was clearly just another step—albeit a huge
one—in the course toward economic (and political)
liberalization that Mexico set for itself in the early
:,ïcs. It was hoped that NAFTA would be the
missing piece to complete Mexico’s new economic
puzzle, delivering employment opportunities and
consistent wage growth to Mexican workers and
curbing emigration. Many observers warned,
however, that change could not be accomplished
overnight, that NAFTA would likely be just
another step in Mexico’s necessary, but painful,
restructuring. Since restructuring had delivered
only more migration up to that point, skeptics
cautioned that it was unrealistic to expect NAFTA
to reduce international migration in the short-to-
medium term.
NAFTA’s Effect on Migration
As it turned out, the skeptics were right. By most
measures, illegal immigration to the United States
continued to increase after NAFTA came into
effect. Apprehensions along the U.S. southwestern
border also continued to increase, from about
¬cc,ccc in :,,¡ to more than :,+cc,ccc at their
peak in :cc:.
19
The population of unauthorized
Mexican immigrants grew as well: The Immigration
and Naturalization Service (INS, which since
March :cc+ became part of the Department of
Homeland Security, DHS) estimated that the
2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977
0
140,000
280,000
420,000
560,000
700,000
840,000
980,000
1,120,000
1,260,000
1,400,000
Source: Office of Immigration Statistics, Department of Homeland Security, provided in Frank Bean and B. Lindsay Lowell, Unauthorized Mexican
Immigration into the United States: IRCA, NAFTA, and Their Migration Implications. Paper commissioned for this report, on file with the author, 2003.
Figure 1. Southwest Border Officer Hours, Fiscal Years
1977–2003
OFFI CER HOURS
Figure 2. Southwest Border Apprehensions, Fiscal Years
1977–2003
APPREHENSI ONS
Carnegie Endowment for International Peace 49
number of Mexicans present in the United States
without authorization rose from : million in :,,c
to ¡.ï million in :ccc, increasing from sï.+ percent
to oï.¬ percent of the estimated total unauthorized
population in the United States.
20
According to
these estimates, ¬, percent of the growth in the
total unauthorized population between :,,c and
:ccc was due to Mexican immigrants. It is not
surprising then that the average growth of the total
unauthorized population during the decade was
higher in the years after NAFTA went into effect
than in the years before. Demographer Jeffrey
Passel obtained similar findings using different
methods, estimating that there were ¡.¬ million
unauthorized Mexican immigrants in the United
States in :ccc.
21
Meanwhile, the trend toward geographic and eco-
nomic dispersion of Mexican-born individuals in
the United States continued. The :ccc Mexican
census revealed that several states that did not have a
tradition of northward migration had begun sending
large numbers of migrants to the United States,
among them Oaxaca, Guerrero, Puebla, Hildalgo,
Veracruz, Morelos, and the state of Mexico, as well
as the capital district itself. An increasing proportion
of migrants were from urban areas.
22
Mexican
migrants also spread to nontraditional destinations
in the United States: States such as North Carolina,
Kentucky, Minnesota, and Arkansas saw increases
of their Mexican-born populations of more than
:,ccc percent between :,,c and :ccc.
23
The characteristics of migrants also appeared to
have changed. Nonrandom surveys of Mexican
migrants taken at popular border crossing points
suggested that from :,,+ to :,,¬, migrants became
less likely to have had a job in Mexico, less likely
to have migrated before, and more likely to be
undocumented. The average length of intended
stay increased as well.
24
Additionally, by the :,,cs,
only a minority of Mexican migrants surveyed
worked in agriculture—in either Mexico or the
United States. (Figures + and ¡ illustrate the recent
growth of the Mexican-born population
in the United States.)
0
1
2
3
4
5
6
7
8
9
10
2000 1990 1980 1970 1960
0
5%
10%
15%
20%
25%
30%
35%
2000 1990 1980 1970 1960
Figure 3. Growth of the Mexican-Born Population
in the United States
MI LLI ONS
Figure 4. Percentage of Growth of the Mexican-Born
Population in the United States
Source: Migration Policy Institute analysis of 2000 Census Bureau data and Campbell Gibson and Emily Lennon, Historical Census Statistics on
the Foreign-Born Population of the United States: 1850–1990 (Washington, D.C.: U.S. Census Bureau, 1999).
Free Trade and
Migration Forces
THE PESO CRI SI S AND RECOVERY
NAFTA’s entry into force was quickly overshadowed
by the “peso crisis” of :,,¡. The results of the crisis
were an immediate devaluation of the peso by more
than sc percent, a :,,o GDP that shrank o.:
percent from the previous year, an increase in out-
right urban unemployment from +.o percent in :,,¡
to o.+ percent in :,,s,
25
and a large movement of
workers into informal-sector employment. The
effects were not unlike those of the :,ï: crisis: Large
numbers of formal-sector jobs were lost, real wages
in Mexico dropped severely relative to those in the
United States, and confidence in the Mexican
economy was badly shaken. In one public opinion
poll taken during the thick of the crisis, in March
:,,s, only +s percent of those polled said they
thought that economic conditions would improve
in the next year.
26
The response of many Mexicans was similar to that
shown in the :,ï: crisis: Few jobs in Mexico, high
relative wages in the United States, and uncertain
prospects for the future added up to good reason
to head up the well-trod path northward.
Apprehensions along the border jumped in :,,s,
and continued to increase in :,,o.
Similarly, while the NAFTA negotiations probably
promoted some of the exuberant investment in
Mexico that led up to the peso crisis, the crisis
itself cannot be attributed to the trade agreement.
Further, the political ties developed in the course
of the NAFTA negotiations and the thickening
economic linkages secured by NAFTA clearly
played a strong role in encouraging the United
States to engage in the unprecedented bailout that
mitigated the crisis. If it had any effect, NAFTA
likely dampened the effects of the economic crisis.
THE BOOMI NG U. S. ECONOMY
In :,,¡, real U.S. GDP grew by ¡ percent from
the previous year, beginning a remarkable period
of sustained growth that lasted until :ccc.
27
Unemployment stood at o.: percent in :,,¡ and
descended to ¡.c percent by :ccc, the lowest
average rate since :,o,.
28
The tight labor market
provided ample jobs for low-skilled Mexican immi-
grants, making them a critical part of the robust
growth of many sectors of the U.S. economy and
playing a key role in drawing additional migrants
to the United States. Of particular note was the
increasing importance of Mexican workers in
the U.S. personal services sector—a development
that provided a strong indicator that the NAFTA-
abetted increase in the trade of goods and high-
skill, high-value-added services was not going
to provide an adequate substitute for migration.
Surprisingly to some, however, the :ccc downturn
in the U.S. economy, exacerbated by the attacks of
September ::, :cc:, did not bring about an observ-
able decrease in Mexican unauthorized immigration
to the United States. Not only has the population
of Mexican-born individuals in the United States
not declined, but other indicators of the size of
that population, such as remittances and Current
Population Survey-based estimates of the number
of Mexicans in the United States, have continued
to rise. Furthermore, although apprehensions along
the border dropped in :cc:, possibly indicating
decreased illegal migration inflows, deaths of migrants
along the border have remained tragically frequent.
One way to reconcile the increase in the size of the
Mexican-born population in the United States with
the decrease in apprehensions at the border is to
speculate that the decline in the apprehension rate
reflects primarily a decline in circular crossings, as
migrants already in the United States postpone trips
home because they fear challenging the heavily aug-
mented U.S. border security. Also, while the U.S.
economy has struggled, the Mexican economy has
also been hurt through its close links to the United
50 NAFTA’s Promise and Reality
States, giving migrants little incentive to return to
their home country. According to a recent Pew
Hispanic Center study, Mexican-American workers
seemed to have suffered the lowest percent growth in
unemployment in the United States from September
:ccc to October :cc: (:+ percent); by comparison,
certain other groups in the U.S. labor pool experi-
enced increases as high as +c percent or more.
29
Employment prospects for Mexicans in the United
States have remained robust despite the most recent
lapse in the U.S. economy, a fact that may have
encouraged immigrants from Mexico to remain.
CHANGES I N BORDER ENFORCEMENT
Beginning in :,,+, the U.S. Border Patrol began a
series of “concentrated border enforcement” exercises.
Under this strategy, line patrols were drastically
increased in high-traffic crossing areas, most of
them in urban settings. The strategy sought to make
crossing illegally as difficult and costly as possible
by closing off the easiest routes. As noted, it has
succeeded in making crossing more difficult, as
evidenced by the increased use of “coyotes” (people-
smugglers) higher smuggling fees, and the increased
deaths of unauthorized migrants in remote areas
along the border. However, there is no evidence that
illegal immigration from Mexico has slowed as a
result of the enhanced enforcement.
30
Instead, border
enforcement seems to have reinforced the trend away
from circular migration and toward longer stays in
the United States, in turn prompting more women
and children to migrate to join men working there.
NAFTA, MEXI CAN AGRI CULTURE,
AND RURAL OUT- MI GRATI ON
31
The hope that exports of high-value fruits and
vegetables would bring more employment to rural
Mexico was balanced by the fear that imports from
the United States would swamp Mexico’s produc-
tion of grain, particularly maize. Maize is a labor-
intensive staple crop in Mexico, but Mexican
farmers produce it far less efficiently than their U.S.
counterparts. In regard to the Mexican workforce, it
was feared that open trade would generate intense
labor displacement in the agricultural sector and
additional migration from rural areas—with many
of those migrants ending up in the United States.
A :cc+ study by J. Edward Taylor and George Dyer
commissioned for this report, using data from the
Mexico National Rural Household Survey, shows
that NAFTA did not slow migration from rural areas.
Although Mexican exports of fruits and vegetables
increased considerably after NAFTA was imple-
mented, generating additional employment, employ-
ment in the agricultural sector declined overall.
Migration from many rural communities accelerated,
and less of that migration went to other rural areas
in Mexico. In fact, an increasing proportion of that
migration found its way to the United States: Thirty
percent of migrants from rural Mexico were in the
United States in :cc:, versus :, percent in :,,¡.
From :,ïc to :,,¡, migration from the surveyed rural
communities to the United States increased by ,s
percent. By :cc:, migration to the United States
was ¡s: percent higher than in :,ïc (see Figure s).
Carnegie Endowment for International Peace 51
0
100
200
300
400
500
600
2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980
Source: Analysis of data from Mexico National Rural Household Survey of 2002, in J.
Edward Taylor and George Dyer, NAFTA, Trade, and Migration. Paper commissioned
for this report, on file with the author, 2003.
Figure 5. Migration from Rural Mexico to the United States, 1980–2002
HOUSEHOLD MEMBERS: 1 980=1 00
52 NAFTA’s Promise and Reality
NAFTA does not appear to be the culprit in this
acceleration of rural out-migration, however. Taylor
and Dyer found no indication that NAFTA created
any sort of “break point” in the growth of migration
from rural areas.
32
Rather, migration from rural
Mexico to the United States had been accelerating
well before the onset of NAFTA, and the trend
continued afterward. Further, while the expected
increase in imports in corn and other grains from
the United States occurred, Mexican corn produc-
tion has not been gutted. In fact, annual corn pro-
duction averaged about :ï.+ million tons from :,,s
to :cc:, almost exactly what it was in the years
immediately prior to NAFTA. Neither has there
been an observable shift in production between
rain-fed, largely subsistence farms and more com-
mercial, irrigated farms.
33
In fact, even as agricul-
tural prices dropped and Mexico’s trade deficit in
agricultural goods with the United States widened
after NAFTA, Mexico’s agricultural GDP increased.
That growth, however, was slower than the growth
of GDP as a whole with two exceptions: In :,,¡
and :cc:, overall GDP shrank. (Much of the growth
in agriculture was in labor-intensive fruit and veg-
etable crops in the northern and western states of
Mexico, where exports of many types of fruits and
vegetables more than doubled.)
The gains in the value of Mexican agriculture were
accompanied, however, by a seemingly paradoxical
decline in employment in the Mexican agricultural
sector, from ï.: million jobs in :,,+ to o.ï million
in :cc:.
34
A number of factors besides NAFTA
were at work, however. The first, and one that is
often overlooked, is the natural, perhaps inevitable,
process of rural-to-urban movement that all coun-
tries experience as their economies advance. The
share of agricultural workers as a proportion of
Mexico’s workforce has declined steadily, from over
sc percent in :,oc, to +o percent in :,ïc, to less
than :s percent and falling since :,,s.
35
The second
factor is the continued reform of Mexican agricul-
tural policy. Reforms of the ejido system of
landownership that began in :,,: have allowed
land sales and rentals and have been accompanied
by cuts and changes in the structure of agricultural
subsidies. Both changes have encouraged increased
productivity and production, but not always in
ways that have resulted in greater agricultural
employment or have encouraged rural people
to stay put.
Thus, NAFTA has played only a minor role in the
continuing acceleration of rural outmigration
during the decade since its enactment. The choice of
whether to migrate within Mexico or to the United
States, however, has been shaped by the larger and
more structural general migration forces outlined in
this essay, and by the unavailability and low quality
of jobs in Mexico’s cities.
URBAN EMPLOYMENT AND NAFTA: THE RI SE
OF THE MAQUI LADORAS AND THE I NFORMAL
SECTOR
The crises of :,ï: and :,,¡ were characterized by
the decimation of salaried jobs in the formal sector
and the growth in jobs in the informal sector—
self-employment, jobs in small enterprises, and jobs
without benefits. Employment in the formal sector
has risen and fallen with the Mexican economy.
Until :,,s, employment in informal-sector jobs
grew faster than employment in general. The sus-
tained economic growth of the late :,,cs brought
about an increase in the proportion of workers in
formal jobs, but many of these gains have been lost
in the downturn of the past three years.
Significantly, a substantial minority of the formal-
sector jobs gained—and lost—following enactment
of NAFTA have been in the maquiladora assembly
industry.
36
Both informal employment and
maquiladora jobs are typically poor substitutes
for international migration. Average productivity
(and thus wages) in the informal sector is very low.
Migrant remittances are an essential source of
capital for many small enterprises, meaning that
the informal sector and migration are often comple-
ments, not substitutes. Likewise, wages in the
maquiladoras are low, turnover is high, and workers
tend to be young and, until recently, overwhelm-
ingly female (in :cc:, for the first time, the majority
of recorded maquiladora workers were men), which
means that the energetic and ambitious bypass or do
not stay long in maquiladora jobs.
Thanks in part to increases in foreign investment
and manufacturing exports brought about by
NAFTA, as well as social security reforms, informal-
sector employment declined in the initial period
following enactment, along with open unemploy-
ment. By one indicator, unemployment and
informal employment together fell from a high
of s+ percent of the workforce in :,,s to a low of
¡¡ percent in :ccc, only to climb to ¡¬ percent in
:cc+.
37
Both rates remain higher than those prior
to the :,,s crisis, however.
Although the manufacturing sector in general was
hit harder by the :,,s crisis than the maquiladora
subsector, employment in non-maquiladora manu-
facturing recovered strongly on the back of export
growth, with employment increasing :c percent
between its :,,s trough and :ccc peak; maquiladora
employment roughly doubled in the same period.
In the new century, it appears that the maquiladora
sector may be in decline. The combination of the eco-
nomic downturn, competition from China and other
low-wage countries, and the loss, due to NAFTA, of
some of the maquiladoras’ preferential tariff treatment
has contributed to a level of employment that, in
mid-:cc+, was down :, percent from the sector’s :ccc
peak, in contrast to non-maquiladora manufacturing
employment, which was down ::.s percent.
NAFTA and Migration:
Promise and Reality
In terms of its effects on illegal migration, NAFTA
has been cruel to both its most vocal critics and
its most ardent proponents. It has not decimated
Mexican employment, but it has not led to dramatic
job and wage growth. If anything, it has shifted the
Mexican economy slightly toward greater formal-
sector employment, leading one to believe that
Mexico’s disappointing economic performance in
the past ten years may well have been much worse
without NAFTA.
Migration from Mexico to the United States, both
legal and illegal, has continued to grow. In the
ten years that NAFTA has been in effect, vastly
expanded investment in Mexico and regional
trade in goods has not reduced the movement
of people—albeit for reasons that probably have
as much to do with conditions in the United States
as with those in Mexico. The fairest conclusion
may be that, ultimately, NAFTA’s economic effects
have been dwarfed by much more powerful and
enduring forces: robust demand for Mexican
workers in the United States, enduring and deeply
rooted social networks that promote migration,
a demographic boom that is still several steps
ahead of the employment creation capabilities
of the Mexican economy, and an economy that,
like those of many developing countries, has,
over the past two decades, suffered repeated grave
crises and a painful process of readjustment.
Carnegie Endowment for International Peace 53
Looking Ahead
The “age” of selling free-trade agreements to skep-
tical policy makers and mass publics by claiming that
they will reduce illegal immigration may have passed.
Yet there are cases in which a different model of
regional integration has reduced migration pressures
enormously. This model, however, goes beyond just
free trade. When Greece, Spain, and Portugal joined
the European Union (EU), for example, the opening
in labor mobility did not bring about a rush of new
migration. This nonevent occurred despite a nearly
three-decade history of labor migration to the EU
from all three countries. However, the process of
joining the EU involves much more than opening to
free trade. It is both preceded and followed by exten-
sive EU investments in the social and physical infra-
structure of candidate and new member states, as
well as by massive annual investments in the member
states’ agricultural sectors. This last investment alone
consumes nearly half the European Commission’s
total budget. Furthermore, the EU integration
concept mandates extensive economic and political
reforms that enhance the newcomers’ stability and
prepares them to take better advantage of the
benefits of membership.
The EU’s model of economic and political integra-
tion seems unlikely to be duplicated elsewhere in the
near future. In light of the failures of both free trade
and unilateral border controls to “solve” the problem
of illegal immigration, only one other major option
seems open: substituting legal, regulated, safe, and
orderly migration for the current system of illegal,
unregulated, and disorderly migration. The perversity
of the status quo becomes starker when one realizes
that in effect the sovereign prerogative of states to
make immigration decisions to individual migrants
and organized smuggling networks is surrendered.
The alternative calls for engaging in a process of using
further openings in permanent immigration and sub-
stantial numbers of legal temporary work visas to
satisfy a much greater proportion of the developed
economies’ demand for additional foreign labor and
the less developed economies’ interest in easier access
to the labor markets of the more developed world.
In many ways, the political ties the United States
and Mexico developed in the course of negotiating
NAFTA helped to open a number of dialogues on
migration management between the two countries
that began soon after the agreement’s entry into force.
These dialogues dealt with important but often
procedural issues at first, but gained in both depth
and intensity following the elections of Vicente Fox
Quesada and George W. Bush. The momentum dissi-
pated, however, soon after the terrorist attacks of :cc:
and the subsequent shift in U.S. political attention
and interest. However, the negotiations’ central con-
cepts of regularizing the presence of unauthorized
immigrants, offering Mexico much broader access to
permanent and temporary U.S. visas, and taking joint
responsibility for the management of the common
border live on in the continued interest of several key
U.S. lawmakers who have proposed a variety of new
legislative schemes in this area.
38
In the present climate, significant migration agree-
ments, if they are to happen at all, will most likely
happen outside the explicit context of trade accords.
Although the mobility of businesspersons and
investors under trade accords may no longer be con-
troversial, the employment of foreigners at various
levels of skill, education, and experience is a very
difficult political issue for most developed societies.
The “toxicity” of going beyond the narrowest possible
areas of mobility has been playing itself out for two
years now in the inability of the governing coalition
in Germany to pass its immigration reform legisla-
tion, and was felt again most recently in the United
States. After approving trade pacts with Chile and
Singapore that contained labor mobility provisions
far more limited than those in NAFTA,
39
the U.S.
Senate passed a nonbinding resolution stating that
“trade agreements are not the appropriate vehicle for
enacting immigration-related laws or modifying
current immigration policy,” and that “future trade
agreements to which the United States is a party…
should not contain immigration-related provisions.”
40
54 NAFTA’s Promise and Reality
Canada, for its part, has also been cautious in
engaging other countries in mobility agreements
similar to the one it negotiated with Mexico under
NAFTA. Canada’s :,,¬ free-trade agreement with
Chile made NAFTA-like provisions for the tempo-
rary employment of professionals, but its :cc:
agreement with Costa Rica only provided for the
temporary entry of business visitors and for the
employment of intracompany transferees. However,
Canada has continued a somewhat productive
dialogue with Mexico on labor migration: It signed
a :cc: letter of intent stating its intention to expand
the small agricultural guest worker program it
has had with Mexico since :,¬¡.
In sum, both the United States and Canada have
mapped generally similar paths on migration since
NAFTA. They have made few commitments
regarding the ability of foreigners to get access to
their respective domestic labor markets through
trade agreements, while at the same time running
fairly liberal “unilateral” programs for the temporary
entry and employment of people from all nations
and continuing to engage Mexico on migration
matters from time to time.
One could take from this analysis the lesson that
migration agreements cannot be naturally accommo-
dated within free trade negotiations. In many ways,
this is counter-intuitive. After all, it is during trade
negotiations that the negotiating position of many
developing states may be the strongest. The collapse
of the Cancún WTO ministerial in September :cc+
certainly demonstrates this last point. Furthermore,
NAFTA’s brief history shows that free trade cannot
serve as a substitute for labor migration, at least
in the short term—and that loading a free-trade
agreement with mobility provisions beyond those
appearing in NAFTA will make the agreement
politically unpalatable to developed countries. The
lack of substantial progress so far in the WTO
discussion of trade-in-services (which could come
to include mobility issues that go well beyond those
of NAFTA) points to a trend toward more modest
commitments on the mobility of persons.
Regardless of the political moment, there remain
compelling reasons why migration and free-trade
agreements will continue to be thought of—if not
acted on—in tandem. First, from a purely economic
perspective, there is little difference between trade in
goods and trade in services, and much trade in serv-
ices requires the movement of significant numbers
of people. Furthermore, economists argue that the
potential global economic gains from even a modest
increase in the movement of workers can be much
larger than any further increases in the movements
of goods.
41
These gains only grow as the spectrum of
skills and occupations eligible to move are expanded
to allow countries to exploit their comparative advan-
tage in services. More convincingly, perhaps, this
potential for economic gains has serious practical
effects. As NAFTA aptly demonstrates, the rich coun-
tries’ voracious demand for workers and the poorer
countries’ ample supply create powerful transnational
linkages between labor markets, both because of and
despite official policy. The last ten years clearly
demonstrated the durable need for Mexicans in low-
value-added manufacturing and low-skill services in
the United States, but the role of Indian information
technology and communication workers (temporary
and otherwise) in the United States in the :,,cs pro-
vides an equally potent example. Once worker and
employer have begun to turn the potential economic
gains of migration into a profitable reality, govern-
ments face an uphill battle in disentangling them.
Nor is this analysis unique to the NAFTA partner-
ship. Within the FTAA zone, Mexico, Argentina,
Brazil, and Chile, among others, are all significant
destinations for workers from other countries, as
well as regional hubs for business. Often, just as
in the case of migration from Mexico to the United
States, the driving force is not the government’s
legal approach to the movement of people, but the
demands of the economy and the existence of estab-
lished migration networks. Regional agreements that
set the terms for the ongoing exchange of business
visitors and several types of workers among all the
countries of a region may thus be worth pursuing
on their own merit—independently of, or parallel
Carnegie Endowment for International Peace 55
to, negotiations on trade and commercial pacts.
The United States and Canada already have extensive
provisions for the temporary employment of foreign
workers outside the context of international agree-
ments. As negotiations continue on CAFTA and
FTAA, and in the WTO, as well as depending on
the level of the developed world’s interest in gaining
access to foreign markets, it may make sense for
developed countries to use limited and regulated
access to their labor markets as a bargaining chip.
The bargain can be seemingly simple: Developed
countries desire concessions from developing coun-
tries in opening their service sectors that parallel the
concessions developing countries want from devel-
oped countries in regard to the movement of people.
The United States, Britain, and many other devel-
oped countries have large surpluses in net exports of
high-skill services, reflecting their large comparative
advantage in telecommunications, energy, manage-
ment, and financial services. Yet developing country
protectionism, among other factors, holds services to
about :c percent of all world trade. The ability of
Indian information technology and communication
professionals to work in the United States or of
Brazilian construction companies to operate in the
United States using a certain proportion of Brazilian
workers might thus be exchanged for increased access
to the telecommunications or financial services
sectors of these countries by U.S. firms. This type of
“trade in services” quid pro quo could be tested first
in the U.S.-Mexican context: An agreement on tem-
porary movement of low-skill workers from Mexico
to the United States and U.S. access to Mexico’s
petroleum sector were first discussed together in
NAFTA negotiations, and both countries remain
conscious of these two items’ power as bargaining
chips.
42
Other, equally sensitive bilateral irritants will
also have to be included in any real bargain, particu-
larly ones that involve the taking of joint responsi-
bility for the management of the common border in
ways that effectively address each other’s concerns
about drugs, organized crime, and, first and foremost
among U.S. interests at this time, security.
Such arrangements will have to deal with the
inevitable—and valid—concern that permitting
increased movement of labor could affect relative
wages in sensitive social sectors in developed countries.
With stronger social policies and proper regulation
and enforcement, however, these fears could go the
way of NAFTA’s “giant sucking sound” famously
evoked in :,,¡ by Ross Perot. If anything, some of the
United States’ recent experience shows that temporary
worker admissions can function much as one would
want them to: Applications by U.S. employers for
foreign workers in the high-technology sector climbed
dramatically in the late :,,cs, when there was enor-
mous demand for such workers, but have declined
sharply since the :ccc downturn. In other words, the
use of temporary foreign employees responded to
market forces, and foreign workers employed properly
by U.S. employers did not undercut U.S. workers as
the demand for technical skills ebbed.
43
Still left unanswered is the question of how to nego-
tiate agreements on the movement of workers. In
the case of the EU, the nearly completely free move-
ment of people takes place in the context of very
deep regional political-economic integration.
Another approach, now slowly taking shape in the
Caribbean Community, uses the regional trade
agreements’ existing commitments on the mobility
of business visitors and high-skill professionals as a
starting point from which to extend mobility to
other labor market sectors by gradually eliminating
administrative barriers and making less-skilled
workers eligible to move. This, in effect, was also
the approach proposed by India in the WTO’s
Doha Development Round, to a tepid reception.
A final approach would not tie migration measures
directly to trade agreements. Rather, it would use
the resulting regional or subregional economic inte-
gration and cooperative spirit as the context within
which to negotiate subsequent mobility agreements.
Similarly, a successfully concluded trade pact could
be used as a political forum for a regional discourse
that concluded with an understanding on migra-
tion. The countries of the South American customs
union Mercosur, which experience significant levels
56 NAFTA’s Promise and Reality
of intraregional illegal migration, has used the ties
built though their trading bloc to negotiate the reg-
ularization of unauthorized immigrants.
The most reasonable thing to assume at this time,
however, is that neither the FTAA nor CAFTA nego-
tiations, when completed, will look much different
on mobility issues from the precedent set by the U.S.
agreements with Chile and Singapore. Moreover,
absent a sharp turnaround in the U.S. economy,
U.S. negotiators may even seek to eliminate any ref-
erence to professional entries under the resulting
accords. The direction the United States might wish
to follow, however, is not likely to be as easily
“imposed” on the other parties as it was on
Singapore or Chile. The stated intent of Brazil to
obtain larger concessions from the United States in
FTAA negotiations, and the tough stance taken by
developing countries in general at the September
:cc+ WTO negotiations in Cancún, are indications
that there may yet be new developments in the
mobility of people associated with trade in services.
44
Epilogue
This brief evaluation of “NAFTA at Ten” allows us
to bury some false ideas and suggest some new pos-
sibilities. The idea that free trade by itself can bring
about changes that can control existing migration
flows in the short-to-medium term is clearly wrong.
Equally erroneous is the fear that trade agreements
will spur massive movements of people.
International trade is only one of many economic
forces affecting migration, and migration itself has
deep roots in society. Migration and economic
integration have not met for the last time, however.
The movement of people is an economic force
with a power potentially far exceeding that of the
movement of goods or capital, and trade agreements
will continue to be a forum for discussing—if not
concluding—cooperative agreements on the
management of migration.
NOTES
1 More information on Mexican expectations leading up to
NAFTA is provided in Francisco Alba, Elusive and Changing
Mexican Expectations Regarding NAFTA’s Implications on
Migration. Paper commissioned for this report, on file with
the author, :cc+.
2 A vivid example of Mexican officials’ ambivalence toward the
TN visa is the cases of actuaries and plant pathologists.
Canadians and Americans in the NAFTA Mobility Working
Group have waited for several years for Mexican representa-
tives to approve expanding the TN occupational list to
include these two categories.
3 Demetrios G. Papademetriou, “New Directions for Managing
U.S.-Mexican Migration,” Migration, Free Trade and Regional
Integration in North America (Paris: OECD, :,,ï).
4 “Attorney General Reno Sees NAFTA Benefits in Creating
Jobs, Stopping Drugs and Illegal Immigration from Mexico”
(press release). The White House, Washington, D.C., October
::, :,,+, available at www.ibiblio.org/pub/archives/
whitehouse-papers/:,,+/Oct/NAFTA-Notes-:,,+-:c-::.
5 The BIP was created partially in response to the end of the
United States’ bracero program, which had allowed Mexicans
to work seasonally on U.S. farms and had promoted the
recruitment of Mexican workers by U.S. employers.
6 Interestingly, however, FDI from all other countries fell by
almost sc percent in :,,s and has never fully recovered,
perhaps an indication that the United States’ NAFTA advan-
tage displaced capital from other countries. The special rela-
tionship between the United States and Mexico may be
diluted, though, through Mexico’s signing of free-trade
agreements with multistate groupings elsewhere in Latin
America, the European Union, the European Free Trade
Association states, and Israel; Mexico even has an agreement
pending with Japan. Correspondingly, Mexico’s advantageous
access to U.S. markets is also being diluted, by the United
States’ ongoing free-trade agreement negotiations and by
China’s accession to the WTO.
7 In most instances, U.S. employers must obtain labor
certification for those employment-based immigrants and
other foreign workers they wish to hire. This process requires
an employer to demonstrate that the foreigner’s presence will
not adversely affect U.S. workers.
8 “Ten Source Countries with the Largest Populations in the
United States as Percentages of the Total Foreign-Born
Population: :,oc” (graph). (Washington D.C.: Migration
Information Source, Migration Policy Institute), available at
www.migrationinformation.org.
9 For more information on these topics, see Binational Study on
Migration, Binational Study on Migration between Mexico and
the United States (Mexico City, Mexico: Binational Study on
Migration, :,,¬); Douglas Massey, Jorge Durand, Nolan
Malone, and Alfred Buch, Beyond Smoke and Mirrors: Mexican
Immigration in an Era of Economic Integration (New York:
Russell Sage Foundation, :cc:); Douglas Massey, Joaquín
Arango, Graeme Hugo, Ali Kouaouci, Adela Pellegrino, and J.
Edward Taylor, Worlds in Motion, (Oxford, England:
Carnegie Endowment for International Peace 57
58 NAFTA’s Promise and Reality
Clarendon Press, :,,ï); Douglas Massey, Rafael Alarcón, Jorge
Durand, and Humberto González, Return to Atzlan: The
Social Process of International Migration from Western México
(Berkeley, Calif.: University of California Press, :,ï¬).
10 Bureau of Citizenship and Immigration Services, The
Yearbook of Immigration Statistics (Washington, D.C.: U.S.
Department of Homeland Security, various years).
11 Consejo Nacional de Población, La Población de México en el
Nuevo Siglo (Mexico City, Mexico: Consejo Nacional de
Población, :cc:). See also U.S.-Mexico Migration Panel,
Mexico-U.S. Migration: A Shared Responsibility (Washington,
D.C.: Carnegie Endowment, :cc:).
12 Consejo Nacional de Población, Situación Demográfica de
México,  (Mexico City, Mexico: Consejo Nacional de
Población, :ccc).
13 Employment figures for formal employment are for tempo-
rary and permanent workers covered by the national social
security agency, as reported by the National Institute of
Statistics, Geography, and Informatics (Instituto Nacional de
Estadística Geografía e Informática, INEGI).
14 For further discussion see J. Edward Taylor and George
Dyer, NAFTA, Trade, and Migration. Paper commissioned
for this report, on file with the author, :cc+.
15 INEGI, “Porcentaje de Población por Tamaño de Localidad,
:,sc-:ccc” (table). (Mexico City, Mexico: INEGI).
16 J. Edward Taylor, and Antonio Yúnez-Naude, “Agricultural
Policy and the Village Economy: A Computable General
Equilibrium Analysis,” in Roger Rose, Carolyn Tanner, and
Margot A. Bellamy, eds., Issues in Agricultural Competitiveness
(Aldershot, England: Dartmouth, :,,¬), pp. :,ï‒+c¡.
17 Using an ISI policy, Mexico sought to develop local “infant”
industries by protecting them from competition from imports
through tariffs, import quotas, exchange rate controls, subsi-
dies, and preferential treatment of capital imports. Mexico’s
intense policy of ISI began soon after World War II and deliv-
ered fairly steady growth, but it began to falter in the mid-
:,¬cs, when mounting debt, inflation, and capital flight forced
the devaluation of the peso from the peg it had held with the
dollar since :,s¡. However, rising oil prices sustained ISI in
Mexico through :,ï:, when, following a drop in oil prices, the
Mexican economy went into full-blown financial crisis.
18 Carlos Salas and Eduardo Zepeda, Wages and Productivity in
Mexico: Theoretical and Empirical Issues, (Table :). Paper
commissioned for this report, on file with the author, :cc+.
19 This period also saw a simultaneous reduction in the
number of apprehensions per officer hour of border enforce-
ment, a measure that is often used to account for changes in
apprehension statistics, themselves caused by changes in
resources dedicated to enforcement rather than flows across
the border. This indicator should not be interpreted as a reli-
able sign that the entry of undocumented immigrants into
the United States was decreasing, or that the pressure to
migrate had decreased. Beginning in :,,+, officer hours were
greatly increased in certain high-traffic urban areas under the
Immigration and Naturalization Service’s “Enhanced Border
Enforcement Strategy.” The program yielded an initial
upsurge both in apprehensions per officer hour and in the
probability of being intercepted, but this effect soon sub-
sided. It appears that migrants adapted by using less tran-
sited, albeit more dangerous, entry routes and by turning
more systematically to “coyotes” (immigrant smugglers).
Additional reading on this topic is provided in Frank Bean
and B. Lindsay Lowell, Unauthorized Mexican Migration into
the United States: IRCA, NAFTA, and Their Migration
Implications. Paper commissioned for this report, on file with
the author, :cc+.
20 Office of Policy and Planning, Estimates of the Unauthorized
Immigrant Population Residing in the U.S.:  to 
(Washington, D.C.: Bureau of Citizenship and Immigration
Services, :cc+).
21 Jeffrey Passel, New Estimates of the Undocumented Population
in the United States (Washington, D.C.: Migration
Information Source, Migration Policy Institute, :cc:),
available at www.migrationinformation.org.
22 La Población de México en el Nuevo Siglo (see note :c).
23 Migration Information Source, “States and Regions Ranked
by Percent Change of the Foreign Born: :,,c and :ccc”
(table). (Washington, D.C.: Migration Policy Institute, n.d.),
available at www.migrationinformation.org.
24 Results from the Northern Border Migration Survey pre-
sented in Situación Demográfica de México (see note ::).
25 For observers used to interpreting unemployment figures
from developed countries, Mexican unemployment figures
will appear to underestimate unemployment by a large
margin. This is in part because outright unemployment is a
luxury unaffordable to Mexico’s poor, who take refuge in
informal employment when formal-sector jobs are not avail-
able. Additional reading on the effects of the peso crisis on
the Mexican economy and population is provided in J.
Edward Taylor and George Dyer, NAFTA, Trade, and
Migration. Paper commissioned for this report, on file with
the author, :cc+. See also Sebastian Edwards and Moisés
Naím. Mexico : Anatomy of an Emerging-Market Crash
(Washington, D.C.: Carnegie Endowment for International
Peace, :,,¬).
26 Peter H. Smith, “Political Dimensions of the Peso Crisis,” in
Sebastian Edwards and Moisés Naím, eds., Mexico :
Anatomy of an Emerging-Market Crash (Washington, D.C.:
Carnegie Endowment for International Peace, :,,¬), pp. +:‒s+.
27 Bureau of Economic Analysis, “Gross Domestic Product:
Percent Change from Preceding Period” (table).
(Washington, D.C.: U.S. Department of Commerce,
:cc+), available at www.bea.doc.gov/bea/dn/gdpchg.xls.
28 Bureau of Labor Statistics, “Employment Status of the
Civilian Noninstitutional Population, :,¡c to Date” (table),
in Bureau of Labor Statistics, Household Data Annual
Averages (Washington, D.C.: U.S. Department of Labor,
:cc+), available at www.bls.gov/cps/cpsaat1.pdf.
29 Arturo Gonzalez, The Impact of the / Economic
Recession on Hispanic Workers: A Cross-Sectional Comparison
of Three Generations (Washington, D.C.: Pew Hispanic
Center, :cc:).
30 Unauthorized Mexican Migration into the United States (see
note :ï).
31 The analysis in this section draws heavily on NAFTA, Trade,
and Migration (see note :+).
Carnegie Endowment for International Peace 59
32 Cuts in agricultural tariffs under NAFTA were to be phased
in over a fourteen-year period. However, on many commodi-
ties, including maize, the Mexican government has exceeded
its commitments and declined to exercise the option to
impose “tariff rate quotas.”
33 Historical series data provided by Mexico’s Servicio de
Información Estadística Agroalimentaria y Pesqueria (SIAP,
Statistical Information Service of Food, Agriculture, and
Fisheries) of the Secretaria de Agricultura, Ganaderia,
Desarrollo Rural, Pesqueria, y Alimentación (SAGARPA,
Secretary of Agriculture, Livestock, Rural Development,
Fisheries, and Nutrition).
34 Unrevised and unpublished data provided by the Mexican
National Institute of Statistics, Geography, and Informatics
(Instituto Nacional de y Estadística, Geografia, e
Informática, INEGI).
35 Michele Veeman, Terence Veeman, and Ryan Hoskins,
“NAFTA and Agriculture: Challenges for Trade and Policy,”
in Edward J. Chambers and Peter H. Smith, eds., NAFTA in
the New Millennium (La Jolla, Calif.: Center for U.S.-
Mexican Studies, University of California, San Diego, :cc:),
pp. +cs‒:,.
36 NAFTA did not directly benefit the maquiladora sector.
Maquiladoras exporting to the United States were exempt
from tariffs prior to NAFTA, while some of the privileges
accorded to the sector were dismantled by NAFTA by the
late :,,cs, contributing to the sector’s woes.
37 Percentage of workers openly unemployed plus those
employed but not receiving a wage or salary. The author’s cal-
culations are derived from data from Banco de Información
Económica, “Otros Indicadores de Empleo y Desempleo
Trimestral” (table). (Mexico City, Mexico: INEGI, n.d.).
38 For more information on bilateral migration negotiations, see
Francisco Alba, Elusive and Changing Mexican Expectations
Regarding NAFTA’s Implications on Migration. Paper commis-
sioned for this report, on file with the author, :cc+.
39 Chilean and Singaporean professionals can be employed in
the United States only under existing U.S. law and adminis-
trative procedures (the H-1B visa). No new visa categories
were created in the trade agreements with Chile and
Singapore, as had been done under NAFTA, and no admin-
istrative requirements were waived. The only notable (but
otherwise inconsequential) U.S. concession in this area was
simply to carve out a very small number of H-1B visas for
each of these two countries.
40 Senate Resolution :::, :cïth Congress, introduced July +:,
:cc+ by Senator Sessions. Daily Digest, Government
Printing Office, July +:, :cc+.
41 According to one economic modeling exercise, if in each year
developed countries allowed the temporary entry of a quota of
foreign workers equivalent to + percent of their workforce, the
world economy would gain uss:so billion per year. These
gains are about the size of the annual GDP of Indonesia or
Denmark, and are greater than those that would result from
dropping all remaining tariffs on the trade of goods in the
same model. Other models suggest that world production
could more than double in the hypothetical case of completely
“free” movement of workers. Significantly, the bulk of these
potential gains comes from the movement of low-skilled
workers. To put the first figure in perspective, in :cc: admis-
sions of new temporary workers (not including workers
staying on multiyear permits issued in previous years) into the
United States were equivalent to about c.s percent of the U.S.
labor force, while new permanent admissions equaled about
c.¬ percent of the workforce. The estimated stock of unautho-
rized immigrants in the United States in :ccc was equivalent
to about s percent of the U.S. workforce, with about two-
thirds of these immigrants being Mexican. For details see L.
Alan Winters, Terrie L. Walmsley, Zhen Kun Wang, and
Roman Grynberg, “Negotiating the Liberalisation of the
Temporary Movement of Natural Persons,” Discussion Paper
in Economics no. ï¬ (Brighton, England: Commonwealth
Secretariat, Sussex University at Brighton, :cc:), available at
www.sussex.ac.uk/Units/economics/dp/Wintersetalï¬.pdf.
42 In :cc+, the U.S. House of Representative’s Committee on
International Relations passed a nonbinding amendment to
H.R. :,sc stating, “It is the sense of the Congress… that any
accord on migration issues between the United States and
Mexico should also include an accord to open Petroleos
Mexicanos (Pemex) to investment by U.S. oil companies and
specific steps to reform Pemex’s operations to make them
more transparent and efficient.” The implied proposal was
quickly rejected by the administration of President Fox. As
of this writing, the bill is in the Senate.
43 In October :ccc, the U.S. Congress passed the American
Competitiveness in the Twenty-First Century Act (“AC21”).
The counting methodology for H-1Bs, however, has since
changed. Certain H-1B employees are now exempt from
numerical limitations, including those employed by institu-
tions of higher education related or affiliated nonprofit enti-
ties, or nonprofit or government research organizations.
44 NAFTA’s mobility provisions, modest as they are, are nonethe-
less noteworthy for their influence on other negotiations. The
WTO’s :,,¡ General Agreement on Trade in Services (GATS)
provided a multilateral framework for addressing the move-
ment of business visitors and professionals via its “Mode ¡” of
service delivery (the delivery of services through the presence
of the nationals of one country in the territory of another).
NAFTA, as the most prominent free-trade agreement being
developed at the time, was an important influence on the
architecture and language of GATS, and the influence of
both of these agreements is still very much evident in the
discussion of services in trade agreements being negotiated
today, such as CAFTA and FTAA. See Julia Nielson,
“Current Regimes for the Temporary Movement of Service
Providers: Labour Mobility in Regional Trade Agreements.”
Paper presented at the :cc: Joint WTO-World Bank
Symposium on the Movement of Natural Persons (Mode ¡)
under the GATS (Geneva: April ::‒::, :cc:), available at
www.wto.org/english/tratop_e/serv_e/symp_apr_c:_nielson1_e.doc.
Carnegie Endowment for International Peace 61
I N 1 993, THE CLI NTON ADMI NI STRATI ON
hailed the North American Free Trade Agreement
(NAFTA) as the “greenest” trade agreement ever
completed.
1
Despite this promise, NAFTA and its
parallel environmental accord remain the source
of intense debate. A decade after the agreement
entered into force, disagreements continue around
the basic facts of NAFTA, as well as whether it has
kept its pledge of promoting sustainable develop-
ment, preserving the environment, and ensuring
that environmental laws guarantee high levels of
environmental protection.
2
In :cc:, Public Citizen
dismissed the environmental provisions of NAFTA
as “meaningless.”
3
Measuring the environmental impact of trade
remains complex, despite advances that have been
made in assessment methods, underlying data,
and empirical evidence. Environmental quality
is subject to change, often unexpectedly and from
a myriad of sources. Since free trade affects the
economy indirectly and often weakly, the impact
of trade on environmental quality also tends to be
indirect and weak.
4
Despite methodological challenges in identifying
causal links, studies confirm that trade exerts two
types of pressure on the environment. First, trade can
affect environmental quality through scale impacts.
There is rarely, if ever, a linear relationship between
economic scale and environmental impacts, since the
former tends to be offset by more efficient technolo-
gies, compositional changes (for instance, from agri-
culture to the manufacturing or services sector) or the
harmonization of standards among trading partners,
all associated with trade liberalization.
5
Second, trade
rules can influence environmental policy directly, by
affecting policy on food safety, the environment, con-
servation, and other areas of domestic concern. This
second area has remained at the center of the trade
and environment agenda for more than a decade.
Despite predictions that the trading system would
become overwhelmed with trade-environment cases,
this has not occurred either under NAFTA or the
World Trade Organization (WTO). A limited
number of precedent-setting environmentally related
disputes have occurred involving NAFTA Chapter ::
investor-state disputes.
Environmental reviews of trade liberalization con-
tinue to focus on the economic sectors that are most
affected by NAFTA liberalization schedules, and
which are environmentally sensitive. These sectors
include pollution-intensive industrial and manufac-
turing sectors, as well as resource-based sectors, such
as cement, and renewable resource sectors, such as
fisheries and forestry.
During the past decade, somewhat less attention
has focused on the environmental impacts of
three
The Greenest Trade Agreement Ever?
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S COT T VAUGHAN
NAFTA’s agricultural provisions. Understanding
agricultural liberalization (or the failure to liberalize
farm trade) is important from an environmental
perspective. No other sector exhibits such a close,
symbiotic relationship as that of terrestrial farming
and the environment.
I examine some changes in U.S.-Mexican farm
trade, and focuses on three principal environmental
issues: (a) the rise in the overapplication of nitrogen,
phosphorus, and other agrochemical inputs; (b) the
depletion of groundwater due to increased crop irri-
gation; and (c) the vicious circle of poverty and
income divergence, subsistence farming, and high
rates of deforestation and changes in land use (this
third issue being the leading cause of habitat degra-
dation and loss of biological diversity in southern
Mexico).
To assess the effects that NAFTA has had on
nitrogen pollution, water scarcity, and biological
diversity losses, I examine changes in Mexico-U.S.
trade in three crop groupings—wheat, maize, and
fresh vegetables and fruit. Trade in each group has
been strongly affected by NAFTA-specific liberaliza-
tion disciplines (in contrast to what has occurred
under the WTO Agreement on Agriculture),
shifting demand patterns as a function of rising
income in some urban areas, fluctuations in drought
conditions and severity, and other factors.
Wheat. U.S. exports of wheat to Mexico have
increased by :ï: percent since :,,:. This export
increase has in turn contributed to an ïc percent
compositional shift in the production of wheat vari-
eties within Mexico’s breadbasket region, from bread
wheat to durum wheat. The production of both vari-
eties in the semiarid regions of northern Mexico is
heavily reliant on irrigation drawn primarily from
groundwater. Over the past decade, groundwater
tables have declined by approximately sc percent in
the breadbasket area of the Yaqui Valley. Durum
wheat requires greater total amounts of fertilizer
inputs in semiarid regions, compared to bread wheat.
Although Mexico’s aggregate consumption of fertil-
izers has remained roughly constant since NAFTA,
following the end of state-supported fertilizer subsi-
dies, fertilizer use has become more concentrated in
larger-scale, export-oriented farms. During the past
decade, increases in nitrogen and other chemical
loading from agrochemicals have been recorded in
groundwater in Sonora and other commercial
farming regions.
Nitrogen runoff is the largest pollution source in
Mexico, the United States, and Canada. It is also the
leading cause of eutrophication and algae blooms
affecting Mexico’s rivers and lakes, the Sea of Cortez,
and the Gulf of Mexico. The ecological effects of
nitrogen pollution tend to be greater in Mexico
than in the United States, given Mexico’s warmer
waters—which can accelerate algae blooms—and
much larger concentration of freshwater and coastal
marine biological diversity. The compositional
change from bread wheat to durum wheat can be
explained largely by structural changes consisting of
vertical integration of durum wheat with upstream
food processing. Durum wheat is used for the pro-
duction of pasta. Since enactment of NAFTA, pasta
processing has been among the largest recipients of
foreign direct investment (FDI) inflows in Mexico,
aside from the manufacturing and services sector.
Mexico’s exports of all pasta types to the United
States have increased by approximately sc percent
since NAFTA took effect.
Maize/Corn. U.S. maize exports to Mexico have
increased by :¡c percent since :,,:. Increased U.S.
imports may pose an environmental risk to tradi-
tional Mexican maize varieties. Laboratory tests
conducted in :cc: confirmed that genetically
modified corn has been introgressed in Oaxaca and
elsewhere. This introduction has occurred despite
the import ban imposed by Mexico on biotech-
nology corn seed in :,,ï. Given that Mexico is a
center of origin for more than forty maize varieties,
the risk posed by the genetic contamination of tra-
ditional varieties in biologically rich areas, such as
Oaxaca, may be of global concern. A large propor-
tion of U.S. maize imports to Mexico are used as
62 NAFTA’s Promise and Reality
grain-feed inputs for that country’s quickly
expanding livestock sector, as well as in the syrup
industry. While most livestock production in
Mexico meets rising domestic demand (reflecting
a change in diet in middle-income households
from grains to meat and processed foods), exports
to the United States of calves and cattle have also
increased since NAFTA. NAFTA has accelerated
structural changes in the maize sector by way
of deepening vertical integration with livestock
operations and the sugar industry. Environmental
pressures associated with the concentration of
large-scale confined-animal feedlot operations in
Mexico appear to resemble environmental pressures
recorded in the United States and Canada, albeit at
a lower level. Finally, a marginal increase in maize
production in the United States to serve the
Mexican market is the cause of increased environ-
mental pressures in the United States. Increased
maize exports from the United States result in an
increase of ¬¬,ccc tons of nitrogen, phosphorus,
and potassium-based loadings to U.S. waterways,
with emissions concentrated in the already heavily
polluted Mississippi River Delta.
Fresh Vegetables and Fruit. Since enactment of
NAFTA, Mexican exports of all fresh vegetables
have increased by ïc percent, and exports of fresh
fruit have increased by ,c percent. Structural
changes in Mexico’s horticulture sector have been
especially pronounced since NAFTA took effect,
although structural changes commenced with liber-
alization reforms introduced in Mexico in the :,ïcs.
On average, export-intensive horticulture farms are
larger, rely on standardized capital inputs such as
fertilizers and pesticides, specialize in single crops,
and have a far greater propensity toward irrigation,
compared to smaller farms serving the domestic
market in Mexico. Field data suggest that larger,
export-oriented farms are less sensitive to smaller,
ejido farm holdings, and use greater amounts of
groundwater irrigation per yield, compared to
smaller farms. Mexico is one of the most water-
stressed countries in the Western Hemisphere, and
its expansion of exports of fresh fruits and vegetables
is the main anthropogenic cause of this water stress.
The export of horticulture products to the United
States represents the transfer of millions of gallons
of freshwater equivalent each year. For example,
the export of tomatoes from Mexico to the United
States accounts for the equivalent transfer of approx-
imately :o: million gallons of freshwater equivalent
to the United States each year since :,,+.
Based on these limited examples, I draw the fol-
lowing three conclusions. First, there is little evi-
dence that the environmental safeguards in NAFTA
have directly improved environmental quality in the
farm sector. To date, none of the environmental
safeguards inserted in NAFTA or its environmental
side accord—the North American Agreement for
Environmental Cooperation—have been used in
any disputes involving agricultural liberalization. At
the same time, the accelerated NAFTA liberalization
schedule adopted by Mexico to phase out tariff-rate
quotas for maize has opened the maize market too
quickly to imports and related price and employ-
ment shocks. During this turbulent transitional
period, this market has increased ecological risk in
Mexico, as well as environmental damage in the
United States. Finally, the absence in NAFTA of
disciplines that can constrain farm subsidies for
maize, wheat, and other crops has led to an increase
in total subsidy payments in the United States, with
the amended :cc: Farm Act, as well as increased
subsidy payments in Mexico. Increased farm subsidy
payments have increased pricing and market fail-
ures, resulting in the overproduction of some crops,
as well as the excessive application of fertilizers and
other capital inputs, which further magnifies envi-
ronmental degradation. In addition, the pattern of
subsidy payments appears to favor large farms over
smaller ones, thereby contributing to the expansion
of subsistence farming in marginalized areas in the
southern regions of Mexico.
My second conclusion is that NAFTA has
accelerated the structural shift toward large-scale,
commercially viable, export-oriented farms.
Clearly, this restructuring began well before
Carnegie Endowment for International Peace 63
NAFTA, with the introduction of liberalization
reforms in the late :,ïcs in Mexico. However,
recalling the argument of Jeffrey Sachs and Andrew
Warner that the opening of the economy through
trade liberalization is the “sine qua non of the overall
reform process,” it is reasonable to assume that
NAFTA has both accelerated and significantly deep-
ened structural changes in Mexico.
6
In addition,
the distribution of subsidy payments has accelerated
structural changes in the grains and horticulture
sector so as to favor large-scale, export-oriented,
vertically and horizontally integrated farms. The
structural shift appears to have increased the
concentrations of nitrogen and phosphorus, water-
polluting agrochemicals used as inputs in larger-
scale farms. Export-oriented farms also appear to use
greater amounts of irrigated water inputs per yield,
compared to producers of similar products destined
for domestic markets. Since farming is the largest
consumer of freshwater by a very wide margin,
this structural shift has magnified water scarcity
in Mexico.
My third conclusion is that commercially oriented
farms have not delivered environmental benefits
associated with intensive farming. Those environ-
mental benefits typically derive from land-saving
effects associated with an increase in production
efficiency. The main reason for this failure to
deliver environmental benefits appears to be the
structure and extent of poverty and the pattern of
income divergence in southern Mexico. While com-
mercial cultivation of some crops has expanded,
downward price premiums on staples, such as
maize, has increased poverty in this region. The
average deforestation rate in the biologically rich
southern regions of Mexico has exceeded o+c,ccc
hectares per year since :,,+. The leading cause of
deforestation in Mexico remains poverty, with
slash-and-burn clearing and tree felling by poor
households in need of fuel remaining the leading
causes of forest clearing. In addition, small-scale,
rain-fed maize production has increased by :ï
percent in marginalized areas, as poor farmers
respond to falling prices.
The environmental costs of deforestation and
changes in land use in Mexico are staggering. That
country is one of the planet’s leading centers of
“megadiversity,” home to :c percent of all known
species, of which +c to sc percent are endemic.
Mexico has the world’s second-highest number
of reptile species, and ranks fourth for amphibians
and fifth for mammalian diversity in the world.
7
However, the geography of this biological diversity
coincides exactly with Mexico’s geography of
extreme poverty.
Trade theory scarcely hides the unhappy fact that
there are winners and losers from trade liberaliza-
tion. However, people—especially indigenous
peoples in the poorest regions of southern Mexico—
maintain an enduring allegiance to their ancestral
homes, community ties, and traditional knowledge,
which date back o,ccc years. Given that these ties
reach deeper than economically rational decision
making, millions of poor farmers who are clearly
losers on the ledgers of free trade remain committed
to their lands, despite structural changes in the farm
sector that increasingly lock them out of commer-
cially viable markets.
The most important environmental challenge
arising from NAFTA is to build a bridge between
aspects of the dual farm economy in Mexico—a
divide characterized by larger, commercial farms in
the northern and central regions and subsistence,
ejido, and small-family holdings. Although commer-
cial farming has not taken hold in Mexico to the
extent it has in the United States or other industrial-
ized countries, this stylized distinction between large
and small is nevertheless useful in showing the tra-
jectory of structural changes in the agricultural
sector. Although standard economic theory says that
unprofitable farm production should relocate, there
is nowhere for millions of poor farmers to go, since
the contraction in Mexico’s agriculture has not been
accompanied by an expansion in other sectors.
Economic shocks experienced during the adjust-
ment period of liberalization often appear to be
64 NAFTA’s Promise and Reality
intractable. However, innovative solutions that
re-engage public institutions and policy, that build
partnerships with private agriculture and other
sectors, and that are intent on nurturing the com-
mercial viability of farms are needed for environ-
mental reasons alone (aside from compelling social
equity and poverty alleviation objectives), as a means
to slow rates of deforestation and habitat loss, as well
as protect Mexico’s biological diversity. One solution
can be protected areas. Real spending on nature
reserves has increased significantly since :,,+, to
usso.s billion a year. However, competition among
indigenous groups, communities, and illegal squat-
ters in these reserves remains strong, while trust in
collective solutions remains fragile at best. Moreover,
protected areas have never been a lasting solution
to broader, in situ biological diversity protection.
A second solution involves nurturing new commer-
cial opportunities in the poorest regions to generate
higher revenue returns to farmers, relative to subsis-
tence farming underway in marginal areas. Viable
commercial alternatives that can close part of the
poverty gap do exist in specific market niches, those
that center on ecofriendly products or anticipate
new revenue streams from emerging environmental
markets. Examples include ecotourism, carbon
sequestration, and organic and sustainable farming.
As in other markets, information failures and
structural rigidities continue to constrain Mexico’s
full participation in these quickly growing global
markets, in part because of liberalization and
mergers in the country’s banking system. With the
dramatic consolidation of the banking sector,
private credit channels assume that only large-scale
farms are creditworthy, an assumption that leads to
the disappearance of almost all small-scale farm
credit. For example, the leading reason why small-
scale farmers abandon their operations and rent
their lands to commercial interests in the Sonora
region is credit scarcity. Solutions to redress this
working capital bottleneck now include the cre-
ation of the Sustainable Coffee Fund, which is sup-
ported by the North American Commission for
Environmental Cooperation (NACEC), Banamex,
the largest commercial bank in Mexico, the govern-
ment of Mexico, and other partners. These efforts
should be expanded, with the active participation
of large-scale, U.S.-based produce buyers, whereby
a proportion of seasonal contract farming arrange-
ments are channeled toward funding sustainable
agricultural markets.
NAFTA and the Environment:
A Difficult Relationship
The economic gains from NAFTA are typically meas-
ured by the kind of statistics cited in chapter :. These
economic gains are traditionally calculated by esti-
mating gross savings, which is gross national product
(GNP) minus public and private consumption.
However, in the last decade, efforts have been made
to measure, quantify, and internalize environmental
costs in standard economic measurements, and some
progress has been made in “greening” national
income accounts. This process includes calculating
relatively explicit costs, such as resource extraction,
as well as making depletion calculations from the loss
of forestry resources, pollution damages, and other
factors. Some methods of green accounting rely on
standardized proxies of environmental damage values,
such as the uss:c per metric ton of carbon emitted
that is used to calculate the marginal global damage
of climate change. Other factors, such as soil degrada-
tion, the loss of tropical forests, or the loss of fisheries
stocks, are considerable, but extremely difficult to
quantify except through site-specific field studies
to impute environmental values, based on people’s
willingness to pay for their conservation.
8
In :cc:, the government of Mexico—one of the
world’s leaders in environmental valuation and green
accounting—estimated that the total value of envi-
ronmental damages exceeded uss+o billion per
annum since :,,c.
9
If these environmental damages
were included in GNP and gross domestic product
(GDP) estimates, then Mexico would have run an
ecological deficit the equivalent of uss, billion per
Carnegie Endowment for International Peace 65
year.
10
Clearly, NAFTA has not been responsible for
most, or even a significant portion, of these total
environmental damages. However, they underline
the fact that economic growth generates considerable
pressures on the environment through scale effects.
A decade ago, surprisingly little attention was
focused on the scale effects of trade-led economic
growth. Since NAFTA is the first trade accord to
include explicit environmental provisions and safe-
guards, it remains the subject of debate among pro-
and anti-globalization activists generally. This debate
still hinges on two regulatory, as opposed to scale,
effects:
11
■ The free-trade accord would begin a “race-to-the
bottom,” as states would lower environmental
standards to attract investment.
■ If environmental standards remained intact
despite the competitive pressures of free trade,
then companies would move production to “pol-
lution havens,” places where regulations did not
exist or did not matter.
A decade, later, the environmental record of
NAFTA remains mixed. Neither the great benefits
claimed by proponents nor the overwhelming
damages predicted by critics have come to pass. In
the manufacturing sector, which due to its pollution
intensity has been subject to closet scrutiny, NAFTA
has contributed directly to an increase of between :
and : percent in annual gross emissions of carbon
monoxide and sulfur dioxide, due to changes in the
petroleum, base metals, and transportation equip-
ment sectors.
12
NAFTA has also contributed
directly to air pollution spikes in the Canadian-U.S.
and U.S.-Mexican border regions, as ïc percent of
total NAFTA trade is transported via truck-trans-
port passing through increasingly congested border
points.
13
NAFTA Chapter o energy provisions have
contributed to an increase in carbon dioxide emis-
sions arising from increased U.S.-Canadian trade in
electricity, as well as increased Mexican exports of
electricity to the United States.
14
In other cases—notably in the production of
cement, steel, and nonferrous metal industries—the
environmental performance of Mexican companies
since the enactment of NAFTA has been superior to
that of their U.S.-based counterparts.
15
This
improvement is partly explained by increased FDI
inflows that accelerate the turnover of capital stocks
in these sectors, leading to the adoption of more
efficient and less polluting process technologies. The
improvement is also explained by increased environ-
mental awareness within Mexico—as in other
countries—since the late :,ïcs. Regulations intro-
duced in the early :,,cs strengthened Mexico’s
environmental statues and institutional capabilities.
U.S.-Mexican cooperative action on a number of
fronts—notably in tackling environmental pressures
along the border—has reduced some, but hardly
all, environmental pressures. Trilateral cooperation
through NACEC has supported the international
benchmarking of some environmental norms, such
as the harmonization of toxic release data and the
development of criteria for air pollutants among the
three North American countries. The harmonization
of environmental data is an important step toward
comparing the environmental performance
of Canada, Mexico, and the United States.
16
Environmental awareness has catalyzed other
more systemic reforms within Mexico, notably
in improving access to information and codifying
public participation.
17
The good news that NAFTA has not created
pollution havens hardly means that NAFTA is envi-
ronmentally benign. In addition to the two anti-
NAFTA assertions—the race to the bottom and the
pollution haven—a third assertion from the NAFTA
debates is that trade is somehow self-cleansing. That
is, as incomes rise as a result of free trade, the rate of
environmental degradation decelerates and gradually
improves.
18
Unfortunately, real-world evidence
shows that only a few pollution indexes decline with
economic growth, and mostly at the subregional
level. Most important, pollution reductions take
place as a result of tightly enforced environmental
regulations combined with the replacement of
66 NAFTA’s Promise and Reality
capital stock by more resource-conserving technolo-
gies.
19
While some benefits do occur, evidence
suggests that other environmental quality indexes
rise almost continuously with income growth,
notably greenhouse gas emissions.
The most debated relationship between environ-
mental laws and NAFTA rules is in the area of invest-
ment. Under NAFTA, private investors are given new
opportunities to seek compensation for regulatory
action taken by NAFTA parties that is tantamount
to expropriation. By :cc+, ten of NAFTA’s Chapter ::
cases involving allegations of expropriation associated
with changes in domestic environmental regulations
had taken place. One dispute compelled the
Canadian government to modify its import ban
on methylcyclopentadienyl manganese tricarbonyl
(MMT), and pay damages to a U.S. firm totaling
uss:+ million. Three other cases have resulted in paid
damages totaling uss:c million. In response to these
cases, in July :cc: the NAFTA parties negotiated a
clarification of their intentions regarding investment
rules, designed to minimize national governments’
exposure to expropriation cases.
20
Notwithstanding the NAFTA Chapter :: cases,
the greatest environmental pressure associated with
NAFTA is transmitted through the scale effects of
economic growth, to which trade liberalization con-
tributes. In the manufacturing sector, environmental
regulations—as strong as they were on paper with
the passage of NAFTA—did not keep pace with
rates of economic growth. Mexico’s manufacturing
sector has grown by ¡ percent per annum since
enactment of NAFTA, but real spending on pollu-
tion monitoring and on-site inspections has fallen
by ¡s percent over the same period. Overall, air
pollution has increased :c percent per year in the
manufacturing sector of Mexico since NAFTA took
effect.
21
Clearly, NAFTA has been solely responsible for
neither increased pollution emissions nor the weak-
ening of environmental enforcement. All North
American countries have experienced some weak-
ening of domestic environmental regulations that
has coincided with NAFTA, such as the recent delay
of some U.S. Clean Air Act–mandated schedules
for emission reductions with the introduction
of the Bush administration’s Clear Skies initiative.
However, a case cannot be made that the Clear
Skies initiative is linked to NAFTA.
Measuring Environmental
Effects and Mexico’s Farm
Sector
Changes in the manufacturing sector provide one
important insight into trade-environment relation-
ships. However, for many countries, the most
significant interaction between trade liberalization
and environmental quality is transmitted within the
agricultural sector. This is especially true for devel-
oping countries, whose primary exports are agricul-
tural products. There are three main reasons why it
is vital to examine the environmental impacts of
agricultural liberalization in general, and its impact
on Mexico’s farm sector in particular.
Pollution. Farming is the leading source of pollution
in Canada, Mexico, and the United States. The
excessive application of nitrogen—an important
element in fertilizers—contributes to high soil
salinity and the presence of air-polluting ground-
level ozone, disrupts forest processes, acidifies lakes
and rivers, and degrades coastal waters and ecosys-
tems through algae blooms and groundwater pollu-
tion.
22
Since :,,+, Mexico’s total consumption of
nitrogenous fertilizers has remained roughly con-
stant (see Figure :). However, with the withdrawal
of state subsidy support for fertilizers in the mid-
:,,cs, the pattern of fertilizer consumption has
shifted away from small-scale, undercapitalized
farms and increasingly toward larger-scale opera-
tions. This shift in fertilizer purchases has magnified
a pattern of concentration of fertilizer inputs in
those areas in which more intensive farming is
Carnegie Endowment for International Peace 67
68 NAFTA’s Promise and Reality
underway. In addition, imports of nitrogenous
fertilizers into Mexico have increased sharply since
enactment of NAFTA (see Figure :).
A similar trend of increased pesticide imports into
Mexico from the United States also occurred during
the first decade of NAFTA (see Figure +).
As a nonpoint pollution source, nitrogen pollution
is significantly more difficult to monitor and
regulate, compared to point-source industrial
pollutants.
23
(It is uncertain whether the ¡s
percent decrease in spending for environmental
monitoring and enforcement affected, one way
or the other, scale effects of rising pollution levels
in the agricultural sector. That is, even if on-site
inspections were unaffected by budget rollbacks—
which seems extremely unlikely—inspectors
lack the capability to monitor and regulate most
nonpoint pollution sources, with the exception
of the livestock sector and perhaps the cotton
production sector.)
Freshwater. Agriculture is by a wide margin the
largest consumer of freshwater (see Figure ¡) in
Mexico. More than ïc percent of Mexico’s annual
water draws are consumed in farming.
24
Water
scarcity is not only the most urgent environmental
and developmental problem facing Mexico, it has
increasingly become the subject of political and
diplomatic tension between the United States and
Mexico. In :cc:, Presidents George W. Bush and
Vicente Fox Quesada jointly promised to resolve
Mexico’s ¡sc billion gallon water deficit with the
United States, under provisions of a :,¡¡ treaty
setting out shared water management quotas
between the two countries for the Rio Grande.
Biological Diversity. Agriculture is the leading cause
of changes in land use, such as the deforestation that
brings with it habitat destruction. In turn, these
changes in land use are the leading cause of the
destruction of ecologically rich habitats and biolog-
ical and agricultural diversity in Mexico. The loss
of biological diversity is of global environmental
2001 1999 1997 1995 1993 1991 1989 1987 1985
0
600,000
1,200,000
1,800,000
2001 1999 1997 1995 1993 1991 1989 1987 1985
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
Source: Food and Agriculture Organization of the United Nations (FAO),
FAOSTAT online statistical service, www.fao.org (FAO, Rome, 1999).
Source: Food and Agriculture Organization of the United Nations (FAO),
FAOSTAT online statistical service, www.fao.org (FAO, Rome, 1999).
Imports
Exports
Production
Consumption
Figure 1. Mexico’s Consumption of Nitrogenous Fertilizers
MEGATONS
Figure 2. Mexico’s Imports and Exports of Nitrogenous Fertilizers
MEGATONS
Carnegie Endowment for International Peace 69
significance, since Mexico houses some of the
richest and most important endowments of biolog-
ical diversity on the planet, concentrated in its
southern tropical forests (as well as in its coral reefs).
Mexico is home to :c percent of all known species,
of which +c to sc percent are endemic. Mexico has
the world’s second-highest number of reptile species,
and ranks fourth for amphibians and fifth for
mammalian diversity in the world. Mexico also has
one of the highest deforestation rates in the Western
Hemisphere. Since :,,+, about ¬.ï million hectares
of forest have disappeared. While rates have deceler-
ated in recent years, more than o+:,ccc hectares of
forests have been cleared on average every year since
:,,c. Poverty remains the leading cause of deforesta-
tion, and thus, the extinction of flora and fauna.
25
Specifically, the expansion of subsistence farm areas
into marginal lands to increase yields to compensate
for price declines in staple crops such as maize
remains the leading cause of forest clearing, followed
by the felling of trees for poor-income household
fuel use. Therefore, there is a strong link between
poverty and biodiversity loss in southern Mexico.
The issues I address below are the effect that
NAFTA has had on this poverty-environmental
degradation nexus, as well as the risk of genetic
erosion affecting traditional maize varieties.
Environmental Impacts
of NAFTA-Induced Trade
in Agriculture
Given the robust relationship between agricultural
land use and environmental quality, I begin my dis-
cussion of the contribution NAFTA has made to
changing environmental conditions by examining
the total changes in U.S.-Mexican agricultural trade
volumes. Table :
26
summarizes some of the major
changes in Mexico’s domestic farm production and
in net agricultural imports, which overwhelmingly
originate in the United States.
2001 1999 1997 1995 1993 1991 1989
0
15,000
30,000
45,000
60,000
75,000
Source: Food and Agriculture Organization of the United Nations (FAO),
FAOSTAT online statistical service, www.fao.org (FAO, Rome, 1999).
