[Senate Hearing 106-80]
[From the U.S. Government Publishing Office]
S. Hrg. 106-80
TRADE VERSUS AID: NAFTA FIVE YEARS LATER
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
APRIL 13, 1999
__________
Printed for the use of the Committee on Foreign Relations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
U.S. GOVERNMENT PRINTING OFFICE
56-855 CC WASHINGTON : 1999
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON FOREIGN RELATIONS
JESSE HELMS, North Carolina, Chairman
RICHARD G. LUGAR, Indiana JOSEPH R. BIDEN, Jr., Delaware
PAUL COVERDELL, Georgia PAUL S. SARBANES, Maryland
CHUCK HAGEL, Nebraska CHRISTOPHER J. DODD, Connecticut
GORDON H. SMITH, Oregon JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas PAUL D. WELLSTONE, Minnesota
CRAIG THOMAS, Wyoming BARBARA BOXER, California
JOHN ASHCROFT, Missouri ROBERT G. TORRICELLI, New Jersey
BILL FRIST, Tennessee
James W. Nance, Staff Director
Edwin K. Hall, Minority Staff Director
(ii)
C O N T E N T S
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Page
Buchanan, Patrick J., columnist, Washington, DC.................. 25
Dabbs, Mrs. Vontella, human resources assistant, Catawba Plant of
Delta Mills Marketing Co., Maiden, NC.......................... 21
Fisher, Hon. Richard W., Deputy U.S. Trade Representative........ 3
Prepared statement of........................................ 9
Helms, Senator Jesse, prepared statement of...................... 2
McMillion, Dr. Charles W., MBG Information Services, Washington,
DC............................................................. 30
Prepared statement of........................................ 36
Appendix
Responses of Ambassador Fisher to questions submitted by Senator
Helms.......................................................... 57
(iii)
TRADE VERSUS AID: NAFTA FIVE YEARS LATER
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TUESDAY, APRIL 13, 1999
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 2:41 p.m., in
room D-562, Dirksen Senate Office Building, Hon. Jesse Helms
(chairman of the committee) presiding.
Present: Senators Helms and Thomas.
The Chairman. The committee will come to order, first with
the apologies of the chairman, who is slower than usual and had
to walk out on the chairman of the Joint Chiefs of Staff and
the Secretary of Defense in order to be here. But it is worth
it.
The committee hearing today will address the pros and cons
of NAFTA, a treaty that has cost thousands of American workers
their jobs and created a sharp division about its wisdom. North
Carolina's textile workers have been especially hard hit, as
well as those in many other States. And we will hear from some
of those victimized.
For example, Mrs. Vontella Dabbs, who has taken the time
from her job at Delta Mills in Maiden, NC, to come here to
testify, for which I am very grateful. Mrs. Dabbs will speak
for hundreds of thousands of workers who have lost their jobs
as a result of NAFTA.
Now there are 10 Senators, and I have counted them, still
around this place who served with the late Senator Sam Ervin.
Senator Ervin was my senior colleague for 2 years before his
retirement on January 3, 1974. Now Senator Ervin and I did not
belong to the same party, but he was my friend, and we worked
together on countless issues.
After he left the Senate, he missed the Senate. And he
missed it badly. And he called almost every day, and sometimes
I would call him. But when a constitutional issue was raised in
the Senate, I always sought Senator Ervin's advice, along with
several other constitutional scholars with whom I have a
personal relationship.
Now Senator Ervin was on target about most things, and he
was absolutely right when he worried about the principal harm
to the American working people when U.S. negotiators sat down
with foreign representatives regarding treaties. He would say,
``Uh-oh.'' I can hear him now with that chuckle, warning that
``the United States had never lost a war or won a treaty.''
Now I mention all this as a prelude to my reiterating that
Senator Sam was right on target about NAFTA. Now that the
United States is 5 years into NAFTA, more than 200,000 jobs
have been lost nationwide. In North Carolina, more than 20,000
have been lost in the textile industry alone. And the picture
is getting bleaker by the day, with plants closing and moving
to Mexico, hundreds and often thousands of good-paying jobs
being lost by Tarheel workers. And the same thing is going on
in other States.
