Trade Liberalization and NAFTA

Following the crisis of 1982, the Mexican economy received praise for having “adjusted well”, but failed to achieve any significant momentum due to renewed struggles in 1985-86. Mexico’s response has been to implement a policy of labor “flexibilizacion”, or weakening collective labor bargaining, and widespread trade liberalization to take advantage of newly awakened international competitiveness. Since the 1994 implementation of NAFTA or the North American Free Trade Agreement, Mexico has signed twelve free trade agreements with such diverse nations as Japan, Israel, and Chile.

NAFTA is by far the most important trade agreement Mexico has signed both in the magnitude of reciprocal trade with its partners as well as in its scope. Unlike the rest of the free trade agreements that Mexico has signed, NAFTA is more comprehensive in its scope and was complemented by the North American Agreement for Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). Given the overall size of trade between Mexico and the United States, there are remarkably few trade disputes, and even those few involve relatively small dollar amounts. These disputes are generally settled in World Trade Organization (WTO) or NAFTA panels or through negotiations between the two countries.

While the trade agreement has not synchronized employment or productivity across North America, it has resulted in an enormous interdependence between Mexico and the United States. Even as the United States has been shifting much of its dependence for imports to other nations such as China, Mexico remains firmly dependent on the state of the United States’ economy. Exports now represent 30 percent of Mexico’s GDP, up from 10 percent 20 years ago. The great majority of Mexico’s exports are manufactured goods, and almost 90 percent of them are shipped to the United States.

While Mexico has undoubtedly benefited from trade liberalization, a history of bilateral trade agreements which Mexico has historically been able to join that other nations have been unable to access has resulted in a preferential place in world trade. Unfortunately for Mexico, the entrance of many nations such as China into the WTO and the United States’ aggressive moves to increase free trade worldwide is already working to erode that preferential trade status. While the economic case for free trade suggests that Mexico will ultimately benefit from reduced trade restrictions with other nations, Mexico is already beginning to suffer the early price of dislocation of many of its people. In particular, Mexico’s maquiladora industries face competition from China and Mexico’s rural poor face stiff competition from American agri-business.

One disturbing impact of increased integration into the global economy has been Mexico’s increasing wage inequality. The new economic reality of globalization has resulted in a substantial increase in the wage premium for skilled labor, which when coupled with an unequal distribution of skills has created higher inequality in the distribution of labor incomes that is closely associated to disparities in schooling.

As each of the Asian tigers achieves greater market penetration in the United States, Mexico’s export-dependent growth becomes more threatened. In particular, as tariffs against textiles from China expire, Mexico can expect to suffer financially. Yet Mexico’s real problem with trade liberalization is that it exposes an uncomfortable truth – that Mexico is no longer a relatively “poor” nation, but its institutions and human capital nonetheless remain unable to compete with “wealthy” nations.

Are Multinational Corporations Good for the Developing World?

Multinational corporations obviously have many effects both for good and for ill on the developing world. Nonetheless, it is unlikely that these cumulative effects are precisely neutral.

Given the significant technology gap between the developed and developing worlds, multinational corporations have a clearly positive contagion effect that spreads innovation quickly around the world. And even if these corporations don't directly share their expertise with anyone, the increased competition probably encourages domestic firms to be more efficient. Multinationals have greater access to worldwide capital markets, so they bring capital into the economy. They pay their workers higher than prevailing wages and provide management skills not locally available.

Taken together, these benefits clearly ensure that at least some multinational corporations are a force for good.

Yet, multinationals are also capable of exploiting their workers, maintaining control over their fiscal and intellectual resources, and preempting local development. The culture gap also introduces products that aren't appropriate because multinationals can't accurately understand local culture. And even if that doesn't occur, human rights abuses have been repeatedly documented by corporations that drop to local standards rather than rising to expectations.

A real danger for many developing countries is that multinationals create a net capital outflow, actually remitting more profits to their home country than they initially put into the local economy. When the multinationals use inappropriate technology for the country's level of development, they can actually drive many out of work and retard local development.

On balance, multinational corporations are neither an unmitigated good nor a force for evil. Rather, these corporations have numerous disparate effects, both intended and otherwise, that need to be evaluated on an individual basis. Still, the history of multinational development provides significant hope that the benefits from technology transfer outweigh most other considerations under most circumstances.