Note: Dotted lines indicate missing data from 1995 and 2000.
Source: Compendio Básico del Agua en México, 2002, Plan Nacional de
Desarrollo (PND), Comisión Nacional del Agua (CAN), Secretaría de
Medio Ambiente y Recursos Naturales (SEMARNAT).
Figure 3. U.S. Insecticide Trade with Mexico
U. S. DOLLARS
Figure 4. Distribution of Mexican Water Use
82.7%
Agriculture
12.6%
Public 4.7%
Industrial
Imports—Value
Exports—Value
70 NAFTA’s Promise and Reality
The value and volume of North American farm
trade has grown more rapidly than has North
America’s trade with the rest of the world. Exports
from Mexico to the United States have more than
doubled in value, from uss:.s billion to usss.:
billion, since enactment of NAFTA, while U.S.
exports to Mexico have almost quadrupled, to
usso.ï billion. Clearly, NAFTA has successfully
strengthened agricultural ties throughout North
America, particularly between the United States
and Mexico.
Working from the data on these overall changes,
I examine the proportion of U.S.-Mexican trade
that has solely, or significantly, been affected by
NAFTA (as opposed to the liberalizing effects of
WTO agreements, as well as important nontrade
variables such as climatic fluctuations and drought,
market proximity and shrinking transport costs,
and changes in consumer food preferences).
27
On
an aggregate basis, the impact of NAFTA-specific
liberalization on U.S.-Mexican agricultural trade
has been minor; for decades, the U.S. and Mexican
agricultural economies have been moving toward
deeper integration. However, for a typical basket of
agricultural goods, NAFTA has had a significant
impact on U.S.-Mexican agricultural trade.
U.S. exports to Mexico that fall into this category
include maize/corn, rice, sorghum, cotton, processed
potatoes, fresh apples, and pears. Mexican exports to
the United States that have been strongly affected by
NAFTA-only schedules include wheat, cattle and
calves, sugar, fresh tomatoes, and cantaloupe.
28
Since
it is impossible to weigh the environmental impacts
of production, consumption, and export changes for
all commodities involved in trade, I focus only on
some environmental consequences associated with
wheat, maize, and fresh fruit and vegetables, all of
which have been significantly affected by NAFTA.
29
MAI ZE
Mexico is a center of origin for Zea mays, the
ancestral precursor of modern corn. Approximately
+ million farmers in Mexico, mostly from small-scale
farms, are involved in maize production. Indirectly,
some :ï million people depend on maize for their
livelihood. Traditional maize is not only a staple
food of Mexican diet; it also provides a symbolic
lifeline connecting traditional and indigenous
cultures dating back approximately o,ccc years—
since the time that maize was first cultivated—
with the modern Mexico of today.
30
Table 1. Changes in Mexico’s Domestic Farm Production and Agricultural Imports
THOUSANDS OF MEGATONS
Average Production Average Production Average Net Imports Average Net Imports
1990–93 1999–2002 1990–93 1999–2002
Wheat 3,799 3,277 917 2,592
Maize 15,965 18,891 1,691 5,751
Barley 418 709 171 145
Sorghum 4,556 5,888 3,547 5,005
Rice 257 308 332 660
Soybeans 273 308 1,747 4,205
Sugar 3,577 4,798 393 -337
Beef 1,202 1,422 -21 191
Pork 803 1,061 47 169
Poultry 908 1,854 70 249
Tomatoes 1,173 2,186 -361 -691
Source: Organization for Economic Cooperation and Development, Agricultural Policies in OECD Countries: Monitoring and Evaluation
(Paris: OECD, 2003), available at www.oecd.org.
Although estimates remain difficult to obtain,
approximately +s‒¡c percent of U.S. corn is derived
from genetically modified (GM) varieties. A debate
over the benefits and costs of GM crops has been
underway ever since biotechnology was approved
for some commercial crops in the United States,
Canada, and elsewhere in the mid-:,,cs.
31
One
response to the potential risk of GM crops, was the
introduction of a Mexican ban on the import of
genetically modified corn seeds in :,,ï.
32
Despite
this ban, in :cc: Nature magazine published a peer-
reviewed article demonstrating that GM corn had
been found growing in Mexican fields.
33
This
sparked scientific concern, as well as a highly visible
public debate, about the risks of genetic contamina-
tion as well as mutation.
34
Subsequent independent
laboratory tests conducted by the Mexican govern-
ment have confirmed that contamination by
biotechnology corn has occurred in Oaxaca—a
global center of megadiversity—and elsewhere in
Mexico. Neither the pathways of that contamina-
tion, nor the ecological implications that could arise
from it, are clearly understood at this time.
A scientific consensus exists that the risks to human
health from GM foods are low or nonexistent.
35
In the United States, biotechnology foods are
embedded throughout processed foods that contain
soybeans and corn. In the area of food safety, the
potential risks that biotechnology crops pose to the
environment differ from those normally raised in
regard to human health, and include the possible
impact of GM crops on soil ecology, farmland
diversity, and even gene flow change.
36
A recent
study by the European Environment Agency has
found that maize poses a medium to high risk of
pollen-mediated gene transfers from crop to crop,
concluding that “evidence suggests that GM maize
plants would cross-pollinate non-GM maize plants
up to and beyond the recommended isolation dis-
tance of :cc meters.”
37
In addition to recorded cases of GM maize pollina-
tion, similar cases in which gene stacking involving
genetically modified canola have been recorded since
:,,: in the Canadian prairies. Affected canola crops
in western Canada appear to be more resistant to her-
bicides than conventional (non-biotechnology) crops.
In early :cc¡, NACEC will finalize an independent
analysis that examines the environmental and
conservation risks that science associates with the
possible contamination by biotechnology crops
of traditional crop varieties such as Mexican maize.
Given the implications of this case for the Biosafety
Protocol of the UN Convention on Biological
Diversity,
38
as well as for the application of the
precautionary principle to international trade,
the NACEC report will be the most important
and controversial ever issued in the ten-year history
of that NAFTA-related organization.
The increase in U.S. corn imports also risks weak-
ening in situ conservation involving some or all of
the forty races of maize that are grown in Mexico,
with some varieties dating their origin back o,ccc
years. While there has been an absolute contraction
in maize production in Mexico since the enactment
of NAFTA, led by a free fall in commercially har-
vested crops, production of rain-fed maize has
remained stable. To date, there is little evidence
that NAFTA has undermined in situ conservation
of maize. However, the price difference of approxi-
mately :¬ percent between U.S. corn and Mexican
varieties suggests that over time the price wedge
may result in U.S. imports crowding out rain-fed
varieties. This substitution will eventually present
small-scale farmers with three choices: exit farming
altogether; diversify the composition of crop
output; or concentrate on fledgling but potentially
high-growth market niches that award a price
premium for traditional, organic, and sustainable
produce such as traditional maize. Each presents
formidable obstacles to small-scale farmers. As
noted in chapter :, there are few economic and
employment alternatives for millions of farmers in
Mexico. At the same time, the quality of soil in
marginal lands makes crop switching very unlikely.
Finally, even if market niches for sustainable
produce expand dramatically, this will not alleviate
Carnegie Endowment for International Peace 71
72 NAFTA’s Promise and Reality
all pressures on in situ conservation. Therefore, the
long-term erosion of the knowledge base on which
traditional maize growing is based is one of the
greatest conservation threats directly posed by
NAFTA.
In addition to the explanations for the persistence
of rain-fed maize identified by Sandra Polaski in
chapter :, a further reason why rain-fed varieties
have remained stable or increased slightly may be
traced to the large proportion of corn imports
that are used as grain feed for Mexico’s quickly
expanding livestock sector.
39
Structural changes
associated with the horizontal integration of maize
as an input to confined animal feedlot operations
and slaughterhouses have been dramatic in
Mexico.
40
These structural changes result in a series
of interlocking environmental pressures that very-
large-scale feedlot and slaughter operations pose
to environmental regulators.
Environmental pressures from intensive livestock
operations include large volumes of nitrogen, phos-
phorus, hydrogen sulfide gases, and atrazine pesti-
cide, leading to soils that are overenriched with
nutrients while posing threats to local watersheds
with runoff that can cause algae blooms, loss of
habitat, changes in aquatic biological diversity, and
depletion of dissolved oxygen.
41
These wastes can
also contain pathogens, antibiotics, and hormones.
Recently, episodes of neurological disorders affecting
individuals living close to these industrial farms have
also been reported.
42
Although data from Mexico
delineating different sources of nitrogen pollution
are far from complete, the data that exist point to
some convergence in environmental pressures arising
from livestock operations in Mexico with those that
exist in the United States and Canada. This is hardly
surprising, given the strong consolidation of the
North American livestock sector fueled by mergers
and acquisitions during the :,,cs. Today, four firms
control ï: percent of the U.S. and Canadian cattle
and beef market, and a similar pattern of market
consolidation is underway in Mexico, although at a
slower pace. In the same way that turnkey industrial
plant investments incorporate uniform capital stock
and management policies, livestock operations in
any one location of North America are increasingly
similar to operations elsewhere.
The main focus of environmental attention has been
on potential risks within Mexico because of U.S.
corn imports. At the same time, environmental pres-
sures have increased within the United States itself,
because of the production increase to serve the
Mexican market. The :¡c percent rise in U.S. corn
exports has resulted in a doubling of the proportion
of total U.S. production that is destined for Mexico,
from : to :.: percent of total domestic production. I
assume that the entire : percent production increase
is attributed to NAFTA, and conclude that expanded
production of corn in the United States destined for
Mexico generates an additional ¬¬,ccc tons of
nitrogen-, phosphorus-, and potassium-based pollu-
tion per year.
43
This increase in pollution is concen-
trated in the Mississippi River Delta, already the
most polluted region of the United States because
of nitrogen runoff and related ecological stress. In
addition, increased corn production is exacerbating
water scarcity in those states that have high irrigation
intensities for corn production, notably Nebraska,
Kansas, and Texas.
44
WHEAT
Since enactment of NAFTA, U.S. exports of wheat
to Mexico have increased by :ï: percent, resulting
in a : percent increase in U.S. wheat production. In
general, economic models anticipate that trade liber-
alization will bring about a shift in the location of
grain production, with production contracting in
industrialized countries and increasing in developing
ones.
45
However, for wheat and corn production,
the opposite pattern took place: U.S. exports to
Mexico increased, while commercial production
in Mexico contracted.
In contrast to maize output, Mexico’s output of
wheat has not altered significantly since enactment
of NAFTA. Instead, wheat production in the Yaqui
Valley—the birthplace of the green revolution
for wheat and the breadbasket of Mexico today—
remains the region’s leading agricultural activity
(accounting for roughly ïs percent of total planted
crop area).
46
However, the composition of wheat
production in the region has changed dramatically
since :,,+. Then, bread wheat made up the bulk of
total wheat output. By :cc:, bread wheat output in
the region had declined from roughly ïc percent of
total production to :s to :c percent. In bread
wheat’s place, durum wheat—which constituted a
small percentage of total production in :,,+—now
accounts for more than ïc percent of the total
wheat output in the Yaqui Valley.
The change from bread wheat to durum wheat
has not altered the region’s severe water scarcity.
Through a combination of drought and surface
conditions in the area, the levels of groundwater—
the main source of irrigation for wheat produc-
tion—have declined by half since :,,:.
47
At the
same time, the production shift from bread to
durum has directly led to an increase in nitrogen
pollution in the region. In arid and semiarid regions
such as the Yaqui Valley, durum wheat requires as
much as :c percent more fertilizer inputs within
irrigated systems than other wheat crops. This
compositional production shift has directly led to
increased fertilizer inputs, and increased nitrogen
pollution and nitrogen runoff associated with
eutrophication in nearby rivers and lakes. Estimates
suggest that the application of nitrogen per hectare
in the Yaqui Valley exceeds :sc kilograms, making
this region among the heaviest users of fertilizers
on a per hectare basis in the world.
In Sonora, Sinaloa, and other states where intensive
farming occurs, ecological pressures from nitrogen
pollution have risen dramatically. The main source
of nitrogen pollution in the Sea of Cortez originates
from commercial agricultural production in Sonora.
Nitrogen pollution is increasing in the Tacana River
Basin and the Rio Lerma. Eutrophication has
significantly lowered the inflow time of the Rio
Lerma to Lake Chapala—the largest freshwater
body in Mexico and a center of rich biological
diversity. Uncontrolled blooms of water weeds have
increased since the late :,ïcs, and now cover more
than :c percent of Lake Chapala’s surface area.
48
Although nitrogen pollution in Mexico is less than
in the Mississippi River Delta or Chesapeake Bay, its
effect is more ecologically destructive in the warmer
waters of Mexico. For example, eutrophication in
the Sea of Cortez is a main source of stress on coral
reefs—which have a higher concentration of biolog-
ical diversity than most tropical forests—and coastal
plankton.
49
Durum wheat is used to produce dry pasta and pasta
products. The food processing sector has been among
the largest recipients of FDI inflows to Mexico since
NAFTA investment liberalization disciplines were set
out in Chapter ::. FDI inflows have more than
doubled in Mexico’s food processing sector, to more
than usss.+ billion, concentrating on a narrow set of
value-added food processing activities, led by pasta
(and followed by confectionery products, for which
corn syrup is increasingly used as an input).
50
As
Mexico’s domestic production capacity for pasta
foods has increased, so too have its exports to the
United States. Since NAFTA, Mexican exports of all
kinds of pasta have grown relatively constantly, from
:c million kilograms in :,,s to more than +: million
kilograms in :cc: (see Figure s).
FRESH VEGETABLES AND FRUI T
Horticulture has seen its export earnings roughly
triple since NAFTA took effect, up to uss+.s billion
in :ccc. Since enactment, the volume of fresh
vegetable exports has increased by ïc percent, and
of fresh fruit, by ,c percent. This production and
export growth has resulted in an increase in the total
area of cropland dedicated to vegetables and fruit.
51
The most pronounced structural change in Mexico’s
agricultural sector due to NAFTA has occurred in
the fresh vegetables and fruit sector.
52
The most
important aspect of this structural change is the
Carnegie Endowment for International Peace 73
expansion in the average farm size among export-led
producers in the grains and horticultural sector, and
a decline in the number of individual farms engaged
in export markets. In the north, northwest, and
central plateau areas, a smaller number of larger
farms are owned either by wealthy families or by
commercial interests.
53
Typically, these farms have
strong links with external markets, through contract
farming (see page •) and ready access to domestic
and external credit sources. Larger farms specialize
in a limited number of monoculture commercial
crops. This specialization entails replacing on-farm
inputs such as organic pest control and local fodder
and composting with pesticides, commercial animal
feeds, and fertilizers. Specialization also entails
higher rates of irrigation per hectare, and the
replacement of traditional seed varieties with hybrid,
purchased seeds (as well as biotechnology seeds for
cotton crops).
54
By contrast, in the southern and southeastern
regions of Mexico, there are a larger number of
smaller farms, with an average size between : and
s hectares. Farms are either owned by single fami-
lies or compose part of ejido (community) hold-
ings. Smaller farms produce heterogeneous crops
for on-farm consumption, barter as well as some
limited farm-gate exchange, tend to use few inputs
such as pesticides or fertilizers, and rely little on
irrigation. High obstacles are one reason for this
low level of capital intensity that small farmers
face in getting access to all credit sources in
Mexico. As a consequence of this credit squeeze,
up to ¬c percent of ejido farmers in some regions
(for example, Sonora) have decided to abandon
farming altogether. (This figure is probably much
higher than in other regions, since less land
appears to have been transferred out of common
property than originally feared. For those who
remain on the farm, barely :ï percent of house-
hold income for ejido farms in some regions is
generated through on-farm crop cultivation and
animal husbandry.)
As noted in chapter :, income divergence within
Mexico has increased over the past decade, measured
by any number of indicators. Nowhere is this diver-
gence more dramatic than in the farm sector. From
an environmental perspective, poverty in Mexico is
concentrated in regions—particularly in Oaxaca and
Chiapas—that house some of the world’s richest
abundance of biological diversity.
The production of commercial fruits and vegetables
in the northern region leads to nitrogen pollution
similar to that generated in the maize and wheat
sectors. However, the most significant environ-
mental stress that arises from this sector is water
scarcity. On average, one-third of Mexico’s total
cropland is irrigated, one of the highest concentra-
tions of irrigated farmland in the world.
55
There has
been a slight increase in the total amount of irri-
gated land in Mexico since NAFTA, as the most
dramatic rise in irrigation occurred during the pre-
vious decade (see Figure o).
Research shows that irrigated groundwater for
water-intensive crops such as tomatoes, pecans, and
74 NAFTA’s Promise and Reality
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
2002 2001 2000 1999 1998
Source: U.S. Census Bureau, Foreign Trade Division (www.census.gov)
Figure 5. Total U.S. Pasta Trade with Mexico
KI LOGRAMS
Total exports
Total imports
alfalfa is applied on average more intensively for
export crops than for crops bound for the domestic
market. Evidence from Sonora demonstrates that
export crops in the fresh fruit and vegetable category
consume :c to +c percent more groundwater irriga-
tion than crops intended for domestic consumption.
Larger farms use significantly greater amounts of
irrigated water per yield than single-family or ejido
farms. A number of factors explain this correlation
between farm size and irrigation intensity, beginning
with the degree of technological specialization that
generally can be associated with larger farms, as
well as the water abundance of the southern regions.
Nevertheless, larger farms use irrigation more
intensely in Mexico, suggesting a convergence
between intensity of irrigation and farm size like
that observed in the United States. (In the United
States, larger farms have a tendency to use irrigation
systems more than smaller farms, and a tendency to
use irrigation system more efficiently and accurately.
Irrigated farms in the United States also generate
twice the income of their rain-fed counterparts.)
56
However, the inverse correlation of farm size and
irrigation intensity is more dramatic in Mexico,
where a full ïc percent of ejido and single-family
farms in some regions do not use irrigation of any
kind.
57
The most plausible explanation for this
absence of irrigation intensity can be traced directly
to the virtual disappearance of rural credit in the
past decade. As noted, ¬c percent of ejido farmers in
some regions have abandoned farming altogether,
and rented their right of access to groundwater wells
and irrigation systems to larger private or corporate
farm interests.
This pattern of larger farms using greater amounts
of irrigated groundwater for export crops is exacer-
bated by the structure of ejido ownership, which
constrains the amount of groundwater extraction so
as to ensure an equitable sharing of resources among
eight to twelve owners. By contrast, larger farms are
not constrained by any equitable sharing considera-
tions, which suggests that they are less sensitive to
water scarcity and water stress signals than are
ejidos.
58
In addition, the pattern of water irrigation
subsidy payments is slanted—as subsidy payments
generally are—in favor of larger, commercial farms.
As noted below, subsidy payments generally further
cloud scarcity signals, and lead to resource stress and
environmental pressures.
As a result primarily of water consumption from the
farm sector, water scarcity has become so acute a
problem in Mexico that bulk water transfers—pro-
hibited in Canada because of their negative environ-
mental impacts—have compensated for regional
water deficits. In total, agricultural irrigation is
responsible for approximately os percent of total
groundwater draws in Mexico. Of the ¡s, aquifers
in the country, more than ïc face high rates of
depletion. The greatest concentration of depleted
groundwater sources is in the northern agricultural
regions and in the Lerma-Balsas Basin.
59
Irrigation inputs for export crops have been linked
to the U.S.-Mexican dispute over water flows and
quotas of the Rio Grande. The United States and
Carnegie Endowment for International Peace 75
5,000
5,500
6,000
6,500
7,000
2000 1998 1996 1994 1992 1990 1988
Source: Food and Agriculture Organization of the United Nations (FAO),
FAOSTAT online statistical service, www.fao.org (FAO, Rome, 1999).
Figure 6. Irrigated Land in Mexico
THOUSANDS OF HECTARES
Mexico have established water-sharing quotas for
that river, under a :,¡¡ treaty administered by the
International Boundary and Water Commission.
Since :,,:, Mexico has run a deficit with the United
States that now exceeds ¡sc billion gallons of water.
Mexican authorities blame severe drought condi-
tions for their decision to withhold northward water
flows from Mexico into Texas. In turn, farmers in
Texas have faced acute water shortages, leading to a
:s percent decline in crop output in some regions.
Some of these farmers, and state and other officials
in the United States, allege that some of the ¡sc
billion gallon deficit has been diverted to water-
intensive agricultural production in Mexico, with
exports destined for the United States.
60
(In early
September :cc+, the two countries announced a
timetable for Mexico to begin paying down the
water deficit.)
When one considers this water deficit with the
United States, and mounting water scarcity within
the export centers of northern Mexico, it is also
worth noting that Mexico’s horticultural exports
are the equivalent of transferring millions of
gallons of freshwater each year to the United
States. While it is impossible to calculate this net
transfer in water equivalents for all agricultural
trade, I will consider here the example of a single
crop, tomatoes. Figure ¬ illustrates the expansion
of tomato exports from Mexico to the United
States since :,,c. As noted, exports of tomatoes
increased by ,c percent since :,,+, with trade
growth strongly affected by NAFTA. Water makes
up approximately ,c percent of tomatoes by
weight. A proxy estimate of the water transfers
from Mexico to the United States alone through
tomato exports is roughly :o: million gallons of
freshwater per year since :,,+.
61
LAND-SAVING BENEFITS AND INTENSIVE FARMING
NAFTA is neither the sole cause, nor, in most cases,
the primary cause of growing environmental pres-
sures associated with Mexico’s agricultural sector.
Mexico’s changing agricultural patterns date back
to the :,ïcs, when the government encouraged
export-oriented agricultural production by facili-
tating large-scale farming through land law reforms.
That said, NAFTA liberalization in maize, wheat,
and fruits and vegetables has accelerated and
deepened this trend toward export-oriented,
chemical-intensive production.
62
The key question
is whether this shift toward intensive farming has,
on a net basis, delivered environmental benefits, as
well as the obvious environmental costs associated
with pollution and water stress.
One tenet of the green revolution is that, despite
localized increases in pollution, environmental
benefits can accrue based on large-scale, intensive
farming. These benefits arise from land-saving and
land-offsetting effects of intensive farm produc-
tion.
63
With the increased reliance on capital inputs
such as fertilizers, pesticides, and bioengineered
seeds, production efficiency increases on average,
either by reducing the total amount of land needed
for comparable yields or by increasing the yield per
hectare of existing land use. This increase in produc-
76 NAFTA’s Promise and Reality
150,000
250,000
350,000
450,000
550,000
650,000
750,000
850,000
950,000
2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Figure 7. Tomato Exports from Mexico to the United States
METRI C TONS
Source: Food and Agriculture Organization of the United Nations (FAO),
FAOSTAT online statistical service, www.fao.org (FAO, Rome, 1999).
tion efficiency reduces pressure on farms to convert
additional lands, including marginal lands or forests,
to meet the rising demand for food. A stylized
image of this hypothesis is that of a seesaw: The
more that specialization and intensive farming goes
up in one region, the more that land-use pressures
associated with extensive farming recede elsewhere.
Although the extent of potential benefits is specific
to the region under consideration, Pedro Sanchez
and others have argued that, as a rule of thumb, for
every hectare of land that is converted into intensive
farming, between s and :c hectares of tropical
forests will be conserved elsewhere.
64
In the United
States, for example, intensive farming has been esti-
mated to “save” ,c million hectares of forests that
otherwise would have been cleared for farming.
In areas with smaller, low-productivity, unprofitable
farms, the lack of access to working capital means
that environmental problems associated with fertil-
izers and pesticides are almost entirely absent.
However, more serious from an environmental
perspective is the strong link between impoverished
southern rural areas and changes in land use,
deforestation, and habitat destruction and fragmen-
tation.
65
Rural poverty is the leading cause of
environmental degradation in the Lacandon
jungle—among the richest habitats on the planet.
Poor farmers continue to clear tropical forests to
plant crops. However, since the nutrient composi-
tion of tropical forests is concentrated in the
biomass of trees above, and not in the soil found
below, farmers usually get only one crop per season
before soils are exhausted of nutrients, and they are
forced to move elsewhere to clear additional forests
for more cropland or grazing areas.
However, evidence from Mexico and elsewhere now
shows that land-saving benefits that could arise from
intensive farming are neither automatic nor of the
magnitude observed in industrialized countries such
as the United States. One reason for this failure to
deliver automatic land-saving benefits may be that
the returns of the green revolution began to bottom
out some years ago.
66
For example, soil degradation
arising from high levels of salinity has reduced crop
output in many commercial farming regions.
Diminishing returns of intensification may partially
explain why the expansion of commercial farms in
the northern and central regions has not resulted
in forest-saving benefits in the southern regions.
However, the most plausible explanation for the
failure of land-saving benefits to occur is the
structural bifurcation of Mexico’s farm economy.
Productivity gains occurring in the northern and
central regions have little or no impact on subsis-
tence farming and associated land clearing in the
poorest, southern regions of Mexico. The simplest
explanation is that the seesaw does not work,
because it has become unhinged in the middle.
NAFTA accelerated and deepened the structural
divide between large-scale, vertically integrated,
export-oriented farms and small-scale, subsistence
farms to the extent that no market signals are trans-
mitted between the two. (Even in well-functioning
markets, increased economic opportunities can also
lead to an expansion of crop areas.)
In well-functioning markets, as the total amount
of available land shrinks, farmers will increase
capital inputs as the principal means of increasing
yields. The single most important catalyst of more
intensive farming is land scarcity. In Mexico, one
potential cause of land scarcity—particularly in the
southern regions—is the nature reserves throughout
Mexico, with a total land coverage of priority bio-
sphere reserves. In the past, these reserves were little
more than “paper parks”—lines on a map with little
or no budget for enforcement. However, with the
support of the U.S. Agency for International
Development, the Global Environment Facility,
Pro Natura, and other groups, the newly established
Mexican Fund for Conservation of Nature has a
total funding base for all protected areas of usso.s
billion per year.
67
Despite increased spending, some of which can be
attributed to more general environmental cooperation
Carnegie Endowment for International Peace 77
that NAFTA has supported, nature reserves in
Mexico remain chronically underfunded and
underenforced, which leaves them vulnerable to
illegal land use, animal husbandry, and competition
among indigenous groups and others.
68
Since, by
definition, setting aside protected areas creates losers
in the immediate regions in which reserves are
created, neighboring residents have a high propen-
sity to cheat, by way of illegal logging, land clearing,
and corruption and nonenforcement among park
officials.
69
Therefore, potential land-scarcity signals
that could originate from reserves, which would
in well-functioning markets lead to land savings
through intensive farming, are probably not
affecting land-use decisions in Mexico.
Other, nontrade factors clearly contribute to the dete-
rioration of pricing and other signals linking com-
mercial and small-scale farms. Four are noted below.
Farm Subsidies. As in other countries, the pattern of
subsidy payments in Mexico supports large-scale
farms over small ones.
70
Although farm-sector
lobbyists argue that farm subsidies generally are
needed to support farm income, payments are not
being channeled into the most impoverished areas
of southern Mexico. At the aggregate level, only
one-quarter of total farm subsidies support farm
income. By contrast, ¬s percent are directed to
offset capital costs of various production inputs—
such as fertilizers, herbicides, machinery, and farm
fuels, as well as to change the market value of
farmland. Since extensive farms by definition do not
specialize in capital inputs, most farm subsidies are
directed toward larger, intensive farming operations.
For example, the structure of water irrigation
subsidies disproportionately favors large-scale farms
over small ones, while the pattern of payments
under the PROCAMPO and ASERCA programs
also appears to benefit large-scale farmers.
71
Moreover, PROCAMPO payments are intended to
bolster land saving by supporting liberalized,
intensive farming. However, they have had the
opposite impact in the Yucatan Peninsula, where
rates of deforestation have accelerated by as much as
+¡ percent, largely because PROCAMPO increased
land values, which had the effect of accelerating
land clearing rather than intensification on existing
lands (see Figure ï).
72
The environmental impacts of production subsidies
are well documented,
73
and include overproduction
and excessive application of agrochemicals, irriga-
tion, and other production inputs. Although
NAFTA was hailed as an environmental agreement,
its failure to include strict disciplines that constrain
farm subsidy payments has rendered various envi-
ronmental safeguards (with the possible exception of
food safety standards) powerless to minimize envi-
ronmentally damaging subsidy payments. NAFTA
has therefore been no more successful than the
WTO in constraining subsidy payments in North
America, most recently seen in the United States in
the increase in total farm payments under the :cc:
Farm Act. This increase in subsidy payments in the
United States is closely related to an increase in
some subsidy payments in Mexico.
74
Contract Farming. The bias of subsidy payments
toward commercial farms is reinforced by the
increased reliance on contract farming as a primary
avenue of Mexican agricultural exports to the
United States, especially for fresh vegetables and
fruit. Contract farming is hardly unique to Mexico,
nor can it be attributed to NAFTA.
75
The main
environmental effect of contract farming is the
imposition of production criteria by suppliers on
growers. Typically, these criteria cover not only
price, quantity, and quality, but some production
specifications, including the mandated use of fertil-
izers, pesticides, and other technical specifications
that only larger farms can afford.
76
Field research in
Guanajuato shows that contract buyers exclusively
engage in business with large-scale growers. This is
done to reduce transaction costs. Average farm size
in Guanajuato for farms under contract is +:
hectares, more than ten times the average size of an
ejido.
77
For tomato farms in the region, the average
farm size is :,ccc to :,ccc hectares. Supply con-
tracts explicitly set out requirements for pesticides,
78 NAFTA’s Promise and Reality
fertilizer, and other production inputs (for example,
plastic sheet covers for tomato farms).
Narrowly speaking, NAFTA has had no bearing
on how private commercial contracts between
exporters and buyers are negotiated and imple-
mented. However, the structure and pattern of
export growth in the horticultural sector has been
strongly affected by NAFTA. This expansion has
led to structural changes favoring larger farms,
which in turn are strongly favored by large-scale
buyers entering into contract farm arrangements.
The structure of these arrangements suggests at the
very least a tension among NAFTA liberalization of
some barriers (notably tariffs and tariff-rate quotas),
the diminished role of spot markets, and their
replacement with consolidated markets serving
large-scale, oligopolistic buyers.
Disappearing Rural Credit. The pattern of larger,
export-oriented farms supported by subsidies and
commercially engaged through contract farming is
magnified by the dramatic retreat of all commercial
credit from smaller farming operations. With the
consolidation of Mexico’s banking sector during the
:,,cs
78
(see Figure ,), credit policy and risk man-
agement procedures have become more homoge-
neous, and have explicitly turned away from the
financing of smaller-scale businesses of all kinds.
Banks in Mexico have complained to the World
Bank about the lack of “creditworthy” clients, and
credit is increasingly directed to larger corporations
and government agencies.
79
As commercial credit evaporated for all small enter-
prises, Banrural, the public development agency for
rural credit, was until :cc+ the sole credit source for
small farms in Mexico. However, immediately upon
its creation, Banrural shrank the number of out-
standing loans by half.
80
Even with this rationaliza-
tion of credit policy, the performance of Banrural has
been miserable by any standard. In :cc:, ¡c percent
of its portfolio was nonperforming. The collapse and
dismantling of public agencies and credit institutions
coincided with the dramatic consolidation of private-
sector capital that was clearly unwilling to fill the
Carnegie Endowment for International Peace 79
-30%
-20%
-10%
0
10%
20%
30%
40%
50%
60%
Cattle Eggs Chicken Wheat Milk Sorghum Maize
2001 2000 1999 1994 1990
0
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: Organization for Economic Cooperation and Development,
PSE/CSE database, 2002 (www.oecd.org).
Source: Economic Commission for Latin America and the Caribbean
(ECLAC), “Foreign Investment in Latin America and the Caribbean,”
2002, www.eclac.org.
Figure 8. Producer Subsidy Equivalent: Mexico Figure 9. Foreign Share of Banking Assets
OECD average 2002
Mexico 2002
Mexico
Argentina
Chile
Brazil
80 NAFTA’s Promise and Reality
void left by public microfinance policy in full retreat.
(In May :cc+, the World Bank announced a ussscs
million loan to liquidate Banrural and begin again,
with a new rural credit agency devoted to low- and
middle-income farmers.)
81
The scarcity of farm credit has profoundly affected
land-use decisions. As noted above, the leading
reason why single-family farms and ejido farmers in
some commercial regions rent their lands to private
commercial interests is the absence of rural credit.
82
Evidence also suggests that whatever farm credit
which is extended tends to favor intensive farming.
That is, farms that receive credit usually defer deci-
sions about fertilizer dose amounts to the recom-
mendations of credit authorities, who recommend
an “excessive” use of fertilizers.
83
In addition,
financing extended through contract farming
appears more plentiful, and much cheaper. U.S.-
denominated farm loans to support exports in the
Yaqui Valley have interest rates of :+ to :ï percent,
while peso-denominated farm credit—if it is avail-
able—is between :s and +c percent. (Black market
rates can exceed these levels per month.)
84
The Cost of the Dual
Economy on Biological
Diversity
It is impossible to quantify the total value of
Mexico’s tropical and other forests, environmental
services derived from wetlands and other habitats,
and biological diversity. One of the few global esti-
mates, by Constanza et al. (:,,¬), suggests that the
total annual value of the world’s ecosystem functions
is approximately uss+o trillion.
85
Although this
study is useful in suggesting the order of magnitude
of environmental values, it has come under criticism
on various fronts, largely on methodological
grounds.
At the same time, it is clear that most environmental
values—but particularly those values associated with
biological diversity—remain uncounted, under-
valued, and external to market prices. In one small
step to redress this externalization problem,
numerous environmental valuation field studies have
been conducted in Mexico. The combined economic
values suggested by these studies are impossible to
aggregate, since they rely on different methodologies
and baselines, generally consist of decentralized
research (unlike the climate change agenda, which is
conducted under the UN Intergovernmental Panel
on Climate Change), and tend to concentrate on
very small areas, such as lagoons or specific parts of
tropical forests or coral reefs.
86
Despite the difficulties in valuing Mexico’s forests
and biological diversity, we know with certainty that
those values are substantial, conservatively running
into billions of dollars for direct values such as eco-
tourism. Other values are more difficult to quantify.
For instance, the value of a single wild-grass peren-
nial grass variety related to maize is estimated to be
usso.ï billion per year.
87
Potential revenues from
carbon sequestration are in the range of uss+:.s
million to uss::o million for Mexico’s forestry
sector alone, depending on the price per ton of
carbon equivalent in world markets.
88
The value of
possible carbon sinks from low-till farming, as well
as grasslands and commercial and other forestation
projects outside tropical regions, is much higher.
Rather than attempt to quantify the full value of
Mexico’s biological diversity that has been put at
risk because of the cycle of rural poverty and
changes in land use from slash-and-burn clearing,
one could take the more practical approach of iden-
tifying practical and achievable policy options as a
means of gauging the transfer of benefits associated
with conservation of Mexico’s biological diversity.
Some of these benefit transfers are noted below.
They include ecotourism and shade-grown and
organic produce, both of which gain their market
and revenue value precisely because of the worth
consumers place on biological diversity.
Lessons and
Recommendations
Structural changes under way in Mexico’s agricul-
tural sector did not begin with NAFTA, nor has
NAFTA been the sole cause of these changes.
However, structural changes influenced largely
by NAFTA in the horticultural and grains sectors
reinforce and magnify changes that are further
influenced by other, non-NAFTA forces, such as
the liberalization of the financial services sector and
consolidation of export farms through subsidy
payments and contract farming. Moreover, NAFTA
has prompted action among rural communities to
reopen the trade agreement to take into account the
vulnerability of communities to trade, including the
adoption of the National Rural Accord by commu-
nities in the spring of :cc:.
89
NAFTA has reduced some pricing distortions, by
lowering or eliminating tariffs and tariff rate quotas.
At the same time, NAFTA has failed to constrain
the use of farm subsidies, which have deepened
pricing and market failures and accelerated environ-
mental degradation through overcapacity. Structural
changes linked with trade growth have introduced
new forms of market failure, in particular the
replacement of spot markets for fruit and vegetables
with concentrated markets patronized by oligopoly
buyers exerting high levels of buying power through
contract farming. A similar oligopoly in the private
banking sector helps explain the virtual disappear-
ance of private credit for small and mid-sized enter-
prises, in particular small-scale farms.
Those worst affected by structural changes associated
with trade liberalization and trade growth are Mexico’s
poor farmers. Alan Winters observes that the poor in
developing countries are disproportionately affected by
trade liberalization: Adjustment periods for the poor
are long and very costly. Winters concludes that the
industrialized countries can offer little guidance to
developing countries in addressing the problems of the
poor who have been adversely affected by free trade.
90
The most important challenge from an environ-
mental perspective alone is to address the plight of
small-scale farms in Mexico, by identifying commer-
cially viable revenue sources that are equal to or
greater than the subsistence income derived from
subsistence farming on marginal lands.
91
Given
the strong pull that southern farmers, indigenous
peoples, and communities in the region feel toward
their land, providing grants for employment
training and relocation—even if financing were
available—would not break the circle of poverty
and environmental degradation.
One source of hope may originate in markets that
are taking shape because of environmental consider-
ations. The global market for environmental goods
and services remains fragile and incoherent.
However, evidence suggests that small-scale, under-
capitalized farms can gain a comparative advantage
in several environmental market niches such as
organic goods, precisely because they cannot afford
fertilizers, herbicides, pesticides, and GM seedlings.
Consumers in Europe, Japan, the United States,
and Canada are showing an increased preference for
produce that is not grown with pesticides or other
input. For example, the global market for organic
foods alone exceeds roughly uss:c billion a year,
and remains the fastest-growing segment of the
food industry, recording sales volume increases of
:c to +c percent per year. The North American
market for certified, shade-grown, sustainable coffee
is uss:s: million on the retail side, while the global
market value (including noncertified coffees that
are marketed as sustainable, bird-friendly, organic,
or under other labels), is usssos million per year in
retail sales.
92
Mexico is the world leader in shade-grown organic
coffee; similar opportunities exist for other crops,
including traditional maize varieties, cocoa, spices,
honey, and palm. The environmental benefits of
these kinds of products are well documented in
some cases. For example, coffee grown under tree
canopies typically has ,c percent more on-site bird
life, compared to sun-grown coffee raised on plan-
Carnegie Endowment for International Peace 81
82 NAFTA’s Promise and Reality
tations that clear forests.
93
Similar markets for
ecotourism and eventually carbon sequestration
are likely to channel new revenues into southern
Mexico.
94
Although these markets are small, they require
capital to overcome market failures, as well as to
differentiate their products in the market through
labeling, certification, and the use of geographic
indicators, and to arrange transportation and over-
come intermediary market barriers. One of
NACEC’s outstanding contributions is to create a
special fund to support small-scale, community, or
cooperative-based shade-grown coffee certification
and export promotion in Oaxaca, Chiapas, and
other regions of southern Mexico. Among the sup-
porters of the fund are Banamex and the govern-
ment of Mexico. This fund is building one bridge
between the two farm economies of Mexico.
Working with the reconfigured coffee subsidy pay-
ments can make it possible that Mexico’s poverty
circle can be broken thanks to new markets that
value environmental attributes.
This chapter has described a series of issues that,
taken together, continue to affect agriculture in
Mexico. These include trade liberalization prompted
by NAFTA, the liberalization and consolidation of
the financial services sector, the concentration of
vertically integrated sectors within Mexico’s farm
economy, the effect of agricultural subsidies, and the
increasingly important pull that contract farming is
exerting on the production decisions of farmers.
NAFTA is not the cause of these issues’ emergence,
but it remains the focal point of most liberalization
reforms undertaken in Mexico since :,,+. From an
environmental perspective, these liberalization issues
are linked together by a chain of poverty affecting
poor farmers, indigenous peoples, and communities
in southern Mexico. Initiatives that support sustain-
able niche markets will not break this chain of
poverty and environmental degradation. However,
evidence from market analysis and sales shows
signs of hope that new income sources from green
markets can bolster environmental protection
by opening new revenue sources to the poor.
Neighboring countries in Central and South
America have different histories, economic and envi-
ronmental endowments, social traditions, and levels
of economic reform. At the same time, many of
these countries share a common environmental her-
itage, from the Meso-American biological diversity
corridor to rich ecosystems of coastal marine and
tropical forestry areas in South America. There is
no one-size-fits-all formula for how to anticipate
the environmental effects of trade liberalization.
However, we do know that the poverty-environment
nexus in the agricultural sector will be affected in
similar ways, as in Mexico during the :,,cs.
Anticipatory policies include ensuring that working
capital is available to small farms when it is most
urgently needed during the transitional period of lib-
eralization; that liberalization schedules do not open
vulnerable markets too quickly; that discrete envi-
ronmental markets are supported; and that environ-
mental monitoring and data are focused from the
outset, to track and offset scale impacts of free trade.
NOTES
1 In September :,,+, President Bill Clinton declared that
NAFTA would “lead to improvements in the environment
and increased investment on the Mexican side of the border
in environmental cleanup.” Carol Browner, the administrator
of the U.S. Environmental Protection Agency, went further,
stating that NAFTA was the “the most environmentally
sensitive trade agreement in history.”
2 NAFTA Preamble, CEC Article +, BECC/NADBank, Article
:, Section :.
3 Public Citizen, NAFTA Chapter  Investor-State Cases:
Bankrupting Democracy, September :cc:, www.citizen.org.
4 Evidence showing a robust, linear relationship between trade
liberalization and economic growth is weak and uneven,
with that relationship generally inferred by measuring the
relative openness of an economy. A strong empirical case
exists showing that open economies grow quicker than do
closed ones. Measures of economic openness vary, but
include indicators of trade liberalization such as tariff and
subsidy levels. See, for instance, Robert J. Barro,
Determinants of Economic Growth: A Cross-Country Empirical
Study (Cambridge, Mass.: MIT Press, :,,,); and Michael
Ferrantino, The Dynamic Effects of Trade Liberalization: An
Empirical Analysis (Washington, D.C.: U.S. International
Trade Commission, :,,¬).
5 The literature on environmental review methodologies is
extensive. See, for example, Dale Andrew, ed., Assessing the
Environmental Effects of Trade Liberalization Agreements:
Methodologies (Paris: Organization for Economic Cooperation
and Development, :,,,); and Sarah Richardson, ed., Assessing
the Environmental Effects of the North American Free Trade
Agreement: An Analytical Framework (Phase II) and Issues
Studies (Montreal, Canada: North American Commission for
Environmental Cooperation, :,,,).
6 Jeffrey D. Sachs and Andrew Warner, “Economic Reform
and the Process of Global Integration,” Brookings Papers on
Economic Activity (Washington, D.C.: Brookings Institution,
:,,s).
7 Estrategia nacional sobre biodiversidad de México
(Comisión Nacional para el Conocimiento y Uso
de la Biodiversidad [CONABIO]: :ccc),
www.conabio.gob.mx/institucion/conabio_espanol/doctos/
catalogo.html.
8 See Kirk Hamilton and Michael Clemens, “Are We Saving
Enough for the Future?” in Expanding the Measure of Wealth
(Washington, D.C.: World Bank, :,,¬). See also Robert
Repetto et al. Wasting Assets: Natural Resources in the
National Accounts (Washington, D.C.: World Resources
Institute, :,ï,).
9 In the Mexican study, measurement of environmental
damages relied largely on pollution indicators, notably air
pollution indicators such as carbon dioxide, sulfur dioxide,
nitrogen oxides, ground-level ozone, and airborne dioxins,
with damages focusing on indicators such as increased mor-
tality and morbidity impacts associated with air pollution;
increased cancer risk from long-term, low-dose exposure to
toxic substances; increased gastrointestinal illnesses from pol-
luted drinking water; and damages to human health or more
direct cleanup costs from hazardous wastes.
10 Kevin Gallagher, Economic Integration, Environment, and
Development: Assessing the Mexican Experience, forthcoming.
11 For a summary of NAFTA’s environmental provisions, see
Daniel Magraw, ed., NAFTA and the Environment: Substance
and Process (Washington, D.C.: American Bar Association,
:,,s). For a discussion of the politics of environment in
NAFTA, see John Audley, Green Politics and Global Trade
(Washington, D.C.: Georgetown University Press, :,,¬).
12 Kenneth Reinert and David Roland-Holst, “The Industrial
Pollution Impacts of NAFTA: Some Preliminary Results,” in
Scott Vaughan, ed., The Environmental Effects of Free Trade
(Montreal, Canada: North American Commission for
Environmental Cooperation, :cc:).
13 Rachel Poynter and Sheila Holbrook-White, “NAFTA
Transportation Corridors: Approaches to Assessing
Environmental Impacts and Alternatives,” in Scott Vaughan,
ed., The Environmental Effects of Free Trade (Montreal,
Canada: North American Commission for Environmental
Cooperation, :cc:).
14 North American Commission for Environmental
Cooperation, Challenges and Opportunities in North
America’s Evolving Electricity Market (Montreal, Canada:
North American Commission for Environmental
Cooperation, :cc:).
15 Economic Integration, Environment, and Development (see note
:c). See also Marisa Jacott, Cyrus Reed, Amy Taylor, and
Mark Winfield, “Energy Use in the Cement Industry in North
America,” paper presented at the Second Symposium on
Assessing the Environmental Effects of Trade, North American
Commission for Environmental Cooperation (Mexico City,
Mexico, March :cc+), available at www.cec.org.
16 See North American Commission for Environmental
Cooperation, Taking Stock (Montreal, Canada: North
American Commission for Environmental Cooperation, :cc+).
For an overview of the mandate and work of the commission,
see Gary Hufbauer et al., NAFTA and the Environment: Seven
Years Later (Washington, D.C.: Institute for International
Economics, :,,¬); Carolyn Deere and Daniel Esty, eds.,
Greening the Americas: NAFTA’s Lessons for Hemispheric Trade
(Cambridge, Mass.: MIT Press, :cc:); and Jan Gilbreath,
Environment and Development in Mexico (Washington, D.C.:
Center for Strategic and International Studies, :cc+).
17 Among the first public meetings ever held between the
federal government of Mexico and members of nongovern-
mental organizations took place in the early :,,cs, when
environmental issues related to the proposed construction of
a wharf in Cozumel were discussed. Since then, public con-
sultations have become a regular feature of government in
Mexico, extending to a range of public issues. For an
account of some of these public consultation practices, see
Timothy Whitehouse, ed., Public Access to Government-Held
Environmental Information: Report on North American Law,
:d ed. (Montreal, Canada: North American Commission for
Environmental Cooperation, :cc+).
Carnegie Endowment for International Peace 83
84 NAFTA’s Promise and Reality
18 In the midst of the NAFTA debate in :,,:, two economists—
Grossman and Krueger—demonstrated that some indexes of
pollution increase at the early stages of economic development,
but then begin to decrease after a certain level of income is
reached. The income turning point changed with the particular
pollutant, but was in the range of usss,ccc‒sï,ccc per capita
GDP. The theory, known as the Environmental Kuznets Curve,
was adapted from the work of Simon Kuznets, for his work in
showing the relationship between level and inequality of
income. The Grossman-Krueger hypothesis has sparked a very
lively debate in the literature. See, for example, D. Stern,
“Progress on the Environmental Kuznets Curve?” Environment
and Development Economics, vol. + (:,,ï), pp. :¬+‒,o;
Theodore Panayotou, “Demystifying the Environmental
Kuznets Curve: Turning a Black Box into a Policy Tool,”
Environment and Development Economics (special issue: The
Environmental Kuznets Curve), vol. :, no. ¡ (:,,¬), pp.
¡os‒ï¡; and K. G. Maler, “Environment, Poverty, and
Economic Growth,” in B. Pleskovic and J. Stiglitz, eds.,
Annual World Bank Conference on Development Economics
(Washington, D.C.: World Bank, :,,¬).
19 See Susmita Dasgupta, Hemamala Hettige, and David
Wheeler, What Improves Environmental Performance?
Evidence from Mexican Industry (Washington, D.C.: World
Bank, :,,¬).
20 See Howard Mann, Private Rights, Public Problems: A Guide
to NAFTA’s Controversial Chapter on Investor Rights
(Winnipeg, Canada: International Institute for Sustainable
Development and World Wildlife Fund, :cc:). After
numerous attempts to reach settlement, on July +:, :cc:, the
governments of Mexico, Canada, and the United States issued
a clarification regarding NAFTA’s Chapter ::. The statement
addresses three issues: First, it makes clear that Chapter ::
does not preclude the parties from providing public access to
documents submitted to or issued by a dispute panel. Second,
it attempts to limit the scope of the legal terms “minimum
standard of treatment” and “full protection and security” by
restating a principle in customary international law regarding
minimum standard of treatment. Finally, it limits efforts by
investors seeking damages under NAFTA only to infractions
that may arise under Chapter :: disciplines, not other ele-
ments of the agreement. The full text of this statement can be
found at the U.S. Trade Representative’s web site,
www.ustr.gov/regions/whemisphere/nafta-chapter11.pdf.
21 Economic Integration, Environment, and Development (see
note :c).
22 Charles Driscoll et al., “Nitrogen Pollution: Sources and
Consequences in the U.S. Northeast,” Environment, vol. ¡s,
no. ¬ (September :cc+).
23 R. Ford Runge, “Positive Incentives for Pollution Control in
North Carolina: A Policy Analysis,” in D. Huisingh and V.
Bailey, eds., Making Pollution Prevention Pay (New York:
Pergamon Press, :,ï:).
24 Sistema Unificado de Informacion Básica del Agua (:cc+),
Agua en México, Secretaria de Medio Ambiente y Recursos
Naturales (SEMARNAT) and Comisión Nacional del Agua,
Mexico City.
25 Food and Agriculture Organization of the United Nations,
“Forestry Data” (Rome: Food and Agriculture Organization of
the United Nations, :,,,), available at FAOStat, www.fao.org.
26 Organization for Economic Cooperation and Development,
Agricultural Policies in OECD Countries: Monitoring and
Evaluation (Paris: Organization for Economic Cooperation
and Development, :cc+), available at www.oecd.org.
27 Mexico’s food consumption has changed as GDP per capita
has risen on average. Consumption is moving away from
unprocessed bulk commodities and toward higher-value
foods such as meat, fresh fruits, dairy products, and
processed foods. At the same time, rates of malnutrition and
hunger have also increased.
28 Steven Zahniser and John Link, eds., Effects of NAFTA
on Agriculture and the Rural Economy (Washington, D.C.:
U.S. Department of Agriculture, July :cc:), available at
http://ers.usda.gov/publications/wrsc:c:/.
29 There are more than :cc different agricultural products traded
among the NAFTA countries, each with different environ-
mental characteristics depending not only on the specific crop
but on the climate, soil, water, and other factors affecting how
that crop is cultivated (or in the case of aquaculture and live-
stock, produced). Unlike in the electric power generating
sector, there are no standardized or uniform emissions factors
for these agricultural goods, with the possible exception of
cotton. Given important differences in the environmental
characteristics of different crops, it is not feasible to extrapolate
more general or net environmental impact stemming from
NAFTA liberalization from the three examples discussed in
this chapter. Even if these differences were not so pronounced
among crops, environmental quality indicators are generally
disaggregated, making it difficult to compare changes in pollu-
tion with changes in water scarcity or biological diversity.
30 Alejandro Nadal, “Maize in Mexico: Some Environmental
Implications of NAFTA,” in Sarah Richardson, ed., Assessing
the Environmental Effects of NAFTA: An Analytical
Framework (Montreal, Canada: North American
Commission for Environmental Cooperation, :,,,).
31 The debate over the risks to health and the environment
from GM foods and crops is far from settled. For example,
there is now a scientific consensus that the risk to human
health from consuming the current range of GM foods is
low or nonexistent. A recent scientific panel report of the
government of the United Kingdom concluded that “on
balance...the risks to human health for GM crops currently on
the market are very low. But depending on the crops developed
GM food may present greater challenges in risk management in
the future” (UK Government Science Panel Report, July
:cc+), available at www.gmsciencedebate.org.uk.
32 Chantal Line Carpentier and Hans Herrman, Maize and
Biodiversity: The Effects of Transgenic Maize in Mexico: Issues
Summary (Montreal, Canada: North American Commission
for Environmental Cooperation, :cc:).
33 D. Quist and I. H. Chapala, “Transgenic DNA Integressed
into Traditional Maize Landscapes in Oaxaca, Mexico,”
Nature, vol. ¡:¡ (:cc:), pp. s¡:‒¡+.
34 After attacks led by the biotechnology industry and others,
Nature retracted the article in mid-:cc:, which in turn
fueled an international scandal around the risks of GM
Carnegie Endowment for International Peace 85
contamination to the environment. Editorial Note, Nature,
vol. ¡:o (April ::, :cc:) p. occ.
35 The July :cc+ UK Government Science Panel Report (see
note +:) found that it was “very unlikely [that GM crops]
would invade the country-side and become problematic
plants.” However, the panel recommended that more
research be conducted on the environmental effects of gene
flow and on herbicide tolerance of GM crops.
36 Ibid.
37 Katie Eastham and Jeremy Sweet, Genetically Modified
Organisms: The Significance of Gene Flow Through Pollen
Transfer (Copenhagen, Denmark: European Environment
Agency, :cc+).
38 The Biosafety Protocol of the UN Convention on Biological
Diversity entered into force in mid-:cc+. The objective of the
Biosafety Protocol is to protect biological diversity from
potential risks posed by living modified organisms resulting
from biotechnology. The Protocol establishes an advanced
information agreement to ensure that countries importing
living modified organisms are able to make informed decisions
prior to that importation taking place. Since the focus of the
Protocol is on trade in living modified organisms, it is unclear
if it would have any bearing on unintentional or accidental
contamination. While Mexico has signed and ratified the
Protocol, neither Canada nor the United States has done so.
39 For an insightful discussion of the relationship among trade
liberalization, structural changes in markets, and vertical
integration, see David Hummels, Jun Ishii, and Kei-Mu Yi,
“The Nature and Growth of Vertical Integration in World
Trade,” Journal of International Economics, vol. s¡, no. :
(June :cc:), pp. ¬s–,o.
40 Rosamond Naylor, Walter Falcon, and Arthur Puente-
Gonzalez, “Policy Reforms and Mexican Agriculture: Views
from the Yaqui Valley,” Economics Program Paper no. c:‒c:
(Mexico City: CIMMYT, :cc:).
41 C. Ford Runge, “Feedlot Production of Cattle in the United
States and Canada,” in Sarah Richardson, ed., Assessing
Environmental Effects of the North American Free Trade
Agreement: An Analytical Framework (Montreal, Canada: North
American Commission for Environmental Cooperation, :,,,).
See also Jerry Speir, Marie-Ann Bowden, David Ervin, Jim
McElfish, and Rosario Perez Espejo, Comparative Standards for
Intensive Livestock Operations in Canada, Mexico, and the U.S.
(Montreal, Canada: North American Commission for
Environmental Cooperation, :cc:).
42 Jennifer Lee, “Neighbors of Vast Hog Farms Say Foul Air
Endangers Their Health” New York Times, May ::, :cc+, p. :.
43 See Frank Ackerman, Timothy Wise, Kevin Gallagher, Luke
Ney, and Regina Flores, “Free Trade, Corn and the
Environment: Environmental Impacts of U.S.-Mexico Corn
Trade under NAFTA,” working paper no. c+-co (Medford,
Mass: Global Development and Environment Institute),
June :cc+. See also Chantal Line Carpentier, Trade
Liberalization Impacts on Agriculture: Predicted versus
Realized” (Montreal, Canada: North American Commission
for Environmental Cooperation, December :cc:).
44 Corn production in the United States is not only the biggest
user of farmland, but also the greatest consumer of commer-
cial nitrogen and phosphate fertilizers, making up ¡s percent
of total U.S. sales. In addition, U.S. corn production is a
significant user of pesticides. The highest concentration of
nitrogen pollution is found in the Mississippi River Delta—
where more than half of total U.S. farm production is con-
centrated—where it moves over long distances and into the
Gulf of Mexico. In recent years, incidences of hypoxic zones
have increased in occurrence and severity. The main herbicide
used in corn production is atrazine, which has been found
extensively in groundwater wells. For a comprehensive review
of the environmental effects of corn production, see C. Ford
Runge, King Corn: The History, Trade and Environmental
Consequences of Corn (Maize) Production in the United States
(Washington, D.C.: World Wildlife Fund, :cc:).
45 See, for example, Kym Anderson and J. Drake Brockman,
Trade and Environment Policy Issues: Implications for the Asia-
Pacific Region (Canberra, Australia: Australian Pacific Economic
Cooperation Committee, :,,s). Reprinted in abridged form in
the Business Council Bulletin, vol. ::ï (April :,,s), pp. ¡o‒s+.
46 B. L. Turner et al., Illustrating the Coupled Human-
Environment System to Vulnerability Analysis: Three Case
Studies (Palo Alto, Calif.: Stanford University, :cc+),
available at www.pnas.org.
47 Enrique Aguilar, Pricing of Irrigation Water in Mexico,
paper presented at the Irrigation Water Policies:
Micro and Macro Considerations, World Bank,
Agadir Morrocco, June :s‒:¬, :cc:, available at
http://Inweb:ï.worldbank.org/ESSD/ardext.nsf/
:ïByDocName/eventsagadirconference:cc:.
48 Jose de Anda, Sergio Quinones-Cisneros, Richard French,
and Manuel Guzman, “Hydrologic Balance of Lake
Chapala,” Journal of the American Water Resources Association,
vol. +¡, no. o (:,,ï).
49 North American Commission for Environmental Cooperation,
The North American Mosaic (Montreal, Canada: North
American Commission for Environmental Cooperation, :cc:).
50 Jorge Mattar, Juan-Carlos Moreno-Brid, and Wilson Peres,
“Foreign Investment in Mexico After Economic Integration,”
(Mexico City: CEPAL-ECLAC, July :cc:),
www.networkideas.org/featart/sep:cc:mexico.pdf.
51 Antonio Yúnez-Naude and Fernando Barceinas Paredes,
The Agricultural of Mexico after Ten Years of NAFTA
Implementation (Washington, D.C.: Carnegie Endowment
for International Peace, :cc+), available at www.ceip.org.
52 A variable used by Yúnez-Naude and Paredes (see note s:) to
estimate structural change in the fresh fruit and vegetable
sector measures the value of agricultural monthly exports and
imports (totals and per crop) in constant pesos using real
exchange rate indexes for :,,c. The discussion above also
refers to structural changes outside this definition, including
Schumpeterian definitions of market structure transformation
and innovation, including vertical and horizontal integration.
53 The shift to intensive farming in the grains and horticulture
sector may be much greater than the overall shift in the agri-
cultural sector. Some studies suggest that the contribution that
modern farms make to Mexico’s GDP has remained roughly
constant at between :¬ and +s percent since the early :,ïcs.
54 Dennis Henderson, “Between the Farm Gate and the Dinner
86 NAFTA’s Promise and Reality
Plate: Motivations for Industrial Change in the Processed
Food Sector,” The Future of Food (Paris: Organization for
Economic Cooperation and Development, :,,,).
55 Favia Echanove Hacuja, “Working under Contract for the
Vegetable Agro-Industry in Mexico,” Culture and Agriculture,
vol. :+, no. + (Fall :cc:).
56 Lee Christensen, Soil Nutrient and Water Management
Systems in U.S. Corn Production (Washington, D.C.: U.S.
Department of Agriculture, April :cc:).
57 See note ¡¬.
58 Ibid.
59 Jose Maria Martinez, Aquifers and Agro-Chemicals in a
Border Region: NAFTA Challenges and Opportunities for
Mexican Agriculture (Montreal, Canada: North American
Commission for Environmental Cooperation, :cc+).
60 Travis Phillips, “Behind the U.S.-Mexico Water Treaty
Dispute,” report no. ¬¬-¬ (Austin, Texas: House Research
Organization: Texas House of Representatives, April +c,
:cc:).
61 This does not include a net account of total water transfers
in tomatoes, since the United States also exported tomatoes
to Mexico, although at a much smaller level. As indicated in
Figure ¬, about o.: million metric tons of tomatoes were
exported from Mexico to the United States from :,,+ to
:cc:, or approximately oïc,ccc pounds per year. One metric
ton of water is the equivalent of :os.o:¬ gallons of water,
making the average equivalent of exported water :ïc,oso,o+:
gallons per year. Approximately ,c percent of all Mexican
tomato exports on average are bound for the United States.
A conservative, or lower bound, estimate therefore suggests
that roughly :o: million gallons of freshwater equivalents are
contained in these exports.
62 NAFTA and trade liberalization generally have affected farm
size in Mexico in much the same way they have affected
average farm sizes in the United States and Canada.
According to the International Trade Commission, average
farm size in the United States increased from ¡¡, acres to
¡ï¬ acres from :,¬ï to :,,¬, while the number of farms
declined from :.+ million to :., million; U.S. International
Trade Commission, “The Impact of Trade Agreements:
Effect of the Tokyo Round, U.S.-Israel FTA, U.S.-Canada
FTA, NAFTA and the Uruguay Round on the U.S.
Economy,” August, publication no. +o:: (Washington, D.C.:
U.S. International Trade Commission, August :cc+). See
also Trade and Environment Policy Issues, note ¡s.
63 P. A. Matson, W. J. Parton, A. G. Power, and M. J. Swift,
“Agricultural Intensification and Ecosystem Properties,”
Science, vol. :¬¬, no. :s (July :,,¬).
64 P. A. Sanchez, Properties and Management of Soils in the
Tropics (New York: John Wiley & Sons, :,¬o).
65 Patricia Bouillon, Ariana Legovini, and Nora Lustig, Rising
Inequality in Mexico: Household Characteristics and Regional
Effects (Washington, D.C.: World Bank, September :cc:).
These authors show that the Gini coefficient increased from
¡,.:¡ to s¡.,: between :,ï¡ and :,,¡, and the mean-log
deviation grew by :o percent during the same period.
66 David Lee, Paul Ferrara, and Christopher Barrett,
“Changing Perspectives on Agricultural Intensification,
Economic Development and the Environment,” in David R.
Lee and Christopher B. Barrett, eds., Tradeoffs or Synergies?
Agricultural Intensification, Economic Development and the
Environment (New York: CABI Publishing, :cc:), pp. :‒:o.
67 The North American Mosaic (see note ¡,).
68 An insightful analysis of the history of public participation
in Mexico’s protected areas is provided in Martha Rosas,
Participatory Environmental Policy Processes: The Case of
Advisory Councils in Protected Areas in Mexico, unpublished
thesis (England: University of Sussex, :cc+).
69 David Pearce, How Valuable Are the Tropical Forests (paper
presented at the Séminaire Développement Durable et
Économie de l’Environmement, Paris, December :cc:),
available at www.iddri.org/iddri/telecharge/mardis/pearce.pdf.
70 One exception is payments for production of coffee, the
largest export crop in Mexico. In :cc:, annual payments
through the Mexican Coffee Council of approximately
uss:cc million in coffee subsidies extended higher payments
to all organic farms (the majority of which are small-scale),
as well as higher payments for coffee grown in mountain
regions. It is too early to tell if this subsidy structure is
sufficient to reverse the effects of decades of payments that
favored large coffee plantations.
71 ASERCA (Support Services for Agricultural Marketing) was
created in :,,: and originally designed to provide support
for farmers to pay for marketing expenses, such as storage
and transportation. PROCAMPO (Farmers Direct Support
Program) was created in :,,¡ and provides direct payments
(decoupled income transfers) to farmers based on the size of
their holdings. In response to criticism that they favor large-
scale farms, reforms have been announced in July :cc+ for
ASERCA programs so that payments will cover all states,
with varying farm sizes within states, for ten crops: maize,
wheat, sorghum, sunflowers, canola, cotton, rice, soy, and
two other crops used as grain feed for cattle.
72 B. L. Turner, J. Geoghegan, J. Eastman, D. Lawrence, and
H. Vester, Land Cover and Land-Change in the Southern
Yucatan Peninsular Region: Refining Models and Projections
of Deforestation with Application to the Carbon Cycle, Biotic
Diversity, and Regeneration Capacity, Sustainability and
Vulnerability, available from the National Aeronautics and
Space Administration at http://lcluc.gsfc.nasa.gov/
products/pdfs/:cc+AnPrgRp/AnPrgRp_TurnerBL:cc+.doc.
73 See, for example, David Ervin, C. Ford Runge, E. Graffy, W.
Anthony, S. Batie, P. Faeth, T. Penny, and T. Warman,
“Agriculture and the Environment: A New Strategic Vision,”
Environment, vol. ¡c, no. o (July/August :,,ï), pp. ï‒:s,
+s‒¡c; Hakan Nordstom and Scott Vaughan, Trade and
Environment: Special Study (Geneva, Switzerland: World
Trade Organization, :,,,).
74 See Karel Maynard, Stephanie Dionne, Marc Paquin, and
Isaack Pageot-Lebel, The Economic and Environmental Impacts
of Agricultural Subsidies: An Assessment of the  U.S. Farm
Bill and the Doha Round (Montreal, Canada: North American
Commission for Environmental Cooperation, :cc+); and
Joseph Cooper et al., Some Domestic Environmental Effects
of U.S. Agricultural Adjustments under Liberalized Trade: A
Preliminary Analysis (Montreal, Canada: North American
Carnegie Endowment for International Peace 87
Commission for Environmental Cooperation, :cc+), both
available at www.cec.org.
75 Campbell’s began contract farming arrangements in Mexico
in :,oc, followed by Del Monte in :,o:. Today, there
are several frozen-food companies operating in Mexico,
including Green Giant and Birdseye. See M. A. Barron
and E. Rello, “The Impact of the Tomato Agro-Industry
on the Rural Poor in Mexico,” Agricultural Economics,
vol. :+ (:ccc), pp. :ï+‒,¬.
76 Between :,• and :cc:, U.S. growers received an increas-
ingly smaller percentage of retail value for their produce,
while the consolidation of the retail sector has meant that a
higher share of retail value has gone to distributors and mar-
keters. See The Impact of Trade Agreements: Effect of the Tokyo
Round, U.S.-Israel FTA, U.S.-Canada FTA, NAFTA, and the
Uruguay Round on the U.S. Economy, publication no. +o::
(Washington, D.C.: U.S. International Trade Commission,
August :cc+), available at www.usitc.gov.
77 Of the eighteen frozen-food companies operating in Mexico, ¬s
percent have their operations in Guanajuato. Roughly :c
percent of all vegetables grown in Mexico are from Guanajuato,
which generates one-quarter of total agricultural revenues.
Leading fresh crops are broccoli and cauliflower. In that state,
approximately :ï,ccc hectares, on sïc farms, are cultivated
under contract. Buyers with purchase contract arrangements
include Green Giant and Birdseye. See “The Impact of the
Tomato Agro-industry on the Rural Poor in Mexico,” note ¬s.
78 Under the :,,+ Foreign Investment Law, foreign ownership
of banks was limited to +c percent, increasing to ¡, percent
in :,,o. In :,,,, amendments allowed for full majority own-
ership by foreign interests. Similar reforms have been enacted
by other Latin American countries, notably Colombia in
:,¬,, Bolivia and Brazil in :,ï,, and Costa Rica in :,,s.
However, the changes in Mexico’s laws have been the
deepest.
79 World Bank, “Product Document for a Proposed Rural
Finance Development Structural Adjustment Loan in the
Amount of sscs.o million,” report no. :sïsï (Washington,
D.C.: World Bank, May :o, :cc+), available at www.world-
bank.org. See also Emmanuel Baldacci, Luiz de Mello, and
Gabriela Inchaute, “Financial Crisis, Poverty and Income
Distribution,” working paper no. wi⁄c:⁄c¡ (Washington,
D.C.: International Monetary Fund, :cc:).
80 B. L. Turner et al., Illustrating the Coupled Human-
Environment Systems for Vulnerability Analysis: Three
Case Studies, March :cc+, available at www.pnas.org.
81 World Bank, “World Bank Approves sscs Million Loan
to Reform Banking Sector in Mexico,” press release
(Washington, D.C.: World Bank, June :+, :cc+).
82 During :,,:–:,,:, ss percent (by area) of the production of
wheat—the main crop in the Sonora region—was under
ejido control, compared with +¬ percent owned privately, and
ï percent rented by ejidos to private interests. By :,,¬–:,,ï,
:, percent of wheat production was controlled by ejidos; ¡o
percent was controlled by the private sector and :s percent
was rented to private farming interests.
83 Rosamond Naylor, Walter Falcon, and Ivan Ortiz-
Monasterio, “Policy Reforms and Mexican Agriculture:
Views from the Yaqui Valley,” CIMMYT Economic Program
Paper no. c:-c: (Palo Alto, Calif.: Stanford University, :cc:),
available at http://yaquivalley.stanford.edu/publications.
84 Ibid.
85 R. Constanza, D. Arge, R. de Groot, S. Faber, M. Grasse,
B. Hannon, K. Limburgh, S. Naeen, and R. O’Neil, “The
Value of the World’s Ecosystem Services and Natural
Capital,” Nature, vol. +ï¬ (:,,¬), pp. :s+‒oc.
86 The three general approaches to economic valuation are (a) esti-
mates of averted behavior; (b) hedonic pricing estimates, using
changes in real estate-type prices as a proxy; and (c) contingent
valuation, based on questionnaires of the willingness-to-pay
(WTP) type. Approaches generally give some proxy of the total
economic value (TEV) of the environmental resource being
valued, based on the following stylized estimate: TEV = direct
use value + indirect use value + option value + existence value.
87 A. C. Fisher and W. M. Hanemann, Option Value and the
Extinction of Species (Berkeley, Calif.: California Agriculture
Experiment Station, :,ïs).
88 Scott Vaughan, Chantal Line Carpentier, and Zachary
Patterson, Mexico and Emerging Carbon Markets: Investment
Opportunities for Small and Medium-Sized Companies
(Montreal, Canada: North American Commission for
Environmental Cooperation, :ccc).
89 The main demands of the farmers included a moratorium
on all agricultural provisions of NAFTA, emergency and
long-term agricultural development programs, viable rural
credit institutions, government investment in rural infra-
structure and communities, food safety and quality for con-
sumers, and recognition of the rights of indigenous peoples.
90 Alan Winters, “Trade Liberalization and Poverty: What Do
We Know?” GTAP Working Papers, (West Lafayette, Ind.:
Purdue University, June :cc+), available at www.gtap.org.
See also William Easterly, The Elusive Quest for Growth
(Cambridge, Mass.: MIT Press, :cc:); and World Bank,
Globalization, Growth and Poverty: Building an Inclusive
World Economy (policy research report) (Washington, D.C.:
World Bank, :cc:).
91 The author is grateful to Dan Biller, World Bank Institute,
for this insight regarding benefits transfers.
92 Daniele Giovannucci, Sustainable Coffee Survey of the North
American Specialty Coffee Industry (report prepared for the
Nature Conservancy, the Summit Foundation, the NACEC,
the Specialty Coffee Association, and the World Bank, July
:cc+), available at www.cec.org.
93 A. Brezinski and Scott Vaughan, Measuring Consumer Interest
in Shade-Grown Coffee: An Assessment of the Canadian, Mexican
and U.S. Markets (Montreal, Canada: North American
Commission for Environmental Cooperation, :,,,).
94 A long-standing challenge for developing-country exporters
attempting to differentiate products in the marketplace
involves the cost of often multiple certification and labeling
schemes to convey to consumers some environmental charac-
teristics of sustainable products. Mexico’s biological diversity
research and policy group (CONABIO) recently has
explored highly innovative ways of using geographic indica-
tors to distinguish, for consumers, different sustainable prod-
ucts being produced in rich ecosystem areas such as Chiapas.
88 NAFTA’s Promise and Reality
ABOUT THE CARNEGI E ENDOWMENT
The Carnegie Endowment for International Peace is a private, nonprofit organization
dedicated to advancing cooperation between nations and promoting active international
engagement by the United States. Founded in :,:c, its work is nonpartisan and dedicated
to achieving practical results.
Through research, publishing, convening, and, on occasion, creating new institutions and
international networks, Endowment associates shape fresh policy approaches. Their interests
span geographic regions and the relations between governments, business, international
organizations, and civil society, focusing on the economic, political, and technological forces
driving global change.
Through its Carnegie Moscow Center, the Endowment helps to develop a tradition of
public policy analysis in the former Soviet Republics and to improve relations between
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For more information about the Carnegie Endowment visit www.ceip.org.
The Trade, Equity, and Development Project works with policy leaders in governments,
intergovernmental and nongovernmental organizations, academia, business, and labor to
develop innovative solutions to key issues in the debate over global economic integration.
These issues include the impact of trade on the environment; the impact on jobs and labor
standards; and how the forces of trade and financial flows can be harnessed to achieve
broad-based economic growth and alleviate poverty. The project is directed by John J.
Audley, senior associate. For more information, visit www.ceip.org/trade.