Well, Levi Strauss, recognized worldwide as a
quintessential American product, is moving offshore. In
February, Levi announced the layoff of 30 percent of its U.S.
work force, meaning that 5,900 Americans had lost their jobs
pronto, 380 of them living in Murphy, a rural mountain
community, where the unemployment rate in North Carolina is
more than 10 percent. And jobs are already scarce. The same
story applies to Burlington and so forth and so on.
And I am going to forego the reading of the rest of my
prepared statement, and I may work it in as time goes by.
[The prepared statement of Senator Helms follows:]
Prepared Statement of Senator Jesse Helms
The Committee will come to order. Today's hearing will address the
pros and cons of NAFTA, a treaty that has cost thousands of American
workers their jobs and created a sharp division about its wisdom. North
Carolina's textile workers have been especially hard hit as well as
those in many other states.
We will hear from some of those victimized for example--Mrs.
Vontella Dabbs who has taken time from her job at Delta Mills in
Maiden, N.C., to come here to testify--which I very much appreciate.
Mrs. Dabbs will speak for hundreds of thousands of workers who have
lost their jobs as a result of NAFTA.
There are ten U.S. Senators still around who served the late
Senator Sam Ervin, Jr. Senator Ervin was my senior colleague from North
Carolina for the two years before his retirement on January 3, 1974.
Senator Ervin and I did not belong to the same party, but he was my
friend and we worked together on countless issues. After he left the
Senate, he missed the Senate, and we talked by telephone two or three
times a week, sometimes more often than that. When a constitutional
issue was raised in the Senate, I always sought Senator Ervin's advice
along with several other constitutional scholars with whom I had a
personal relationship.
Senator Ervin was on target about most things and he was absolutely
right when he worried about the potential harm to the American working
people when U.S. negotiators sat down with foreign representatives
regarding treaties. I can hear Senator Sam now, with that chuckle,
warning that the United States ``had never lost a war or won a
treaty.''
I mention all this as a prelude to my reiterating that Senator Sam
was right on target about NAFTA. Now that the U.S. is five years into
NAFTA, more than 200,000 jobs have been lost nationwide. In North
Carolina more than 20,000 jobs have been lost in the textile industry
alone--and the picture is getting bleaker by the day with plants
closing and moving to Mexico--hundreds, and often thousands, of good
paying jobs being lost by Tarheel workers.
Levi Strauss, recognized worldwide as a quintessential American
product, is moving offshore. In February, Levi announced the lay-off of
30% of its U.S. workforce, meaning that 5,900 Americans lost their
jobs--380 of them living in Murphy, a rural community where the
unemployment rate is more than 10% and jobs are already scarce.
The same story applies to Burlington Industries. In January,
Burlington announced the closing of seven mills, another 2,400 North
Carolinians out of work, and devastating to the hard working men and
women affected.
The failings of NAFTA are by no means limited to North Carolina or
the Southeast. The Wall Street Journal reported the misery of Berj
Mehserjian, a hard working immigrant who escaped war-torn Lebanon to
start a small apparel shop in Los Angeles, California. Through hard
work, his small shop grew rapidly and in 1987 it generated $2.9 million
in sales and $400,000 in profits from 120 sewing machines.
Has he achieved the American dream? Nope, because of NAFTA, he was
forced to move his plant to Mexico to have similar labor costs with his
competitors. He didn't want to move; he had no choice and today he is
in Mexico, living in a run-down hotel and paying his workers $60 a week
instead of $300 a week he paid his workers in Los Angeles.
The Wall Street Journal also recently reported that the U.S. trade
deficit ballooned from $4.5 billion in 1993 when the U.S. entered NAFTA
to $40 billion just three years later. In 1998 alone, North Carolina
lost 10,500 textile jobs--6% of North Carolina's entire industry in one
year!