Asia's Foreign Reserves - A New Pool

Businessweek reports that a group of Asian nations who collectively hold 65% of the world's foreign exchange reserves has agreed to create a new "pooling arrangement" to help prevent fallout in the aftermath of incidents like the 1997 Asian Contagion that rapidly spread throughout the region. The group is motivated by the perception that the IMF, the global body usually acting as a lender of last resort in these types of scenarios, imposed conditions like higher interest rates and lower government spending in exchange for loans.

The first obvious implication of this unprecedented regional cooperation is that China, Japan, and the rest of southeast Asia are finally willing to cooperate without outside interference to advance their own interests. The continued economic dynamism of the region will ensure that an increasing share of the global economy will depend on the institutions constructed by the region. Despite the recent historical weakness of these financial institutions, this new multilateral endeavor indicates that the major players have internalized the importance of cooperation.

The second, far less positive implication is that much of the region, and China in particular, is interested in constructing a parallel global economic framework that embraces nonintervention in nation economics as a first order principle. The real concern here is that enabling despotic regimes such as Thailand, Myanmar, or even North Korea will result in humanitarian disasters. But just as frightening to the economies of the region is a commitment to not imposing fiscal reforms. The real causes of financial collapse are weak institutions and poor policy. By setting up an additional bulwark against failure before intervention by the IMF, this "pooling arrangement" is going to ensure that weaker, less wide-ranging reforms are enacted at the conclusion of each economic shock, making future failures more likely.

The good done by increasing political cooperation between these critical components of the global economy is at least partially offset by the purpose of their cooperation. The world would be much better off if China and the rest of the region put their reserves into existing institutions like the IMF in exchange for increased consideration. With the failure of the Doha Round at the WTO, the world looked immediately to bilateral agreements to continue trade progress. While regional cooperation is superior to earlier bilateral cooperation, only truly global cooperation will best advance everyone's interests.

Please Revive the Doha Round!

Voice of America reports that negotiators from the US, the EU, Brazil, and India are meeting today to try to revive the trade talks that broke down last July.

Too much optimism is probably misplaced at this point because the political considerations surrounding agricultural subsidies that derailed talks before are unchanged. The only real changes at this point are the US-South Korean free trade agreement and months of castigating editorials belaboring the shortsightedness of the Bush administration.

Everyone not party to the US-South Korean free trade agreement is probably concerned about trade distortions that could steal their market share in two of the world's largest economies. This might concern far-sighted economists, but most politicians will probably remain oblivious.

The real unknown then is what impact months of editorials in many of the world's finest newspapers has had on the political will of the folks pulling the negotiators' strings. It is conceivable that Europe is sufficiently concerned about the US going it alone with bilateral trade agreements to sign on to an agreeable treaty. But not terribly likely.

Indeed, the real hope for success at a revived Doha Round lies with Brazil and India. If they reduce their expectations of reduced subsidies from the West, any deal becomes much more workable. Essentially giving in would be political suicide, but that doesn't mean it won't happen. It just probably won't happen.

US - South Korea Free Trade Agreement

The NYT reports that negotiators in Seoul squeezed through "the world's largest bilateral free trade agreement" before President Bush's fasttrack negotiating authority expired. Most free traders are mildly optimistic, but they'd certainly prefer that the deal was rendered unnecessary due to the success of the Doha round at the WTO.

The primacy of multilateral trade agreements over bilateral treaties always struck me as fairly straightforward. Yet political considerations have pushed the Bush administration into making quite explicit the contention that bilateral agreements are enough. I was actually surprised at the generally thin literature on this issue, but this article rather definitively decides the issue in favor of multilateral trade agreements.

The real question now is one of how to proceed from here. With the rather spectacular death of the Doha round, not even the smallest progress toward multilateral negotiation seems possible. Some progress on lowered trade barriers is obviously better than none, but distortions will creep into the system. The current bilateral trade regime is based on the "wheel and spoke" model, but invariably the "spokes" of trade are unbalanced and even overlapping. Real human costs are observable every time the international trade regime is upended by a new set of rules. The current adjustment makes the world richer on balance, but unfortunately future changes will be more painful because of the political failures of the Doha round.

Truly free trade, despite almost universal acceptance in principle, still eludes us. Maybe next time we'll finally get it right.