© 2004 Carnegie Endowment for International Peace. All rights reserved. The Carnegie Endowment normally does not take institutional positions on public policy issues; the views presented here do not necessarily reflect the views of the Endowment, its officers, staff, or trustees. Printed with soy-based ink on recycled paper.

A BO U T T H E AU T H O R S

John J. Audley is a senior associate at the Carnegie Endowment for International Peace, where he directs the Trade, Equity, and Development Project. Before joining the Endowment in April , he was the trade policy coordinator at the U.S. Environmental Protection Agency, where he was responsible for developing and presenting EPA positions on U.S. trade policy.

is co-director and co-founder of the Migration Policy Institute, www.migrationpolicy.org. His work concentrates on the North American borders and migration agenda, immigrant settlement and integration, and migration management throughout the advanced industrial world. Previously, he was a senior associate at the Carnegie Endowment for International Peace, where he co-directed the International Migration Policy Program.
Demetrios G. Papademetriou

is a senior associate with the Carnegie Endowment’s Trade, Equity, and Development Project. Her work focuses on international labor policy in the context of trade, development, and multilateral relations. She served from ‒ as the Special Representative for International Labor Affairs at the U.S. Department of State.
Sandra Polaski Scott Vaughan

is a visiting scholar with the Carnegie Endowment, focusing on the WTO and NAFTA. He previously held positions with the North American Commission for Environmental Cooperation, the World Trade Organization, the United Nations Environment Program, and the Royal Bank Financial Group (Canada).

For print and electronic copies of the introduction and the full-text report in English and Spanish, visit www.ceip.org/pubs.

Table of Contents

 

Introduction John J. Audley   Jobs, Wages, and Household Income Sandra Polaski          The Shifting Expectations of Free Trade and Migration Demetrios G. Papademetriou   The Greenest Trade Agreement Ever? Measuring the Environmental Impacts of Agricultural Liberalization Scott Vaughan





Acknowledgments

This report is the product of each of its primary authors’ research and years of experience working in trade policy. In addition, the report was greatly influenced by research papers prepared by the following people: Francisco Alba Fernando Barceinas Paredes David Barkin Frank Bean George Dyer B. Lindsay Lowell Carlos Salas Paez Edith Pacheco Martha Ileana Rosas J. Edward Taylor Antonio Yúnez-Naude Eduardo Zepeda Miramontes El Colegio de México (COLMEX) has been our research partner from the beginning, and we wish to thank General Academic Coordinator Jean Francois Prud’Homme for the exceptional research conducted by his colleagues. In particular, the work done by Antonio Yúnez-Naude and his colleagues at the Programa de Estudios del Cambio Económico y la Sustentabilidad del Agro Mexicano (PRECESAM) was essential to our understanding of the relationship between trade liberalization and agriculture.