Levi Strauss, Sara Lee, Fruit of the Loom, Cone Mills, Guilford
Mills, Unifi, Burlington Industries--all are companies that have moved
south because of NAFTA. Some argue, and we may hear it today, that the
net gain in so-called high tech and service sector jobs have more than
made up for such losses. Try telling that to folks in towns like Forest
City, Cliffside, Henrietta, Mooresville, Cramerton, Oxford,
Statesville, Raeford, Murphy in North Carolina--and additional others
in South Carolina, Tennessee, Georgia, California--all across the
country--which have lost thousands of good jobs because of dollar-a-day
wages south of the border.
So it is appropriate that we're having this hearing to examine
NAFTA after its five-year trial period. I hope a useful and candid
dialogue will emerge to enable careful consideration of what is
happening to our small towns in North Carolina and elsewhere as a
result of NAFTA and other trade policies.
The Chairman. Now, then, I understand several people have
travel schedules, and I want to keep this thing going as
rapidly as I can. The first witness will be the Honorable
Richard W. Fisher, who is a Deputy U.S. Trade Representative;
Dr. Charles McMillion, MBG Information Services of Washington;
and the one and only Patrick J. Buchanan, columnist from
Washington; and Mrs. Vontella Dabbs, whom I mentioned earlier.
If you will be prepared to testify in that order, and we
will hear first from you, Mr. Fisher.
STATEMENT OF HON. RICHARD W. FISHER, DEPUTY U.S. TRADE
REPRESENTATIVE
Mr. Fisher. Thank you, Mr. Chairman. I appreciate the
opportunity to be here, to appear before you this morning
alongside two celebrated public figures, one of whom,
incidently, voted for me when I ran for the U.S. Senate in
1994. I do not think it was Mr. Buchanan, but nonetheless, I am
delighted to be here with two such well-known individuals.
As you requested, Mr. Chairman, I would like this afternoon
to address the impact of NAFTA on jobs, on wage rates, on
industry. And I will be using many statistics and numbers in
this hearing.
I would like to say by way of preface that I know what lies
behind these numbers. I ran a business in the private sector
for 20 years before being asked to join this Government 1 year
ago. I am a Texan who grew up in Mexico. I spent a great deal
of time in deep south Texas and northern Mexico on the very
frontier of NAFTA.
And perhaps more importantly than all that, I know what it
is like to watch your father lose his job or, in the sanitary
parlance of economists, to be displaced. I know what it is like
to have two working parents without a college degree, in fact
without a high school degree, because I was a ``latch key kid''
before sociologists coined the term.
And I know that behind every job number there is a human
being, a family, a sense of self-worth and dignity, and a dream
for a better future. It is against this background, Mr.
Chairman, that I am here to tell you that NAFTA is a good
thing. It is good for jobs. It is good for business. It is good
for living standards.
And I suppose like the music of Wagner, it is not as bad as
it sounds, especially the version played by some of the
witnesses that will follow me today, both of whom are gifted
rhetoriticians, far more skilled than I am. But I would like to
make the argument for the case for NAFTA.
Against the background particularly of America's trade
interests, which are worldwide, it is fair to say that we have
no relationship more important to our trade interests, our
fundamental interests in peace and security and to the daily
lives of our people, Mr. Chairman, than those who are closest
to home.
This is true in the narrowest trade policy sense. Canada,
as you well know, is our largest export market. Mexico is our
second largest export market. And it is true in the larger
sense that the importance to all Americans of a peaceful,
prosperous, environmentally healthy North American continent.
Let me begin, sir, with the context in which we should
discuss not only NAFTA but all the economic policies that I
know you are interested in. As we meet today, our country's
economy is perhaps in better economic shape than it has been in
a long time. As you know, we have been enjoying the longest
peacetime expansion in America's history. Our economy, led by
our private sector, has created 18 million new jobs and cut
unemployment to 4.2 percent, which is a 30-year low.