We have been privileged to work with an excellent team of assistants, including Carnegie Junior Fellows Vanessa Ulmer and Jacob Steinfeld, and Kristen Dubay, from Duke University. Maria Carlo helped keep us on schedule by mastering travel schedules, contracts, and deadlines. Demetrios Papademetriou at the Migration Policy Institute (MPI) was assisted by Maia Jachimowicz and Kevin O’Neil. MPI senior fellow and former head of the United States Immigration and Naturalization Service Doris Meissner provided guidance throughout the project. In addition to our research team, the following people reviewed chapters and gave us their time and suggestions: Chantal Line Carpentier, Paul Miller, Kevin Gallagher, George Perkovich, Ronald Steenblik, Timothy Wise, and Deborah Meyers. The report would not have been possible without support from the Carnegie Endowment for International Peace. We would also like to extend our gratitude to the Charles Stewart Mott Foundation, the Department of Foreign Affairs and Trade of the Government of Canada, and the North American Commission for Environmental Cooperation for their financial support. Without the combined efforts of the people and organizations listed above, this report would not have been possible. The views expressed in this report are those of the individual authors. John J. Audley Senior Associate and Director Trade, Equity, and Development Project Carnegie Endowment for International Peace

4 NAFTA’s Promise and Reality

the laws are rarely enforced. “Free trade and increased economic integration are key factors for raising standards of living. and adopted a similar prescription. Ambassador Robert Zoellick. Mexico’s earlier economic strategy of import substitution and a large role for the public sector had increased jobs and economic output. 1 9 9 4 NAFTA fuels economic growth and dynamic trade. Twenty-five years ago.”1 Many officials and observers in the hemisphere believed that free trade would remedy ailing economies. and provide greater job opportunities in North America. percent a year from ‒. in  L AT I N A M E R I CA N A N D CA R I B B E A N CO U N T R I E S How to grow their national economies. A N D C A N A D A . and thereby complement efforts to promote the successful conclusion of the FTAA negotiations. Their task is burdened by more than two decades of weak economic performance that has failed to create jobs for a workforce expected to grow by . Nicaragua. in January . NAFTA partners promote environmental protection. improving the working conditions of people in the Americas. the U. Guatemala.. Latin American governments are negotiating or have completed seventeen different free-trade agreements with member states of the Organization for Economic Cooperation and Development (OECD). According to the U.Introduction JOHN J. while they may have enacted sound environmental and public health laws. the governments of Costa Rica. especially in rural areas. 1 9 9 9 the hemisphere. Negotiating a Free Trade Area of the Americas (FTAA) was central to their agenda. Trade Representative. Current per capita income stands at a meager . AUDLEY …a giant sucking sound… — R O S S P E R O T. Mexican president Miguel de la Madrid Hurtado responded by moving Mexico toward an export economy. Most recently.S. In total. M E X I C O. Mexico faced a similar economic situation. and generate the revenues necessary to provide basic public goods such as human health and environmental protection. Honduras. create good jobs. Despite considerable domestic opposition. and according to the Inter-American Development Bank. stimulates investment while creating productive partnerships. According to the heads of state attending the  meeting. works for small and medium-sized businesses and provides fairness and certainty. and better protecting the environment. El Salvador. approximately  million people—one out of every three people living in Latin America and the Caribbean— earn less than  a day. and security throughout Carnegie Endowment for International Peace 5 . and the United States announced the launch of comprehensive trade negotiations. thirty-four governments from the Western Hemisphere met in  to outline an ambitious agenda to advance prosperity. Nearly one person in ten is out of work. prior to completion of the FTAA. — T H E G OV E R N M E N T S O F T H E U N I T E D S TAT E S . governments throughout the region admit that. which are scheduled to be completed by the end of . democratic values and institutions. FAC E A N E N O R M O U S C H A L L E N G E : Hoping to avoid another “lost decade” similar to the s.-Central American Free Trade Agreement (CAFTA) negotiations would further the regional integration the Central Americans have themselves begun.S. but it had also left Mexico with a crushing external debt that sparked a major economic crisis in . To compound the problem.

While not entirely similar. Our analysis focuses on people. and the choices they make as they attempt to negotiate their social and economic environments. or WTO). and the overall effect of these changes on migration and environmental quality. Mexican wages have not converged with U. advocacy groups. Unprecedented growth in trade. paychecks and productivity. that are interested in strengthening their bilateral and multilateral economic ties within the region. The agricultural sector. the productivity growth that has occurred over the last decade has not translated into growth in wages. million jobs since . where almost a fifth of Mexicans still work. increasing productivity. their communities. What has Mexico’s experience been after twenty years of trade liberalization and ten years of NAFTA? How have the lives of Mexicans changed? Has the Mexican government developed the capacity to create conditions that put Mexicans to work. While we touch on the experience of all three countries. we set out to determine how the quality of life in North America. That said. has fared as a result of trade liberalization in North America. Our second objective is to offer insights to other countries. We emphasize ■ NAFTA has not helped the Mexican economy keep pace with the growing demand for jobs. and securing a commitment from the United States and Canada in  to negotiate a free-trade agreement. and a surge in both portfolio and foreign direct investment have led to an increase of .Mexico joined the General Agreement on Tariffs and Trade (predecessor to the World Trade Organization. President Carlos Salinas de Gortari built on de la Madrid’s initial steps toward liberalization by reducing the size of the public sector. our analysis provides a rigorous and balanced assessment of NAFTA by focusing on its effects on people’s lives. and intergovernmental organizations because we answer this question about the lessons of NAFTA by analyzing what conventional NAFTA studies pass over. and households. Despite predictions to the contrary. Our study is different from those already done by some research institutions. These similarities mean that NAFTA’s record can offer insights to other countries as they consider the potential costs and benefits of agreements such as CAFTA and FTAA. wages for most Mexicans today are lower than they were when NAFTA took effect. ■ Real 6 NAFTA’s Promise and Reality . Mexico’s economic and cultural history and rich ecosystem are more closely linked to those of its Latin American neighbors than to those of the United States or Canada. jobs in manufacturing from  to . particularly in Mexico.2 The North American Free Trade Agreement (NAFTA) went into force in . and agricultural production and land use. what lessons can be learned by other Latin American countries from Mexico’s attempt to use trade liberalization with the United States and Canada as its engine for economic development? changes in household income. we emphasize Mexico’s experience since the enactment of NAFTA. this setback in wages was caused by the peso crisis of –—not by NAFTA. and give them real alternatives to migration? In short. wages. rural employment. particularly in Latin America. marking the first major trade deal between developed and developing countries. We then examine how NAFTA’s trade rules and institutions played a role in these changes. has lost . livelihoods. as it is more relevant to other developing countries interested in strengthening their economic ties with wealthy countries such as Canada and the United States. while most positive analyses focus on the macro level and most negative analyses rely only on losses and not gains.S. However. protect their health and the environment. In short. First. promoting land ownership reform. O U R O B J ECT I V ES O U R CO N C LU S I O N S This report has two objectives.

enactment of NAFTA accelerated changes in commercial farming practices that have put Mexico’s diverse ecosystem at great risk of contamination from concentrations of nitrogen and other chemicals commonly used in modern farming. ■ Mexico’s Put simply. hectares per year since  in the biologically rich regions of southern Mexico. to reduce expenses. there has been a dramatic rise in the number of migrants to the United States. families rely on remittances sent home by those who migrate to the United States. Mexico’s most vulnerable citizens have faced a maelstrom of change beyond their capacity. The net environmental loss associated with an increase in the farming of marginal land and illegal logging and poaching for fuel and food places some of the most important biological reserves in the hemisphere at risk of irreparable damage. a practice that has resulted in an average deforestation rate of more than . many households have developed survival strategies to meet basic subsistence needs. Mexico’s agricultural policies provide commercial farmers with substantial support. In response to the growing challenges facing rural Mexico. evolution toward a modern. while relying on sporadic agricultural work to supplement their incomes.■ NAFTA has not stemmed the flow of poor Mexicans into the United States in search of jobs. private sectors to respond to the economic. and the pull of employment opportunities in the United States provide better explanations for the increase in migration than NAFTA itself. and environmental shocks of trading with two of the biggest economies in the world. The Mexican government estimates that annual pollution damages over the past decade exceeded  billion per year. and develop and implement ■ The fear of a “race to the bottom” in environmental regulation has proved unfounded. instead. These strategies include a mix of increased cultivation of basic crops and off-farm employment. for Mexico’s rural households the picture is clear—and bleak. governments must respond to economic opening with effective policies. Trade should not be seen as an end in itself. Historical migration patterns. the peso crisis. Many rural workers have nonagricultural activities as their primary occupations. NAFTA has accelerated Mexico’s transition to a liberalized economy without creating the necessary conditions for the public and Carnegie Endowment for International Peace 7 . often in the informal sector. such as the deployment of social safety nets and trade adjustment assistance. Finally. At the same time. it should be used as a tool to strengthen economies through the operation of comparative advantage. NAFTA has been neither the disaster its opponents predicted nor the savior hailed by its supporters. This damage to the environment is greater than the economic gains from the growth of trade and of the economy as a whole. More specifically. More than ever. in fact. But while NAFTA’s overall impact may be muddled. despite an unprecedented increase in border control measures. Rural farmers have replaced lost income caused by the collapse in commodity prices by farming more marginal land. exportoriented agricultural sector has also failed to deliver the anticipated environmental benefits of reduced deforestation and tillage. they can open doors to new markets while providing adequate protections from the stress associated with exposure to global competition and the increased pressure on natural resources. but do not benefit subsistence farmers. Negotiated properly. social. or that of their government. rural households also fall back on more traditional approaches to heating their homes and feeding their families. to control. and in some cases in maquiladora plants that have relocated away from the northern border into the hinterlands. Trade agreements do not need to result in this kind of hardship for the world’s rural poor. with or without legal status. At this point some elements of Mexico’s economy are dirtier and some are cleaner.

countries should bargain for meaningful financial support for transitional trade adjustment assistance. Assistance to the rural poor should be aimed at allowing them to transition to livelihoods that are sustainable in the modern global market—and should acknowledge that the process of urbanization will continue. Such adjustment assistance should include training for workers and subsistence farmers in new skills and access to credit that allows and encourages small farmers to develop economically and environmentally sound farming practices. and environmental protection are examples of topics on which deeper cooperation is sorely needed. They should commit to national action plans that build environmental infrastructure. they must stop making ■ Developing 8 NAFTA’s Promise and Reality . Because these policies may be valued by their wealthier trading partners. and countries at all levels of development have good reason to discuss temporary migration in a variety of contexts. Governments can win back public support for new trade agreements. which may include future free-trade negotiations. developing countries may win additional advantages in trade agreements by making these commitments. First. nor should they be loaded with unrealistic expectations. given the political sensitivity of the issue.programs that protect labor rights and the environment. from rural farmers in Latin America to cotton producers in Africa to manufacturing workers in the United States and Europe. but they must change their current tactics. Regional and bilateral trade agreements should not allow developed countries to duck the crucial issue of producer subsidies in agriculture. from trading partners and from international donor organizations. ■ The ■ Trade ■ Developing L O N G -T E R M S T R AT E G I E S Free-trade agreements should not be thought of as an end in themselves. countries should adopt and implement policies that help distribute the gains from trade more equitably. As nations consider how best to use trade agreements to foster development. trade agreements should set standards that allow developing countries to take advantage of the growing demand for organic food products. Migration. The need for “shock absorbers” is especially great for the poorest developing countries where agriculture is a principal source of employment. Instead. what is relevant is whether the suppliers create jobs. labor. However. through better tax and minimum wage policies and the expansion of freedom of association and collective bargaining rights. Trade liberalization is facing a crisis of legitimacy among people around the world. we offer the following insights: ■ Developing countries interested in freer trade should negotiate longer and more gradual tariff reduction schedules for agricultural products imported from wealthy countries. ■ To minimize the environmental implications of trade liberalization for agriculture. they should be viewed as part of a larger effort toward substantive bilateral and regional cooperation toward common goals. migration should not be allowed to jeopardize agreements on the movement of goods and capital and on other ways of providing services. Whether the suppliers are owned by domestic or foreign firms is not relevant. and the tendency of export growers to adopt chemicalintensive production methods. and negotiate special safeguards to protect against the dumping of subsidized crops. agreements should allow developing countries to adopt policies that maximize employment gains from trade by promoting the development of domestic suppliers and that do not favor imported components. movement of workers is a powerful social and economic force.

. Second. Mexico: The Policy and Politics of Modernization (Barcelona. N OT ES 1 Ministerial Declaration. 2 Carlos Salinas de Gortari. Miami.asp. is how everyone will achieve greater prosperity..org/ ministerials/miami_e. That. or stem the flow of illegal migration. Spain: Plaza & Janes. See especially parts  and . they must enhance long-term development and avoid unnecessary setbacks by strengthening their domestic economies’ capacity to respond to shocks when exposed to the global marketplace.empty promises that trade liberalization alone will bring new jobs or clean environments. available at www. in the long-term. ). The needs of developing countries must be taken into account in trade negotiations in meaningful ways that create real opportunities for development and growth. so that these countries’ citizens can also become consumers in the global economy. First Summit of the Americas.ftaa-alca. Fla. Carnegie Endowment for International Peace 9 .

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President George W. and the wages paid.”2 When trade pacts are sold to the public and to legislators on the basis of their potential to create jobs and raise wages. stimulating further production of goods and services and creating a virtuous circle of growth. wages. as job creators. wages. If productivity rises.Jobs. Therefore. U. A second important and closely related measure is the effect of trade liberalization on productivity. and it is impossible to assess the effect of trade on societies without knowing which groups gained. A third set of economic issues that must be addressed in measuring the impact of trade on average citizens is how the gains from trade are distributed. because the impact of NAFTA on employment has been much greater there than in Canada or the United States. Bush promotes trade pacts on the same basis. workers can be paid more without driving up inflation or cutting into business profits. As with other effects of NAFTA. Rising productivity that leads to higher wages will expand domestic consumer demand.1 Today. and household income in each North American country. Still. I then discuss the policy implications for countries in the hemisphere that are confronting choices on trade that may have similar employment impacts. In this chapter. The focus is primarily on Mexico. Beyond these economic effects of trade on real people. and particular trade agreements such as the North American Free Trade Agreement (NAFTA). I review the impact of NAFTA on jobs. Wages. promising that they will “generate high-wage jobs for American workers. (Continued on page ) Carnegie Endowment for International Peace 11 . or how much workers actually produce in any given work session. to determine actual results. Such retrospective studies can then be used to guide future trade policy. it is important to revisit those promises. it is not a simple or straightforward proposition to tally the impact of the agreement on jobs. and to what degree they were affected. there is also an important political reason to study the employment impact of trade. and Household Income SANDRA POLASKI one E M P L OY M E N T I S T H E M A I N S O U R C E O F HOUSEHOLD INCOME for a large majority of the population in all the countries of North America. which lost. once time has elapsed and data have accumulated. In the United States. then-president Bill Clinton predicted that NAFTA would create . Political leaders often promote trade in general. and incomes. rising wages can be sustained over the long term. Thus. however. the quality of those jobs. for example. jobs in its first two years of existence.S. one of the most basic measures of a trade agreement’s impact on the well-being of real people is the number of jobs gained or lost as a result of the agreement. there are several aspects of NAFTA’s effects that can now be estimated with some confidence. There are winners and losers from trade.

NAFTA and CUFTA likely played a significant role in the observed productivity growth in Mexico and Canada. NAFTA probably has played a small or negligible role in productivity growth for two reasons: U. economy and the importance of other trading partners. trade is thus likely to account for a portion of the observed growth in wage inequality. 12 NAFTA’s Promise and Reality . After about five years. the losses stopped and export manufacturing began to grow again. because both countries cut tariffs deeply and were thereby exposed to competition from their giant neighbor. particularly China. given the size of the U. employment is small. productivity growth has not translated into wage growth. U. ■ Since the net impact of NAFTA on U. But a widening gap between the wages of skilled and unskilled workers is partly attributable to trade.S. Mexican wages are also diverging from.S. There has also been a decline in domestic manufacturing employment. Data limitations preclude an exact tally. took effect in 1989 and at first led to substantial net job losses in Canada’s traded sectors. since fewer new jobs were created as workers already on payrolls produced more.S. ■ Mexican agriculture has been a net loser in trade with the United States.S. and NAFTA as a factor in U. such as corn. A decade after the enactment of CUFTA. WA G E S ■ Real wages for most Mexicans today are lower than when NAFTA took effect. manufacturing employment recovered to the levels seen before the trade pact and has continued to grow modestly since then. PRODUCTIVITY ■ Productivity has increased in all three countries over the last decade. the Canada-United States Free Trade Agreement (CUFTA). The best models to date suggest that NAFTA has caused either no net change in employment or a very small net gain of jobs. However. and employment in the sector has declined sharply. but it is clear that jobs created in export manufacturing have barely kept pace with jobs lost in agriculture due to imports.MAIN FINDINGS JOBS ■ NAFTA has produced a disappointingly small net gain in jobs in Mexico. U.S. as it did in earlier periods in Mexico. tariffs were already low before NAFTA and trade with the rest of the world plays a much larger role.S. ■ NAFTA’s net effect on jobs in the United States has been minuscule. The rural poor have borne the brunt of adjustment to NAFTA and have been forced to adapt without adequate government support. wages. This stunning setback in wages is mainly attributable to the peso crisis of 1994–1995. Many of these operations were relocated to lower-wage countries in Asia. related in part to import competition and perhaps also to the substitution of foreign inputs in assembly operations. ■ NAFTA’s predecessor. exports of subsidized crops. In the United States. during the NAFTA period. ■ The desirable growth in productivity may have had the unwanted side effect of reducing the rate of job growth. rather than converging with. About 30 percent of the jobs that were created in maquiladoras (export assembly plants) in the 1990s have since disappeared. have depressed agricultural prices in Mexico. the impact on overall wages is also minor.

In Mexico. especially in the short-to-medium term. ■ The short-to-medium term adjustment costs faced by the losers from trade can be severe.■ Overall real wages in Canada were only slightly higher in 2002 than when CUFTA took effect in 1989. Regional inequality within Mexico has also increased. The possibility that increased trade would weaken the Canadian social safety net was a concern of CUFTA opponents. Because manufacturing wages performed better than wages in most other sectors. The growing wage gap between high-skilled and low-skilled workers is one of the causes. ■ Despite relatively more equal incomes in Canada than in either Mexico or the United States. that there will be winners and losers from trade. This suggests that NAFTA and CUFTA did not have a negative impact on wages. Carnegie Endowment for International Peace 13 . farmers are still struggling to adapt to NAFTA-induced changes. ■ Income inequality in the United States increased during the decade before NAFTA and has continued to widen. due to insufficient skills. It must also be recognized that there may be permanent losers from trade. since earnings in nontraded sectors increased slower than in manufacturing. while all others have experienced declines. As in the case of Mexico. it took a decade for manufacturing employment to recover from the initial displacements caused by CUFTA. Rather. while the other 90 percent have lost income share or seen no change. INCOME DISTRIBUTION ■ Income inequality has been on the rise in Mexico since NAFTA took effect. The richest 20 percent of Canadian households have increased their share of national income during the period. but there is no clear evidence to support a causal relationship. the winners. it is also implicated in growing inequality. which play an important role in the incomes of the bottom 40 percent of households. meager savings. reversing a long-term trend toward convergence in regional incomes. accounts for most of the change. Only the top 20 percent of households had higher real incomes in 2000 than in 1989. due to these limitations. but manufacturing earnings fared somewhat better. reversing a brief declining trend in the early 1990s. a reduction in transfer payments from government. the top 10 percent of households have increased their share of national income. and to the extent that trade is a factor in the wage gap. productivity increases in Canada significantly outstripped wage increases. The losers may be as numerous as. WINNERS AND LOSERS ■ The experience of each of the NAFTA countries confirms the prediction of trade theory. income inequality has been on a marked upward trend since CUFTA’s entry into force in 1989. and limited mobility. Compared to the period before NAFTA. it seems clear that trade-induced wage changes were not the cause of the observed increase in inequality in Canada. or even more numerous than. In Canada. and the losers are often those segments of society least able to cope with adjustment.

it is necessary to look at both the elimination of tariffs on exports from Mexico to its northern neighbors (which could increase exports and therefore increase jobs) and the elimination of Mexican tariffs on U. With respect to manufacturing. Translating Mexico has an abundance of labor. but excludes the maquiladora sector. and Canadian goods (which could increase Mexico’s imports from the United States and Canada and thereby eliminate jobs in Mexico) to understand the impact of NAFTA’s tariff cuts on Mexican jobs. that would be a desirable effect for a country with a large and growing workforce such as Mexico. million in . meaning that Mexico needed almost a million jobs a year simply to absorb the growth in labor supply. and on the overall balance of gains and losses from the trade agreement as negotiated. these changes in trade patterns into employment impacts is not easy. and transportation equipment. the Mexican labor force grew from . with the largest cuts on textiles and apparel. and in what sequence. Very high population growth rates through the mid-s translated into a demographic bulge in the workforce through the late s. the wages paid. which are export assembly plants. The Mexican government tracks manufacturing employment through two separate data series. Trade in services shows a small deficit for Mexico (see Figure ). chemicals. during the s and s. miscellaneous manufactures. followed by more modest but still significant reductions on footwear. However. The following discussion focuses on tariff changes between Mexico and the United 14 NAFTA’s Promise and Reality . In addition. From Mexico’s standpoint.S. the United States cut tariffs on most Mexican manufactured goods. million immediately before NAFTA to . The overall net surplus masks a growing deficit in agricultural trade with the United States that is more than offset by a surplus in manufactured exports from Mexico. in practice. women joined the workforce at increasing rates. including which tariffs were reduced or eliminated by each country.3 Economic theory suggests that opening to trade will increase the demand for labor in a labor-abundant country and therefore will increase the number of jobs. and jobs. because trade between Mexico and Canada is a very small part of Mexico’s total trade. Overall. the effect of a trade pact like NAFTA depends on many factors. Other Mexican crops face seasonal restrictions that are scheduled to end by .4 Under NAFTA. although one of Mexico’s main agricultural products. Mexico cut tariffs dramatically on both agricultural and livestock products and virtually all manufactured goods from the United States. Manufacturing Employment. Meanwhile. continues to be restricted through tariffs and quotas. production. Some tariffs will be maintained on sensitive agricultural products such as maize and beans until . Thus. The pattern of trade between the two countries changed in a number of ways as a result of these cuts.Mexico JOBS States. in part because of the decline in the reproductive rate. but in practice the Mexican government has already allowed substantial above-quota tariff-free imports of corn. but approximate numbers of jobs can be determined with reasonable certainty. the task is complicated by data availability. at what pace. or both. sugar. but also out of the need to support household incomes during recurrent economic crises. Clearly. The United States also cut agricultural tariffs and increased quotas. as people born during the earlier high-growth years matured and began to look for work.5 A separate survey covers maquiladoras. It also depends on other negotiated provisions of the pact—and related government policies—that affect decisions about investment. One survey covers medium-size and large manufacturing establishments that account for about  percent of industrial production. the cumulative changes resulted in a shift from a net trade deficit with the United States before NAFTA to a substantial net trade surplus in .

which are mainly in the informal sector. maquiladoras employ about . Currently. Maquiladora plants produce almost entirely for export. business cycle has come to play a dominant role in Mexico’s economic fortunes.S. NAFTA began a process of phasing out the unique tax and tariff advantages of the maquiladora program. million in January .000 1. million jobs in non-maquiladora manufacturing. In May  there were . electronics. by Sector MILLIONS OF DOLLARS Figure 2. while granting similar treatment to non-maquiladora manufacturers in Mexico.000 10.000 1. The recent decline has been caused in significant part by the U.6 Employment in the nonmaquiladora manufacturing sector stood at about .500.000 1. jobs at its peak in May  before declining again over the past three years. fewer than when NAFTA took effect (see Figure ).300.000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Compiled by the U. declined sharply during the peso crisis. the U. Non-Maquiladora Manufacturing T O TA L E M P L OY M E N T.250. International Trade Commission from official statistics of the U.000 5. jobs between NAFTA’s enactment in January  and the sector’s peak employment in . Maquiladora assembly plants added about .000 0 -5. The maquiladora program was created by Mexico and the United States in  to allow tariff-free and tax-free imports of materials and components into Mexico for assembly and re-export to the United States.400. more workers than they did before NAFTA (see Figure ). Department of Commerce. Mexico’s Trade Balance with the United States. Carnegie Endowment for International Peace 15 . It is concentrated in the auto parts. J A N U A RY 1 O F E A C H Y E A R 30. The growth in maquiladora jobs is not primarily attributable to NAFTA.000 20. Source: Mexican National Institute of Statistics. and Informatics (INEGI). They then shed about . since the program predates that pact. and apparel sectors.S.Overall employment in non-maquiladora manufacturing in Mexico was lower in  than in . then began a recovery that produced an additional .000 1993 1994 1995 1996 1997 1998 1999 2000 2001 1. jobs through May .S. economy.000 Services Agriculture Manufacturing 1. At the same time. As NAFTA has linked Mexico more and more closely to the U. about . Ministry of Employment and Social Insurance (STPS).000 25. Geography. recession.350. Monthly Industrial Survey (EIM).450. so employment in that sector can be attrib- Figure 1. Many observers expect the maquiladoras’ share of Mexico’s manufactured exports to continue to decline over time.000 1.S. but NAFTA did provide significant tariff cuts on apparel and as a result stimulated that subsector of the maquiladoras. Bureau of the Census.000 15. except in microenterprises.200.000 1.S.

This pattern is quite clear in the maquiladora sector.000 800. lower transport costs. and other factors account for the rest. In this model. the data on non-maquiladora manufacturing employment blend production for export with production for domestic markets. which reduces the amount of job creation for any given level of exports. 16 NAFTA’s Promise and Reality . it is difficult to determine the proportion of employment attributable to exports. and alone cannot account for the very slow growth in manufacturing employment. such as the stimulation of businesses that supply parts and materials.000 600.000 1.S. The peso devaluation of ‒ gave a very significant boost to all Mexican exports.000 400.000 1.000 500. as the dollar bought more than twice the value of Mexican goods after the devaluation.400. limiting the multiplier effect of any growth in exports. Monthly Indicators of the Maquila Industry. the gains were fairly modest.100. are not created.200. This unwelcome divergence between manufacturing output and employment growth emerged in Mexico in the mid-s but appears to have widened since enactment of NAFTA.000 1. But the non-maquiladora export sector shows similar patterns.000 700. One obvious explanation is productivity growth. some . One factor that likely explains part of the phenomenon is that export manufacturing in Mexico is increasingly based on a production model in which component parts are imported. The intrafirm production carried out by multinational firms operating in Mexico in sectors Figure 3. jobs between  and . then re-exported. were based on exports to the United States.300. jobs. while the peso devaluation. the spillover effect of such operations on the broader economy is very limited.8 If one uses the USITC’s findings on the relative impact of various factors on changes in Mexican exports to the United States. J A N U A RY 1 O F E A C H Y E A R 1. and then declined. By contrast. One study suggests that the share of nonmaquiladora manufacturing employment associated with exports increased by roughly . A study by the U. or the addition of about . International Trade Commission (USITC) found that the peso devaluation of ‒ had a larger impact on the growth of Mexican exports of manufactured goods to the United States than all NAFTA-related tariff changes combined.10 A number of explanations for this outcome have been advanced. because only a narrow range of processing or assembly operations benefit the labor market. Forward and backward linkages.000 900.7 Of those jobs. then processed or assembled. in which  percent of components are imported and only  percent are produced locally in Mexico. therefore. While productivity did increase in Mexican manufacturing through most of the s. NAFTA tariff cuts likely explain about one-quarter of the total growth in export manufacturing jobs (maquiladora and nonmaquiladora).uted largely to trade (although not exclusively to trade resulting from NAFTA).9 The overall reality during the NAFTA years has been one of strong growth in the volume of manufactured exports but very disappointing growth in manufacturing employment. Maquiladora Employment in Mexico T O TA L E M P L OY M E N T.000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: INEGI.000. Only part of the growth in both maquiladora and non-maquiladora export employment can be attributed to NAFTA.000 1.

just before NAFTA came into force. Agricultural Employment. employing . corn was sold in Mexico from  through  at prices  percent or more below the cost of production. the firstmover advantage is progressively diluted. and so the nature of bilateral agricultural trade will continue to evolve. Employment in the sector then began a downward trend. This may be due in part to greater efficiency among U. As noted above. as more free-trade agreements are negotiated. percent. percent. undermining Mexico’s current advantage. particularly in labor-intensive sectors such as apparel and electronics. engineering. with . For example. in areas such as research.13 The increasing trade deficit has translated into job losses in agriculture. subsidies. The accession of China to the WTO. Tariffs on the most sensitive crops in both the United States and Mexico have yet to be eliminated. million employed (Continued on page ) Carnegie Endowment for International Peace 17 . has not kept pace with imports of U. However.12 The skilled labor component in manufacturing was actually less than the average share of skilled labor in the overall economy. The agricultural trade deficit existed before NAFTA. and accounting. The one bright spot for Mexico. The export manufacturing model in Mexico has also failed to generate much growth in jobs at the highskills end of the spectrum. . and thus account for part of the weakness in manufacturing employment. but it is also partly due to U. It is no accident that Mexico was the last WTO member to agree to the terms for China’s accession to the trading organization. but it grew after enactment of the trade pact and was larger in  than in any previous year. in particular. except the peso crisis year of . Mexico enjoyed the advantage of being the first low-wage country to strike a free-trade agreement with the United States. In .S.11 Another important factor in the decline of domestic manufacturing employment is that some Mexican manufactures have been displaced directly by imports. One study of the skills component of manufacturing jobs in Mexico found that in  the proportion of skilled labor in the manufacturing sector was only . when the huge devaluation of the peso made most dollar-denominated products too expensive for Mexicans.S. China displaced Mexico as the second-largest exporter to the United States (after Japan). the pattern to date challenges the conventional wisdom that agricultural liberalization is good for the developing country in a trade relationship with a developed economy. The proliferation of free-trade agreements by the United States also means that the value of Mexico’s market access advantages will erode as other low-wage countries gain similar access. U. million Mexicans at the end of .such as the auto and electronics industries depends heavily on imported inputs. producers. unilateral preference programs are expanded. has meant mounting competition for Mexico’s manufactured exports. However. The limited job creation under the manufacturing model currently prevalent in Mexico is of particular concern when put in the context of other changes that are likely to affect future employment growth in the sector. By one estimate. with low pay and usually without benefits. design. Mexico has had a net trade deficit in agricultural goods with the United States every year since NAFTA took effect. Agricultural employment in Mexico actually increased somewhat in the late s and early s. It seems probable that Mexican manufacturers that previously supplied inputs to large manufacturing firms have lost a significant share of input production to foreign suppliers. The limited employment growth that has occurred in manufacturing for the domestic market has been mainly in very small firms and in the informal sector.S. and World Trade Organization (WTO) membership grows. a proposed free-trade pact with Central America would add a sizable pool of lower-wage labor to the available regional labor supply. an increase in exports of fruits and vegetables.S. grains and oilseeds.

International Financial Statistics. the fixed regime created predictability about the exchange rate and relieved investors of exchange rate risk. DOLLARS Year 1990 1991 1992 1993 1994 1995 External Portfolio Investment 3. as most of the bonds were issued for three-month terms. The inflow of capital investment in the early 1990s was a welcome change for Mexico after the lost decade of the 1980s.S. through which the peso was pegged to the U. 76 percent.972 6. To the extent the government’s monetary policies were seen as credible. Together. when NAFTA took effect. portfolio investment accounted for 63 percent. known as a crawling parity band. as the latter entails activities such as actual construction of factories and acquisition of equipment that may be hard to resell. making higher returns in countries such as Mexico even more attractive to investors on a relative basis. About 60 percent of the portfolio investment was in bonds. Mexico began negotiations with the United States and Canada on what would become NAFTA. External Portfolio and Foreign Direct Investment in Mexico MILLIONS OF U.S. The renewed inflows of capital were dominated by portfolio capital.742 4. when the repayment of huge debt from earlier periods suppressed economic growth and living standards.741 18.U N D E R S TA N D I N G T H E P E S O C R I S I S — WA S I T R E L AT E D T O N A F TA? T he story of the 1994 Mexican peso crisis is basically a story of huge capital inflows from 1991 through early 1994. and 85 percent of capital inflows in 1991. dollar.S.14 Investors viewed this type of arrangement positively at the time. Table 1. these policy choices accounted for one side of the attraction that Mexico began to hold for foreign investment and domestic flight capital. and 1993. equipment. then abrupt outflows in late 1994 and 1995. Mexico maintained a relatively fixed exchange rate regime.-led Brady plan of 1989. and other businesses) surpassed the shorter-term portfolio investments.S. that foreign direct investment (in factories. market and that investments in Mexico would be protected under an ambitious investment clause included in the new trade agreement.041 28.140 Foreign Direct Investment 2. respectively. investment in government bonds and corporate stocks and bonds rather than direct investment in plants and equipment. Monetary authorities in those countries cut interest rates to try to revive their domestic economies.185 -10. October 1996.549 4.393 4. During the period leading up to the crisis. a series of privatizations in the early 1990s. As Table 1 shows. the volume and ultimately the direction of capital flows was partly a function of policy choices by the national government and partly the result of factors outside the government’s control. It was only in 1994. that is. farms. and a rise in oil prices associated with the 1991 Gulf War together helped shake Mexico out of its economic doldrums.389 10. Meanwhile. beginning with contractions in Europe and Japan in 1990 and a downturn in the United States in 1991. allowing much greater capital mobility. As was the case in other developing-country financial crises of the 1990s. The other side was that the same period saw an economic recession in most of the developed world. 1992. A restructuring of that debt through the U. 18 NAFTA’s Promise and Reality .963 Source: International Monetary Fund. increasing investors’ confidence that Mexican products would have access to the huge U.369 12.919 8.15 Portfolio investment is much more mobile or “footloose” than foreign direct investment. Investments in Mexican government bonds were particularly short range investments. An important additional ingredient in the mix was that Mexico undertook financial liberalization beginning in the late 1980s that eliminated most capital and exchange controls.

In February 1994.64 to the dollar by the end of 1995. it shifted the public debt out of pesos into dollar-based securities (called tesobonos) as the three-month bonds came due. portfolio capital flows to Mexico contracted sharply during the next three months. so that it had no levers under its control when investor sentiment changed. In evaluating the policy choices of the Mexican government with hindsight. keep them out of the domestic money supply. called CETES) in this difficult environment. in what was to be a series of rate increases as the United States experienced a strong economic recovery. The government did not publish data that would allow the exact situation to be known. the Bank of Mexico widened the parity band in which the peso could move from about 2 percent to 15 percent. inflating it like a bubble. but investors and speculators began to expect that the government would run out of reserves and be forced to devalue the peso. it is useful to remember that until 1994 Mexico was often held up as a model of economic development by U. it seems clear that very large capital flows. clearly demonstrates that this is not a prudent policy for a developing country interacting with much larger global financial forces. In response to the growing demand for dollars and shrinking foreign reserves.S. Carnegie Endowment for International Peace 19 . However. With the interest rate spread between the United States and Mexico narrowing. the period leading up to the Mexican presidential election. This allowed the government to prevent a collapse of the peso and an economic contraction during the first three quarters of 1994. First. At the same time. indeed. to less than one-fifth of their previous level. In light of the Mexican experience. government indications) that there would be no devaluation. This was contrary to investor expectations (and. Continuing to fall. investors scrambled to shift out of Mexican investments and to trade pesos for dollars in order to do so. Mexico compounded this vulnerability by relaxing all controls over capital flows through its aggressive financial liberalization policies.S. and multilateral financial institutions. The second decision was to continue to “sterilize” funds from international exchange transactions—that is. especially flows of footloose portfolio capital. so now the outflow was covered by those reserves. by the end of 1994 these reserves were almost exhausted. with others to follow. the government made two fateful decisions. allowing the Bank of Mexico to intervene to maintain the peso in its parity band for most of 1994. Within ten days the peso had depreciated 55 percent. 1994. there was a run on the peso. But significant aspects of Mexico’s apparent success in attracting international capital were built on a factor—low world interest rates—over which Mexico had no control. the U. It thereby agreed to assume the exchange rate risk (which investors had previously borne) if the peso’s rate of exchange with the dollar became unsustainable. The United States has recently adopted the position that trade partners must eliminate all existing capital controls as part of any free-trade agreement. Developing countries would be wise to resist demands that they eliminate capital controls as part of free-trade agreements. The Mexican government had to roll over existing debt (the three-month bonds. To beat that eventuality. The capital inflows were huge compared to the size of the economy. At this point. But Mexico’s experience with financial liberalization. it hit a low of 7. new political turbulence emerged in Mexico. can be destabilizing to any macroeconomic policy regime in developing countries. Coming on top of the other pressures that had been building. The “shock” of the capital outflows was therefore also very large. The peso crisis became the first financial crisis of globalization. Just as some funds had been kept out of the domestic monetary base as they flowed into Mexico in the early 1990s (and held as foreign exchange reserves). which predates NAFTA. announced that the peso would be allowed to float. including the uprising of an indigenous group in Chiapas and the assassination of the presidential candidate of the ruling party. The Bank of Mexico suffered large reserve losses over the next two days and on December 22. Federal Reserve Board raised interest rates for the first time since the recession of the early 1990s.

while the most sensitive agricultural tariffs have yet to come down. While the evolution of trade-related employment since enactment of NAFTA is disappointing. It is also the epicenter of the growth in the so-called informal sector. As noted earlier.000 6. although not large. However. are not very labor intensive. the substitution of manufacturing jobs for agricultural jobs is generally considered positive for development.16 While not all of that reduction can be attributed to NAFTA. the agricultural trade balance again turned against Mexico and agricultural employment resumed its decline. there are some reasons for concern about the Mexican manufacturing sector. because most services are not traded and those that are. a loss of .500. representing a move up the production ladder.17 Thus.000. agricultural trade liberalization linked to NAFTA is the single most significant factor in the loss of agricultural jobs in Mexico (see Figure ). Data for 1994 not available. Service Sector Employment.000 7. as noted above. because it is here that most Mexicans find employment.000 7. so the entire impact cannot be ascribed to NAFTA. Further. the long-term effects are still uncertain. so any impact on employment is likely to be negative.000 6. as most manufacturing tariffs have now been eliminated. a. However. pushed in the opposite direction.500. and agricultural employment did improve modestly for a short period thereafter. it is clear that the sum of the effects of the trade pact to date has not been a strong net gain in overall employment and may have been a small net loss of jobs for Mexico. However. National Employment Survey (ENE). During this period. Mexican Employment in Agriculture E M P L OY E E S 8. which also includes fishing. Nevertheless. These include the limited development of forward and backward manufacturing linkages that would multiply job creation. In fact. such as the sharp devaluation of the peso during ‒. Mexico has had a small trade deficit in services with the United States.000 1993 1994a 1995 1996 1997 1998 1999 2000 2001 2002 Source: INEGI/STPS. The share of total employment found in the service sector increased from  percent immediately before NAFTA (Continued on page ) 20 NAFTA’s Promise and Reality .000. Mexico was also liberalizing trade with other partners. it is impossible to establish precisely what proportion of the . NAFTA has had little Figure 4. and the decline in jobs in manufacturing for domestic consumption. direct effect on employment in the service sector. the erosion of Mexico’s first-mover advantage. other forces that affected trade. toward greater growth of Mexican exports over imports. such as financial and telecommunications services.  was the one post-NAFTA year in which Mexico had a surplus in its agricultural trade with the United States. million gain in export manufacturing jobs (at the peak of employment in ) and the . forestry.at the end of . and trapping. million jobs. once the peso stabilized. But the WTO has determined that Mexico reduced its agricultural tariffs much more for the United States than for other trading partners.000 8.500. million loss in agricultural jobs between  and  was directly attributable to NAFTA. The release of labor from the agricultural sector largely offset the employment gains in the export manufacturing sector that occurred after NAFTA took effect.000. the service sector is key to an overall understanding of the Mexican employment situation. Note: Agriculture actually refers to the primary sector.

H O W R U R A L H O U S E H O L D S S U R V I V E 18 he rural economy in Mexico has changed dramatically over the past decade. An additional factor appears to be the preference for native varieties of maize over imported corn. corn (see Figures 5–8. rural households increasingly depend on remittances from household members who migrate. Mexico’s main statistical agency. when questioned further about their activities during the previous six months.22 This represents an augmentation of the agricultural workforce by T Carnegie Endowment for International Peace 21 . designed to elicit more information on rural economic behavior. some diversification of agricultural production. such as tamales. whether to other parts of Mexico or to the United States. However. the National Institute of Statistics. which has helped to sustain the market for traditional maize and for value-added food products using maize as an input. It seems clear that these strategies also involve increased migration to other parts of Mexico as well as migration to the United States. and changing government policy. as a result of NAFTA. Subsistence farmers produced primarily for their own consumption.S. an additional 1. For example. while alternative economic activities are often unavailable or unpalatable. In response. subsidized U. began to include a special series of questions in its household survey in less urbanized areas in the 1990s. While some medium.8 billion in 2002 and on course to reach at least US$12 billion in 2003 at current rates. a substantial number continue to perform some work in agriculture.19 Rural Mexicans’ diverse survival strategies help to explain some surprising developments that run counter to economic predictions but are well documented in Mexican statistics. and sopes. Either the cheaper imported corn did not reach markets in remote areas due to poor roads and other factors. often in the informal sector and in some cases in maquiladora plants that have relocated away from the northern border and into the hinterlands. although some of the increase was also destined for local markets. amounting to US$9.20 The survey showed that about 7 million people were involved in agricultural activities in 2000. and Informatics (INEGI). It also appears that as more rural workers have moved into nonagricultural activities as their primary occupations.5 million people who reported their principal employment as nonagricultural indicated that they had in fact worked in the agricultural sector at some time during that period. although reliable data on either type of migration are not available. corn was allowed into Mexico and subsidies for water use were reduced. For example. sometimes to faraway locations. Geography.21 However.and large-scale farmers have adapted to new market opportunities—often with the support of the Mexican government or foreign investment—much larger numbers of subsistence farmers have fared poorly. among both rural and low-income urban families. rain-fed land (overwhelmingly small subsistence plots) increased when household incomes contracted sharply during the severe recession that followed the peso crisis in 1995. or the lack of cash income influenced the “grow or buy” decision. many rural households have adopted complex survival strategies that involve a mix of increased cultivation of basic crops. Production has continued at similar levels. Rural households already suffering from low standards of living are under increasingly severe strain. production of maize on irrigated lands (mainly larger commercial farms) has declined since cheaper. Data for 2001 and 2002 are preliminary).S. maize production on nonirrigated. other trade pacts. despite imports of cheaper U. posole. the families and communities involved maintain some cohesion as social and economic units. increased day labor. and increased off-farm employment. Despite the dispersal of work. These factors have thrust the rural population into a maelstrom of change beyond its capacity to control. Remittances from the United States have set records each of the last few years.

500 6.500 4. Total Irrigated Maize Production in Mexico THOUSANDS OF METRIC TONS Figure 8. Total Rain-Fed Maize Production in Mexico THOUSANDS OF METRIC TONS 9. available at www.500 5.500 6.sagarpa.000 8.000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Mexican Secretary of Agriculture.000 1.500 15.000 7.000 18.000 10.000 11.000 5. Rural Development.000 19.000 18.000 17.siap. 22 NAFTA’s Promise and Reality . and Nutrition (SIAP-SAGARPA).000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 9.000 20.500 7.000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Figure 7. Fisheries.500 9.000 12.Figure 5.000 4.000 13.gob.000 3.000 19.mx.000 6.000 5. Maize Imports to Mexico THOUSANDS OF METRIC TONS Figure 6.000 20. Total Maize Production in Mexico THOUSANDS OF METRIC TONS 7. Livestock.500 8.500 0 1991–93 1993–94 1995–96 1997–2000 2001 17.000 14.500 2.

domestic remittances (transfers from within Mexico) are also an important factor in cash income for rural households. Carnegie Endowment for International Peace 23 . and for products that can be certified as “organic. A small proportion of rural households and communities have succeeded in establishing market niches for resources such as environmental services and ecotourism. The evident goal is to sustain the life of rural communities as both an alternative to and insurance against the precariousness of the informal economy.” or “artisan. This part-time agricultural activity by workers employed elsewhere helps to explain how agricultural production on small farms has been maintained despite the sharp decline in overall agricultural employment that appears in the main employment data.” all of which command more favorable prices in international marketing schemes (see chapter 3 for further discussion of these niche activities). For example. they allow subsistence farmers to surmount credit constraints to purchase agricultural inputs that ordinarily would be financed through borrowing. were more likely to work for small landowners (40 percent of day laborers) than for larger commercial agriculture or ranching operations (30 percent). urban shantytowns. The remittances are used partly for consumption.about 20 percent for some parts of the year. such as the times of sowing and harvesting. The remaining workers were hired by ejidos. presumably those times requiring the greatest labor. As already noted. The portrait that emerges from these varied economic activities is of a population that combines nonagricultural activities and urban jobs (in Mexico and abroad) with continued agricultural production and remittances. the communities of small-scale farms comprising the poorest segment of agricultural property owners. In addition to international flows. which loom as the main alternatives for poor rural households. remittances from household members who have migrated have become an increasingly important factor in the overall survival of rural households and the surprising staying power of rural communities. This is particularly important in light of the collapse of rural credit in recent years. Day laborers.” “sustainable. somewhat surprisingly. and illegal migration. but are also used for production purposes.

wages for production workers in both maquiladora and non-maquiladora manufacturing are still below pre-NAFTA levels.27 But even for highly educated workers in the manufacturing sector (such as professional. the cost of imported goods and the rate of inflation both shot up. for a variety of reasons. technical. employment was found (or created) mainly in lowpay. However. Increasing productivity is a necessary condition for sustainable increases in wages. with employment in informal jobs approaching  percent of all employment in Mexico in  and . led rural households to struggle to maintain adequate income levels. when a devaluation of the peso and contractionary policies designed to achieve macroeconomic stability and meet the terms 24 NAFTA’s Promise and Reality . Most of the decrease in real wages observed over the last twenty years can be traced to two periods of sharp wage declines. This pattern is true of both traded and nontraded sectors of the economy. since over time an WA G E S A N D P R O D U C T I V I T Y Real wages in Mexico are lower today than when NAFTA took effect. Trade theory suggests that a country with an abundance of low-skill labor (such as Mexico) that opens to trade will experience increasing returns (wages) to its low-skilled workers. and so displaced workers must find alternative employment. which decreased from . following the peso crisis and the subsequent economic contraction. This stunning setback in wages cannot be attributed primarily to NAFTA.23 As discussed above. as well as for employees of small. Some analysts have suggested that. border. Wages gradually recovered after each of those macroeconomic shocks. demanded by international holders of Mexico’s debt led to a sharp drop in wages.took effect to  percent in . The first was during the debt crisis of the early s. they did not grow enough in either recovery period to return to previous levels. the informal sector grew during most of the s.29 The disappointing wage performance has occurred despite the fact that Mexican workers’ productivity has increased since NAFTA took effect (see Figure ). the informal sector shrank somewhat. however.28 This same pattern holds for other sectors of the economy. but still accounts for about  percent of Mexican jobs. low-productivity workers shows no sign of being absorbed by Mexico’s export sector in the foreseeable future. with the only exceptions occurring in a few regions along the U.S. which comprises self-employment. while wages were constrained by the government’s monetary and wage-setting policies. Due to sluggish employment growth in manufacturing.24 Overall. percent of employment in  to . street vending. trade increased the demand for highly skilled labor in Mexico relative to the demand for less skilled workers. real wages in the late s were below those in . However. employment in microenterprises. Much of this was in the informal sector. and administrative staff ). percent in  (see Figure ). After economic growth resumed in the late s.26 While NAFTA is not the cause of the two major setbacks in Mexican wages. wages today are below their  levels. and large firms. Indeed. low-productivity jobs in the service sector such as domestic work. Workers with university degrees and even postgraduate study received lower real wages in  than in . and other forms of employment that do not provide benefits such as health care and pensions. Mexico has no unemployment insurance program. as well as the limited skills of many agricultural workers.25 This reservoir of lowwage. and personal services and repairs. The second decline occurred as a result of the peso crisis of ‒. displacement of subsistence farmers. in part because of increased agricultural imports from the United States as a result of NAFTA tariff cuts. it is striking that a freetrade agreement that dramatically increased exports and foreign direct investment has not done more to increase wages and living standards for average Mexican workers—or even for workers in most export firms—relative to pre-NAFTA levels. Most of this growth was due to absorption of labor from the agricultural sector. When the peso was sharply devalued in each crisis. medium.

it has been government policy to hold down the minimum wage over most of the last two decades. bonuses. (Unit labor costs reflect the combination of wages and productivity). The accession of China and other low-wage countries to the WTO has increased the supply of labor that firms can tap while still being guaranteed access for their output to the world’s rich markets. and benefits. This has been done both to increase global competitiveness of Mexican labor and exports and to meet structural adjustment goals. trade. Mexican data are currently under revision by the STPS and INEGI. Differences in tariffs and transportation costs may not offset larger differences in unit labor costs. Indicadores Economicos de Coyuntura Notes: Productivity and wage data cover both production and nonproduction workers. for many categories of unskilled and semi-skilled labor. Wage outcomes will depend in part on supply and demand in labor markets. Tertiary sector includes transportation. Source: INEGI/STPS. c. Manufacturing Productivity and Real Wages in Mexico INDEX: 1993=100 8% 1984–1993 1993–2002 Productivity Wages 6% 4% 2% 0% -2% Agriculturea Manufacturingb Servicesc Source: INEGI/STPS. National Employment Survey (ENE). b. The maquiladora sector is not included in this data series. including the United States. a. But increased productivity is not sufficient to guarantee wage increases. financial. utilities. contributing at least a partial explanation for poor wage results. and construction. as firms make production and sourcing decisions based in part on labor costs in various countries. Figure 9. forestry. Data for 1993–2002 are annual averages. and in part on the quality (and any bias) of institutions that have been established to determine how the gains from productivity are distributed. Secondary sector includes mining. fishing. Primary sector includes agriculture. Economic Information Bank (BIE). it is also the case that Mexican institutions have been biased against wage increases. 2003 is January–September average. competition is found not only in national labor markets but also internationally. demand and footloose global production undoubtedly contribute to the decoupling of wages from productivity seen in Mexico. Before and After NAFTA Figure 10. The minimum wage determines many other wages in Mexico.economy can only afford to consume what it produces. Monthly Industrial Survey (EIM). In addition. At present. and social services. While labor market supply. Wages include salaries. and trapping. communications. Average Annual Employment Growth by Sector. Carnegie Endowment for International Peace 25 . the increasing integration of global production as a result of liberalized trade and improved protections for foreign investors has meant that. manufacturing. For example. labor market supply continues to exceed demand in most categories of labor in Mexico.

Furthermore. border have been relatively more prosperous. but began to abate again in the early s. have been repressed in Mexico through weak labor laws. thus constraining the incomes of all.33 Income inequality in Mexico has a geographic dimension as well. Further. Since then. Inequality then increased for most of the following decade. 26 NAFTA’s Promise and Reality . the incidence of poverty increased through the remainder of the s (reaching  percent by ) and then began to decline somewhat in the early s. targeted government policies led to an increasing convergence in per capita income among regions. Compared to the period before NAFTA. employment. it has again declined.32 Income inequality had been declining in Mexico for several decades up to the early s. This is a cause for concern because it undermines social stability and political cohesion. However. U. However. Historically. to over  percent. for example.31 Some studies have also shown that overall growth is reduced over the long term by highly unequal income distributions. the long trend toward convergence in regional incomes first stopped and then reversed.S.S. From  to . tariffs were substantially lower than those of Mexico and Canada before NAFTA (and its predecessor.35 I N E Q U A L I T Y A N D P OV E R T Y Gauging the effects of trade on real people requires an assessment of trade’s impact on inequality and poverty.34 The share of people living in extreme poverty in Mexico has followed a similar pattern. Poverty surged again during the peso crisis of ‒. unionization and collective bargaining. it is less dependent on trade because of its huge (and wealthy) domestic market. it is a widespread practice for employers to conclude “protection contracts” with corrupt or nonexistent trade unions. societies with highly unequal economies have been shown to reduce poverty less effectively and at slower rates than more equal societies.which are set as multiples of the minimum. with regional inequality widening again in the s. Since Mexican labor law allows only one union to hold a contract in a workplace. and so the impact is felt beyond the lowest-paid jobs.30 of national income. as it is in much of Latin America. with the extreme poverty rate at  percent when NAFTA took effect. these contracts preclude efforts by workers or more legitimate unions to bargain for wage increases. In the maquiladoras.S. following the macroeconomic crisis of the s. the top  percent of households have increased their share The United States JOBS The impact of NAFTA on the United States’ economy. among the main institutional mechanisms for determining how gains from productivity increases will be distributed between employers and workers. and only one-third of its total trade is with its NAFTA partners. because the gains and losses from trade are not distributed evenly. economy is much larger than that of either of its neighbors. Like economic inequality. for several reasons. Mexico’s southern states have been poorer. while the regions around the capital and along the U. There have been numerous substantiated allegations of Mexican labor authorities allowing employers to collude with nonrepresentative unions to avoid vigorous collective bargaining. the years immediately before NAFTA. Further. but at  percent the proportion of Mexicans living in poverty is still slightly higher than the level seen in the late s. since  inequality has again been on the rise. and the welfare of its citizens is significantly less than its impact on Mexico or Canada. while the other  percent have lost income share or seen no change. but it reversed course after the debt crisis of  and the resulting macroeconomic contraction and structural reforms. Inequality in Mexico is high. The U. shrinking dramatically during the s and s (from  percent to  percent ) and then increasing after the  debt crisis.

39 The model assumes that there is no net gain or loss of jobs due to NAFTA.500. The USITC model estimates that the combined effects of NAFTA and CUFTA had a positive impact on total compensation to U.S. The USITC recently developed a model to measure the impact of NAFTA and four other trade agreements on the U. However.37 Advocates of NAFTA resist applying the multiplier formula to identify jobs lost due to imports.S.000. wages.000 29. the U. like all trade agreements. economy. Since NAFTA has had a much smaller overall impact on the U.S. has produced both winners and losers. since it is not certain that all imported goods substitute for U. with one study attributing a net loss of . and its tariff reductions were proportionately much smaller than the tariff cuts made by those countries. Widely diverging estimates have been produced. workers of approximately  billion in . economy that represents an advance over earlier studies.000 27. this methodology does not distinguish between changes in trade due to NAFTA and changes caused by other trade agreements.500.500.000 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source: United States Bureau of Labor Statistics. The actual impact of NAFTA on U.000 29. and does not take into account the impact of exchange rate fluctuations on trade. employment has been sharply disputed by proponents and critics of the agreement.000. U. as well. analysts on both sides of the question have approached the task by estimating the number of manufacturing jobs supported by a given level of exports and then multiplying the growth in exports to Canada and Mexico by that figure to arrive at job gains.S. the model can be used to estimate the order of magnitude of job gains or losses by changing the assumption about how labor markets adjust to changes in trade. If one assumed instead that wages were rigid and that the full adjustment occurred through increases in the number of jobs rather than Figure 11. jobs have been created due to NAFTA. Current Population Survey. job composition will shift but there will be no net change in total employment. it is clear that NAFTA. the estimates of the employment impact of NAFTA by both proponents and opponents have been unpersuasive. on the other hand.S. Carnegie Endowment for International Peace 27 . This assumption is based on trade theory. which suggests that in full-employment economies.S. Trade Representative estimates that .38 However.000. its impact on jobs.000 27. jobs to NAFTA. such as that creating the WTO.36 Critics. the model assumes that the entire change occurred through changes in wages.S. Employment in Manufacturing E M P L OY E E S 30.40 As noted. Due to these limitations. and so estimates that focus only on jobs created and not those destroyed offer no insight into the agreement’s net employment effects. Labor market adjustment will occur by means of rising wages in the sectors that benefit from trade.500. compared to a scenario without the two agreements. Note: Manufacturing also includes mining and construction. and household incomes in the United States is also much less than in Mexico and Canada. goods that would have been produced in the absence of trade.000 28.000 28. Using this methodology. Further.000. Generally.000 30. apply the multiplier formula to imports.CUFTA).

S.41 The apparel industry produced the greatest number of NAFTA-TAA certified job losers. important changes have occurred in the structure of U. the USITC model would produce a maximum net gain of . To the extent that those decisions are based purely on market access (tariff and nontariff ) considerations. Further research and modeling work is needed to assess these effects. As of September . with most economists identifying technological change as the main driver of this increasing gap. consequently. might show. contrary to many predictions (see chapter  for more discussion). Under that condition. the USITC model will capture them. or neutral or weakly negative. automobiles and parts ( percent).S. which allows U. and those investor benefits may also affect decisions on where to produce. The main structural change is the widening gap between the wages of skilled and unskilled workers that has been observed for the last three decades.increases in wages. manufacturers to maintain the highskilled parts of production processes in the United States while sending low-skilled operations abroad. as further elaboration.S. it is reasonable to assume that some of the NAFTA/CUFTA impact would now be seen in increased employment rather than higher wages. While these lost jobs were likely offset by other jobs gained.S. the impact on wages is also likely to be minor at the national level. jobs and no net change. it is known that about a half-million U. Other industries accounted for  percent or less of those certified eligible. trade adjustment assistance program. investors that had not existed before the agreement. NAFTA is likely to account for some of those observed effects.S.S. employment lies somewhere between a net gain of . many researchers attribute about  percent of increased earnings inequality to trade. unemployment rising in the last three years. Still. workers had been certified as having lost employment due to NAFTA under the NAFTA-TAA program. a total of . But most analyses find that trade has also played a role. with U. Whether the net impact of NAFTA on employment is a small net positive. This U. Other studies look not at overall trade but at the growth of global production chains. about  percent of those eligible under the program. the United States has been at full employment. However. wages that most studies attribute in part to trade. this model suggests that the overall impact of NAFTA on U. as the USITC model suggests. workers lost jobs as a result of the agreement. which it shares with other methodologies. is that it does not capture the effect of investment decisions to relocate production from the United States to Mexico or Canada.43 28 NAFTA’s Promise and Reality . the impact on losers is an economic and political concern. While estimates of the impact of trade on low-skill wage depression vary depending on the methodology of the study. or outsourcing. But NAFTA also included important protections for U.S.S. A useful source of information on NAFTA’s impact on job loss can be found in data compiled by the NAFTA Trade Adjustment Assistance (NAFTA-TAA) program. There is a large literature that attempts to explain this divergence. WA G E S A N D P R O D U C T I V I T Y Because the net impact of NAFTA on overall employment in the United States is small. One study estimates that  percent of the growing wage gap can be attributed to a combination of trade and immigration. A detailed analysis of earlier NAFTA-TAA data showed that about half of the job losses were due to production shifts to Mexico. it is likely that gains from trade have translated into higher wages rather than additional jobs. and fabricated metals ( percent). government program provides benefits for workers affected by NAFTA beyond those included in a general U.42 This is potentially relevant to a discussion of NAFTA impacts. jobs. An important limitation of the USITC model. including research on investment impacts. On the other hand. Since wages are not rigid and the economy is currently not at full employment. followed by electronics ( percent). for most of the period since NAFTA took effect. because immigration from Mexico to the United States has increased since the agreement took effect.

each of the other four household quintiles has seen its share of national income decrease.S. it is clear that increasing economic integration has allowed employers to capture a greater share of productivity gains than had been the case in the three countries during the period when their economies were less open to trade.and medium-skilled labor relative to demand. the trend began in the s.S. percent of its imports are from that country. .44 Meanwhile.S. NAFTA incorporated the provisions of CUFTA and also liberalized trade between Canada and Mexico. manufactured goods faced a serious challenge in the U. While this failure of wages to keep pace with productivity growth cannot be attributed directly to NAFTA or CUFTA. because productivity has grown faster than wages. including the integration of global labor markets for certain types of labor through outsourcing and production chains.45 The carefully constructed model examines the effects of CUFTA on employment. and to the extent that trade is a factor in the wage gap. manufacturing have fallen. the decoupling began after enactment of NAFTA. Since the early s. on other hand. Canada JOBS The impact of NAFTA on Canada cannot be understood without combining NAFTA’s effects with those of its predecessor. respectively. It is also likely that the relative bargaining power of labor is reduced by the possi- bility of outsourcing or plant relocation. The likely channels through which this phenomenon operates are many. because two-thirds of U.S. It is not surprising that the trend in Mexico and Canada is so closely aligned with the advent of NAFTA and CUFTA.S. even when it does not actually occur. was more affected by multilateral tariff reductions effected in successive rounds of General Agreement on Tariffs and Trade (GATT) negotiations. In the United States. it is also implicated in growing inequality. production chains involving many other low-wage countries.S. market from European and Asian imports. wages. and in Canada it began after CUFTA took effect. The growing wage gap between highskilled and low-skilled workers is one of the causes. unit labor costs in U. which took effect on January . The U.S. economy. A recent study by Daniel Trefler of CUFTA effects on employment advances the level of analysis relative both to earlier studies of the Canadian experience and to studies that examine U. It controls Carnegie Endowment for International Peace 29 . To the extent that NAFTA reduced tariff barriers for the cross-border shipment of intermediate goods and provided greater guarantees for investments. However. and Mexican employment impacts. I N EQ UA L I T Y Economic inequality in the United States has been increasing for most of the last two decades. it undoubtedly contributed to the observed growth of shared production between the United States and Mexico. given that the United States is the dominant trading partner of each country. Since the early s. This decoupling of productivity from wage increases is seen in all of the NAFTA countries.S. But trade with Mexico continues to be a small share of Canada’s total trade—less than  percent of Canadian exports go to Mexico and . which increase the available supply of low. the richest quintile (top  percent) of U. households has increased its share of national income from  percent to over  percent. and productivity in manufacturing industries in Canada. Therefore. trade is with partners other than Canada and Mexico.This would tend to raise skilled wages (or depress unskilled wages) through the operation of supply and demand. the main impact of NAFTA/CUFTA on employment in Canada and the Canadian economy in general can be traced to the phasing in of the CUFTA provisions. the Canada-United States Free Trade Agreement (CUFTA). In Mexico. this trend is also evident with respect to U. when U.

but the lack of any net job creation in export industries is noteworthy. and. such as the business cycle. which suggests that the productivity gains may have helped the long-term survival of Canadian manufacturing. employment in the Canadian manufacturing sector recovered.for several other factors.49 That industry underwent significant restructuring. This result runs counter to the findings of earlier studies. employment fell by  percent. Only the top  percent of households had higher real incomes in  than in . Those studies suffered from serious methodological flaws.47 Over the medium term (in this case.46 Insofar as Canadian tariff cuts under CUFTA were deeper than U. which found that employment losses in U. plastics. Trefler did find that both groups of industries experienced fairly strong productivity gains.S. percent of total income that year to . that might account for changes.S. In the export-oriented industries that experienced the largest U. despite actual observed net job losses. The other  percent of Canadian households saw real incomes decline from  to  and then recover slightly. somewhat surprisingly. Trefler finds that in those industries that were most affected by Canadian tariff cuts and therefore were most exposed to import competition. in both manufacturing and nonmanufacturing sectors (see Figure ). but the direction of the results seemed intuitively logical based on trade theory and they were widely accepted. a decade). tariff cuts. but not enough to make up for the earlier decline. but manufacturing earnings fared somewhat better. The industries that showed positive employment trends by the late s included automobiles and auto parts. However.S. more than pre-CUFTA levels. electronics. while all other households experienced declines in their share.50 This suggests that NAFTA/CUFTA or trade more generally did not have a negative impact on Canadian wages. at least between two industrialized countries and in the short-tomedium term (see Figure ). about . Given the relatively better performance of wages in manufacturing than in most other sectors. the manufacturing sector constitutes a slightly larger share of the Canadian economy (. I N EQ UA L I T Y Incomes in Canada are relatively more equal than in either Mexico or the United States.48 Growth continued in  and . the greater impact on import-competing industries is not surprising. In addition.51 The richest  percent of households increased their share of national income. since earnings in nontraded sectors increased slower than in manufacturing. percent in ) than its counterpart in the United States (. percent in . and Canadian industries that compete with imports were more than offset by employment gains in exportoriented industries. As in the case of both Mexico and the United States. million jobs. percent the same year). apparel. there was no increase in employment. with higher-skilled operations becoming a larger share of employment than sewing and other lowerskilled jobs. a significant 30 NAFTA’s Promise and Reality . before declining again in the recession that began that year. tariff cuts and therefore benefited most from the agreement. it seems clear that trade-induced changes in wage income patterns do not explain the decline in incomes for  percent of Canadian households and the increasing economic inequality in Canada over the NAFTA/CUFTA period. with manufacturing employment hitting a peak in  of . The Trefler study calls into question whether a net positive impact on jobs from trade liberalization can be inferred. but inequality has been on a marked upward trend since . although exchange rate movements undoubtedly played a role as well. from . WA G E S Overall real wages in Canada were only slightly higher in  than in . and by  achieved levels last seen in . productivity increases in Canada significantly outstripped wage increases.

000 150 140 3. Manufacturing Productivity and Real Wages in Canada INDEX: 1988=100 3. Labour Force Survey. including macroeconomic policy. a strong concern of NAFTA/CUFTA critics was that trade opening to the United States would put downward competitive pressure on Canada’s social safety net.52 However. Learning from the NAFTA Experience At ten years.factor in household income in Canada is transfer payments from the government. This decline is attributable to a number of factors. In Mexico.100. short.000 1988 1990 1992 1994 1996 1998 2000 2002 1988 1990 1992 1994 1996 1998 2000 2002 Source: Statistics Canada. particularly to the bottom  percent of households. Further studies are needed. Canadian Productivity Measures. the long-term effects of NAFTA on employment. and incomes in the countries of North America cannot yet be judged. Canadian Employment in Manufacturing E M P L OY E E S Figure 13.300. Note: Manufacturing also includes mining and construction. It cannot be ruled out that liberalization of trade was a factor in the downward pressure on unemployment insurance and other social benefits in Canada. the proportion of unemployed workers receiving unemployment benefits declined from  percent to  percent. accumulating data. is that the trade agreement has produced disappointingly small net gains in employment in the countries of North America.000 130 120 2.500. However.000 170 160 Productivity Wages 3.and medium-term impacts can now be assessed on the basis of substantial. which in most cases was superior to that of the United States. For example.000 110 100 90 2.900. Source: Statistics Canada. employment destruction in domestic manufacturing and agricul- Figure 12. and these declined due to cuts in government funding for social programs and changed eligibility requirements. E M P L OY M E N T The most important result of the NAFTA experience.700. and the most surprising when compared with predictions of political advocates and opponents.000 80 2. Carnegie Endowment for International Peace 31 .500. since NAFTA/CUFTA took effect. wages. or the cause of widening gaps in disposable household income.

The United States and. Canada have been at full employment during most of the NAFTA period. However. Policies should be adopted to shift farmers to competitive employment L E A R N I N G F R O M N A F TA ■ The experience of NAFTA shows that trade pacts will shift the composition of jobs. CUFTA led first to a significant net decrease in jobs in traded sectors. such as the United States and Canada. but cannot be expected to create a net gain in jobs in economies that are at full employment. . labor-abundant trading partner. The negative situation currently faced by Mexico also demonstrates that a developing country must use that transition time aggressively to prepare the rural population for the wrenching adjustment it will face. In theory. it is impossible to determine with certainty the precise share of agricultural job losses and manufacturing job gains in Mexico that resulted directly from NAFTA. Policies to maximize employment gains from trade would include measures to promote supplier and support industries as well as terms in the trade agreement that reward rather than discourage the use of domestic inputs in the production of exported goods. Developing countries with significant employment in subsistence agriculture should carefully consider the sequencing of liberalization. to allow the absorption of rural workers into other sectors that expand due to liberalized access to foreign markets. but rather in a different mix of industries and employment. and the government did not adopt sufficiently vigorous rural adjustment policies to help subsistence farmers adapt to the new trade conditions. that will prevent a wealthier trading partner from dumping or distorting trade through domestic or export subsidies. In developing economies with surplus labor. the transition times negotiated by Mexico were too short. net employment growth in the absence of other targeted policies. in Canada. arguably. with some winners and some losers. the shifting of resources into different productive activities based on comparative advantage will not result in a net gain or loss of jobs. is the weak job creation in Mexico. In the United States. at least in the medium term. It is thus evident that NAFTA has not been a robust job creator. such as Mexico. then a continued increase in subsequent years. Meanwhile. followed by a slow recovery of employment to pre-CUFTA levels after ten years. and the overall growth of jobs in all traded sectors since  has been very weak. ■ In negotiations over agricultural trade. although it certainly contradicts the claims of NAFTA boosters. if an economy is at full employment before opening to trade. The political and rhetorical claims for trade as an engine of net job growth are not borne out by experience. which is far from full employment. even for the low-wage. NAFTA has had either a neutral or very small net positive effect on employment. if any. according to basic trade theory. before basic crops are liberalized. 32 NAFTA’s Promise and Reality ■ In agriculture. the trade pact has been the most important factor in Mexico’s changing pattern of trade. including special safeguards. the lack of any significant job growth due to NAFTA in Canada and the United States is not at odds with the predic- tions of economic theory. the NAFTA experience demonstrates that trade pacts cannot be counted on to produce much. even from the perspective of economic theory. The gains from trade in a full-employment economy would be seen in rising wages and incomes. Thus.ture has all but swamped job creation in export manufacturing. What is surprising. Such claims have always been at odds with the predictions of trade theory. The experience of Mexico also suggests that a developing country with a high proportion of its labor force in low-productivity agriculture should negotiate very long transition periods for the phaseout of tariffs on basic crops.53 As noted earlier. developing countries should also insist on terms.

In Canada. Mexican wages are also diverging from. Further. Throughout North America. were exposed to competition from subsidized U. U. However. such as maize. to develop alternative sources of employment in rural areas.crops.S. and to invest heavily in education to prepare the population for more modern occupations. there has been a decoupling of productivity growth from wage growth over the last decade. wages. the strong productivity growth in the United States and somewhat weaker growth in Mexico and Canada may have had the unwelcome side effect of reducing the pace of job creation in the three countries. wages Carnegie Endowment for International Peace 33 ■ Increased productivity appears to be a likely gain from trade. NAFTA likely played a significant role in the observed productivity growth. policy on agricultural subsidies changed significantly in ways that were not foreseen during the NAFTA negotiations. However. as it did in earlier periods in Mexico. during the NAFTA period. Another important factor for Mexico was that some of its most important basic crops. This stunning setback in wages is mainly attributable to the peso crisis of –. such as arbitration. U. . increased productivity Real wages for most Mexicans are lower today than when NAFTA took effect. most notably in the passage of a farm bill in  that increased subsidies. as trade theory would suggest. the institutions and public policies that affect wage outcomes should be strengthened.S. Minimum wage policies may need to be reconsidered. At least in Mexico and Canada. may have contributed to a medium-term revival and perhaps even long-term survival of the manufacturing sector. crops that are sold at artificially low prices. sometimes below the cost of production. if such productivity gains are to be shared with workers as rising wages. WA G E S PRODUCTIVITY The one employment area where a clear positive impact has been seen during the NAFTA period is the growth of productivity in all three North American countries. Successful competition will be impossible for the developing country under such circumstances. based on the North American experience. rather than converging toward. which cut tariffs deeply and were exposed to competition from their giant neighbor.S. productivity growth has not translated into wage growth. could also be strengthened. However. Countries with weak laws and institutions related to freedom of association and collective bargaining should address these problems in conjunction with trade liberalization. dispute resolution mechanisms. as workers produced more and fewer new jobs were created.

reversing a long-term trend toward convergence in regional incomes. the evolution of wages and household incomes since NAFTA took effect has been toward greater inequality. productivity increases in Canada significantly outstripped wage increases. Developed countries should strengthen their trade adjustment or general social safety net programs with a view to addressing the uneven consequences. but manufacturing earnings fared somewhat better. In all three countries. Institutions that govern the ability of workers to organize unions and bargain collectively over wages are important determinants of distribution. the institutional mechanisms that govern how costs and benefits of economic change are distributed may need to be strengthened.S. Developing countries negotiating with wealthier trading partners should seek financial assistance from these countries. As in the case of Mexico. and NAFTA as a factor in U. Government measures that affect income distribution. Whether productivity gains lead to higher wages also depends on the nature and quality of the institutions that determine the distribution of productivity gains within a society between the return to workers as higher wages and the return to investors as higher profits. employment is small. This suggests that NAFTA/CUFTA did not have a negative impact on wages. Compared to the period before NAFTA.S. Overall real wages in Canada were only slightly higher in  than when CUFTA took effect in . of opening to trade. income inequality in the United States has been increasing for most of the last two decades. 34 NAFTA’s Promise and Reality . such as tax and transfer mechanisms. While this trend is clearly compounded of many factors.Because the net impact of NAFTA on U. with most gains going to the upper  percent of households and higher-skilled workers. for citizens. for transitional adjustment programs. The growing wage gap between high-skilled and low-skilled workers is one of the causes. more open trade appears to be implicated as one element—along with continental and global competition over the location of production—that restrains wage growth. since earnings in nontraded sectors increased slower than in manufacturing. the impact on overall wages is also likely to be small. the top  percent of households have increased their share of national income. Regional inequality within Mexico has also increased. as part of the trade package. INCOME DISTRIBUTION Income inequality has been on the rise in Mexico since NAFTA took effect. and to the extent that trade is a factor in the income distribution L E A R N I N G F R O M N A F TA ■ If the gains from trade are to be shared widely throughout a country. But a widening gap between the wages of skilled and unskilled workers is partly attributable to trade. trade probably accounts for a portion of the observed growth in wage disparity within the United States. ■ Countries opening to trade should first strengthen social safety nets to assist those who lose as a result of trade-induced economic restructuring. while the other  percent have lost income share or seen no change. reversing a brief downward trend in the early s. In a trend that predates NAFTA. as are government mechanisms such as minimum wage policies. should be reviewed and fortified to deal with the impact of trade opening.

especially in the short-tomedium term. meager savings. The number of losers may equal or even surpass the number of winners. but inequality has been on a marked upward trend since CUFTA’s entry into force in . but there is currently no clear evidence to support a causal relationship. Trade adjustment assistance should provide income support to workers and small farmers during transitional periods. it took a decade for manufacturing employment to recover from the initial displacements caused by CUFTA. as well as funds for training for new occupations. Such policies are highly desirable complements to trade pacts. Rather. The experience of each of the NAFTA countries confirms the prediction of trade theory that there will always be winners and losers from trade. it seems clear that trade-induced wage changes are not the cause of the observed increase in inequality. Because manufacturing wages have performed better than wages in most other sectors. Because the impacts of trade are uneven. and other factors. geographic isolation.wage gap. due to low skills. Carnegie Endowment for International Peace 35 . although both countries’ plans have critical gaps that should be addressed and both plans need financial strengthening. a reduction in transfer payments from the government. skills. it is also implicated in growing inequality. In Mexico. A trade adjustment assistance program exists in the United States. Incomes in Canada are relatively more equal than in either Mexico or the United States. accounts for most of the change. The harsh impact of agricultural trade liberalization on Mexican subsistence farmers has not been offset by appropriate government policies. The weakening of the Canadian social safety net. governments should establish mechanisms that help offset the losses suffered by those in declining sectors. rural farmers are still struggling to adapt to NAFTAinduced changes. In Mexico. budget constraints and policy choices have precluded the establishment of even the most basic unemployment insurance. It must also be recognized that there may be permanent losers from trade. and the losers are often those segments of society least able to cope with adjustment. which generates these transfer payments. which play an important role in the incomes of the bottom  percent of households. and limited mobility. and a broad social safety net in Canada serves many of the same ends. The short-to-medium term adjust- ment costs faced by the losers from trade can be severe. due to limitations of education. In Canada. was a concern of CUFTA opponents.

36 NAFTA’s Promise and Reality . 15 International Financial Statistics (Washington.  (Washington.org/english/publications. available at www. August ). 12 These figures are for overall manufacturing. North American Labor Markets: A Comparative Profile (Washington. Remarks at the Signing Ceremony for the Supplemental Agreements to the North American Free Trade Agreement. Clinton. ).: U. 7 Enrique Dussel Peters.N OT ES 1 William J. . available at www. This regime resulted in an exchange rate of . publication no. 22 ENIGH special module for rural households (see note ). Monthly Industrial Survey (EIM). and for the United States. percent were from Canada.C. which was . “What Has Changed in the Performance of Employment and Wages in Mexico after NAFTA?” paper prepared for the Third Seminar on Income and Productivity of the North American Commission on Labor Cooperation (February ). and Informatics (INEGI) and the Ministry of Employment and Social Insurance (STPS).-Canada FTA. Geography. 8 The Impact of Trade Agreements: Effect of the Tokyo Round.S.S. multinationals using Mexico as an assembly platform. .  percent of total Mexican exports went to the United States. eds. This disadvantages Mexican producers when they try to export. available at www.C. Government Printing Office. pesos per dollar for most of the period.  percent of total Mexican imports were from the United States and . 23 North American Labor Markets (see note ). while skilled is defined as possession of thirteen years or more. and Dalil Maschino. 13 United States Dumping on World Agricultural Markets. while imposing less of a burden on U. 3 Maria Elena Vicario. The Agriculture of Mexico after Ten Years of NAFTA Implementation. The Mexican Economy after Two Decades of Trade Liberalization. from INEGI.org.” Financial Times. 24 There are a variety of definitions of the informal sector. The definition used here was developed for STPS by Clara Jusidman in . conducted during the second trimester of every odd-numbered year during the s. .) 5 INEGI. Calif.gov.: Secretariat of the North American Commission for Labor Cooperation. Middlebrook and Eduardo Zepeda.usitc. Economy. September . This survey also excludes microenterprises (small businesses with fewer than five employees that operate in the informal sector). 4 In . “Industrial Policy. It takes into account establishment size. pesos to the dollar in early .C. and Antonio Yúnez-Naude and Fernando Barceinas Paredes.org. .wto. Sandra Polaski.whitehouse. from the Bureau of Economic Analysis.S. 2 Remarks by the President at the Signing Ceremony for Chile and Singapore Free Trade Agreements. July  (see acknowledgments). and the industry involved. was designed to improve understanding of rural labor patterns by inquiring about agricultural employment for those people whose principal occupation was nonagricultural. 18 This section draws on two papers commissioned for this report: David Barkin and Edith Pacheco. The authors’ calculations are based on data from the Mexican National Institute of Statistics.  (Washington. International Trade Commission.” in Kevin J. ). based on data from the Bank of Mexico. Data prepared by Edith Pacheco and David Barkin.. 11 This effect could be amplified by a tendency in Mexican monetary policy to overvalue the peso as a means of controlling inflation. Paper on file with the author. 16 North American Labor Markets (see note ). available at www. while . percent went to Canada.S.naalc. October ). 17 World Trade Report  (Geneva: World Trade Organization. (The data for Canada are from Statistics Canada. The survey.gov. depreciating to . José Romero and Alicia Puyana. . Regional Trends and Structural Change in Mexico’s Manufacturing Sector. National Income and Expenditure Accounts.iatp. Cancun Series Paper no. available at www. ENIGH. ). National Income and Product Accounts. special “module” with questions on agricultural activity during the preceding semester of the survey. 25 North American Labor Markets (see note ).S. whereas the main employment data is for the economically active population aged fifteen years and older.C.-Israel FTA. Public Papers of the Presidents of the United States. August ).: U. D. pesos to the dollar in . for Mexico. the position held. since the movement of components into Mexico and of finished products out will largely cancel out or at least smooth out the exchange rate effects. 6 Ibid. July . September .: Stanford University Press. System of National Accounts. The Changing Meaning of Work in Rural Latin America. 19 John Authers. U. 21 Differences between agricultural employment data discussed here and elsewhere in this paper arise because this series includes the economically active population aged twelve years and older. vol. U. The definition of unskilled here is possession of up to twelve years of formal education. 20 INEGI. 14 Very gradual downward adjustments in the peso were allowed through this crawling parity band in which the peso was allowed to depreciate against the dollar at a very small preannounced rate.  (Minneapolis: Institute for Agriculture and Trade Policy. September . Confronting Development: Assessing Mexico’s Economic and Social Policy Challenges (Palo Alto. D. 10 Rogelio Ramirez De La O. 9 Ibid. D. Remittances from the United States provide more foreign funds than either foreign direct investment or tourism. D. NAFTA.S. and the Uruguay Round on the U.: International Monetary Fund. “Mexicans Send More Than  Billion Back Home in July. forthcoming). based on INEGI National Income and Expenditure Survey (ENIGH) and STPS/INEGI National Employment Survey (ENE).

26 Carlos Salas and Eduardo Zepeda, “Employment and Wages: Enduring the Costs of Liberalization and Economic Reform,” in Kevin J. Middlebrook and Eduardo Zepeda, eds., Confronting Development: Assessing Mexico’s Economic and Social Policy Challenges (Palo Alto, Calif.: Stanford University Press, ). 27 See, for example, Raymond Robertson, “Trade Liberalisation and Wage Inequality: Lessons from the Mexican Experience,” World Economy, vol. , no.  (June ), pp. ‒. 28 Carlos Salas and Eduardo Zepeda, Wages and Productivity in Mexico: Theoretical and Empirical Issues, July , paper commissioned for this report, on file with the author. 29 The Mexican Economy (see note ), based on data from the Ministry of Labor and Social Welfare National Employment Survey. 30 The labor side-agreement to NAFTA includes provisions for public petitions to any of the member governments if labor rights violations occur in any of the other NAFTA countries. Several petitions have been filed alleging interference with freedom of association and collective bargaining rights in Mexico. The petitions were filed with the U.S. National Administrative Office, the body that administers the agreement for the United States. While expressing its findings in diplomatic terms, the National Administrative Office found significant shortcomings in this area in many cases (see www.dol.gov/ilab/programs/nao). 31 See, for example, Martin Ravallion, “Can High-Inequality Developing Countries Escape Absolute Poverty?” World Bank Policy Research Working Paper no.  (Washington, D.C.: World Bank, ). The World Bank web site provides a useful summary of research on this topic at www.worldbank.org/ poverty/inequal/abstracts/index.htm. 32 Dani Rodrik, Where Did All the Growth Go? External Shocks, Social Conflict and Growth Collapses (Cambridge, Mass.: Kennedy School of Government, Harvard University, ) provides a political-economic model. Other models are cataloged at the World Bank web site (www.worldbank.org/ poverty/inequal/abstracts/index.htm). 33 North American Labor Markets (see note ). Data based on INEGI, ENIGH, and The Mexican Economy (see note ). 34 Gerardo Esquivel, Sources of Regional (Non) Convergence in Mexico (Washington, D.C.: World Bank, ), available at www.worldbank.org. 35 Diana Alarcon and Eduardo Zepeda, “Economic Reform or Social Development? The Challenges of a Period of Reform in Latin America,” Journal of Development Studies, forthcoming. 36 U.S. Trade Representative, NAFTA at Eight, May , available at www.ustr.gov. 37 Economic Policy Institute, NAFTA at Seven, April , available at www.epinet.org. 38 Apparel imports, for example, come from many countries because of the quota system that exists under the global Agreement on Textiles and Clothing. Apparel imports from Mexico may have displaced imports from other countries rather than U.S. production.

39 The Impact of Trade Agreements (see note ). The USITC model is based on a computable general equilibrium model but uses actual trade flows and other macroeconomic and microeconomic data from the U.S. economy for the period ‒. It controls for such factors as exchange rate shocks to isolate the effects of NAFTA tariff changes. It also takes into account the phased-in nature of the agreement and the growing share of trade in the U.S. economy. 40 In The Impact of Trade Agreements (see note ), the USITC estimates that U.S. labor income would have been  billion less if not for the effects of five trade agreements, including the Tokyo and Uruguay rounds of the General Agreement on Tariffs and Trade (GATT), NAFTA, CUFTA, and the United States-Israel Free Trade Agreement (p. ). Separately, the study finds that  percent of the total impacts attributable to all five agreements were contributed by NAFTA and CUFTA (pp. ‒). 41 Mary Jane Bolle, NAFTA: Estimated U.S. Job “Gains” and “Losses” by State over  ⁄ Years (Washington, D.C.: Congressional Research Service, February , ). 42 George J. Borjas, Richard B. Freeman, and Lawrence F. Katz, “How Much Do Immigration and Trade Affect Labor Market Outcomes?” Brookings Papers on Economic Activity, vol.  (), pp. ‒. 43 Robert C. Feenstra and Gordon H. Hanson, Global Production Sharing and Rising Inequality: A Survey of Trade and Wages (University of California, San Diego, and National Bureau of Economic Research, ). 44 North American Labor Markets (see note ). Data derived from the Current Population Survey, U.S. Bureau of the Census. 45 Daniel Trefler, The Long and Short of the Canada-U.S. Free Trade Agreement (University of Toronto, Canadian Institute for Advanced Research, and National Bureau of Economic Research, December , ), available at www.chass.utoronto.ca/~trefler/fta.pdf. 46 The study actually showed a  percent employment loss in the export industries, but it was statistically insignificant. 47 However, the average annual productivity gains during this period were significantly less than those observed in the s and s. 48 North American Labor Markets (see note ). Data based on Labour Force Survey, Statistics Canada. 49 Ibid. 50 Ibid. Data based on Survey of Employment, Payrolls, and Hours, Statistics Canada. 51 Ibid. Data based on Survey of Consumer Finances, Statistics Canada. 52 For CUFTA, fourteen years of experience and data are available. 53 The basic trade model assumes that capital and labor are immobile. In the real world of capital mobility, international investors may shift production of labor-intensive products to a labor-abundant country such as Mexico if they are assured of access to a rich market such as the United States. Additional labor would be employed, creating net employment growth.

Carnegie Endowment for International Peace 37

The Shifting Expectations

of Free Trade and Migration
D E M E T R I O S G . PA PA D E M E T R I O U

two

T H E P O L I T I C A L PA S S I O N S S U R R O U N D I N G T H E U N I T E D S TAT E S ’ R AT I F I C AT I O N

of the North American Free Trade Agreement (NAFTA), and the exaggerated claims about the trade agreement’s effects, in many ways confused, rather than informed, the discussion about NAFTA’s aim. The U.S. debate’s progression from the understandable hyperbole that accompanies the “selling” of politically contentious policies to dire “if NAFTA ratification fails” scenarios was particularly unfortunate. Such rhetoric virtually guaranteed that any subsequent assessment of the agreement’s value would be burdened by unrealistic expectations in areas that were strictly secondary to NAFTA’s goal of promoting trade and cross-border investment by reducing tariffs and other barriers.

accurately measuring NAFTA’s precise effects on migration from Mexico to the United States. Such an evaluation must nonetheless be attempted, if for no other reason than the fact that free trade and migration are so intimately linked in the public’s mind. My evaluation will assess whether NAFTA lived up to predictions of the trade treaty’s effect on migration, and explore what can be learned from NAFTA when migration is under consideration in future trade negotiations.

A Review of Key Findings and Observations
Ten years ago, both U.S. and Mexican officials argued passionately that NAFTA, by encouraging job growth in Mexico, would reduce illegal immigration from Mexico to the United States. So far, these hopes seem dashed. Although Mexican job opportunities in the export sector increased (mostly in manufacturing), net job gains have been modest at best, and, depending on the timing of the measurement, even flat. Furthermore, average wages in the two countries have hardly begun to converge. In part because of these factors, but also because of robust U.S. demand for low-wage labor and other structural forces, illegal immigration from Mexico has risen sharply since  despite increasingly
Carnegie Endowment for International Peace 39

Migration may well be one of these areas—although it could hardly be of greater consequence for the Mexican public and, in some ways, the U.S. public. Indeed, an evaluation of NAFTA through the lens of migration is fraught with immense difficulties. Concurrent major economic events in both Mexico and the United States since NAFTA came into effect—ranging from the Mexican economic crisis of the mid-s and the peso’s devaluation to remarkably strong U.S. economic growth later in that decade—as well as migration’s deep and structural roots in the two countries’ historical relationship, confound the process of isolating and

vigorous border enforcement efforts that commenced at roughly the same time as NAFTA. Indeed, by most estimates, the population of unauthorized Mexican immigrants in the United States more than doubled between  and  (with most of that growth after ), and has continued to grow strongly in the new century. Is NAFTA, then, responsible for this increase in migration, as some of its critics had predicted? I do not believe so. The analysis points instead to a picture in which the financial crises and restructuring in Mexico that both preceded and followed the trade agreement’s enactment, the continuing inability of Mexican job creation efforts to keep up with the million or more new workers entering the Mexican labor force annually, the booming U.S. economy, and the strong migration networks tying the two countries have had a far more powerful effect on migration than NAFTA. The overarching lesson from the analysis is clear: NAFTA-like free trade and investment agreements neither neutralize nor cause the forces that drive people to migrate. NAFTA has neither rescued nor gutted the Mexican economy, and net changes in employment during a short but eventful ten years have not been significant enough to offset the pressures and incentives for migration. Policy makers, then, should not expect free-trade agreements to “solve” migration problems. The economic and social realities that drive migration will endure through and behave independently of such agreements. In the end, acknowledging these realities and engaging in the sensible and coordinated—even joint—management of migration may be the only viable option. Migration management cannot be focused exclusively on controls, however. Managing the migration spigot more effectively implies recognition and regulation of the demand for more permanent immigration and temporary work visas in both countries—in other words, it requires the more thoughtful expansion of legal migration channels

and taking joint responsibility for the immigration process itself. This is the only way to do better in the migration area at least until the economic growth that trade agreements and other policy initiatives can deliver in the longer run can modulate the demand on both sides of the migration divide. On NAFTA’s tenth anniversary, however, one additional question is still relevant. Are free-trade negotiations and agreements a valid forum for addressing migration per se? The NAFTA negotiators’ answer was a very timid “maybe.” The agreement completely ignored the larger issue of low-skill labor migration while allowing professionals in sixty-three occupational categories to accept employment anywhere within the NAFTA space. But such “largesse” was apparently just a short-lived occurrence. In subsequent U.S. free-trade agreements with Chile, Jordan, and Singapore, as well a Canadian agreement with Costa Rica, the United States and Canada have retreated from this approach. This clearly indicates how difficult the negotiations on the movement of “natural persons” for the purpose of employment are likely to be in negotiations over the Free Trade Agreement of the Americas (FTAA), the Central American Free Trade Agreement (CAFTA), and the World Trade Organization (WTO). I argue that the only viable solution to fundamental disagreements over migration in the foreseeable future lies in bilateral and, gradually, regional cooperation. To the extent that NAFTA-like exercises make such cooperation more viable—as NAFTA has done in many ways—free-trade agreements can become down payments on the long-term investment in “habits of cooperation.” Indeed, trade agreements should not be seen as the last word on either bilateral or regional relationships, but as part of an ongoing process of engagement. To borrow loosely from Winston Churchill’s views about the promise of a united Europe, broad relationships between and among neighbors are living things that grow and adapt in response to shifting on-theground conditions. NAFTA-like agreements can thus make important contributions to the growth

40 NAFTA’s Promise and Reality

both the market mechanism and human nature need to be an important guidepost to any serious effort. In the case of NAFTA.-Mexican border aptly demonstrates that people will continue to capitalize on the economic promise of migration whether or not their government approves. smarter policies that work with. best noncommittal on the issue.of more successful “living things. investors. citizens of each party to the treaty have long made important contributions to the economic lives of the other two countries. When the NAFTA partners decide to focus more squarely on workable approaches to managing migration. In contrast. State Department’s Bureau of Consular Affairs.S.S. reinforced through frequent consultations. Arrayed against that position were the principal domestic agencies that led the actual negotiations on mobility. Complicating the issue further were two additional facts.S. business community— demanded. that in many ways paralleled that of the United States. CUFTA’s mobility provisions were thus an evolutionary step forward in a relentlessly integrating bilateral economic bloc. Canada and the United States already had agreed.” which can in turn set the stage for further cooperation on migration and other deeply divisive issues. from the labor of Mexican workers dating back more than a century in the United States (and beginning much more recently in Canadian agriculture) to the exchange of executives and specialists of multinational corporations. and about sixty classes of professionals. commerce. In many ways. under the Canada-United States Free Trade Agreement of  (CUFTA). The reality that the visa refusal rates of Mexicans attempting to enter the United States exceeded  percent of applications. as well as the product of a United States that was more confident and “open” than at any time since. These agencies brought to the negotiating table not only the technical expertise necessary to conduct the negotiations but also the sense. In fact. to make provision for the movement of business persons. and look for additional bargaining chips in trade or other negotiations. Congress would not support too great a widening of mobility. The failure to stem illegal immigration across the U. bringing Mexico on board by matching the mobility provisions of CUFTA was in many ways revolutionary. and investment for three countries already engaged in the exchange of large amounts of goods and the movement of significant numbers of people. as well as students and professionals of all types. These individuals could cross the border without visas for often unspecified periods of time and were encumbered by only a few procedures—a fact grounded in part in the special treatment of each other’s citizens that goes back to the middle of the nineteenth century. The fact that Canada already had in place a mature and welladministered immigration system. also created a climate of confidence in the Canadians’ ability to deliver on their obligations. that the U. It was not clear at first how open the three parties would be with regard to the movement of people. A final observation may still be of value as the Western Hemisphere’s leaders attempt to conclude the Free Trade Area of the Americas’ negotiations by the  deadline. while many of its negotiators viewed openings in migration as an acceptable price to pay for openings in the trade and investment environment that their principal constituent—the U. rather than against. NAFTA’s Mobility Provisions: Political Climate and Outcome NAFTA put in place a common set of rules of conduct on trade. Trade Representative was at Carnegie Endowment for International Peace 41 . in that Mexico had little in the way of an immigration “system” and it was not clear how quickly or efficiently it could meet any of its obligations in this regard. sharp growth in the movement of goods and capital has proven to be no substitute for the movement of people. as well as the U. The Office of the U.S.S.

” U. Second.S.almost exclusively on grounds that the applicant would seek unauthorized employment in the United States.S. With NAFTA. immigration authorities that they do not intend to abandon their Mexican residence. First.S. procedures. Mexico has come nowhere near that number of entries at any time during the last ten years. As a result. many U. NAFTA adopted a slightly refined set of the CUFTA mobility provisions.S. The H visa category. immigration attorneys of Mexican TN visa applicants advise them to make the extra effort (and pay the additional fees required) to obtain the H-B visa.S. investors. and the total number of visas available to them could not exceed . professional workers in Mexico. had been reconfigured dramatically in new legislation in . law in an area where the U. “NAFTA” or “TN” visa entails a significant amount of paperwork. The H-B visa holds another distinct advantage over the TN visa: It does not require its holders to demonstrate to the U. “Migration” was swiftly taken off of the negotiating table by the United States when the administration of President George H. and most licensing and certification require- ments. and professionals were provided a rules-based system and predictable access to the entire NAFTA space by means of the harmonization of standards. would still be required to obtain a visa prior to U.S. “immigrants”—a requirement that becomes more problematic the longer the worker remains in the U. the Mexican government established for the first time a formal process for admitting foreign 42 NAFTA’s Promise and Reality . The CUFTA mobility provisions had created the “TC” visa.S. Mexicans.S. negotiators still faced a political dilemma on mobility. was an additional complication. congressional sensitivities. the temporary employment of Mexican professionals under the resulting one-year. that they do not intend to become U. in another bow to U. Canadian and U. entry (but not for entry into Canada). Bush concluded that proceeding with any substantial migration provisions could sink the overall agreement in the U. businesspersons. Congress guards its primacy with considerable zeal. Mexico’s initial position on labor mobility was quite different from the views of its northern neighbors. for two major reasons. Most striking is the growth of temporary Canadian and U. Mexico also made it clear that it was not willing to jeopardize the broader economic relationship by insisting on this position. Mexican professionals would have to meet certain additional procedural requirements. however. in any year until .S. which essentially had tracked the U. The best explanation for this passivity is Mexican official ambivalence about the TN visa’s possible acceleration of the already substantial “flight” of talented Mexican professionals to the United States under other visas: a variant of the “brain drain” set of concerns.S.1 With the United States and Mexico having thus agreed to protect their most politically sensitive “sectors.S. Mexico was interested in opening a broad dialogue on all forms of migration between itself and its two prospective partners. Congress. immigration legislation of the time (the “H” nonimmigrant visa as it stood at the time).2 A brief analysis of temporary worker flows among the three NAFTA partners shows a significant increase in both NAFTA and non-NAFTA workers. In the end. with one major exception: Mexico accepted inferior treatment for its professionals relative to that granted to the professionals of the two other parties to the agreement. there is no evidence to indicate that the Mexican government has sought to publicize widely the availability of the TN visa or argue strongly (that is. More significantly.S. engage the issue at the higher political levels) for removing some or all of its unequal provisions. but nominally renewable without limit. However. Although the CUFTA provisions were grandfathered in. Mexico proved compliant and the issue became moot when Mexico removed parts of the Mexican petroleum sector from the negotiating table. extending these provisions to Mexico would modify U. however. that is.S. which “guarantees” them a six-year residence.