And our families are enjoying ever higher living standards.
Since 1992, average wages have reversed a 20-year decline. They
have grown by 6 percent in real, not nominal, terms. Family
prosperity that is new in America is reflected, for example, in
the record rates of home ownership and, I hasten to add, which
is very important, in the phenomenal growth in investment in
the stock market by regular, ordinary Americans.
Some 70 million individuals today own equity mutual funds.
It is no longer a playground for the rich. Many people have put
their retirement hopes and their savings into the marketplace.
Though NAFTA is obviously not the sole source of this
prosperity. We know that. But it has contributed to the
economic boom by creating fairer and more open markets for
Americans. During NAFTA's first 5 years, U.S. goods exports to
our NAFTA partners increased by $93 billion or 66 percent to a
total of $235 billion. These are big numbers, Senator.
The $156 billion in goods we exported to Canada were as
much as we exported to all the countries of East Asia put
together. This year we will export more than five times to
Mexico what we export to China. Our exports of $79 billion in
Mexico makes it our second-largest export market, as I
mentioned earlier, after Canada.
This reflects a fundamental change in Mexican policies. Our
market has long been far more open to Mexican goods and
services than Mexico has been to ours. Five years ago, Mexican
tariffs on industrial goods coming from the United States
averaged 10 percent. That was more than twice our contemporary
rate at that time of 4 percent. Today, Mexican tariffs are 2\1/
2\ percent on average and will be eliminated entirely in the
next decade.
Two weeks ago, Senator, I went to Mexico as part of our
exchange of views that some negotiators were having with them.
I drove past some of the neighborhoods where I played as a
child, and I looked at these residential areas, at the parks
with the lakes where we used to take little boats and rent them
whenever we could, whenever we had free time. And I saw
children playing the same games I played as a child when I
lived there.
But one thing is different. I also saw potential customers
for American products, for our clothes, for our cars, for our
food, for the whole range of goods that we make. Whereas
before, when I grew up there, there were no customers to speak
of for American-made products.
Every State in the Union, all 50, have enjoyed increased
NAFTA trade. Every State represented by the members of your
distinguished committee, sir, enjoyed significant gains from
trade with their NAFTA partners. California, for example, saw
its exports increase by $12.6 billion or 95 percent. Even the
smallest increase percentagewise, recorded by Oregon at 29
percent, meant an extra billion dollars in trade.
Exports to Mexico in some States rose 100 percent and in
some cases, like North Carolina, sir, by more than 300 percent
over the last 5 years. As a result, we hear of stories like
that of General Time Corp. of Norcross, GA, a small
manufacturer of clocks, which saw its sales to Mexico increase
800 percent in 1998, thanks to the reduction of Mexican tariffs
in the NAFTA.
For Goulston Technologies of Monroe, NC, a small
manufacturer of lubricant for synthetic fibers, Mexico cut
tariffs on its products from 15 percent to zero, allowing its
export sales to Mexican fiber producers to grow by more than
250 percent since 1993. Thus Goulston has increased its
employment in the United States to better serve the Mexican
market.
Or Taylor Dunn, a manufacturing firm in Anaheim, CA, just
to pick a small firm here, makes electrical vehicles. They
added 50 workers because NAFTA cut Mexico's tariffs on their
products from 25 percent to zero.
There are many such stories from small businesses to large
ones, none of which provides the gripping visuals that make for
dramatic television news reports, yet all of which confirm that
NAFTA has led to more jobs, higher wages, and improved family
standards of living.
We know this much from the aggregate data in this country:
More Americans are at work today than at any time in American
history. I already noted the national growth in employment. And
looking at the individual States, Mr. Chairman, we see similar
stories.
In North Carolina, for example, total non-agricultural
employment, non-agricultural employment, has risen from 3.3
million in January 1994 to 3.8 million in February 1999, a gain
of over a half million jobs. The unemployment rate in the
Tarheel State, as you well know, has declined to 3.1 percent in
February of this year, well below the national average.