826 11 92. J-1. argued: We will not reduce the flow of illegal immigrants until these immigrants find decent jobs. Flow of Temporary Workers and NAFTA Professionals to Canada from the United States and Mexico.3 The U.838 15. Flow of Temporary Workersa and NAFTA Professionals to the United States from Canada and Mexico. by promoting economic growth in Mexico through increased trade and foreign investment. Carnegie Endowment for International Peace 43 . P-2.879 83 658 10. Q-1.915 2.527 3. H-3.236 101 Source: Unpublished data provided by Citizenship and Immigration Canada. The idea that free trade and foreign investment can act as development catalysts. an individual may enter the country several times. L-1. In some cases. Includes the following temporary worker visa categories: E-1. Bureau of Citizenship and Immigration Services.4 The logic underlying these arguments was not new.123 278 3. had given birth to bilateral public policy cooperation as early as .571 Source: The Yearbook of Immigration Statistics.S. a substantial part of that debate focused on whether NAFTA would lead to a significant decrease in the unauthorized movement of people across the U. H-1B. visitors for whom employment is incidental to the purpose of their visit. Mexican president Carlos Salinas Gortari repeatedly expressed the hope that Mexico would export goods.895 162 4. Fiscal Years 1994 and 2001 Type of Entry (Visa Category) FY1994 FY2001 Canada Mexico Canada Mexico Non-NAFTA Workersb 23. H-2B.613 11. attorney general at the time.354 Workers with Specialty Occupations (H1B) 3.704 3. Janet Reno.632 22. there was hardly any discussion about NAFTA’s modest openings in the authorized movement of certain types of professionals in the NAFTA ratification debates in the United States.207 1. at decent wages. H-1A. a. and R-1. b. O-1. NAFTA will create jobs in Mexico—jobs for Mexican workers who might otherwise cross illegally into America.257 255 8.454 14. and thus as at least partial substitutes for migration. O-2.053 4 8.385 34 FY2001 United States Mexico 15.professionals. spouses and children.Mexican border.465 332 35 1. H-2A.011 592 11 7. NAFTA would reduce the pressure for illegal immigration across the United States’ southern border. Table 1.437 113. in Mexico.256 16.791 5. Notably. not individuals. E-2.885 61. not people. Numbers include trainees.532 210 6. United States and Mexican government officials echoed each other in their claims that.423 Intracompany Transferees (L1) 6. various years. Table 2. Fiscal Years 1994 and 2001 Type of Entry Non-NAFTA Workers Management Professional Skilled and Technical Intermediate and Clerical Elementary and Laborers Not Stated NAFTA Professionals FY1994 United States Mexico 16. P-1.482 2. robust Mexican economic growth. Note: Numbers reflect individuals granted work authorization. thus allowing both domestic and foreign companies to tap the United States’ and Canada’s formidable comparative advantage in highskill services (see Tables –).848 396 13 1.723 NAFTA Professionals (TN) 24.058 104 4. Instead.S.992 24. They reflect admissions. Our best chance to reduce illegal immigration is sustained.586 Treaty Traders and Investors (E1/E2) 3. P-3.896 28 856 4.

Permanent Mexican immigration to the United States. farmers to employ Mexican labor.333 1. which is only now beginning to show signs of exhausting itself. from  billion to  billion (see Table ). so far. The first is the extensive history of migration between the two countries.S. Yet enough workers were migrating outside the program’s parameters that the United States deported more than  million Mexicans between  and  without seriously impeding the ability of U.5 BIP factories along the Mexican side of the border were allowed to import inputs tariff-free for assembly in Mexico and then re-export finished products to the United States. Flow of Temporary Workers and NAFTA Professionals to Mexico from the United States and Canada.S. which has bound Mexican workers to low-wage.335 3. low-valueadded labor markets in the United States.743 3.401 696 46. Fiscal Years 1994 and 2001 Type of Entry Non-NAFTA Workers Investors Intracompany Transferees NAFTA Professionals FY1994a United States Canada 1.628 240 FY2001 United States Canada 8. in fact.029 7. Over the eight-year period from  to . Note: Numbers reflect work authorizations. The third is the fact that NAFTA is only one part of a two-decade restructuring of the Mexican economy that. and some analysts argue that it may in fact have fueled unauthorized migration to the United States. at the peak of the special MexicoUnited States agricultural labor arrangement known as the bracero program (which lasted from about the early s to ). NAFTA’s effect on trade and foreign direct investment (FDI) vastly exceeded that of BIP.Table 3. well after most other immigration flows to the United States had begun to include large numbers of women.890 Source: Mexican National Institute of Migration (Instituto Nacional de Migración. beginning the maquiladora phenomenon that would become so significant by the beginning of the NAFTA era. has served only to promote migration.173 49 341 22 832 27 2. Southwest. In the mid-s. like BIP. The recruitment and social networks tying the two countries are by now so deeply embedded that migration is an entrenched part of both countries’ economies and societies. The second is a demographic surge of new entrants into Mexico’s labor market. The explanation for this phenomenon is that NAFTA’s effects on migration to date have been caught up in the crosscurrents of several much larger trends and forces. more permanent in nature. 44 NAFTA’s Promise and Reality Migration Networks and the Inertia of Migration Migration from Mexico to the United States—as it increased throughout the twentieth century— grew geographically dispersed and. FDI from the United States increased about  percent.342 2. By the s. relative to the more typical pattern of repeated short trips northward for seasonal work. also without tariffs. an effective substitute for migration. there is no indication that such migration may even be cresting. with the establishment of the Border Industrialization Program (BIP). INM). migration from Mexico continued to involve largely the circular movement of male Mexican laborers from the rural states of central Mexico to the U. as it turned out. 1994 data collection began in April. BIP was not.6 Yet. a. as a social and economic force. NAFTA did not bring about a decrease in migration from Mexico. more than a half-million Mexican workers were migrating per year to the United States. was still relatively uncommon in the mid-twentieth century despite the fact that the United States’ admissions system for permanent immigrants in some ways .

and. demand for family immigrant visas began to exceed supply. Among other things.” From  to . and sent them to major cities in the United States. In the s and early s. a. by arranging jobs for family members and friends.677 2. favored Mexico (and Canada). illegal immigration from Mexico continued to grow.642 400 2001a 15. these networks had matured and had begun to spread.219 2.657 175 1996 5.585 1. some bracero workers “leaked” out of the agricultural sector and into permanent employment.042 2. Congress passed the Immigration Reform and Control Act (IRCA).477 200 1999 6. Mexican migrants filled an increasingly broad range of jobs.914 2. It was not until the  amendment to the Immigration and Nationality Act that a ceiling of . IRCA provided for the legalization of unauthorized immigrants who could show they had been resident in the United States since January .S. million Mexicans received permanent residency. Mexico (Secretaría de Economía). effective from  to . while the Western Hemisphere remained unaffected.404 2. low-valueadded manufacturing.368 278 1998 5. moving from the agricultural sector into food processing.196 1. in some instances. with Mexico and Canada the de facto beneficiaries. IRCA also created a system of graduated sanctions for employers who hired undocumented immigrants “knowingly. With opportunities for legal admissions remaining grossly inadequate to meet demand.418 5.127 827 5. admissions per year from  through .677 237 Source: Secretariat of the Economy.314 197 1997 7. the U.9 By the late s.039 2. annual slots. by financing the unauthorized migration of other migrants and by providing a temporary social safety net for them. Compounding the problem was IRCA’s failure Carnegie Endowment for International Peace 45 .191 2.8 Over time. and personal services.833 2.203 1.  million of these thanks to IRCA’s legalization provisions.910 2.S.610 68 1995 5.878 1.403 4. in large part due to the preference of Mexican workers for circular migration and rather strict procedural U. With IRCA’s border control provisions essentially unfunded until the mid-s and its controversial employer sanction provisions deeply underenforced.989 14. particularly in the Southwest. was designated for the Western Hemisphere. illegal immigration resumed.394 4. agriculture for a specified time.10 The law led to an initial decrease in the stock of unauthorized immigrants.622 8. Legal permanent immigration from Mexico continued to grow through the s.678 5. Each permanent immigrant multiplied the potential immigration from Mexico by enabling family reunification.281 5.511 2. almost .583 3. Specifically. Foreign Direct Investment in Mexico. the First Quota Act of  established a national origin-based quota system for the Eastern Hemisphere. rules. .084 334 2000 10. 1994–2001 THOUSANDS OF DOLLARS United States Non-Maquiladora Maquiladora Other Countries Non-Maquiladora Maquiladora 1994 4. In . With the capping of certain permanent immigrant admissions from the Western Hemisphere in . averaging .106 3. but one of its net effects was to lay the foundation for increased immigration in the future. but attracted migrants from other parts of Mexico.954 4.303 2.7 Thus.959 1. in  Mexicans accounted for only  percent of the total foreign-born population in the United States. most notably a labor certification requirement.747 4. Permanent admissions from Mexico yet averaged only some . or had worked in U.S. but also in the Chicago and New York metropolitan areas.178 3. per year through the s.444 5. including some urban areas.Table 4. these temporary and permanent movements built intricate and durable networks that generated increasing migration flows from Mexico to the United States. January–September.645 4. They no longer connected only agricultural areas.

Although estimates of the annual growth of the actual workforce vary. when the Mexican government began aggressive family-planning initiatives. While the rates of Mexican infant mortality and mortality in general steadily decreased.15 Agricultural employment grew briefly in the late s and early s before Rapid Demographic Change Throughout the s and leading up to NAFTA’s implementation. the large number of now-legal Mexican immigrants provided the foundation for increased legal family reunification. birthrates continued to rise. million. Mexico’s demographic changes were putting increasing pressure on the sputtering Mexican labor market. this demographic momentum translated into a need to absorb an ever-increasing number of new entrants into the workforce each year. By . Through the s and early s. and . labor market had been steadily increasing for well over fifty years prior to NAFTA. Mexico’s economy has faced an uphill battle in generating jobs (and wages) sufficient to maintain the standard of living of its people. with the rural population accounting for . the Mexican economy left hundreds of thousand of new entrants to the labor force (as well as their unemployed and underemployed predecessors) to choose between the informal sector and.13 Also relevant to Mexico-United States migration is Mexico’s continuing process of rural out-migration. it is no surprise that free trade has had little effect on the twin pillars of Mexican migration to the United States: intricate networks of social ties and labor market interdependence. To demonstrate the power of this demographic momentum during the NAFTA era.S. migration. is experiencing a relentless process of rural out-migration and urbanization—a process that most economists and historians consider a natural part of economic development. but is expected to grow by only . percent of the total population in  and . and urbanization continued in the s. it was only adding about . in . million between  and .14 In . in the population of economically active people— those who are working or looking for work—has peaked: The active workforce grew by .11 However. also a good year for the national economy. but many also likely facilitated the illegal immigration of friends and family.12 An everlarger working-age cohort has meant that even during periods of steady growth. Further. In contrast. . it is clear that even in its best years. Mexico’s working-age population grew by more than twice as many people in those same two years. Only now are the cohorts of young people entering the labor market becoming smaller.to make provisions to address continuing labor demand by widening legal migration channels. this growth will gradually slow: The population of school-age children has begun to decrease and will continue to do so through at least . percent in . it added about . million people between  and . million between  and . The integration of Mexican workers into expanding segments of the U. percent. if they had the wherewithal. jobs in the formal sector. percent of the Mexican population lived in rural areas. Mexico’s National Population Council (Consejo Nacional de Población) estimates that the growth 46 NAFTA’s Promise and Reality . this figure had dropped to . NAFTA’s provisions to integrate the goods-and-services markets of the two countries have been in effect for only ten years. Mexico. giving the economy a chance to catch up. In . However. consider that when Mexico’s real gross domestic product (GDP) was growing at an enviable annual rate of . percent in . Thus. peaking in . like many developing and middle-income countries. They did not begin to decline significantly until after . the annual increase in the population between ages fifteen and sixty-five years reached . and growth in the working-age population plateaued at that figure through .

among other factors. They declined only in . individuals migrated directly to the United States. significant change in the migration “equilibrium” between the two countries. In some cases. Both of these processes—the demographic transition and urbanization—thus provide further reason why it would have been unrealistic to expect NAFTA to have reduced migration pressures in only its first ten years of existence.16 Thus. For example. others chose migration to metropolitan areas in Mexico instead. free-market economy. leading many Mexicans to conclude that migration to the United States represented their best chance of survival and progress. The result of the  crash and the restructuring that followed led to a clear increase in illegal immigration. when Mexico’s cities could not generate sufficient opportunities for these migrants. More and more families drew on the social networks that tied them to the United States for assistance with sending a family member northward. Of course. requires and rewards risktaking and new investment. and Emigration The year  marked a watershed in Mexico’s economic history. illegal entries) rebounded and continued their rising trend. as determined both by the wages themselves and by the exchange rate. Most obvious is the availability of jobs and relative wages in Mexico and the United States—in the latter case. by diversifying a family’s sources of income. and as a source of financial capital for families who have no access to credit. the devaluation of the peso and the attendant collapse of Mexican employment and wages brought about a sudden. The resources sent home by migrants can serve as a form of insurance. apprehensions (and. () IRCA’s employer sanctions created enough initial uncertainty as to whether unauthorized immigrants would be able to find jobs as to deter. Although rural-to-urban migration continued. and the slow recovery that followed. As people lost jobs in sectors that had previously been sheltered or subsidized by the state—many of them moved or were forced into the informal sector—the insurance and capital functions of migration became even more important. These two functions of migration were particularly important as Mexico transitioned from a policy of heavily protected. The decision to emigrate—and to return—involves a complex array of factors. As the ISI-supported industries around the capital disappeared and the middle class they Carnegie Endowment for International Peace 47 .17 This process of structural change. In the latter case. That drop was in large part caused by two factors: () IRCA’s legalization provisions— especially its requirement that the applicant’s presence in the United States be continuous—resulted in a decrease in circular border crossings. but also by family needs and priorities. potential crossers. Structural Change. state-led import substitution industrialization (ISI) to an open.resuming its downward trend. Economic Crises. Mexico City and the area around it was no longer the nation’s chief magnet for internal migrants. both in absolute terms and per officer hours (see Figures  and ). Taylor and Yúnez-Naude found that a  percent devaluation of the peso increased migration by  percent in a traditional migrant-sending village in Mexico. almost by definition. however. The economic changes of the s and early s also brought about a change in migration patterns within Mexico. shook confidence in the Mexican economy. Just as important. After IRCA’s effects subsided. an individual’s decision to migrate is not just shaped by his or her own earning prospects. and thus also in its migration behavior. the crisis. temporarily. That year’s economic crisis and the two decades of economic restructuring that have followed it increased migration to the United States substantially. it is believed. many of them wound up undertaking another migration—this time to the United States. Apprehensions of would-be unauthorized migrants along the border spiked immediately after the  crash.

000. paid poorly compared with many other manufacturing employers.000 6.000 420. Fiscal Years 1977–2003 APPREHENSIONS 10.000. Nevertheless. By most measures. Lindsay Lowell.S. 48 NAFTA’s Promise and Reality .120.18 and had extremely high worker turnover. Many observers warned. illegal immigration to the United States continued to increase after NAFTA came into effect.000 0 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 1. Unauthorized Mexican Immigration into the United States: IRCA. Apprehensions along the U.000 980.000 1. Paper commissioned for this report. For energetic young men looking for a steady job and a way up.000.400. the maquiladoras proved no substitute for heading north.000 1. delivering employment opportunities and consistent wage growth to Mexican workers and curbing emigration.000 2.000.000 1. the skeptics were right. from about .000 5.000 9.000 0 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: Office of Immigration Statistics. NAFTA. southwestern border also continued to increase. that change could not be accomplished overnight. Since restructuring had delivered only more migration up to that point.000 3. DHS) estimated that the Figure 1.000.000 7. 2003.000. and Their Migration Implications. It was hoped that NAFTA would be the missing piece to complete Mexico’s new economic puzzle. Southwest Border Officer Hours. Fiscal Years 1977–2003 OFFICER HOURS Figure 2. which since March  became part of the Department of Homeland Security.19 The population of unauthorized Mexican immigrants grew as well: The Immigration and Naturalization Service (INS. skeptics cautioned that it was unrealistic to expect NAFTA to reduce international migration in the short-tomedium term. on file with the author. at their peak in . the jobs that migrants found in the border states were not always substitutes for the jobs once found around Mexico City. but painful. The maquiladoras employed mostly women.000 140. however.260.000.000 280.. Southwest Border Apprehensions. NAFTA’s Effect on Migration As it turned out. restructuring.000. as the medium-size cities of Mexico’s northern border states and the maquiladora assembly factories located in those cities became more attractive.000 8.000. in  to more than .had supported receded in importance in the new economic environment. NAFTA was clearly just another step—albeit a huge one—in the course toward economic (and political) liberalization that Mexico set for itself in the early s.000 560.000 700.000 840.000. Department of Homeland Security. that NAFTA would likely be just another step in Mexico’s necessary.000 4. provided in Frank Bean and B.

 percent to .22 Mexican migrants also spread to nontraditional destinations in the United States: States such as North Carolina. the trend toward geographic and economic dispersion of Mexican-born individuals in the United States continued. estimating that there were . Kentucky.  percent of the growth in the total unauthorized population between  and  was due to Mexican immigrants.C.21 Meanwhile. It is not surprising then that the average growth of the total unauthorized population during the decade was higher in the years after NAFTA went into effect than in the years before. and more likely to be undocumented. (Figures  and  illustrate the recent growth of the Mexican-born population in the United States. Puebla. The  Mexican census revealed that several states that did not have a tradition of northward migration had begun sending large numbers of migrants to the United States. Minnesota. increasing from . only a minority of Mexican migrants surveyed worked in agriculture—in either Mexico or the United States. among them Oaxaca. Nonrandom surveys of Mexican migrants taken at popular border crossing points suggested that from  to . Guerrero. Percentage of Growth of the Mexican-Born Population in the United States 35% 10 9 30% 8 7 6 5 4 3 2 5% 1 0 0 15% 25% 20% 10% 1960 1970 1980 1990 2000 1960 1970 1980 1990 2000 Source: Migration Policy Institute analysis of 2000 Census Bureau data and Campbell Gibson and Emily Lennon. and the state of Mexico. Veracruz. 1999). D. Growth of the Mexican-Born Population in the United States MILLIONS Figure 4.S. percent between  and . million unauthorized Mexican immigrants in the United States in .23 The characteristics of migrants also appeared to have changed. Carnegie Endowment for International Peace 49 .number of Mexicans present in the United States without authorization rose from  million in  to . percent of the estimated total unauthorized population in the United States. The average length of intended stay increased as well. as well as the capital district itself. An increasing proportion of migrants were from urban areas.) Figure 3. less likely to have migrated before. Hildalgo. Morelos. and Arkansas saw increases of their Mexican-born populations of more than . Historical Census Statistics on the Foreign-Born Population of the United States: 1850–1990 (Washington.20 According to these estimates. by the s. million in .: U. Census Bureau. Demographer Jeffrey Passel obtained similar findings using different methods. migrants became less likely to have had a job in Mexico.24 Additionally.

beginning a remarkable period of sustained growth that lasted until . Also.26 The response of many Mexicans was similar to that shown in the  crisis: Few jobs in Mexico. percent in  and descended to . The effects were not unlike those of the  crisis: Large numbers of formal-sector jobs were lost. Of particular note was the increasing importance of Mexican workers in the U. percent in . high relative wages in the United States. If it had any effect. have continued to rise.S.S. and uncertain prospects for the future added up to good reason to head up the well-trod path northward. real U. an increase in outright urban unemployment from . the political ties developed in the course of the NAFTA negotiations and the thickening economic linkages secured by NAFTA clearly played a strong role in encouraging the United States to engage in the unprecedented bailout that mitigated the crisis. Furthermore. S. deaths of migrants along the border have remained tragically frequent. GDP grew by  percent from the previous year. possibly indicating decreased illegal migration inflows. Similarly. percent from the previous year. however.S. personal services sector—a development that provided a strong indicator that the NAFTAabetted increase in the trade of goods and highskill. as migrants already in the United States postpone trips home because they fear challenging the heavily augmented U. although apprehensions along the border dropped in .Free Trade and Migration Forces T H E P E S O C R I S I S A N D R E C OV E R Y T H E BO O M I N G U.25 and a large movement of workers into informal-sector employment. making them a critical part of the robust growth of many sectors of the U. exacerbated by the attacks of September . a  GDP that shrank . Surprisingly to some. border security. ECO N O M Y NAFTA’s entry into force was quickly overshadowed by the “peso crisis” of .27 Unemployment stood at .S. high-value-added services was not going to provide an adequate substitute for migration. Apprehensions along the border jumped in . and continued to increase in . the Mexican economy has also been hurt through its close links to the United 50 NAFTA’s Promise and Reality . such as remittances and Current Population Survey-based estimates of the number of Mexicans in the United States. the lowest average rate since . in March . economy and playing a key role in drawing additional migrants to the United States. One way to reconcile the increase in the size of the Mexican-born population in the United States with the decrease in apprehensions at the border is to speculate that the decline in the apprehension rate reflects primarily a decline in circular crossings.S. economy has struggled. In one public opinion poll taken during the thick of the crisis. the crisis itself cannot be attributed to the trade agreement. Not only has the population of Mexican-born individuals in the United States not declined. Further. In .S. only  percent of those polled said they thought that economic conditions would improve in the next year.28 The tight labor market provided ample jobs for low-skilled Mexican immigrants. The results of the crisis were an immediate devaluation of the peso by more than  percent. . real wages in Mexico dropped severely relative to those in the United States. NAFTA likely dampened the effects of the economic crisis. and confidence in the Mexican economy was badly shaken. percent by . the  downturn in the U. while the U. percent in  to . economy. while the NAFTA negotiations probably promoted some of the exuberant investment in Mexico that led up to the peso crisis. did not bring about an observable decrease in Mexican unauthorized immigration to the United States. but other indicators of the size of that population.

the U. Although Mexican exports of fruits and vegetables increased considerably after NAFTA was implemented. According to a recent Pew Hispanic Center study. Maize is a laborintensive staple crop in Mexico. Paper commissioned for this report. Figure 5. Edward Taylor and George Dyer. and Migration. Migration from many rural communities accelerated. there is no evidence that illegal immigration from Mexico has slowed as a result of the enhanced enforcement. and less of that migration went to other rural areas in Mexico. Trade. in J.S.30 Instead. In fact. was feared that open trade would generate intense labor displacement in the agricultural sector and additional migration from rural areas—with many of those migrants ending up in the United States. 1980–2002 HOUSEHOLD MEMBERS: 1980=100 600 500 400 300 N A F TA . Under this strategy. By . but Mexican farmers produce it far less efficiently than their U. A N D R U R A L O U T.S. NAFTA. migration from the surveyed rural communities to the United States increased by  percent. Migration from Rural Mexico to the United States. However.M I G R AT I O N 31 200 The hope that exports of high-value fruits and vegetables would bring more employment to rural Mexico was balanced by the fear that imports from the United States would swamp Mexico’s production of grain. it 100 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source: Analysis of data from Mexico National Rural Household Survey of 2002. Carnegie Endowment for International Peace 51 . employment in the agricultural sector declined overall. counterparts. economy. particularly maize. as evidenced by the increased use of “coyotes” (peoplesmugglers) higher smuggling fees. generating additional employment. certain other groups in the U. labor pool experienced increases as high as  percent or more.States. C H A N G ES I N BO R D E R E N FO R C E M E N T Beginning in . border enforcement seems to have reinforced the trend away from circular migration and toward longer stays in the United States. migration to the United States was  percent higher than in  (see Figure ). The strategy sought to make crossing illegally as difficult and costly as possible by closing off the easiest routes. using data from the Mexico National Rural Household Survey. most of them in urban settings. it has succeeded in making crossing more difficult. versus  percent in . As noted. In regard to the Mexican workforce. giving migrants little incentive to return to their home country. shows that NAFTA did not slow migration from rural areas. Mexican-American workers seemed to have suffered the lowest percent growth in unemployment in the United States from September  to October  ( percent). a fact that may have encouraged immigrants from Mexico to remain. on file with the author. From  to .29 Employment prospects for Mexicans in the United States have remained robust despite the most recent lapse in the U. 2003. A  study by J. in turn prompting more women and children to migrate to join men working there.S. by comparison. Border Patrol began a series of “concentrated border enforcement” exercises. and the increased deaths of unauthorized migrants in remote areas along the border. Edward Taylor and George Dyer commissioned for this report.S. line patrols were drastically increased in high-traffic crossing areas. an increasing proportion of that migration found its way to the United States: Thirty percent of migrants from rural Mexico were in the United States in . M E X I C A N A G R I C U LT U R E .

The sustained economic growth of the late s brought about an increase in the proportion of workers in formal jobs.33 In fact. irrigated farms.NAFTA does not appear to be the culprit in this acceleration of rural out-migration. The share of agricultural workers as a proportion of Mexico’s workforce has declined steadily. but many of these gains have been lost in the downturn of the past three years. even as agricultural prices dropped and Mexico’s trade deficit in agricultural goods with the United States widened after NAFTA. meaning that the informal sector and migration are often complements. The choice of whether to migrate within Mexico or to the United States. Thus. however. was slower than the growth of GDP as a whole with two exceptions: In  and . turnover is high. In fact. however. U R B A N E M P L OY M E N T A N D N A F TA : T H E R I S E O F T H E M AQ U I L A D O RAS A N D T H E I N FO R M A L S ECTO R The crises of  and  were characterized by the decimation of salaried jobs in the formal sector and the growth in jobs in the informal sector— self-employment. almost exactly what it was in the years immediately prior to NAFTA. million in . and the trend continued afterward. largely subsistence farms and more commercial. (Much of the growth in agriculture was in labor-intensive fruit and vegetable crops in the northern and western states of Mexico. and by the unavailability and low quality of jobs in Mexico’s cities. and one that is often overlooked. wages in the maquiladoras are low. Average productivity (and thus wages) in the informal sector is very low. Employment in the formal sector has risen and fallen with the Mexican economy. from . That growth. Reforms of the ejido system of landownership that began in  have allowed land sales and rentals and have been accompanied by cuts and changes in the structure of agricultural subsidies. employment in informal-sector jobs grew faster than employment in general. Until . NAFTA has played only a minor role in the continuing acceleration of rural outmigration during the decade since its enactment. however. Significantly. by a seemingly paradoxical decline in employment in the Mexican agricultural sector. a substantial minority of the formalsector jobs gained—and lost—following enactment of NAFTA have been in the maquiladora assembly industry. process of rural-to-urban movement that all countries experience as their economies advance. million jobs in  to . to less than  percent and falling since . and workers 52 NAFTA’s Promise and Reality . annual corn production averaged about . Mexican corn production has not been gutted. million tons from  to . Migrant remittances are an essential source of capital for many small enterprises.36 Both informal employment and maquiladora jobs are typically poor substitutes for international migration.32 Rather.) The gains in the value of Mexican agriculture were accompanied. not substitutes. Further.34 A number of factors besides NAFTA were at work. but not always in ways that have resulted in greater agricultural employment or have encouraged rural people to stay put. The first.35 The second factor is the continued reform of Mexican agricultural policy. is the natural. where exports of many types of fruits and vegetables more than doubled. perhaps inevitable. Mexico’s agricultural GDP increased. however. overall GDP shrank. has been shaped by the larger and more structural general migration forces outlined in this essay. from over  percent in . Both changes have encouraged increased productivity and production. while the expected increase in imports in corn and other grains from the United States occurred. migration from rural Mexico to the United States had been accelerating well before the onset of NAFTA. Likewise. to  percent in . jobs in small enterprises. Neither has there been an observable shift in production between rain-fed. however. Taylor and Dyer found no indication that NAFTA created any sort of “break point” in the growth of migration from rural areas. and jobs without benefits.

which was down . the majority of recorded maquiladora workers were men).37 Both rates remain higher than those prior to the  crisis. In the new century. like those of many developing countries. Carnegie Endowment for International Peace 53 . of some of the maquiladoras’ preferential tariff treatment has contributed to a level of employment that. and an economy that. both legal and illegal. maquiladora employment roughly doubled in the same period. with employment increasing  percent between its  trough and  peak. Migration from Mexico to the United States. percent. Thanks in part to increases in foreign investment and manufacturing exports brought about by NAFTA. but it has not led to dramatic job and wage growth. enduring and deeply rooted social networks that promote migration. has continued to grow. and the loss. leading one to believe that Mexico’s disappointing economic performance in the past ten years may well have been much worse without NAFTA. NAFTA and Migration: Promise and Reality In terms of its effects on illegal migration. suffered repeated grave crises and a painful process of readjustment. It has not decimated Mexican employment. In the ten years that NAFTA has been in effect. a demographic boom that is still several steps ahead of the employment creation capabilities of the Mexican economy. The fairest conclusion may be that. unemployment and informal employment together fell from a high of  percent of the workforce in  to a low of  percent in . over the past two decades. it appears that the maquiladora sector may be in decline. informalsector employment declined in the initial period following enactment. Although the manufacturing sector in general was hit harder by the  crisis than the maquiladora subsector. due to NAFTA. as well as social security reforms. only to climb to  percent in . overwhelmingly female (in . employment in non-maquiladora manufacturing recovered strongly on the back of export growth. NAFTA has been cruel to both its most vocal critics and its most ardent proponents. ultimately. which means that the energetic and ambitious bypass or do not stay long in maquiladora jobs. By one indicator. in mid-. was down  percent from the sector’s  peak. along with open unemployment. for the first time. competition from China and other low-wage countries. NAFTA’s economic effects have been dwarfed by much more powerful and enduring forces: robust demand for Mexican workers in the United States. has. The combination of the economic downturn. in contrast to non-maquiladora manufacturing employment. If anything. it has shifted the Mexican economy slightly toward greater formalsector employment. until recently. vastly expanded investment in Mexico and regional trade in goods has not reduced the movement of people—albeit for reasons that probably have as much to do with conditions in the United States as with those in Mexico. however.tend to be young and.

Although the mobility of businesspersons and investors under trade accords may no longer be controversial. It is both preceded and followed by extensive EU investments in the social and physical infrastructure of candidate and new member states. but gained in both depth and intensity following the elections of Vicente Fox Quesada and George W. and disorderly migration. However. Senate passed a nonbinding resolution stating that “trade agreements are not the appropriate vehicle for enacting immigration-related laws or modifying current immigration policy. however. unregulated. and experience is a very difficult political issue for most developed societies. This nonevent occurred despite a nearly three-decade history of labor migration to the EU from all three countries. only one other major option seems open: substituting legal.S.S. regulated. After approving trade pacts with Chile and Singapore that contained labor mobility provisions far more limited than those in NAFTA.Looking Ahead The “age” of selling free-trade agreements to skeptical policy makers and mass publics by claiming that they will reduce illegal immigration may have passed. the political ties the United States and Mexico developed in the course of negotiating NAFTA helped to open a number of dialogues on migration management between the two countries that began soon after the agreement’s entry into force. and was felt again most recently in the United States. In light of the failures of both free trade and unilateral border controls to “solve” the problem of illegal immigration. significant migration agreements. These dialogues dealt with important but often procedural issues at first. and orderly migration for the current system of illegal. soon after the terrorist attacks of  and the subsequent shift in U. Spain. the EU integration concept mandates extensive economic and political reforms that enhance the newcomers’ stability and prepares them to take better advantage of the benefits of membership. as well as by massive annual investments in the member states’ agricultural sectors. the negotiations’ central concepts of regularizing the presence of unauthorized immigrants. education. Yet there are cases in which a different model of regional integration has reduced migration pressures enormously. the employment of foreigners at various levels of skill. offering Mexico much broader access to permanent and temporary U. if they are to happen at all. The momentum dissipated. The EU’s model of economic and political integration seems unlikely to be duplicated elsewhere in the near future. Bush. will most likely happen outside the explicit context of trade accords.” and that “future trade agreements to which the United States is a party… should not contain immigration-related provisions. however. political attention and interest. the process of joining the EU involves much more than opening to free trade. and Portugal joined the European Union (EU).S.”40 54 NAFTA’s Promise and Reality . lawmakers who have proposed a variety of new legislative schemes in this area.39 the U. the opening in labor mobility did not bring about a rush of new migration. In many ways. goes beyond just free trade. Furthermore. visas. The “toxicity” of going beyond the narrowest possible areas of mobility has been playing itself out for two years now in the inability of the governing coalition in Germany to pass its immigration reform legislation.S. The perversity of the status quo becomes starker when one realizes that in effect the sovereign prerogative of states to make immigration decisions to individual migrants and organized smuggling networks is surrendered. safe. for example.38 In the present climate. and taking joint responsibility for the management of the common border live on in the continued interest of several key U. This model. However. The alternative calls for engaging in a process of using further openings in permanent immigration and substantial numbers of legal temporary work visas to satisfy a much greater proportion of the developed economies’ demand for additional foreign labor and the less developed economies’ interest in easier access to the labor markets of the more developed world. When Greece. This last investment alone consumes nearly half the European Commission’s total budget.

The lack of substantial progress so far in the WTO discussion of trade-in-services (which could come to include mobility issues that go well beyond those of NAFTA) points to a trend toward more modest commitments on the mobility of persons. there remain compelling reasons why migration and free-trade agreements will continue to be thought of—if not acted on—in tandem. The last ten years clearly demonstrated the durable need for Mexicans in lowvalue-added manufacturing and low-skill services in the United States. economists argue that the potential global economic gains from even a modest increase in the movement of workers can be much larger than any further increases in the movements of goods. Canada’s  free-trade agreement with Chile made NAFTA-like provisions for the temporary employment of professionals. the rich countries’ voracious demand for workers and the poorer countries’ ample supply create powerful transnational linkages between labor markets. Mexico. as well as regional hubs for business. governments face an uphill battle in disentangling them. but the demands of the economy and the existence of established migration networks. but its  agreement with Costa Rica only provided for the temporary entry of business visitors and for the employment of intracompany transferees. and much trade in services requires the movement of significant numbers of people. the driving force is not the government’s legal approach to the movement of people. As NAFTA aptly demonstrates. Regional agreements that set the terms for the ongoing exchange of business visitors and several types of workers among all the countries of a region may thus be worth pursuing on their own merit—independently of. NAFTA’s brief history shows that free trade cannot serve as a substitute for labor migration. from a purely economic perspective. at least in the short term—and that loading a free-trade agreement with mobility provisions beyond those appearing in NAFTA will make the agreement politically unpalatable to developed countries. Regardless of the political moment. perhaps. However. both because of and despite official policy. More convincingly. but the role of Indian information technology and communication workers (temporary and otherwise) in the United States in the s provides an equally potent example. In many ways. there is little difference between trade in goods and trade in services. Nor is this analysis unique to the NAFTA partnership. In sum.Canada. Brazil. Once worker and employer have begun to turn the potential economic gains of migration into a profitable reality. Argentina. are all significant destinations for workers from other countries. One could take from this analysis the lesson that migration agreements cannot be naturally accommodated within free trade negotiations. They have made few commitments regarding the ability of foreigners to get access to their respective domestic labor markets through trade agreements. Canada has continued a somewhat productive dialogue with Mexico on labor migration: It signed a  letter of intent stating its intention to expand the small agricultural guest worker program it has had with Mexico since . it is during trade negotiations that the negotiating position of many developing states may be the strongest. has also been cautious in engaging other countries in mobility agreements similar to the one it negotiated with Mexico under NAFTA. After all. Within the FTAA zone. among others. First. Furthermore.41 These gains only grow as the spectrum of skills and occupations eligible to move are expanded to allow countries to exploit their comparative advantage in services. Furthermore. this potential for economic gains has serious practical effects. both the United States and Canada have mapped generally similar paths on migration since NAFTA. for its part. Often. this is counter-intuitive. and Chile. or parallel Carnegie Endowment for International Peace 55 . just as in the case of migration from Mexico to the United States. The collapse of the Cancún WTO ministerial in September  certainly demonstrates this last point. while at the same time running fairly liberal “unilateral” programs for the temporary entry and employment of people from all nations and continuing to engage Mexico on migration matters from time to time.

these fears could go the way of NAFTA’s “giant sucking sound” famously evoked in  by Ross Perot.43 Still left unanswered is the question of how to negotiate agreements on the movement of workers. As negotiations continue on CAFTA and FTAA.S. in effect. uses the regional trade agreements’ existing commitments on the mobility of business visitors and high-skill professionals as a starting point from which to extend mobility to other labor market sectors by gradually eliminating administrative barriers and making less-skilled workers eligible to move. Britain.42 Other. Such arrangements will have to deal with the inevitable—and valid—concern that permitting increased movement of labor could affect relative wages in sensitive social sectors in developed countries. when there was enormous demand for such workers.S. was also the approach proposed by India in the WTO’s Doha Development Round. Another approach. energy. In other words. the nearly completely free movement of people takes place in the context of very deep regional political-economic integration. it may make sense for developed countries to use limited and regulated access to their labor markets as a bargaining chip. and financial services. however. and.to. The United States. a successfully concluded trade pact could be used as a political forum for a regional discourse that concluded with an understanding on migration. employers for foreign workers in the high-technology sector climbed dramatically in the late s. The United States and Canada already have extensive provisions for the temporary employment of foreign workers outside the context of international agreements. Yet developing country protectionism. as well as depending on the level of the developed world’s interest in gaining access to foreign markets. In the case of the EU. to a tepid reception. among other factors.S. security. workers as the demand for technical skills ebbed. organized crime. firms. The ability of Indian information technology and communication professionals to work in the United States or of Brazilian construction companies to operate in the United States using a certain proportion of Brazilian workers might thus be exchanged for increased access to the telecommunications or financial services sectors of these countries by U. If anything. and in the WTO.S.-Mexican context: An agreement on temporary movement of low-skill workers from Mexico to the United States and U.S. some of the United States’ recent experience shows that temporary worker admissions can function much as one would want them to: Applications by U. With stronger social policies and proper regulation and enforcement. equally sensitive bilateral irritants will also have to be included in any real bargain. and both countries remain conscious of these two items’ power as bargaining chips.S. negotiations on trade and commercial pacts. This type of “trade in services” quid pro quo could be tested first in the U. and many other developed countries have large surpluses in net exports of high-skill services.S. The bargain can be seemingly simple: Developed countries desire concessions from developing countries in opening their service sectors that parallel the concessions developing countries want from developed countries in regard to the movement of people. employers did not undercut U. particularly ones that involve the taking of joint responsibility for the management of the common border in ways that effectively address each other’s concerns about drugs. reflecting their large comparative advantage in telecommunications. A final approach would not tie migration measures directly to trade agreements. and foreign workers employed properly by U. the use of temporary foreign employees responded to market forces. first and foremost among U. access to Mexico’s petroleum sector were first discussed together in NAFTA negotiations. now slowly taking shape in the Caribbean Community. The countries of the South American customs union Mercosur. which experience significant levels 56 NAFTA’s Promise and Reality . holds services to about  percent of all world trade. it would use the resulting regional or subregional economic integration and cooperative spirit as the context within which to negotiate subsequent mobility agreements. interests at this time. but have declined sharply since the  downturn. management. Rather. This. Similarly.

absent a sharp turnaround in the U. Migration and economic integration have not met for the last time. Migration Policy Institute). . The White House. is that neither the FTAA nor CAFTA negotiations.” Migration.. and the tough stance taken by developing countries in general at the September  WTO negotiations in Cancún. will look much different on mobility issues from the precedent set by the U. ). Correspondingly. 5 The BIP was created partially in response to the end of the United States’ bracero program. Worlds in Motion. International trade is only one of many economic forces affecting migration. the European Free Trade Association states.of intraregional illegal migration. Paper commissioned for this report. D. which had allowed Mexicans to work seasonally on U.org. “New Directions for Managing U. workers.-Mexican Migration. . however. however. has used the ties built though their trading bloc to negotiate the regularization of unauthorized immigrants. is not likely to be as easily “imposed” on the other parties as it was on Singapore or Chile.S. the European Union. 6 Interestingly. U. agreements with Chile and Singapore. on file with the author. Jorge Durand. available at www. The direction the United States might wish to follow. 4 “Attorney General Reno Sees NAFTA Benefits in Creating Jobs. and Alfred Buch. Nolan Malone. Canadians and Americans in the NAFTA Mobility Working Group have waited for several years for Mexican representatives to approve expanding the TN occupational list to include these two categories. through Mexico’s signing of free-trade agreements with multistate groupings elsewhere in Latin America.44 N OT ES Epilogue This brief evaluation of “NAFTA at Ten” allows us to bury some false ideas and suggest some new possibilities. employers. though. England: Carnegie Endowment for International Peace 57 .C. Moreover.S. and J. markets is also being diluted. see Binational Study on Migration.C.ibiblio.S. 1 More information on Mexican expectations leading up to NAFTA is provided in Francisco Alba. Edward Taylor. and Israel. Elusive and Changing Mexican Expectations Regarding NAFTA’s Implications on Migration. negotiators may even seek to eliminate any reference to professional entries under the resulting accords. ). (Oxford. Papademetriou. farms and had promoted the recruitment of Mexican workers by U. 9 For more information on these topics. and migration itself has deep roots in society. FDI from all other countries fell by almost  percent in  and has never fully recovered. 3 Demetrios G. however.org/pub/archives/ whitehouse-papers//Oct/NAFTA-Notes---. The idea that free trade by itself can bring about changes that can control existing migration flows in the short-to-medium term is clearly wrong. The most reasonable thing to assume at this time.S. The stated intent of Brazil to obtain larger concessions from the United States in FTAA negotiations. Stopping Drugs and Illegal Immigration from Mexico” (press release). Graeme Hugo.S. available at www.S. U. Binational Study on Migration between Mexico and the United States (Mexico City. Beyond Smoke and Mirrors: Mexican Immigration in an Era of Economic Integration (New York: Russell Sage Foundation. The movement of people is an economic force with a power potentially far exceeding that of the movement of goods or capital. are indications that there may yet be new developments in the mobility of people associated with trade in services. Mexico even has an agreement pending with Japan. and trade agreements will continue to be a forum for discussing—if not concluding—cooperative agreements on the management of migration. Adela Pellegrino. ). Equally erroneous is the fear that trade agreements will spur massive movements of people. Mexico: Binational Study on Migration. Douglas Massey. by the United States’ ongoing free-trade agreement negotiations and by China’s accession to the WTO. Douglas Massey. when completed. 7 In most instances. Free Trade and Regional Integration in North America (Paris: OECD.migrationinformation. employers must obtain labor certification for those employment-based immigrants and other foreign workers they wish to hire. Washington. perhaps an indication that the United States’ NAFTA advantage displaced capital from other countries. October . This process requires an employer to demonstrate that the foreigner’s presence will not adversely affect U. (Washington D. Joaquín Arango. Ali Kouaouci. 8 “Ten Source Countries with the Largest Populations in the United States as Percentages of the Total Foreign-Born Population: ” (graph). economy. however.S. 2 A vivid example of Mexican officials’ ambivalence toward the TN visa is the cases of actuaries and plant pathologists. Mexico’s advantageous access to U.: Migration Information Source.S. The special relationship between the United States and Mexico may be diluted.S.

. Wages and Productivity in Mexico: Theoretical and Empirical Issues. ). Issues in Agricultural Competitiveness (Aldershot.S.: Carnegie Endowment for International Peace. Mexico-U. the Mexican economy went into full-blown financial crisis. Bellamy. and Migration. Additional reading on the effects of the peso crisis on the Mexican economy and population is provided in J. Trade.C. when mounting debt. (Washington. ). and Migration. 15 INEGI. exchange rate controls. 13 Employment figures for formal employment are for temporary and permanent workers covered by the national social security agency. Additional reading on this topic is provided in Frank Bean and B.C. ).: U. following a drop in oil prices. D. available at www. 12 Consejo Nacional de Población. Rafael Alarcón. 29 Arturo Gonzalez. Calif. -” (table). Trade. Edward Taylor. ). . See also U.S.” in Roger Rose. available at www.  (Mexico City. “Employment Status of the Civilian Noninstitutional Population.: Bureau of Citizenship and Immigration Services. Paper commissioned for this report. ). ).: University of California Press. D. 26 Peter H. D. Trade. ‒. Unauthorized Mexican Migration into the United States: IRCA. Return to Atzlan: The Social Process of International Migration from Western México (Berkeley.C. ).migrationinformation. . on file with the author.” in Sebastian Edwards and Moisés Naím.C. pp.C. 11 Consejo Nacional de Población. Situación Demográfica de México.). 24 Results from the Northern Border Migration Survey presented in Situación Demográfica de México (see note ). Carolyn Tanner. n.bls. a measure that is often used to account for changes in apprehension statistics. NAFTA.: Pew Hispanic Center. The Impact of the / Economic Recession on Hispanic Workers: A Cross-Sectional Comparison of Three Generations (Washington.org. Smith. Mexico sought to develop local “infant” industries by protecting them from competition from imports through tariffs. Mexico : Anatomy of an Emerging-Market Crash (Washington.S. 23 Migration Information Source. Beginning in . Paper commissioned for this report. 30 Unauthorized Mexican Migration into the United States (see note ). Department of Homeland Security. Douglas Massey.” The program yielded an initial upsurge both in apprehensions per officer hour and in the probability of being intercepted. Mexico: Consejo Nacional de Población.:  to  (Washington. This indicator should not be interpreted as a reliable sign that the entry of undocumented immigrants into the United States was decreasing. ). 20 Office of Policy and Planning. NAFTA. ).: Carnegie Endowment. and capital flight forced the devaluation of the peso from the peg it had held with the dollar since . Department of Labor. eds.S. 19 This period also saw a simultaneous reduction in the number of apprehensions per officer hour of border enforcement. “Gross Domestic Product: Percent Change from Preceding Period” (table). D. inflation. “Agricultural Policy and the Village Economy: A Computable General Equilibrium Analysis. Mexico: Consejo Nacional de Población. Geography. D. 10 Bureau of Citizenship and Immigration Services.gov/bea/dn/gdpchg. The Yearbook of Immigration Statistics (Washington. who take refuge in informal employment when formal-sector jobs are not available.org. . New Estimates of the Undocumented Population in the United States (Washington. on file with the author.migrationinformation. available at www. rising oil prices sustained ISI in Mexico through . .C. Edward Taylor and George Dyer. Edward Taylor and George Dyer. Migration: A Shared Responsibility (Washington. “States and Regions Ranked by Percent Change of the Foreign Born:  and ” (table). ). D. “Porcentaje de Población por Tamaño de Localidad. ).pdf.C. Mexico: INEGI). 28 Bureau of Labor Statistics. ).xls. Paper commissioned for this report. D. Mexican unemployment figures will appear to underestimate unemployment by a large margin. Mexico : Anatomy of an Emerging-Market Crash (Washington. and Antonio Yúnez-Naude. D. but this effect soon sub58 NAFTA’s Promise and Reality sided. and Their Migration Implications.: U. entry routes and by turning more systematically to “coyotes” (immigrant smugglers). “Political Dimensions of the Peso Crisis. 17 Using an ISI policy. 21 Jeffrey Passel. when. 22 La Población de México en el Nuevo Siglo (see note ). Mexico’s intense policy of ISI began soon after World War II and delivered fairly steady growth. (Washington. subsidies. as reported by the National Institute of Statistics. .: U. (Table ).S.-Mexico Migration Panel.C. and Margot A. pp. ‒. but it began to falter in the mids.d.Clarendon Press. D. It appears that migrants adapted by using less transited. Household Data Annual Averages (Washington.: Migration Information Source. and preferential treatment of capital imports.: Migration Policy Institute. See also Sebastian Edwards and Moisés Naím.: Carnegie Endowment for International Peace. officer hours were greatly increased in certain high-traffic urban areas under the Immigration and Naturalization Service’s “Enhanced Border Enforcement Strategy. 14 For further discussion see J.  to Date” (table). themselves caused by changes in resources dedicated to enforcement rather than flows across the border. Jorge Durand. (Mexico City. 25 For observers used to interpreting unemployment figures from developed countries. on file with the author. NAFTA. in Bureau of Labor Statistics. La Población de México en el Nuevo Siglo (Mexico City.C. albeit more dangerous. INEGI). or that the pressure to migrate had decreased. various years). However. 31 The analysis in this section draws heavily on NAFTA.bea. import quotas.S. Migration Policy Institute. 27 Bureau of Economic Analysis.doc. 16 J.gov/cps/cpsaat1.. England: Dartmouth. and Informatics (Instituto Nacional de Estadística Geografía e Informática. Department of Commerce. 18 Carlos Salas and Eduardo Zepeda. Estimates of the Unauthorized Immigrant Population Residing in the U. This is in part because outright unemployment is a luxury unaffordable to Mexico’s poor.C. and Migration (see note ). Paper commissioned for this report. on file with the author. eds. ). Lindsay Lowell. available at www. and Humberto González. D.

and Nutrition). available at www. y Alimentación (SAGARPA. Fisheries. or nonprofit or government research organizations. such as CAFTA and FTAA. Smith. Agriculture. on file with the author. has since changed. the bulk of these potential gains comes from the movement of low-skilled workers. and Fisheries) of the Secretaria de Agricultura. Daily Digest. Carnegie Endowment for International Peace 59 . oil companies and specific steps to reform Pemex’s operations to make them more transparent and efficient. and Ryan Hoskins. “It is the sense of the Congress… that any accord on migration issues between the United States and Mexico should also include an accord to open Petroleos Mexicanos (Pemex) to investment by U. and the influence of both of these agreements is still very much evident in the discussion of services in trade agreements being negotiated today. the Mexican government has exceeded its commitments and declined to exercise the option to impose “tariff rate quotas. “Current Regimes for the Temporary Movement of Service Providers: Labour Mobility in Regional Trade Agreements. 43 In October . 44 NAFTA’s mobility provisions. modest as they are.d.. Alan Winters. Livestock. and Roman Grynberg. the U.” The implied proposal was quickly rejected by the administration of President Fox. However. 42 In .S.org/english/tratop_e/serv_e/symp_apr__nielson1_e.ac. England: Commonwealth Secretariat.sussex. The WTO’s  General Agreement on Trade in Services (GATS) provided a multilateral framework for addressing the movement of business visitors and professionals via its “Mode ” of service delivery (the delivery of services through the presence of the nationals of one country in the territory of another). No new visa categories were created in the trade agreements with Chile and Singapore. Pesqueria. as the most prominent free-trade agreement being developed at the time. ).wto. NAFTA. “Negotiating the Liberalisation of the Temporary Movement of Natural Persons. and no administrative requirements were waived. introduced July .).uk/Units/economics/dp/Wintersetal. available at www.: Center for U. 41 According to one economic modeling exercise.S. percent of the U. Mexico: INEGI. University of California. pp.S. with about twothirds of these immigrants being Mexican. . if in each year developed countries allowed the temporary entry of a quota of foreign workers equivalent to  percent of their workforce. Chambers and Peter H.  stating. (Mexico City. Walmsley. on many commodities. NAFTA in the New Millennium (La Jolla. Terrie L.Mexican Studies. 36 NAFTA did not directly benefit the maquiladora sector.R. See Julia Nielson. San Diego. Zhen Kun Wang.  (Brighton.S. n. 39 Chilean and Singaporean professionals can be employed in the United States only under existing U. Statistical Information Service of Food.S. INEGI). in  admissions of new temporary workers (not including workers staying on multiyear permits issued in previous years) into the United States were equivalent to about . Elusive and Changing Mexican Expectations Regarding NAFTA’s Implications on Migration. ).S.pdf. Rural Development. the world economy would gain  billion per year.S. was an important influence on the architecture and language of GATS. 35 Michele Veeman. Sussex University at Brighton.32 Cuts in agricultural tariffs under NAFTA were to be phased in over a fourteen-year period. as had been done under NAFTA.” 33 Historical series data provided by Mexico’s Servicio de Información Estadística Agroalimentaria y Pesqueria (SIAP. e Informática. Calif. The only notable (but otherwise inconsequential) U. including those employed by institutions of higher education related or affiliated nonprofit entities. These gains are about the size of the annual GDP of Indonesia or Denmark. 40 Senate Resolution . . Geografia. including maize.” in Edward J. while new permanent admissions equaled about . 34 Unrevised and unpublished data provided by the Mexican National Institute of Statistics. “Otros Indicadores de Empleo y Desempleo Trimestral” (table). the bill is in the Senate. The estimated stock of unauthorized immigrants in the United States in  was equivalent to about  percent of the U. Geography. To put the first figure in perspective. while some of the privileges accorded to the sector were dismantled by NAFTA by the late s.” Paper presented at the  Joint WTO-World Bank Symposium on the Movement of Natural Persons (Mode ) under the GATS (Geneva: April ‒. Terence Veeman. eds. Significantly. and Informatics (Instituto Nacional de y Estadística. percent of the workforce. labor force. ). Ganaderia. concession in this area was simply to carve out a very small number of H-1B visas for each of these two countries. The author’s calculations are derived from data from Banco de Información Económica. The counting methodology for H-1Bs. workforce. and are greater than those that would result from dropping all remaining tariffs on the trade of goods in the same model. Maquiladoras exporting to the United States were exempt from tariffs prior to NAFTA. ‒. Desarrollo Rural. Certain H-1B employees are now exempt from numerical limitations. see Francisco Alba. 38 For more information on bilateral migration negotiations. Government Printing Office. are nonetheless noteworthy for their influence on other negotiations. contributing to the sector’s woes.S. the U. law and administrative procedures (the H-1B visa). however.doc. “NAFTA and Agriculture: Challenges for Trade and Policy. Congress passed the American Competitiveness in the Twenty-First Century Act (“AC21”). As of this writing. Secretary of Agriculture.  by Senator Sessions.” Discussion Paper in Economics no. 37 Percentage of workers openly unemployed plus those employed but not receiving a wage or salary. For details see L. House of Representative’s Committee on International Relations passed a nonbinding amendment to H. th Congress. Other models suggest that world production could more than double in the hypothetical case of completely “free” movement of workers. Paper commissioned for this report. July .

.

Environmental reviews of trade liberalization continue to focus on the economic sectors that are most affected by NAFTA liberalization schedules. as well as whether it has kept its pledge of promoting sustainable development. by affecting policy on food safety.The Greenest Trade Agreement Ever?                                                     S C O T T VA U G H A N three economic scale and environmental impacts. and ensuring that environmental laws guarantee high levels of environmental protection. such as fisheries and forestry.2 In . A decade after the agreement entered into force. Public Citizen dismissed the environmental provisions of NAFTA as “meaningless. studies confirm that trade exerts two types of pressure on the environment. somewhat less attention has focused on the environmental impacts of Carnegie Endowment for International Peace 61 I N 1 9 9 3 . such as cement. despite advances that have been made in assessment methods. T H E C L I N T O N A D M I N I S T R AT I O N hailed the North American Free Trade Agreement (NAFTA) as the “greenest” trade agreement ever completed. Despite predictions that the trading system would become overwhelmed with trade-environment cases.”3 Measuring the environmental impact of trade remains complex. Since free trade affects the economy indirectly and often weakly. A limited number of precedent-setting environmentally related disputes have occurred involving NAFTA Chapter  investor-state disputes. the impact of trade on environmental quality also tends to be indirect and weak. This second area has remained at the center of the trade and environment agenda for more than a decade. the environment. all associated with trade liberalization. and which are environmentally sensitive. conservation.1 Despite this promise. since the former tends to be offset by more efficient technologies. trade rules can influence environmental policy directly. There is rarely. trade can affect environmental quality through scale impacts. and renewable resource sectors. often unexpectedly and from a myriad of sources. First. disagreements continue around the basic facts of NAFTA. These sectors include pollution-intensive industrial and manufacturing sectors. and empirical evidence. preserving the environment.4 Despite methodological challenges in identifying causal links. During the past decade. NAFTA and its parallel environmental accord remain the source of intense debate. if ever. compositional changes (for instance. from agriculture to the manufacturing or services sector) or the harmonization of standards among trading partners. as well as resource-based sectors. underlying data. this has not occurred either under NAFTA or the World Trade Organization (WTO). Environmental quality is subject to change. and other areas of domestic concern. a linear relationship between .5 Second.

phosphorus. water scarcity. fertilizer use has become more concentrated in larger-scale. maize imports to Mexico are used as 62 NAFTA’s Promise and Reality . A large proportion of U.NAFTA’s agricultural provisions. aside from the manufacturing and services sector. No other sector exhibits such a close. symbiotic relationship as that of terrestrial farming and the environment. and other factors. exports of wheat to Mexico have increased by  percent since . Understanding agricultural liberalization (or the failure to liberalize farm trade) is important from an environmental perspective. Trade in each group has been strongly affected by NAFTA-specific liberalization disciplines (in contrast to what has occurred under the WTO Agreement on Agriculture). The production of both varieties in the semiarid regions of northern Mexico is heavily reliant on irrigation drawn primarily from groundwater. Mexico’s exports of all pasta types to the United States have increased by approximately  percent since NAFTA took effect. and (c) the vicious circle of poverty and income divergence. Durum wheat is used for the production of pasta. imports may pose an environmental risk to traditional Mexican maize varieties. and other agrochemical inputs. export-oriented farms. The ecological effects of nitrogen pollution tend to be greater in Mexico than in the United States. Nitrogen runoff is the largest pollution source in Mexico. U. following the end of state-supported fertilizer subsidies. and focuses on three principal environmental issues: (a) the rise in the overapplication of nitrogen. the risk posed by the genetic contamination of traditional varieties in biologically rich areas. pasta processing has been among the largest recipients of foreign direct investment (FDI) inflows in Mexico. I examine some changes in U. Since enactment of NAFTA. This export increase has in turn contributed to an  percent compositional shift in the production of wheat varieties within Mexico’s breadbasket region. Over the past decade. maize exports to Mexico have increased by  percent since . To assess the effects that NAFTA has had on nitrogen pollution. The compositional change from bread wheat to durum wheat can be explained largely by structural changes consisting of vertical integration of durum wheat with upstream food processing. During the past decade. Increased U.S.S. groundwater tables have declined by approximately  percent in the breadbasket area of the Yaqui Valley. trade in three crop groupings—wheat. such as Oaxaca. compared to bread wheat. and the Gulf of Mexico. shifting demand patterns as a function of rising income in some urban areas. maize. U. Given that Mexico is a center of origin for more than forty maize varieties. increases in nitrogen and other chemical loading from agrochemicals have been recorded in groundwater in Sonora and other commercial farming regions.S.S. (b) the depletion of groundwater due to increased crop irrigation. the United States. Durum wheat requires greater total amounts of fertilizer inputs in semiarid regions. from bread wheat to durum wheat. This introduction has occurred despite the import ban imposed by Mexico on biotechnology corn seed in . may be of global concern. and high rates of deforestation and changes in land use (this third issue being the leading cause of habitat degradation and loss of biological diversity in southern Mexico). I examine changes in Mexico-U.-Mexican farm trade. Maize/Corn. and biological diversity losses. izers has remained roughly constant since NAFTA.S. Laboratory tests conducted in  confirmed that genetically modified corn has been introgressed in Oaxaca and elsewhere. and Canada. subsistence farming. It is also the leading cause of eutrophication and algae blooms affecting Mexico’s rivers and lakes. the Sea of Cortez.S. and fresh vegetables and fruit. fluctuations in drought conditions and severity. given Mexico’s warmer waters—which can accelerate algae blooms—and much larger concentration of freshwater and coastal marine biological diversity. Although Mexico’s aggregate consumption of fertilWheat.

and have a far greater propensity toward irrigation. phosphorus.S. My second conclusion is that NAFTA has accelerated the structural shift toward large-scale.grain-feed inputs for that country’s quickly expanding livestock sector. is the main anthropogenic cause of this water stress. For example. albeit at a lower level. At the same time. Since enactment of NAFTA. as well as the excessive application of fertilizers and other capital inputs. Mexico is one of the most waterstressed countries in the Western Hemisphere. During this turbulent transitional period. with emissions concentrated in the already heavily polluted Mississippi River Delta. none of the environmental safeguards inserted in NAFTA or its environmental side accord—the North American Agreement for Environmental Cooperation—have been used in any disputes involving agricultural liberalization. with the amended  Farm Act. export-oriented farms. Field data suggest that larger. NAFTA has accelerated structural changes in the maize sector by way of deepening vertical integration with livestock operations and the sugar industry. Based on these limited examples. On average. wheat. although structural changes commenced with liberalization reforms introduced in Mexico in the s. and its expansion of exports of fresh fruits and vegetables Fresh Vegetables and Fruit. resulting in the overproduction of some crops. First. Structural changes in Mexico’s horticulture sector have been especially pronounced since NAFTA took effect. the export of tomatoes from Mexico to the United States accounts for the equivalent transfer of approximately  million gallons of freshwater equivalent to the United States each year since . commercially viable. as well as increased subsidy payments in Mexico. the accelerated NAFTA liberalization schedule adopted by Mexico to phase out tariff-rate quotas for maize has opened the maize market too quickly to imports and related price and employment shocks. the absence in NAFTA of disciplines that can constrain farm subsidies for maize. Increased maize exports from the United States result in an increase of . specialize in single crops. the pattern of subsidy payments appears to favor large farms over smaller ones. Clearly. Mexican exports of all fresh vegetables have increased by  percent. a marginal increase in maize production in the United States to serve the Mexican market is the cause of increased environmental pressures in the United States. export-oriented farms are less sensitive to smaller. Finally. and potassium-based loadings to U. as well as environmental damage in the United States. Environmental pressures associated with the concentration of large-scale confined-animal feedlot operations in Mexico appear to resemble environmental pressures recorded in the United States and Canada. this market has increased ecological risk in Mexico. this restructuring began well before Carnegie Endowment for International Peace 63 . rely on standardized capital inputs such as fertilizers and pesticides. The export of horticulture products to the United States represents the transfer of millions of gallons of freshwater equivalent each year. as well as in the syrup industry. While most livestock production in Mexico meets rising domestic demand (reflecting a change in diet in middle-income households from grains to meat and processed foods). To date. compared to smaller farms serving the domestic market in Mexico. there is little evidence that the environmental safeguards in NAFTA have directly improved environmental quality in the farm sector. Finally. exports to the United States of calves and cattle have also increased since NAFTA. tons of nitrogen. I draw the following three conclusions. and other crops has led to an increase in total subsidy payments in the United States. waterways. In addition. export-intensive horticulture farms are larger. thereby contributing to the expansion of subsistence farming in marginalized areas in the southern regions of Mexico. and exports of fresh fruit have increased by  percent. Increased farm subsidy payments have increased pricing and market failures. ejido farm holdings. compared to smaller farms. and use greater amounts of groundwater irrigation per yield. which further magnifies environmental degradation.

the geography of this biological diversity coincides exactly with Mexico’s geography of extreme poverty. commercial farms in the northern and central regions and subsistence. community ties. as poor farmers respond to falling prices. Although standard economic theory says that unprofitable farm production should relocate. since the contraction in Mexico’s agriculture has not been accompanied by an expansion in other sectors. My third conclusion is that commercially oriented farms have not delivered environmental benefits associated with intensive farming. hectares per year since . has increased poverty in this region.6 In addition. and traditional knowledge.NAFTA. and small-family holdings. the distribution of subsidy payments has accelerated structural changes in the grains and horticulture sector so as to favor large-scale. Since farming is the largest consumer of freshwater by a very wide margin. rain-fed maize production has increased by  percent in marginalized areas. The environmental costs of deforestation and changes in land use in Mexico are staggering. years. The leading cause of deforestation in Mexico remains poverty. That country is one of the planet’s leading centers of “megadiversity. Economic shocks experienced during the adjustment period of liberalization often appear to be 64 NAFTA’s Promise and Reality . this structural shift has magnified water scarcity in Mexico. and ranks fourth for amphibians and fifth for mammalian diversity in the world. such as maize. with slash-and-burn clearing and tree felling by poor households in need of fuel remaining the leading causes of forest clearing. Given that these ties reach deeper than economically rational decision making. While commercial cultivation of some crops has expanded. despite structural changes in the farm sector that increasingly lock them out of commercially viable markets. millions of poor farmers who are clearly losers on the ledgers of free trade remain committed to their lands. In addition. downward price premiums on staples. The most important environmental challenge arising from NAFTA is to build a bridge between aspects of the dual farm economy in Mexico—a divide characterized by larger. The main reason for this failure to deliver environmental benefits appears to be the structure and extent of poverty and the pattern of income divergence in southern Mexico. of which  to  percent are endemic. vertically and horizontally integrated farms.” home to  percent of all known species. small-scale. Although commercial farming has not taken hold in Mexico to the extent it has in the United States or other industrialized countries. this stylized distinction between large and small is nevertheless useful in showing the trajectory of structural changes in the agricultural sector. export-oriented. waterpolluting agrochemicals used as inputs in largerscale farms. Mexico has the world’s second-highest number of reptile species. compared to producers of similar products destined for domestic markets. Those environmental benefits typically derive from land-saving effects associated with an increase in production efficiency. which date back . However. with the introduction of liberalization reforms in the late s in Mexico. there is nowhere for millions of poor farmers to go. The average deforestation rate in the biologically rich southern regions of Mexico has exceeded . people—especially indigenous peoples in the poorest regions of southern Mexico— maintain an enduring allegiance to their ancestral homes. Trade theory scarcely hides the unhappy fact that there are winners and losers from trade liberalization. ejido.” it is reasonable to assume that NAFTA has both accelerated and significantly deepened structural changes in Mexico. recalling the argument of Jeffrey Sachs and Andrew Warner that the opening of the economy through trade liberalization is the “sine qua non of the overall reform process. Export-oriented farms also appear to use greater amounts of irrigated water inputs per yield. The structural shift appears to have increased the concentrations of nitrogen and phosphorus. However.7 However.

in part because of liberalization and mergers in the country’s banking system.9 If these environmental damages were included in GNP and gross domestic product (GDP) estimates.intractable.-based produce buyers. or the loss of fisheries stocks. the government of Mexico—one of the world’s leaders in environmental valuation and green accounting—estimated that the total value of environmental damages exceeded  billion per annum since . U. whereby a proportion of seasonal contract farming arrangements are channeled toward funding sustainable agricultural markets. and other factors. innovative solutions that re-engage public institutions and policy. pollution damages. such as soil degradation. as well as making depletion calculations from the loss of forestry resources. However. and organic and sustainable farming. based on people’s willingness to pay for their conservation. For example. However. One solution can be protected areas. carbon sequestration. and some progress has been made in “greening” national income accounts. those that center on ecofriendly products or anticipate new revenue streams from emerging environmental markets. such as resource extraction. efforts have been made to measure. are considerable. Examples include ecotourism. quantify. which is gross national product (GNP) minus public and private consumption. protected areas have never been a lasting solution to broader. Other factors. Viable commercial alternatives that can close part of the poverty gap do exist in specific market niches.S. These economic gains are traditionally calculated by estimating gross savings. As in other markets. and that are intent on nurturing the commercial viability of farms are needed for environmental reasons alone (aside from compelling social equity and poverty alleviation objectives). an assumption that leads to the disappearance of almost all small-scale farm credit. the loss of tropical forests. However. which is supported by the North American Commission for Environmental Cooperation (NACEC). as well as protect Mexico’s biological diversity. communities. then Mexico would have run an ecological deficit the equivalent of  billion per Carnegie Endowment for International Peace 65 . to . Banamex. and illegal squatters in these reserves remains strong. the largest commercial bank in Mexico. Solutions to redress this working capital bottleneck now include the creation of the Sustainable Coffee Fund. and other partners. Real spending on nature reserves has increased significantly since . information failures and structural rigidities continue to constrain Mexico’s full participation in these quickly growing global markets. This process includes calculating relatively explicit costs. while trust in collective solutions remains fragile at best. but extremely difficult to quantify except through site-specific field studies to impute environmental values. as a means to slow rates of deforestation and habitat loss. These efforts should be expanded. Some methods of green accounting rely on standardized proxies of environmental damage values. the leading reason why smallscale farmers abandon their operations and rent their lands to commercial interests in the Sonora region is credit scarcity. A second solution involves nurturing new commercial opportunities in the poorest regions to generate higher revenue returns to farmers. NAFTA and the Environment: A Difficult Relationship The economic gains from NAFTA are typically measured by the kind of statistics cited in chapter . and internalize environmental costs in standard economic measurements. Moreover. relative to subsistence farming underway in marginal areas. private credit channels assume that only large-scale farms are creditworthy. competition among indigenous groups. that build partnerships with private agriculture and other sectors.8 In . the government of Mexico. billion a year. With the dramatic consolidation of the banking sector. such as the  per metric ton of carbon emitted that is used to calculate the marginal global damage of climate change. with the active participation of large-scale. in the last decade. in situ biological diversity protection.

S. and transportation equipment sectors. However.-Mexican cooperative action on a number of fronts—notably in tackling environmental pressures along the border—has reduced some. Trilateral cooperation through NACEC has supported the international benchmarking of some environmental norms. base metals. leading to the adoption of more efficient and less polluting process technologies. they underline the fact that economic growth generates considerable pressures on the environment through scale effects.16 Environmental awareness has catalyzed other more systemic reforms within Mexico. The harmonization of environmental data is an important step toward comparing the environmental performance of Canada.10 Clearly.S. environmental standards remained intact despite the competitive pressures of free trade. it remains the subject of debate among proand anti-globalization activists generally. later. as well as increased Mexican exports of electricity to the United States.18 Unfortunately. pollution reductions take place as a result of tightly enforced environmental regulations combined with the replacement of 66 NAFTA’s Promise and Reality .year. of these total environmental damages. and mostly at the subregional level. This debate still hinges on two regulatory.17 The good news that NAFTA has not created pollution havens hardly means that NAFTA is environmentally benign. notably in improving access to information and codifying public participation.12 NAFTA has also contributed directly to air pollution spikes in the Canadian-U.15 This improvement is partly explained by increased FDI inflows that accelerate the turnover of capital stocks in these sectors. In addition to the two antiNAFTA assertions—the race to the bottom and the pollution haven—a third assertion from the NAFTA debates is that trade is somehow self-cleansing.S. but hardly all. effects:11 ■ The free-trade accord would begin a “race-to-the bottom. and U. environmental pressures. due to changes in the petroleum. Neither the great benefits claimed by proponents nor the overwhelming damages predicted by critics have come to pass. as opposed to scale. NAFTA has not been responsible for most. and nonferrous metal industries—the environmental performance of Mexican companies since the enactment of NAFTA has been superior to that of their U. NAFTA has contributed directly to an increase of between  and  percent in annual gross emissions of carbon monoxide and sulfur dioxide.” as states would lower environmental standards to attract investment.S.13 NAFTA Chapter  energy provisions have contributed to an increase in carbon dioxide emissions arising from increased U.” places where regulations did not exist or did not matter. A decade ago. and the United States. the environmental record of NAFTA remains mixed. U. or even a significant portion. which due to its pollution intensity has been subject to closet scrutiny.-Canadian trade in electricity.S. the rate of environmental degradation decelerates and gradually improves. surprisingly little attention was focused on the scale effects of trade-led economic growth.14 In other cases—notably in the production of cement. The improvement is also explained by increased environmental awareness within Mexico—as in other countries—since the late s. Regulations introduced in the early s strengthened Mexico’s environmental statues and institutional capabilities. Since NAFTA is the first trade accord to include explicit environmental provisions and safeguards. then companies would move production to “pollution havens. ■ If A decade.-Mexican border regions. steel. as  percent of total NAFTA trade is transported via truck-transport passing through increasingly congested border points. such as the harmonization of toxic release data and the development of criteria for air pollutants among the three North American countries.-based counterparts. real-world evidence shows that only a few pollution indexes decline with economic growth. That is. Most important. Mexico. In the manufacturing sector. as incomes rise as a result of free trade.

The most debated relationship between environmental laws and NAFTA rules is in the area of investment. Carnegie Endowment for International Peace 67 . Mexico’s total consumption of nitrogenous fertilizers has remained roughly constant (see Figure ). undercapitalized farms and increasingly toward larger-scale operations. the pattern of fertilizer consumption has shifted away from small-scale. Mexico’s manufacturing sector has grown by  percent per annum since enactment of NAFTA. One dispute compelled the Canadian government to modify its import ban on methylcyclopentadienyl manganese tricarbonyl (MMT). notably greenhouse gas emissions. However. Mexico. In response to these cases. such as the recent delay of some U. a case cannot be made that the Clear Skies initiative is linked to NAFTA. private investors are given new opportunities to seek compensation for regulatory action taken by NAFTA parties that is tantamount to expropriation. All North American countries have experienced some weak- ening of domestic environmental regulations that has coincided with NAFTA. and its impact on Mexico’s farm sector in particular. in July  the NAFTA parties negotiated a clarification of their intentions regarding investment rules.S. acidifies lakes and rivers. However. Overall. the most significant interaction between trade liberalization and environmental quality is transmitted within the agricultural sector. designed to minimize national governments’ exposure to expropriation cases.22 Since . for many countries. There are three main reasons why it is vital to examine the environmental impacts of agricultural liberalization in general. Clean Air Act–mandated schedules for emission reductions with the introduction of the Bush administration’s Clear Skies initiative. Measuring Environmental Effects and Mexico’s Farm Sector Changes in the manufacturing sector provide one important insight into trade-environment relationships.capital stock by more resource-conserving technologies. air pollution has increased  percent per year in the manufacturing sector of Mexico since NAFTA took effect. evidence suggests that other environmental quality indexes rise almost continuously with income growth. Farming is the leading source of pollution in Canada.19 While some benefits do occur. whose primary exports are agricultural products. environmental regulations—as strong as they were on paper with the passage of NAFTA—did not keep pace with rates of economic growth. disrupts forest processes. ten of NAFTA’s Chapter  cases involving allegations of expropriation associated with changes in domestic environmental regulations had taken place. Three other cases have resulted in paid damages totaling  million. and degrades coastal waters and ecosystems through algae blooms and groundwater pollution.S. Under NAFTA.20 Notwithstanding the NAFTA Chapter  cases.21 Clearly. This shift in fertilizer purchases has magnified a pattern of concentration of fertilizer inputs in those areas in which more intensive farming is Pollution. and pay damages to a U. However. and the United States. This is especially true for developing countries. By . to which trade liberalization contributes. NAFTA has been solely responsible for neither increased pollution emissions nor the weakening of environmental enforcement. In the manufacturing sector. firm totaling  million. The excessive application of nitrogen—an important element in fertilizers—contributes to high soil salinity and the presence of air-polluting groundlevel ozone. with the withdrawal of state subsidy support for fertilizers in the mids. the greatest environmental pressure associated with NAFTA is transmitted through the scale effects of economic growth. but real spending on pollution monitoring and on-site inspections has fallen by  percent over the same period.

A similar trend of increased pesticide imports into Mexico from the United States also occurred during the first decade of NAFTA (see Figure ). even if on-site inspections were unaffected by budget rollbacks— which seems extremely unlikely—inspectors lack the capability to monitor and regulate most nonpoint pollution sources.fao.000 700.org (FAO. such as the deforestation that brings with it habitat destruction. In . FAOSTAT online statistical service. In addition. nitrogen pollution is significantly more difficult to monitor and regulate. 1999).000 Production Consumption 900.000 200. Source: Food and Agriculture Organization of the United Nations (FAO).000 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 Source: Food and Agriculture Organization of the United Nations (FAO).000 800. 68 NAFTA’s Promise and Reality .800. Biological Diversity. one way or the other. The loss of biological diversity is of global environmental Figure 1.200.000 400. with the exception of the livestock sector and perhaps the cotton production sector.fao. www. imports of nitrogenous fertilizers into Mexico have increased sharply since enactment of NAFTA (see Figure ).org (FAO.23 (It is uncertain whether the  percent decrease in spending for environmental monitoring and enforcement affected. In turn. Rome.) Agriculture is by a wide margin the largest consumer of freshwater (see Figure ) in Mexico. FAOSTAT online statistical service.000 600. More than  percent of Mexico’s annual water draws are consumed in farming. it has increasingly become the subject of political and diplomatic tension between the United States and Mexico. these changes in land use are the leading cause of the destruction of ecologically rich habitats and biological and agricultural diversity in Mexico. under provisions of a  treaty setting out shared water management quotas between the two countries for the Rio Grande.000 300.underway. Freshwater. As a nonpoint pollution source. www. Rome.000 100.24 Water scarcity is not only the most urgent environmental and developmental problem facing Mexico. scale effects of rising pollution levels in the agricultural sector. Bush and Vicente Fox Quesada jointly promised to resolve Mexico’s  billion gallon water deficit with the United States.000 600.000 500. Mexico’s Consumption of Nitrogenous Fertilizers M E G AT O N S Figure 2. That is. Presidents George W. compared to point-source industrial pollutants. Agriculture is the leading cause of changes in land use. Mexico’s Imports and Exports of Nitrogenous Fertilizers M E G AT O N S 1.000 Imports Exports 1. 1999).

DOLLARS Figure 4. Note: Dotted lines indicate missing data from 1995 and 2000. Mexico also has one of the highest deforestation rates in the Western Hemisphere. U.org (FAO.significance. million hectares of forest have disappeared. there is a strong link between poverty and biodiversity loss in southern Mexico.S. FAOSTAT online statistical service.000 Imports—Value Exports—Value 60. Carnegie Endowment for International Peace 69 . more than . followed by the felling of trees for poor-income household fuel use. Secretaría de Medio Ambiente y Recursos Naturales (SEMARNAT).S.000 82.7% Agriculture 15. Mexico has the world’s second-highest number of reptile species. as well as the risk of genetic erosion affecting traditional maize varieties. which overwhelmingly originate in the United States. While rates have decelerated in recent years. Rome. Environmental Impacts of NAFTA-Induced Trade in Agriculture Given the robust relationship between agricultural land use and environmental quality. 1999). hectares of forests have been cleared on average every year since . 2002.6% Public 4. the expansion of subsistence farm areas into marginal lands to increase yields to compensate for price declines in staple crops such as maize remains the leading cause of forest clearing. Therefore. Table 26 summarizes some of the major changes in Mexico’s domestic farm production and in net agricultural imports.7% Industrial 45. of which  to  percent are endemic. Poverty remains the leading cause of deforestation. Since . since Mexico houses some of the richest and most important endowments of biological diversity on the planet. Distribution of Mexican Water Use 75.fao.000 0 1989 1991 1993 1995 1997 1999 2001 Source: Food and Agriculture Organization of the United Nations (FAO). and ranks fourth for amphibians and fifth for mammalian diversity in the world. Figure 3.25 Specifically. and thus. Insecticide Trade with Mexico U. Comisión Nacional del Agua (CAN). the extinction of flora and fauna. about . The issues I address below are the effect that NAFTA has had on this poverty-environmental degradation nexus. Source: Compendio Básico del Agua en México. Plan Nacional de Desarrollo (PND).-Mexican agricultural trade volumes. I begin my discussion of the contribution NAFTA has made to changing environmental conditions by examining the total changes in U. www.S.000 12. Mexico is home to  percent of all known species. concentrated in its southern tropical forests (as well as in its coral reefs).000 30.

or significantly. 70 NAFTA’s Promise and Reality . Working from the data on these overall changes. Traditional maize is not only a staple food of Mexican diet.173 Average Production 1999–2002 3.854 2.S. NAFTA has had a significant impact on U. and changes in consumer food preferences).005 660 4.S. mostly from small-scale farms.org. been affected by NAFTA (as opposed to the liberalizing effects of WTO agreements. cotton.798 1. and cantaloupe.556 257 273 3. to . U. while U. I focus only on some environmental consequences associated with wheat.202 803 908 1.205 -337 191 169 249 -691 Source: Organization for Economic Cooperation and Development.The value and volume of North American farm trade has grown more rapidly than has North America’s trade with the rest of the world. billion. are involved in maize production.186 Average Net Imports 1990–93 917 1. maize. and Mexican agricultural economies have been moving toward deeper integration.-Mexican trade that has solely. billion. billion to . and fresh fruit and vegetables.577 1.888 308 308 4. market proximity and shrinking transport costs. Mexican exports to the United States that have been strongly affected by NAFTA-only schedules include wheat.691 171 3.061 1.28 Since it is impossible to weigh the environmental impacts of production. Indirectly. the U.965 418 4. since enactment of NAFTA.30 Table 1. NAFTA has successfully strengthened agricultural ties throughout North America.799 15. from . exports to Mexico that fall into this category include maize/corn. the impact of NAFTA-specific liberalization on U.29 MAIZE Mexico is a center of origin for Zea mays. years— since the time that maize was first cultivated— with the modern Mexico of today. sorghum.S.891 709 5. and export changes for all commodities involved in trade.277 18. I examine the proportion of U. fresh tomatoes. cattle and calves. fresh apples.oecd. Approximately  million farmers in Mexico.547 332 1. 2003).751 145 5. Exports from Mexico to the United States have more than doubled in value. Clearly. sugar.S. for a typical basket of agricultural goods. for decades. as well as important nontrade variables such as climatic fluctuations and drought.-Mexican agricultural trade has been minor. Changes in Mexico’s Domestic Farm Production and Agricultural Imports T H O U S A N D S O F M E G AT O N S Wheat Maize Barley Sorghum Rice Soybeans Sugar Beef Pork Poultry Tomatoes Average Production 1990–93 3. particularly between the United States and Mexico.422 1.-Mexican agricultural trade.747 393 -21 47 70 -361 Average Net Imports 1999–2002 2. Agricultural Policies in OECD Countries: Monitoring and Evaluation (Paris: OECD. processed potatoes. the ancestral precursor of modern corn.S.27 On an aggregate basis. some  million people depend on maize for their livelihood. rice.592 5. it also provides a symbolic lifeline connecting traditional and indigenous cultures dating back approximately . available at www.S. all of which have been significantly affected by NAFTA. and pears. consumption. exports to Mexico have almost quadrupled. However.

As noted in chapter .31 One response to the potential risk of GM crops. there is little evidence that NAFTA has undermined in situ conservation of maize. Each presents formidable obstacles to small-scale farmers.35 In the United States. led by a free fall in commercially harvested crops. the price difference of approximately  percent between U. While there has been an absolute contraction in maize production in Mexico since the enactment of NAFTA. A debate over the benefits and costs of GM crops has been underway ever since biotechnology was approved for some commercial crops in the United States. diversify the composition of crop output. approximately ‒ percent of U.”37 In addition to recorded cases of GM maize pollination. biotechnology foods are embedded throughout processed foods that contain soybeans and corn.33 This sparked scientific concern. as well as a highly visible public debate.S. At the same time. Given the implications of this case for the Biosafety Protocol of the UN Convention on Biological Diversity. Finally. there are few economic and employment alternatives for millions of farmers in Mexico. A scientific consensus exists that the risks to human health from GM foods are low or nonexistent. nor the ecological implications that could arise from it. this will not alleviate Carnegie Endowment for International Peace 71 . organic. and elsewhere in the mid-s. To date. Canada.Although estimates remain difficult to obtain. was the introduction of a Mexican ban on the import of genetically modified corn seeds in . Neither the pathways of that contamination. the quality of soil in marginal lands makes crop switching very unlikely. production of rain-fed maize has remained stable. This substitution will eventually present small-scale farmers with three choices: exit farming altogether. The increase in U. Affected canola crops in western Canada appear to be more resistant to herbicides than conventional (non-biotechnology) crops.34 Subsequent independent laboratory tests conducted by the Mexican government have confirmed that contamination by biotechnology corn has occurred in Oaxaca—a global center of megadiversity—and elsewhere in Mexico. imports crowding out rain-fed varieties. corn is derived from genetically modified (GM) varieties.38 as well as for the application of the precautionary principle to international trade. and include the possible impact of GM crops on soil ecology. about the risks of genetic contamination as well as mutation. concluding that “evidence suggests that GM maize plants would cross-pollinate non-GM maize plants up to and beyond the recommended isolation distance of  meters. NACEC will finalize an independent analysis that examines the environmental and conservation risks that science associates with the possible contamination by biotechnology crops of traditional crop varieties such as Mexican maize. even if market niches for sustainable produce expand dramatically. or concentrate on fledgling but potentially high-growth market niches that award a price premium for traditional. similar cases in which gene stacking involving genetically modified canola have been recorded since  in the Canadian prairies. and sustainable produce such as traditional maize. corn and Mexican varieties suggests that over time the price wedge may result in U. with some varieties dating their origin back .S. in  Nature magazine published a peerreviewed article demonstrating that GM corn had been found growing in Mexican fields. the potential risks that biotechnology crops pose to the environment differ from those normally raised in regard to human health. In the area of food safety. However. farmland diversity. In early . corn imports also risks weakening in situ conservation involving some or all of the forty races of maize that are grown in Mexico. are clearly understood at this time.S. the NACEC report will be the most important and controversial ever issued in the ten-year history of that NAFTA-related organization.S.32 Despite this ban. years. and even gene flow change.36 A recent study by the European Environment Agency has found that maize poses a medium to high risk of pollen-mediated gene transfers from crop to crop.

resulting in a  percent increase in U. notably Nebraska. phosphorus-. production that is destined for Mexico. because of the production increase to serve the Mexican market.41 These wastes can also contain pathogens. exports to Mexico increased. and depletion of dissolved oxygen. and Canadian cattle and beef market. In addition to the explanations for the persistence of rain-fed maize identified by Sandra Polaski in chapter . In contrast to maize output. for wheat and corn production.40 These structural changes result in a series of interlocking environmental pressures that verylarge-scale feedlot and slaughter operations pose to environmental regulators.42 Although data from Mexico delineating different sources of nitrogen pollution are far from complete. four firms control  percent of the U. with production contracting in industrialized countries and increasing in developing ones. a further reason why rain-fed varieties have remained stable or increased slightly may be traced to the large proportion of corn imports that are used as grain feed for Mexico’s quickly expanding livestock sector. while commercial production in Mexico contracted. environmental pressures have increased within the United States itself. and conclude that expanded production of corn in the United States destined for Mexico generates an additional .all pressures on in situ conservation. Today. livestock operations in any one location of North America are increasingly similar to operations elsewhere. exports of wheat to Mexico have increased by  percent. The main focus of environmental attention has been on potential risks within Mexico because of U. Environmental pressures from intensive livestock operations include large volumes of nitrogen. Mexico’s output of wheat has not altered significantly since enactment 72 NAFTA’s Promise and Reality . the long-term erosion of the knowledge base on which traditional maize growing is based is one of the greatest conservation threats directly posed by NAFTA.39 Structural changes associated with the horizontal integration of maize as an input to confined animal feedlot operations and slaughterhouses have been dramatic in Mexico.S. and a similar pattern of market consolidation is underway in Mexico. The  percent rise in U. In the same way that turnkey industrial plant investments incorporate uniform capital stock and management policies. Recently.S. percent of total domestic production. episodes of neurological disorders affecting individuals living close to these industrial farms have also been reported. This is hardly surprising. corn exports has resulted in a doubling of the proportion of total U. given the strong consolidation of the North American livestock sector fueled by mergers and acquisitions during the s.S. hydrogen sulfide gases. already the most polluted region of the United States because of nitrogen runoff and related ecological stress. and potassium-based pollution per year. leading to soils that are overenriched with nutrients while posing threats to local watersheds with runoff that can cause algae blooms. increased corn production is exacerbating water scarcity in those states that have high irrigation intensities for corn production.45 However. At the same time. loss of habitat.44 W H E AT Since enactment of NAFTA. the opposite pattern took place: U. phosphorus. In addition. Kansas. although at a slower pace. In general. changes in aquatic biological diversity. and Texas.S. and atrazine pesticide. from  to . I assume that the entire  percent production increase is attributed to NAFTA.S. the data that exist point to some convergence in environmental pressures arising from livestock operations in Mexico with those that exist in the United States and Canada. antibiotics. and hormones. U.S.S. corn imports.43 This increase in pollution is concentrated in the Mississippi River Delta. wheat production. Therefore. economic models anticipate that trade liberalization will bring about a shift in the location of grain production. tons of nitrogen-.

By . its effect is more ecologically destructive in the warmer waters of Mexico.46 However.52 The most important aspect of this structural change is the Carnegie Endowment for International Peace 73 . and other states where intensive farming occurs. Eutrophication has significantly lowered the inflow time of the Rio Lerma to Lake Chapala—the largest freshwater body in Mexico and a center of rich biological diversity. the composition of wheat production in the region has changed dramatically since . by  percent. making this region among the heaviest users of fertilizers on a per hectare basis in the world.of NAFTA.48 Although nitrogen pollution in Mexico is less than in the Mississippi River Delta or Chesapeake Bay. to more than . This production and export growth has resulted in an increase in the total area of cropland dedicated to vegetables and fruit. Mexican exports of all kinds of pasta have grown relatively constantly. Through a combination of drought and surface conditions in the area. In Sonora. Sinaloa.51 The most pronounced structural change in Mexico’s agricultural sector due to NAFTA has occurred in the fresh vegetables and fruit sector. In arid and semiarid regions such as the Yaqui Valley. Then. bread wheat made up the bulk of total wheat output. The food processing sector has been among the largest recipients of FDI inflows to Mexico since NAFTA investment liberalization disciplines were set out in Chapter .49 Durum wheat is used to produce dry pasta and pasta products. the production shift from bread to durum has directly led to an increase in nitrogen pollution in the region. ecological pressures from nitrogen pollution have risen dramatically. billion in . billion. for which corn syrup is increasingly used as an input). bread wheat output in the region had declined from roughly  percent of total production to  to  percent. the volume of fresh vegetable exports has increased by  percent. up to . FDI inflows have more than doubled in Mexico’s food processing sector. and increased nitrogen pollution and nitrogen runoff associated with eutrophication in nearby rivers and lakes. led by pasta (and followed by confectionery products. wheat production in the Yaqui Valley—the birthplace of the green revolution for wheat and the breadbasket of Mexico today— remains the region’s leading agricultural activity (accounting for roughly  percent of total planted crop area). from  million kilograms in  to more than  million kilograms in  (see Figure ). and of fresh fruit. Instead. F R E S H V E G E TA B L E S A N D F R U I T Horticulture has seen its export earnings roughly triple since NAFTA took effect. Since enactment. The change from bread wheat to durum wheat has not altered the region’s severe water scarcity. Nitrogen pollution is increasing in the Tacana River Basin and the Rio Lerma. concentrating on a narrow set of value-added food processing activities. For example.47 At the same time. Since NAFTA. This compositional production shift has directly led to increased fertilizer inputs. In bread wheat’s place. eutrophication in the Sea of Cortez is a main source of stress on coral reefs—which have a higher concentration of biological diversity than most tropical forests—and coastal plankton. durum wheat requires as much as  percent more fertilizer inputs within irrigated systems than other wheat crops.50 As Mexico’s domestic production capacity for pasta foods has increased. The main source of nitrogen pollution in the Sea of Cortez originates from commercial agricultural production in Sonora. and now cover more than  percent of Lake Chapala’s surface area. so too have its exports to the United States. durum wheat—which constituted a small percentage of total production in —now accounts for more than  percent of the total wheat output in the Yaqui Valley. Estimates suggest that the application of nitrogen per hectare in the Yaqui Valley exceeds  kilograms. the levels of groundwater— the main source of irrigation for wheat production—have declined by half since . Uncontrolled blooms of water weeds have increased since the late .

On average. Pasta Trade with Mexico KILOGRAMS 35. Census Bureau. these farms have strong links with external markets. up to  percent of ejido farmers in some regions (for example. Larger farms specialize in a limited number of monoculture commercial crops. Smaller farms produce heterogeneous crops for on-farm consumption.000. one of the highest concentrations of irrigated farmland in the world. the most significant environmental stress that arises from this sector is water scarcity. Sonora) have decided to abandon farming altogether. and a decline in the number of individual farms engaged in export markets. Specialization also entails higher rates of irrigation per hectare. pecans. and Figure 5.expansion in the average farm size among export-led producers in the grains and horticultural sector.000 5. In the north.000. through contract farming (see page ) and ready access to domestic and external credit sources. This specialization entails replacing on-farm inputs such as organic pest control and local fodder and composting with pesticides.000.000 25. purchased seeds (as well as biotechnology seeds for cotton crops). As a consequence of this credit squeeze.000. Nowhere is this divergence more dramatic than in the farm sector. measured by any number of indicators.) As noted in chapter .000 Total exports Total imports 30. High obstacles are one reason for this low level of capital intensity that small farmers face in getting access to all credit sources in Mexico. since less land appears to have been transferred out of common property than originally feared.S.census. and rely little on irrigation.S. there are a larger number of smaller farms. as the most dramatic rise in irrigation occurred during the previous decade (see Figure ). one-third of Mexico’s total cropland is irrigated. northwest.000.000. Foreign Trade Division (www. For those who remain on the farm. (This figure is probably much higher than in other regions. Farms are either owned by single families or compose part of ejido (community) holdings. barely  percent of household income for ejido farms in some regions is generated through on-farm crop cultivation and animal husbandry.000 10.000 15. tend to use few inputs such as pesticides or fertilizers. commercial animal feeds.53 Typically.000 0 1998 1999 2000 2001 2002 Source: U. and central plateau areas.55 There has been a slight increase in the total amount of irrigated land in Mexico since NAFTA. with an average size between  and  hectares. poverty in Mexico is concentrated in regions—particularly in Oaxaca and Chiapas—that house some of the world’s richest abundance of biological diversity. However.000 20. income divergence within Mexico has increased over the past decade. and fertilizers. in the southern and southeastern regions of Mexico.54 By contrast.000. Research shows that irrigated groundwater for water-intensive crops such as tomatoes. a smaller number of larger farms are owned either by wealthy families or by commercial interests. The production of commercial fruits and vegetables in the northern region leads to nitrogen pollution similar to that generated in the maize and wheat sectors. barter as well as some limited farm-gate exchange. and the replacement of traditional seed varieties with hybrid. Total U.gov) 74 NAFTA’s Promise and Reality . From an environmental perspective.

000 6. As noted below.  percent of ejido farmers in some regions have abandoned farming altogether. as well as the water abundance of the southern regions.000 1988 1990 1992 1994 1996 1998 2000 Source: Food and Agriculture Organization of the United Nations (FAO). agricultural irrigation is responsible for approximately  percent of total groundwater draws in Mexico. 1999). As a result primarily of water consumption from the farm sector. more than  face high rates of depletion. Nevertheless. The United States and Figure 6. (In the United States. subsidy payments generally further cloud scarcity signals.)56 However. beginning with the degree of technological specialization that generally can be associated with larger farms.org (FAO. larger farms are not constrained by any equitable sharing considerations.500 6. larger farms use irrigation more intensely in Mexico.59 Irrigation inputs for export crops have been linked to the U. larger farms have a tendency to use irrigation systems more than smaller farms.S. which suggests that they are less sensitive to water scarcity and water stress signals than are ejidos. The greatest concentration of depleted groundwater sources is in the northern agricultural regions and in the Lerma-Balsas Basin. the pattern of water irrigation subsidy payments is slanted—as subsidy payments generally are—in favor of larger. which constrains the amount of groundwater extraction so as to ensure an equitable sharing of resources among eight to twelve owners.57 The most plausible explanation for this absence of irrigation intensity can be traced directly to the virtual disappearance of rural credit in the past decade. water scarcity has become so acute a problem in Mexico that bulk water transfers—prohibited in Canada because of their negative environmental impacts—have compensated for regional water deficits. Carnegie Endowment for International Peace 75 . Irrigated farms in the United States also generate twice the income of their rain-fed counterparts. Of the  aquifers in the country. www.-Mexican dispute over water flows and quotas of the Rio Grande.500 5. Rome. where a full  percent of ejido and single-family farms in some regions do not use irrigation of any kind. and lead to resource stress and environmental pressures. Irrigated Land in Mexico T H O U S A N D S O F H E C TA R E S 7. FAOSTAT online statistical service. Larger farms use significantly greater amounts of irrigated water per yield than single-family or ejido farms. the inverse correlation of farm size and irrigation intensity is more dramatic in Mexico. As noted. suggesting a convergence between intensity of irrigation and farm size like that observed in the United States.alfalfa is applied on average more intensively for export crops than for crops bound for the domestic market. In total. This pattern of larger farms using greater amounts of irrigated groundwater for export crops is exacerbated by the structure of ejido ownership. commercial farms.000 5. A number of factors explain this correlation between farm size and irrigation intensity. and rented their right of access to groundwater wells and irrigation systems to larger private or corporate farm interests. Evidence from Sonora demonstrates that export crops in the fresh fruit and vegetable category consume  to  percent more groundwater irrigation than crops intended for domestic consumption. and a tendency to use irrigation system more efficiently and accurately.58 In addition. By contrast.fao.