American workers are making more money. The average
paycheck has risen since NAFTA's passage. Real hourly earnings
are up from an average of $7.39 in 1993 to $7.83. Now we are
not complacent about this in this administration, and nobody
should be. We want to see further improvement. But the point is
this: After a long period of stagnation in this country, wages
are finally going up in real terms.
Farmers depend more than ever on North American markets.
Our agricultural exports to Mexico have grown from $3.6 billion
in 1993 to $6.1 billion in 1998. That is a 70-percent increase.
Exports to Canada are also up from $5.3 billion in 1993 to
over $7 billion in 1998. Mexico is now the third largest market
for United States agricultural exports, exceeded only by
Canada, which is No. 1, and by Japan. Mexico now takes about $1
in $9 of our agricultural exports from the great United States.
And this is especially important, Mr. Chairman, in the context
of the Asian financial crisis, which has badly hurt our sales
in the Pacific rim.
In 1997 the administration conducted a comprehensive study
of the operations and effects of the NAFTA in 11 industrial
sectors, and also in agricultural commodities. The study
revealed that NAFTA's reduction in tariff and non-tariff
barriers helped raise U.S. exports of motor vehicles,
electronic components, textiles and apparel, computers,
chemicals and agricultural products.
You asked, sir, about the textile industry, and I know that
is of special interest to you. The textile industry in the
United States was a strong supporter of NAFTA when it first
came before Congress because of factors including NAFTA's
strong rules of origin, the opening of Mexico's market to U.S.
textile exports and customs enforcement provisions. The 5-years
since have proven the merits of this agreement for the textile
industry.
In September 1997, Carlos Moore, the executive vice
president of the American Textile Manufacturers Institute said
the following: ``In the Manufacturers Institute's view, NAFTA
is the model of what a trade agreement should be, fair,
balanced and reciprocal. By any measure,'' he went on, ``NAFTA
has provided significant benefits for the U.S. textile
industry. All the NAFTA partners have increased their exports
of textiles to each other. This is what NAFTA promised and this
is what NAFTA delivered to the textile industries.''
Mr. Chairman, the more concrete example came from a talk I
had yesterday with one of your constituents, Mr. Chuck Hayes,
the chairman and CEO of Guilford Mills of Greensboro. As you
know, sir, this is the largest warp knitting operation in the
world. It has 6,500 employees in your State and about $950
million in sales.
And here is what Mr. Hayes told me yesterday about NAFTA,
and I quote with his permission: ``This just doesn't help
Guilford. It's going to help the entire U.S. textile industry.
The theory is simple. If garment makers can be lured to low-
cost manufacturing sites in Mexico, they won't go to the
Orient, where they end up buying fabric from textile
manufacturers in Japan, South Korea and other Asian countries.
If they set up in Mexico instead, they will buy their bolts of
cloth from companies north of the border, such as Guilford
Mills and its local plants. To me, NAFTA was truly the
beginning of a renaissance for the textile industry in the
United States.''
Mr. Hayes went on to say, ``Mr. Ambassador, if we didn't
have NAFTA, we'd be out of business. Ten years from today, I'd
have to close my doors.''
In addition to stimulating U.S. textile exports, the NAFTA
rules of origin result in a high concentration of U.S. fabric
and other inputs in apparel imports from Mexico to the United
States. Under NAFTA, Mexico has indeed become our largest
supplier of imported apparel. Almost 60 percent of the value of
U.S. textile and apparel imports from Mexico in 1998 were
comprised of U.S. content, for example, in formed and cut
fabric.
In contrast to the trade with Mexico, textile and apparel
imports from our large traditional Asian suppliers contain
virtually no U.S. inputs, zero U.S. inputs. NAFTA has thus
shifted production and trade to the North American region,
which created significant opportunities for U.S. producers,
helped to produce and preserve jobs in the United States,
increased efficiencies, and strengthened the industry's global
competitiveness.