Mexican authorities blame severe drought conditions for their decision to withhold northward water flows from Mexico into Texas. and state and other officials in the United States. nor. Since . when the government encouraged export-oriented agricultural production by facilitating large-scale farming through land law reforms.000 350.000 850. 1999). That said. and bioengineered seeds.000 450. it is also worth noting that Mexico’s horticultural exports are the equivalent of transferring millions of gallons of freshwater each year to the United States. production efficiency increases on average. Some of these farmers. the two countries announced a timetable for Mexico to begin paying down the water deficit.61 LAND-SAVING BENEFITS AND INTENSIVE FARMING Figure 7.Mexico have established water-sharing quotas for that river. Water makes up approximately  percent of tomatoes by weight. Mexico has run a deficit with the United States that now exceeds  billion gallons of water. in most cases. under a  treaty administered by the International Boundary and Water Commission.org (FAO. intensive farming. with trade growth strongly affected by NAFTA. leading to a  percent decline in crop output in some regions. Figure  illustrates the expansion of tomato exports from Mexico to the United States since . with exports destined for the United States. allege that some of the  billion gallon deficit has been diverted to waterintensive agricultural production in Mexico. pesticides. In turn. One tenet of the green revolution is that.000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: Food and Agriculture Organization of the United Nations (FAO). on a net basis.fao. chemical-intensive production. 76 NAFTA’s Promise and Reality .000 150. exports of tomatoes increased by  percent since . environmental benefits can accrue based on large-scale. While it is impossible to calculate this net transfer in water equivalents for all agricultural trade. www.) When one considers this water deficit with the United States. FAOSTAT online statistical service. delivered environmental benefits. These benefits arise from land-saving and land-offsetting effects of intensive farm production. This increase in produc- 550.000 250. tomatoes. I will consider here the example of a single crop. Mexico’s changing agricultural patterns date back to the s.000 650.63 With the increased reliance on capital inputs such as fertilizers. NAFTA liberalization in maize. wheat.000 750.62 The key question is whether this shift toward intensive farming has. A proxy estimate of the water transfers from Mexico to the United States alone through tomato exports is roughly  million gallons of freshwater per year since . Tomato Exports from Mexico to the United States METRIC TONS 950. either by reducing the total amount of land needed for comparable yields or by increasing the yield per hectare of existing land use. As noted. Rome. and mounting water scarcity within the export centers of northern Mexico. and fruits and vegetables has accelerated and deepened this trend toward export-oriented. as well as the obvious environmental costs associated with pollution and water stress. the primary cause of growing environmental pressures associated with Mexico’s agricultural sector.60 (In early September . farmers in Texas have faced acute water shortages. despite localized increases in pollution.000 NAFTA is neither the sole cause.

low-productivity. between  and  hectares of tropical forests will be conserved elsewhere. Poor farmers continue to clear tropical forests to plant crops. unprofitable farms. including marginal lands or forests. more serious from an environmental perspective is the strong link between impoverished southern rural areas and changes in land use. soil degradation arising from high levels of salinity has reduced crop output in many commercial farming regions.) In well-functioning markets. farmers will increase capital inputs as the principal means of increasing yields.S. subsistence farms to the extent that no market signals are transmitted between the two. One reason for this failure to deliver automatic land-saving benefits may be that the returns of the green revolution began to bottom out some years ago. these reserves were little more than “paper parks”—lines on a map with little or no budget for enforcement. and habitat destruction and fragmentation. Pedro Sanchez and others have argued that. and they are forced to move elsewhere to clear additional forests for more cropland or grazing areas. However. Pro Natura. evidence from Mexico and elsewhere now shows that land-saving benefits that could arise from intensive farming are neither automatic nor of the magnitude observed in industrialized countries such as the United States. the Global Environment Facility. However. NAFTA accelerated and deepened the structural divide between large-scale. Agency for International Development. The simplest explanation is that the seesaw does not work. The single most important catalyst of more intensive farming is land scarcity. as a rule of thumb. and other groups.65 Rural poverty is the leading cause of environmental degradation in the Lacandon jungle—among the richest habitats on the planet. Productivity gains occurring in the northern and central regions have little or no impact on subsistence farming and associated land clearing in the poorest. the most plausible explanation for the failure of land-saving benefits to occur is the structural bifurcation of Mexico’s farm economy. billion per year. the newly established Mexican Fund for Conservation of Nature has a total funding base for all protected areas of . intensive farming has been estimated to “save”  million hectares of forests that otherwise would have been cleared for farming. Although the extent of potential benefits is specific to the region under consideration.tion efficiency reduces pressure on farms to convert additional lands. and not in the soil found below. some of which can be attributed to more general environmental cooperation Carnegie Endowment for International Peace 77 . the more that land-use pressures associated with extensive farming recede elsewhere. one potential cause of land scarcity—particularly in the southern regions—is the nature reserves throughout Mexico.64 In the United States. A stylized image of this hypothesis is that of a seesaw: The more that specialization and intensive farming goes up in one region. for example. because it has become unhinged in the middle. to meet the rising demand for food. However.67 Despite increased spending. In areas with smaller. export-oriented farms and small-scale. In the past. since the nutrient composition of tropical forests is concentrated in the biomass of trees above. vertically integrated. the lack of access to working capital means that environmental problems associated with fertilizers and pesticides are almost entirely absent. with the support of the U.66 For example. However. with a total land coverage of priority biosphere reserves. deforestation. However. for every hectare of land that is converted into intensive farming. increased economic opportunities can also lead to an expansion of crop areas. farmers usually get only one crop per season before soils are exhausted of nutrients. (Even in well-functioning markets. Diminishing returns of intensification may partially explain why the expansion of commercial farms in the northern and central regions has not resulted in forest-saving benefits in the southern regions. southern regions of Mexico. In Mexico. as the total amount of available land shrinks.

At the aggregate level. payments are not being channeled into the most impoverished areas of southern Mexico. and quality.71 Moreover. the structure of water irrigation subsidies disproportionately favors large-scale farms over small ones. Typically. where rates of deforestation have accelerated by as much as Farm Subsidies. This increase in subsidy payments in the United States is closely related to an increase in some subsidy payments in Mexico. which would in well-functioning markets lead to land savings through intensive farming. including the mandated use of fertilizers. intensive farming operations. largely because PROCAMPO increased land values. setting aside protected areas creates losers in the immediate regions in which reserves are created. hectares. animal husbandry. nor can it be attributed to NAFTA. PROCAMPO payments are intended to bolster land saving by supporting liberalized. while the pattern of payments under the PROCAMPO and ASERCA programs also appears to benefit large-scale farmers. land clearing. For example. This is done to reduce transaction costs.  percent. nontrade factors clearly contribute to the deterioration of pricing and other signals linking commercial and small-scale farms. nature reserves in Mexico remain chronically underfunded and underenforced. by way of illegal logging. most recently seen in the United States in the increase in total farm payments under the  Farm Act. but some production specifications. intensive farming. machinery. Contract Farming. potential land-scarcity signals that could originate from reserves. as well as to change the market value of farmland.73 and include overproduction and excessive application of agrochemicals. most farm subsidies are directed toward larger.77 For tomato farms in the region.69 Therefore. Other. the pattern of subsidy payments in Mexico supports large-scale farms over small ones. 78 NAFTA’s Promise and Reality . Four are noted below. pesticides. Contract farming is hardly unique to Mexico. the average farm size is . Average farm size in Guanajuato for farms under contract is  hectares.that NAFTA has supported. which leaves them vulnerable to illegal land use. they have had the opposite impact in the Yucatan Peninsula. As in other countries. quantity. and farm fuels.76 Field research in Guanajuato shows that contract buyers exclusively engage in business with large-scale growers. which had the effect of accelerating land clearing rather than intensification on existing lands (see Figure ).68 Since. only one-quarter of total farm subsidies support farm income. by definition. However. Since extensive farms by definition do not specialize in capital inputs. herbicides. are probably not affecting land-use decisions in Mexico. Supply contracts explicitly set out requirements for pesticides. NAFTA has therefore been no more successful than the WTO in constraining subsidy payments in North America.72 The environmental impacts of production subsidies are well documented.74 The bias of subsidy payments toward commercial farms is reinforced by the increased reliance on contract farming as a primary avenue of Mexican agricultural exports to the United States. and other technical specifications that only larger farms can afford. its failure to include strict disciplines that constrain farm subsidy payments has rendered various environmental safeguards (with the possible exception of food safety standards) powerless to minimize environmentally damaging subsidy payments.75 The main environmental effect of contract farming is the imposition of production criteria by suppliers on growers. By contrast. and corruption and nonenforcement among park officials. to . and competition among indigenous groups and others. neighboring residents have a high propensity to cheat. irrigation. especially for fresh vegetables and fruit. and other production inputs.70 Although farm-sector lobbyists argue that farm subsidies generally are needed to support farm income. Although NAFTA was hailed as an environmental agreement.  percent are directed to offset capital costs of various production inputs— such as fertilizers. these criteria cover not only price. more than ten times the average size of an ejido.

NAFTA has had no bearing on how private commercial contracts between exporters and buyers are negotiated and implemented.fertilizer.org). 2002 (www. which in turn are strongly favored by large-scale buyers entering into contract farm arrangements. The collapse and dismantling of public agencies and credit institutions coincided with the dramatic consolidation of privatesector capital that was clearly unwilling to fill the Figure 8.org. and have explicitly turned away from the financing of smaller-scale businesses of all kinds. www. Disappearing Rural Credit. The pattern of larger. Banrural. the diminished role of spot markets. Narrowly speaking. With the consolidation of Mexico’s banking sector during the s78 (see Figure ). the public development agency for rural credit. However. and credit is increasingly directed to larger corporations and government agencies. oligopolistic buyers. This expansion has led to structural changes favoring larger farms. and their replacement with consolidated markets serving large-scale. Source: Economic Commission for Latin America and the Caribbean (ECLAC). PSE/CSE database. In .oecd.eclac. Foreign Share of Banking Assets 100% Mexico Argentina Chile Brazil OECD average 2002 Mexico 2002 90% 80% 70% 60% 50% 10% 40% 0 30% -10% -20% -30% 20% 10% Maize Sorghum Milk Wheat Chicken Eggs Cattle 0 1990 1994 1999 2000 2001 Source: Organization for Economic Cooperation and Development. the structure and pattern of export growth in the horticultural sector has been strongly affected by NAFTA. Producer Subsidy Equivalent: Mexico 60% 50% 40% 30% 20% Figure 9. immediately upon its creation. Banks in Mexico have complained to the World Bank about the lack of “creditworthy” clients. The structure of these arrangements suggests at the very least a tension among NAFTA liberalization of some barriers (notably tariffs and tariff-rate quotas). was until  the sole credit source for small farms in Mexico.80 Even with this rationalization of credit policy. However. credit policy and risk management procedures have become more homogeneous. and other production inputs (for example.  percent of its portfolio was nonperforming. Banrural shrank the number of outstanding loans by half.79 As commercial credit evaporated for all small enterprises. plastic sheet covers for tomato farms). export-oriented farms supported by subsidies and commercially engaged through contract farming is magnified by the dramatic retreat of all commercial credit from smaller farming operations.” 2002. “Foreign Investment in Latin America and the Caribbean. the performance of Banrural has been miserable by any standard. Carnegie Endowment for International Peace 79 .

with a new rural credit agency devoted to low. 80 NAFTA’s Promise and Reality . (). generally consist of decentralized research (unlike the climate change agenda. by Constanza et al. For instance. One of the few global estimates. who recommend an “excessive” use of fertilizers. it has come under criticism on various fronts. In one small step to redress this externalization problem. depending on the price per ton of carbon equivalent in world markets. and tend to concentrate on very small areas.denominated farm loans to support exports in the Yaqui Valley have interest rates of  to  percent.85 Although this study is useful in suggesting the order of magnitude of environmental values. one could take the more practical approach of identifying practical and achievable policy options as a means of gauging the transfer of benefits associated with conservation of Mexico’s biological diversity. environmental services derived from wetlands and other habitats.86 Despite the difficulties in valuing Mexico’s forests and biological diversity. both of which gain their market and revenue value precisely because of the worth consumers place on biological diversity.88 The value of possible carbon sinks from low-till farming. the leading reason why single-family farms and ejido farmers in some commercial regions rent their lands to private commercial interests is the absence of rural credit. undervalued. U. the World Bank announced a  million loan to liquidate Banrural and begin again. since they rely on different methodologies and baselines. Some of these benefit transfers are noted below. as well as grasslands and commercial and other forestation projects outside tropical regions. As noted above. we know with certainty that those values are substantial. financing extended through contract farming appears more plentiful.82 Evidence also suggests that whatever farm credit which is extended tends to favor intensive farming. largely on methodological grounds. is much higher. The Cost of the Dual Economy on Biological Diversity It is impossible to quantify the total value of Mexico’s tropical and other forests. million to  million for Mexico’s forestry sector alone.87 Potential revenues from carbon sequestration are in the range of . farms that receive credit usually defer decisions about fertilizer dose amounts to the recommendations of credit authorities.)81 The scarcity of farm credit has profoundly affected land-use decisions.S. conservatively running into billions of dollars for direct values such as ecotourism. The combined economic values suggested by these studies are impossible to aggregate. the value of a single wild-grass perennial grass variety related to maize is estimated to be . such as lagoons or specific parts of tropical forests or coral reefs. (In May . (Black market rates can exceed these levels per month. suggests that the total annual value of the world’s ecosystem functions is approximately  trillion. while peso-denominated farm credit—if it is available—is between  and  percent. Other values are more difficult to quantify.83 In addition. and biological diversity. which is conducted under the UN Intergovernmental Panel on Climate Change). That is. They include ecotourism and shade-grown and organic produce.and middle-income farmers. it is clear that most environmental values—but particularly those values associated with biological diversity—remain uncounted. and much cheaper.void left by public microfinance policy in full retreat. billion per year.)84 At the same time. Rather than attempt to quantify the full value of Mexico’s biological diversity that has been put at risk because of the cycle of rural poverty and changes in land use from slash-and-burn clearing. and external to market prices. numerous environmental valuation field studies have been conducted in Mexico.

organic. The environmental benefits of these kinds of products are well documented in some cases.92 Mexico is the world leader in shade-grown organic coffee. the United States. compared to sun-grown coffee raised on plan- Carnegie Endowment for International Peace 81 . herbicides. structural changes influenced largely by NAFTA in the horticultural and grains sectors reinforce and magnify changes that are further influenced by other. A similar oligopoly in the private banking sector helps explain the virtual disappearance of private credit for small and mid-sized enterprises. nor has NAFTA been the sole cause of these changes. For example. is  million per year in retail sales.89 NAFTA has reduced some pricing distortions. coffee grown under tree canopies typically has  percent more on-site bird life. NAFTA has failed to constrain the use of farm subsidies.Lessons and Recommendations Structural changes under way in Mexico’s agricultural sector did not begin with NAFTA. evidence suggests that small-scale. non-NAFTA forces. The North American market for certified. shade-grown. and GM seedlings. Moreover. Structural changes linked with trade growth have introduced new forms of market failure. indigenous peoples. precisely because they cannot afford fertilizers. Winters concludes that the industrialized countries can offer little guidance to developing countries in addressing the problems of the poor who have been adversely affected by free trade.90 The most important challenge from an environmental perspective alone is to address the plight of small-scale farms in Mexico. which have deepened pricing and market failures and accelerated environmental degradation through overcapacity. bird-friendly. and communities in the region feel toward their land. and palm. including the adoption of the National Rural Accord by communities in the spring of . by lowering or eliminating tariffs and tariff rate quotas. such as the liberalization of the financial services sector and consolidation of export farms through subsidy payments and contract farming. including traditional maize varieties. cocoa. honey. pesticides. NAFTA has prompted action among rural communities to reopen the trade agreement to take into account the vulnerability of communities to trade. recording sales volume increases of  to  percent per year. However. and remains the fastest-growing segment of the food industry. spices. while the global market value (including noncertified coffees that are marketed as sustainable. the global market for organic foods alone exceeds roughly  billion a year. and Canada are showing an increased preference for produce that is not grown with pesticides or other input. providing grants for employment training and relocation—even if financing were available—would not break the circle of poverty and environmental degradation. or under other labels). One source of hope may originate in markets that are taking shape because of environmental considerations. Those worst affected by structural changes associated with trade liberalization and trade growth are Mexico’s poor farmers. For example. Alan Winters observes that the poor in developing countries are disproportionately affected by trade liberalization: Adjustment periods for the poor are long and very costly. in particular the replacement of spot markets for fruit and vegetables with concentrated markets patronized by oligopoly buyers exerting high levels of buying power through contract farming. by identifying commercially viable revenue sources that are equal to or greater than the subsistence income derived from subsistence farming on marginal lands.91 Given the strong pull that southern farmers. similar opportunities exist for other crops. At the same time. in particular small-scale farms. Japan. The global market for environmental goods and services remains fragile and incoherent. However. sustainable coffee is  million on the retail side. undercapitalized farms can gain a comparative advantage in several environmental market niches such as organic goods. Consumers in Europe.

One of NACEC’s outstanding contributions is to create a special fund to support small-scale. NAFTA is not the cause of these issues’ emergence. continue to affect agriculture in Mexico. indigenous peoples. Among the supporters of the fund are Banamex and the government of Mexico. However. the concentration of vertically integrated sectors within Mexico’s farm economy. certification. Working with the reconfigured coffee subsidy payments can make it possible that Mexico’s poverty circle can be broken thanks to new markets that value environmental attributes. evidence from market analysis and sales shows signs of hope that new income sources from green markets can bolster environmental protection by opening new revenue sources to the poor. they require capital to overcome market failures. and to arrange transportation and overcome intermediary market barriers. from the Meso-American biological diversity corridor to rich ecosystems of coastal marine and tropical forestry areas in South America. as in Mexico during the s. 82 NAFTA’s Promise and Reality . Neighboring countries in Central and South America have different histories. At the same time. and communities in southern Mexico. Anticipatory policies include ensuring that working capital is available to small farms when it is most urgently needed during the transitional period of liberalization.94 Although these markets are small. and that environmental monitoring and data are focused from the outset.tations that clear forests.93 Similar markets for ecotourism and eventually carbon sequestration are likely to channel new revenues into southern Mexico. This fund is building one bridge between the two farm economies of Mexico. and other regions of southern Mexico. social traditions. the liberalization and consolidation of the financial services sector. and the use of geographic indicators. Initiatives that support sustainable niche markets will not break this chain of poverty and environmental degradation. that discrete environmental markets are supported. From an environmental perspective. or cooperative-based shade-grown coffee certification and export promotion in Oaxaca. as well as to differentiate their products in the market through labeling. However. These include trade liberalization prompted by NAFTA. many of these countries share a common environmental heritage. taken together. these liberalization issues are linked together by a chain of poverty affecting poor farmers. This chapter has described a series of issues that. the effect of agricultural subsidies. There is no one-size-fits-all formula for how to anticipate the environmental effects of trade liberalization. and levels of economic reform. economic and environmental endowments. but it remains the focal point of most liberalization reforms undertaken in Mexico since . community. Chiapas. and the increasingly important pull that contract farming is exerting on the production decisions of farmers. to track and offset scale impacts of free trade. that liberalization schedules do not open vulnerable markets too quickly. we do know that the poverty-environment nexus in the agricultural sector will be affected in similar ways.

C.: Institute for International Economics. 13 Rachel Poynter and Sheila Holbrook-White. measurement of environmental damages relied largely on pollution indicators.. Article . and Jan Gilbreath. and airborne dioxins. For an account of some of these public consultation practices. ). 6 Jeffrey D. (Montreal. and Development: Assessing the Mexican Experience. “The Industrial Pollution Impacts of NAFTA: Some Preliminary Results. International Trade Commission. NAFTA Chapter  Investor-State Cases: Bankrupting Democracy. CEC Article . ). North American Commission for Environmental Cooperation (Mexico City.org.conabio. Public Access to Government-Held Environmental Information: Report on North American Law. 15 Economic Integration..: MIT Press. ). “NAFTA Transportation Corridors: Approaches to Assessing Environmental Impacts and Alternatives..C. ground-level ozone. Environment. linear relationship between trade liberalization and economic growth is weak and uneven. ). ). D.C. 11 For a summary of NAFTA’s environmental provisions. Assessing the Environmental Effects of Trade Liberalization Agreements: Methodologies (Paris: Organization for Economic Cooperation and Development. see Gary Hufbauer et al. ). BECC/NADBank. The Dynamic Effects of Trade Liberalization: An Empirical Analysis (Washington. D. ed. Sachs and Andrew Warner. Taking Stock (Montreal. See. www. Canada: North American Commission for Environmental Cooperation. ). nitrogen oxides. notably air pollution indicators such as carbon dioxide. low-dose exposure to toxic substances.: World Bank. President Bill Clinton declared that NAFTA would “lead to improvements in the environment and increased investment on the Mexican side of the border in environmental cleanup. ed. with damages focusing on indicators such as increased mortality and morbidity impacts associated with air pollution. Environmental Protection Agency. Since then.” Brookings Papers on Economic Activity (Washington. see John Audley.: American Bar Association.” paper presented at the Second Symposium on Assessing the Environmental Effects of Trade. ).C. D.gob. ).N OT ES 1 In September .” in Scott Vaughan.. 16 See North American Commission for Environmental Cooperation.: Brookings Institution. ). for example. the administrator of the U.C. Canada: North American Commission for Environmental Cooperation. Mexico. ). ed. ). forthcoming. eds. D. ).C. Section . D. when environmental issues related to the proposed construction of a wharf in Cozumel were discussed. Amy Taylor. ed. with that relationship generally inferred by measuring the relative openness of an economy. The Environmental Effects of Free Trade (Montreal. Mass.C... 4 Evidence showing a robust.citizen.mx/institucion/conabio_espanol/doctos/ catalogo. 10 Kevin Gallagher. and Sarah Richardson. Canada: North American Commission for Environmental Cooperation. D. Environment. Cyrus Reed. “Economic Reform and the Process of Global Integration. and Development (see note ). A strong empirical case exists showing that open economies grow quicker than do closed ones. stating that NAFTA was the “the most environmentally sensitive trade agreement in history. sulfur dioxide. Barro. September . increased gastrointestinal illnesses from polluted drinking water. increased cancer risk from long-term. 14 North American Commission for Environmental Cooperation.S. and Michael Ferrantino.: World Resources Institute. “Energy Use in the Cement Industry in North America.: Georgetown University Press. Economic Integration.. Challenges and Opportunities in North America’s Evolving Electricity Market (Montreal.org. 9 In the Mexican study. 7 Estrategia nacional sobre biodiversidad de México (Comisión Nacional para el Conocimiento y Uso de la Biodiversidad [CONABIO]: ). D. See also Robert Repetto et al. ed. Carnegie Endowment for International Peace 83 . and Mark Winfield. ed. www. NAFTA and the Environment: Seven Years Later (Washington. Measures of economic openness vary. For an overview of the mandate and work of the commission. ). 17 Among the first public meetings ever held between the federal government of Mexico and members of nongovernmental organizations took place in the early s. See also Marisa Jacott. See. March ). ). extending to a range of public issues. Determinants of Economic Growth: A Cross-Country Empirical Study (Cambridge.. Canada: North American Commission for Environmental Cooperation. Carolyn Deere and Daniel Esty. went further. NAFTA and the Environment: Substance and Process (Washington. and damages to human health or more direct cleanup costs from hazardous wastes. see Daniel Magraw. Mass.” in Scott Vaughan. 8 See Kirk Hamilton and Michael Clemens.C. available at www. see Timothy Whitehouse. Canada: North American Commission for Environmental Cooperation. 3 Public Citizen.S. The Environmental Effects of Free Trade (Montreal. Greening the Americas: NAFTA’s Lessons for Hemispheric Trade (Cambridge. Green Politics and Global Trade (Washington. 5 The literature on environmental review methodologies is extensive.html.: MIT Press. 12 Kenneth Reinert and David Roland-Holst. D.” 2 NAFTA Preamble. Robert J.cec. Dale Andrew.: U. Environment and Development in Mexico (Washington. Assessing the Environmental Effects of the North American Free Trade Agreement: An Analytical Framework (Phase II) and Issues Studies (Montreal.: Center for Strategic and International Studies. For a discussion of the politics of environment in NAFTA. ). public consultations have become a regular feature of government in Mexico. Canada: North American Commission for Environmental Cooperation. d ed. “Are We Saving Enough for the Future?” in Expanding the Measure of Wealth (Washington. Wasting Assets: Natural Resources in the National Accounts (Washington. ).” Carol Browner. for instance. but include indicators of trade liberalization such as tariff and subsidy levels.

and Development (see note ). fresh fruits. Secretaria de Medio Ambiente y Recursos Naturales (SEMARNAT) and Comisión Nacional del Agua. ). 32 Chantal Line Carpentier and Hans Herrman.18 In the midst of the NAFTA debate in .: World Bank. A recent scientific panel report of the government of the United Kingdom concluded that “on balance. Northeast.” Environment and Development Economics (special issue: The Environmental Kuznets Curve). pp. D. Canada: North American Commission for Environmental Cooperation. but was in the range of . no. Canada: North American Commission for Environmental Cooperation. dairy products. Chapala. available at www. www.” Nature. Poverty.S. Given important differences in the environmental characteristics of different crops. 29 There are more than  different agricultural products traded among the NAFTA countries. ). and K. G. July ). for example. “Demystifying the Environmental Kuznets Curve: Turning a Black Box into a Policy Tool. Annual World Bank Conference on Development Economics (Washington. available at http://ers.. Even if these differences were not so pronounced among crops. “Transgenic DNA Integressed into Traditional Maize Landscapes in Oaxaca. Mexico City. and Economic Growth. ). it makes clear that Chapter  does not preclude the parties from providing public access to documents submitted to or issued by a dispute panel. 84 NAFTA’s Promise and Reality “Forestry Data” (Rome: Food and Agriculture Organization of the United Nations. But depending on the crops developed GM food may present greater challenges in risk management in the future” (UK Government Science Panel Report. and other factors affecting how that crop is cultivated (or in the case of aquaculture and livestock. available at www. it is not feasible to extrapolate more general or net environmental impact stemming from NAFTA liberalization from the three examples discussed in this chapter. soil.gov/regions/whemisphere/nafta-chapter11. The full text of this statement can be found at the U. www. 28 Steven Zahniser and John Link.” in B.C.. Hemamala Hettige.S. with the possible exception of cotton. Canada. . eds. 21 Economic Integration. . ‒. but then begin to decrease after a certain level of income is reached.  (September ). Making Pollution Prevention Pay (New York: Pergamon Press. ).gmsciencedebate. 22 Charles Driscoll et al.pdf.: U.usda. The income turning point changed with the particular pollutant. which in turn fueled an international scandal around the risks of GM . Agua en México.org.org. Stern. . Stiglitz.C.ustr. eds.” Environment. Private Rights. Public Problems: A Guide to NAFTA’s Controversial Chapter on Investor Rights (Winnipeg. ). Bailey. each with different environmental characteristics depending not only on the specific crop but on the climate. 31 The debate over the risks to health and the environment from GM foods and crops is far from settled.‒.the risks to human health for GM crops currently on the market are very low. D. pp. What Improves Environmental Performance? Evidence from Mexican Industry (Washington. the governments of Mexico. At the same time.” in Sarah Richardson. D. The theory. available at FAOStat. vol.. “Nitrogen Pollution: Sources and Consequences in the U. 25 Food and Agriculture Organization of the United Nations. and processed foods. Assessing the Environmental Effects of NAFTA: An Analytical Framework (Montreal. ‒. See. The Grossman-Krueger hypothesis has sparked a very lively debate in the literature. there are no standardized or uniform emissions factors for these agricultural goods. For example.org. 26 Organization for Economic Cooperation and Development. 34 After attacks led by the biotechnology industry and others. “Progress on the Environmental Kuznets Curve?” Environment and Development Economics. July ).S.C.. 23 R. Effects of NAFTA on Agriculture and the Rural Economy (Washington. pp. Theodore Panayotou. Pleskovic and J.” in D. The statement addresses three issues: First. water. Mexico. Quist and I. vol. and David Wheeler.gov/publications/wrs/. ‒. ). Consumption is moving away from unprocessed bulk commodities and toward higher-value foods such as meat. ). “Maize in Mexico: Some Environmental Implications of NAFTA. Maler. vol. it attempts to limit the scope of the legal terms “minimum standard of treatment” and “full protection and security” by restating a principle in customary international law regarding minimum standard of treatment. no. Agricultural Policies in OECD Countries: Monitoring and Evaluation (Paris: Organization for Economic Cooperation and Development. and the United States issued a clarification regarding NAFTA’s Chapter . Unlike in the electric power generating sector. Trade Representative’s web site. Nature retracted the article in mid-. was adapted from the work of Simon Kuznets. “Positive Incentives for Pollution Control in North Carolina: A Policy Analysis. D. produced). Environment. Finally. it limits efforts by investors seeking damages under NAFTA only to infractions that may arise under Chapter  disciplines. environmental quality indicators are generally disaggregated. Huisingh and V. known as the Environmental Kuznets Curve.fao. Maize and Biodiversity: The Effects of Transgenic Maize in Mexico: Issues Summary (Montreal. 19 See Susmita Dasgupta. After numerous attempts to reach settlement. Department of Agriculture. for his work in showing the relationship between level and inequality of income.oecd. Canada: International Institute for Sustainable Development and World Wildlife Fund. making it difficult to compare changes in pollution with changes in water scarcity or biological diversity. eds. 30 Alejandro Nadal. H. Ford Runge. vol. 33 D.  ().. per capita GDP. Second. “Environment. there is now a scientific consensus that the risk to human health from consuming the current range of GM foods is low or nonexistent. rates of malnutrition and hunger have also increased. ).: World Bank. two economists— Grossman and Krueger—demonstrated that some indexes of pollution increase at the early stages of economic development. not other elements of the agreement.uk.  (). on July .. ed. 20 See Howard Mann.. 27 Mexico’s food consumption has changed as GDP per capita has risen on average.  (). 24 Sistema Unificado de Informacion Básica del Agua ().

. Nature.S. “Foreign Investment in Mexico After Economic Integration. 45 See. available at www. 51 Antonio Yúnez-Naude and Fernando Barceinas Paredes.  (). 41 C. Some studies suggest that the contribution that modern farms make to Mexico’s GDP has remained roughly constant at between  and  percent since the early s. and Arthur PuenteGonzalez. . and Wilson Peres. ). For a comprehensive review of the environmental effects of corn production.-Mexico Corn Trade under NAFTA. it is unclear if it would have any bearing on unintentional or accidental contamination. The Agricultural of Mexico after Ten Years of NAFTA Implementation (Washington.nsf/ ByDocName/eventsagadirconference. pp. see David Hummels. ). available at http://Inweb. ). no. Trade Liberalization Impacts on Agriculture: Predicted versus Realized” (Montreal. ‒ (Mexico City: CIMMYT. “The Nature and Growth of Vertical Integration in World Trade. vol. Jim McElfish. 40 Rosamond Naylor. King Corn: The History. In recent years.” However. pp. Illustrating the Coupled HumanEnvironment System to Vulnerability Analysis: Three Case Studies (Palo Alto. and vertical integration. . “Free Trade.: Carnegie Endowment for International Peace. - (Medford. See also Jerry Speir. ). The discussion above also refers to structural changes outside this definition. but also the greatest consumer of commer- cial nitrogen and phosphate fertilizers.worldbank. see C.: World Wildlife Fund. L.  (June ). neither Canada nor the United States has done so.S.pnas. The Protocol establishes an advanced information agreement to ensure that countries importing living modified organisms are able to make informed decisions prior to that importation taking place. “Neighbors of Vast Hog Farms Say Foul Air Endangers Their Health” New York Times. 37 Katie Eastham and Jeremy Sweet. “Hydrologic Balance of Lake Chapala.  (April ). 54 Dennis Henderson. and Manuel Guzman. See also Chantal Line Carpentier. Timothy Wise. Calif. “Policy Reforms and Mexican Agriculture: Views from the Yaqui Valley. Agadir Morrocco. May . ). . –. sales. ). and Rosario Perez Espejo.” Journal of the American Water Resources Association. farm production is concentrated—where it moves over long distances and into the Gulf of Mexico. and Regina Flores. ed. 44 Corn production in the United States is not only the biggest user of farmland. 48 Jose de Anda. for example. Walter Falcon. 39 For an insightful discussion of the relationship among trade liberalization. and Kei-Mu Yi. paper presented at the Irrigation Water Policies: Micro and Macro Considerations. Genetically Modified Organisms: The Significance of Gene Flow Through Pollen Transfer (Copenhagen. “Between the Farm Gate and the Dinner Carnegie Endowment for International Peace 85 . Assessing Environmental Effects of the North American Free Trade Agreement: An Analytical Framework (Montreal. Turner et al. vol. 43 See Frank Ackerman. ). Juan-Carlos Moreno-Brid. ). The North American Mosaic (Montreal.C.S. Kevin Gallagher.” working paper no.pdf.: Stanford University. Australia: Australian Pacific Economic Cooperation Committee. p. In addition. ‒.” (Mexico City: CEPAL-ECLAC. (Montreal.” in Sarah Richardson. The highest concentration of nitrogen pollution is found in the Mississippi River Delta— where more than half of total U. vol. Corn and the Environment: Environmental Impacts of U.” Economics Program Paper no. David Ervin.. D. making up  percent of total U.S. ).  (April . Jun Ishii.S.” Journal of International Economics. Trade and Environmental Consequences of Corn (Maize) Production in the United States (Washington. Kym Anderson and J.ceip. Mexico. . U. June .contamination to the environment. which has been found extensively in groundwater wells. The objective of the Biosafety Protocol is to protect biological diversity from potential risks posed by living modified organisms resulting from biotechnology. “Feedlot Production of Cattle in the United States and Canada. including vertical and horizontal integration. Trade and Environment Policy Issues: Implications for the AsiaPacific Region (Canberra. D. vol. 35 The July  UK Government Science Panel Report (see note ) found that it was “very unlikely [that GM crops] would invade the country-side and become problematic plants. available at www. 50 Jorge Mattar. and the U.. Comparative Standards for Intensive Livestock Operations in Canada. 52 A variable used by Yúnez-Naude and Paredes (see note ) to estimate structural change in the fresh fruit and vegetable sector measures the value of agricultural monthly exports and imports (totals and per crop) in constant pesos using real exchange rate indexes for . While Mexico has signed and ratified the Protocol. Luke Ney. corn production is a significant user of pesticides. Marie-Ann Bowden. December ). Canada: North American Commission for Environmental Cooperation. 42 Jennifer Lee. no. Ford Runge. 53 The shift to intensive farming in the grains and horticulture sector may be much greater than the overall shift in the agricultural sector. www. including Schumpeterian definitions of market structure transformation and innovation.org/featart/sepmexico. Richard French. Canada: North American Commission for Environmental Cooperation. July ). structural changes in markets. the panel recommended that more research be conducted on the environmental effects of gene flow and on herbicide tolerance of GM crops. 49 North American Commission for Environmental Cooperation.org. . Denmark: European Environment Agency. Canada: North American Commission for Environmental Cooperation. Ford Runge. Drake Brockman. 36 Ibid. Reprinted in abridged form in the Business Council Bulletin. Editorial Note. ) p. 47 Enrique Aguilar. Sergio Quinones-Cisneros. Canada: North American Commission for Environmental Cooperation.networkideas.org/ESSD/ardext. 46 B. The main herbicide used in corn production is atrazine. 38 The Biosafety Protocol of the UN Convention on Biological Diversity entered into force in mid-. June ‒. World Bank. Pricing of Irrigation Water in Mexico. Since the focus of the Protocol is on trade in living modified organisms. Mass: Global Development and Environment Institute).C. incidences of hypoxic zones have increased in occurrence and severity.org.

eds.doc. Sustainability and Vulnerability. Swift. 56 Lee Christensen. E. reforms have been announced in July  for ASERCA programs so that payments will cover all states. as well as higher payments for coffee grown in mountain regions. . between  and . making the average equivalent of exported water . Biotic Diversity. and Regeneration Capacity. 73 See. ‒. such as storage and transportation. gallons of water. for example. and M. U.: U. These authors show that the Gini coefficient increased from .” The Future of Food (Paris: Organization for Economic Cooperation and Development. Sanchez. wheat. U. Corn Production (Washington. “Agriculture and the Environment: A New Strategic Vision. D. Economy. L.S. pp. A. 72 B. and Joseph Cooper et al. Power. Faeth. Trade and Environment: Special Study (Geneva. pp. Stephanie Dionne. ). ). average farm size in the United States increased from  acres to  acres from  to . 57 See note . 69 David Pearce.-Israel FTA. for ten crops: maize. available at www.” in David R. ). D. Agricultural Adjustments under Liberalized Trade: A Preliminary Analysis (Montreal. 68 An insightful analysis of the history of public participation in Mexico’s protected areas is provided in Martha Rosas. although at a much smaller level. Department of Agriculture. 55 Favia Echanove Hacuja. cotton. 60 Travis Phillips. gallons per year. “Agricultural Intensification and Ecosystem Properties. Ariana Legovini. ‒. Vester. ). Marc Paquin.: World Bank. Rising Inequality in Mexico: Household Characteristics and Regional Effects (Washington. J. A. available from the National Aeronautics and Space Administration at http://lcluc. Texas: House Research Organization: Texas House of Representatives. A. Some Domestic Environmental Effects of U. Switzerland: World Trade Organization. PROCAMPO (Farmers Direct Support Program) was created in  and provides direct payments (decoupled income transfers) to farmers based on the size of their holdings.” Environment. canola.  (Washington. 62 NAFTA and trade liberalization generally have affected farm size in Mexico in much the same way they have affected average farm sizes in the United States and Canada.S.S.iddri. “The Impact of Trade Agreements: Effect of the Tokyo Round.Plate: Motivations for Industrial Change in the Processed Food Sector. “Changing Perspectives on Agricultural Intensification. 71 ASERCA (Support Services for Agricultural Marketing) was created in  and originally designed to provide support for farmers to pay for marketing expenses. 63 P.C. Aquifers and Agro-Chemicals in a Border Region: NAFTA Challenges and Opportunities for Mexican Agriculture (Montreal. and Nora Lustig. 86 NAFTA’s Promise and Reality Economic Development and the Environment.pdf. As indicated in Figure . 58 Ibid.gov/ products/pdfs/AnPrgRp/AnPrgRp_TurnerBL. and the mean-log deviation grew by  percent during the same period. Tradeoffs or Synergies? Agricultural Intensification. the largest export crop in Mexico. Matson. Economic Development and the Environment (New York: CABI Publishing. or approximately . Batie. Hakan Nordstom and Scott Vaughan. Eastman. vol.” Science. .. and H. and Christopher Barrett. Penny. NAFTA and the Uruguay Round on the U.  (July/August ). - (Austin. note .” Culture and Agriculture. sorghum. September ). In . ). April . Properties and Management of Soils in the Tropics (New York: John Wiley & Sons. to . million metric tons of tomatoes were exported from Mexico to the United States from  to . One metric ton of water is the equivalent of .C. W. about . “Behind the U.S. See also Trade and Environment Policy Issues. million. Paul Ferrara. million to . Paris. Participatory Environmental Policy Processes: The Case of Advisory Councils in Protected Areas in Mexico. G. or lower bound. International Trade Commission. vol. David Ervin. C.-Mexico Water Treaty Dispute. ). no. 74 See Karel Maynard.-Canada FTA. Barrett. Canada: North American Commission for Environmental Cooperation. How Valuable Are the Tropical Forests (paper presented at the Séminaire Développement Durable et Économie de l’Environmement. 65 Patricia Bouillon. ).S.S. International Trade Commission. Canada: North American .nasa. unpublished thesis (England: University of Sussex. J. Approximately  percent of all Mexican tomato exports on average are bound for the United States.  (July ).S. vol. Graffy. while the number of farms declined from .gsfc. Land Cover and Land-Change in the Southern Yucatan Peninsular Region: Refining Models and Projections of Deforestation with Application to the Carbon Cycle.” August. and T. D.” report no.C. and Isaack Pageot-Lebel. no. A conservative. ‒. J. rice. soy. Lee and Christopher B. U. 59 Jose Maria Martinez. and two other crops used as grain feed for cattle. According to the International Trade Commission. 66 David Lee. Canada: North American Commission for Environmental Cooperation. In response to criticism that they favor largescale farms. Soil Nutrient and Water Management Systems in U. ).S. December ). T. J. It is too early to tell if this subsidy structure is sufficient to reverse the effects of decades of payments that favored large coffee plantations. 70 One exception is payments for production of coffee.  (Fall ). P. Geoghegan.. Parton. Ford Runge. D. W. Lawrence. August ). Warman.org/iddri/telecharge/mardis/pearce. Farm Bill and the Doha Round (Montreal. The Economic and Environmental Impacts of Agricultural Subsidies: An Assessment of the  U..S. Anthony. April ). pounds per year.S.: U. 67 The North American Mosaic (see note ). . “Working under Contract for the Vegetable Agro-Industry in Mexico. publication no. S. annual payments through the Mexican Coffee Council of approximately  million in coffee subsidies extended higher payments to all organic farms (the majority of which are small-scale). 61 This does not include a net account of total water transfers in tomatoes. since the United States also exported tomatoes to Mexico. with varying farm sizes within states. Turner. estimate therefore suggests that roughly  million gallons of freshwater equivalents are contained in these exports. no. sunflowers. 64 P.

). 83 Rosamond Naylor. viable rural credit institutions.” press release (Washington.C.C. See “The Impact of the Tomato Agro-industry on the Rural Poor in Mexico.  percent (by area) of the production of wheat—the main crop in the Sonora region—was under ejido control.: California Agriculture Experiment Station. followed by Del Monte in .  percent of wheat production was controlled by ejidos.gov. 86 The three general approaches to economic valuation are (a) estimates of averted behavior. amendments allowed for full majority ownership by foreign interests.-Israel FTA. 92 Daniele Giovannucci. D. “The Impact of the Tomato Agro-Industry on the Rural Poor in Mexico. August ). K. Fisher and W.: U.: International Monetary Fund. Bolivia and Brazil in .-Canada FTA. and R. 81 World Bank. pp. ).  (Washington.  ().S.edu/publications. and (c) contingent valuation. Limburgh. 87 A. Economy. for consumers. there are several frozen-food companies operating in Mexico. available at www. Naeen. Constanza. C.: Purdue University. 78 Under the  Foreign Investment Law. ). March . M. based on the following stylized estimate: TEV = direct use value + indirect use value + option value + existence value. July ). Similar reforms have been enacted by other Latin American countries. approximately .pnas. and  percent rented by ejidos to private interests. are cultivated under contract. the Specialty Coffee Association.: Stanford University. By –. U.C. Leading fresh crops are broccoli and cauliflower. million. However.  (Washington. which generates one-quarter of total agricultural revenues. In that state.org. Hanemann. 82 During –. and Zachary Patterson. increasing to  percent in . ).stanford. 90 Alan Winters. and Costa Rica in . both available at www.C. ). de Groot. Markets (Montreal. “The Value of the World’s Ecosystem Services and Natural Capital. Turner et al. and the Uruguay Round on the U. Luiz de Mello. and World Bank. ). See The Impact of Trade Agreements: Effect of the Tokyo Round.C. ). Roughly  percent of all vegetables grown in Mexico are from Guanajuato. notably Colombia in .” CIMMYT Economic Program Paper no. June ). U. D. based on questionnaires of the willingness-to-pay (WTP) type. Poverty and Income Distribution. available at www. and Ivan OrtizMonasterio. different sustainable products being produced in rich ecosystem areas such as Chiapas. World Bank Institute. June . foreign ownership of banks was limited to  percent.usitc. pp. while the consolidation of the retail sector has meant that a higher share of retail value has gone to distributors and marketers. ). available at www.org.org. 91 The author is grateful to Dan Biller. Grasse. Ind.cec.  (). Arge. O’Neil. and the World Bank.S. (West Lafayette. D.worldbank. 77 Of the eighteen frozen-food companies operating in Mexico. ‒. government investment in rural infrastructure and communities. Mexico and Emerging Carbon Markets: Investment Opportunities for Small and Medium-Sized Companies (Montreal. 80 B. U. and recognition of the rights of indigenous peoples. publication no. Mexican and U. 76 Between  and . ). Faber. Rello. emergency and long-term agricultural development programs. on  farms. 94 A long-standing challenge for developing-country exporters attempting to differentiate products in the marketplace involves the cost of often multiple certification and labeling schemes to convey to consumers some environmental characteristics of sustainable products. the NACEC. Illustrating the Coupled HumanEnvironment Systems for Vulnerability Analysis: Three Case Studies.” Nature. Canada: North American Commission for Environmental Cooperation.gtap. “Financial Crisis. (b) hedonic pricing estimates.org. A. S. NAFTA.S. M. “Trade Liberalization and Poverty: What Do We Know?” GTAP Working Papers. Mass. vol. L. available at www.S. the changes in Mexico’s laws have been the deepest. Brezinski and Scott Vaughan..S. for this insight regarding benefits transfers. vol. Option Value and the Extinction of Species (Berkeley. Canada: North American Commission for Environmental Cooperation.Commission for Environmental Cooperation. and Gabriela Inchaute. S.  ⁄⁄ (Washington. May . - (Palo Alto.: World Bank. Hannon. D. 88 Scott Vaughan. Approaches generally give some proxy of the total economic value (TEV) of the environmental resource being valued. “Policy Reforms and Mexican Agriculture: Views from the Yaqui Valley. See M.” report no. 84 Ibid. D. Buyers with purchase contract arrangements include Green Giant and Birdseye. ).org. hectares. B. 79 World Bank. available at http://yaquivalley. See also William Easterly. International Trade Commission. 93 A. Calif. Globalization.” note .: World Bank. 89 The main demands of the farmers included a moratorium on all agricultural provisions of NAFTA. compared with  percent owned privately. Sustainable Coffee Survey of the North American Specialty Coffee Industry (report prepared for the Nature Conservancy.” working paper no.  percent have their operations in Guanajuato. “Product Document for a Proposed Rural Finance Development Structural Adjustment Loan in the Amount of . Today. 85 R.cec.: MIT Press. See also Emmanuel Baldacci. The Elusive Quest for Growth (Cambridge. D. “World Bank Approves  Million Loan to Reform Banking Sector in Mexico. ‒. Calif. including Green Giant and Birdseye. the Summit Foundation. Measuring Consumer Interest in Shade-Grown Coffee: An Assessment of the Canadian. food safety and quality for consumers. Barron and E.  percent was controlled by the private sector and  percent was rented to private farming interests. Walter Falcon. R. available at www. In . Carnegie Endowment for International Peace 87 . Mexico’s biological diversity research and policy group (CONABIO) recently has explored highly innovative ways of using geographic indicators to distinguish.: World Bank. Growth and Poverty: Building an Inclusive World Economy (policy research report) (Washington. growers received an increasingly smaller percentage of retail value for their produce.S. 75 Campbell’s began contract farming arrangements in Mexico in .” Agricultural Economics. Chantal Line Carpentier. using changes in real estate-type prices as a proxy.

business.ceip.A BO U T T H E CA R N EG I E E N D OW M E N T is a private. Equity. The Carnegie Endowment for International Peace Through research. works with policy leaders in governments. For more information. Audley. visit www.ceip. publishing. on occasion. and how the forces of trade and financial flows can be harnessed to achieve broad-based economic growth and alleviate poverty. political.org. and technological forces driving global change. focusing on the economic. senior associate. For more information about the Carnegie Endowment visit www. Founded in . Endowment associates shape fresh policy approaches. academia.org/trade. Through its Carnegie Moscow Center. The Endowment publishes Foreign Policy. business. Their interests span geographic regions and the relations between governments. the Endowment helps to develop a tradition of public policy analysis in the former Soviet Republics and to improve relations between Russia and the United States. convening. international organizations. intergovernmental and nongovernmental organizations. creating new institutions and international networks. The project is directed by John J. nonprofit organization dedicated to advancing cooperation between nations and promoting active international engagement by the United States. and labor to develop innovative solutions to key issues in the debate over global economic integration. the impact on jobs and labor standards. which reaches readers in more than  countries and in several languages. and. These issues include the impact of trade on the environment. and Development Project 88 NAFTA’s Promise and Reality . one of the world’s leading magazines of international politics and economics. The Trade. and civil society. its work is nonpartisan and dedicated to achieving practical results.

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