NAFTA has also helped promote exports of American-made
textiles and apparel. Prior to NAFTA, Mexico's average tariff
on U.S. textile and apparel products was 16 percent, whereas
the average U.S. tariff on imports from Mexico was 9.1 percent.
Under the NAFTA requirements, by January 1, 1998, Mexico had
eliminated tariffs on 93 percent of U.S. yard and thread
exports, 89 percent of U.S. fabric exports, 60 percent of U.S.
exports of made-up textile products, and 87 percent of U.S.
apparel exports.
United States exports of textiles and apparel to Mexico,
Mr. Chairman, increased by 182 percent between 1993 and 1998,
increasing from $1.6 billion to $4.5 billion. United States
shipments to Canada during that period rose by 72 percent to
$3.4 billion.
Added together, Mr. Chairman, this means that in just 5
years our exports of textiles and apparel products to our NAFTA
partners more than doubled, reaching almost $8 billion in 1998,
of which, incidently, sir, $1.3 billion came from North
Carolina alone, up from $366 million 5 years ago. In other
words, it has quadrupled over the last 5-year period from North
Carolina.
With respect to employment in textiles and apparel, the
trend is also clear. Textile product in this country, in the
United States of America, is up. While employment in the
industry has continued a long decline, wages in the industry
have risen more rapidly than wages for Americans in general
since NAFTA's passage. Wages for production workers in the
textile industry increased 17 percent between 1993 and 1998.
And wages for production workers in the apparel industry rose
20 percent.
The bottom line is this: NAFTA has helped stem the losses
in textiles and apparel, given that it has improved the
competitive situation in the industry regionally and globally.
Or, put another way, in the absence of NAFTA, the competition
position of this industry would likely have eroded, and the job
losses would have been far greater.
Thus on the whole, Mr. Chairman, the NAFTA has helped
create a more competitive North American market, stimulating
more investments that benefit us all. Investment decisions can
now be made to a greater degree on rational economic and
commercial grounds than was the case prior to NAFTA.
Incidentally, NAFTA has not been implemented at the expense
of capital investment in the United States. It is correct to
say, as some of the opponents of NAFTA will say, that U.S.
investors have indeed invested more and more to the north and
to the south. U.S. direct investment on a historical cost basis
reached an aggregate of $25 billion in Mexico and $99 billion
in Canada, according to the latest figures available. But these
figures pale in comparison to investment here in the U.S.,
where $1.3 trillion was invested in 1997 alone.
Finally, NAFTA has helped us improve the environment and
quality of life in North America. And this is as it should be.
In our relations with our neighbors, we have concerns that
extend well beyond trade. And I know you know these better than
I do.
Growth should come hand in hand with a higher quality of
life, the advancement of basic values, like clean air and clean
water, public health and protection of our national heritage
and our natural heritage, safety, dignity, and the elementary
rights of working people, and a common front against crime and
corruption.
NAFTA has allowed us to improve our working relationship
with Mexico and Canada in these areas as well, although to be
sure, Mr. Chairman, we still have problems that need to be
solved. We know that.
With respect to the environment, incidentally, NAFTA has
helped us cooperate more effectively on pollution control,
water quality, wildlife habitat and many other areas. In this
important area of environment improvement, as with the
reduction to barriers in trades and goods and services, NAFTA
is incomplete. It remains a work in progress needing
perfection.
And yet, as the Dallas Morning News pointed out in its
editorial January 4 of this year, NAFTA is ``the `greenest'
commercial pact ever negotiated. And the U.S., Canadian, and
Mexican environments are better off with it than without it.''
NAFTA has represented a significant step forward in the
environmental aspects of trade.
On the labor front, in addition to saving and generating
jobs that would have been lost to Asia, NAFTA's agreement on
labor cooperation has generated our largest cooperative effort
of labor anywhere in the world. It covers safety and health,
employment and training, industrial relations, workers' rights,
child labor and gender issues, and allow citizens to draw
attention to labor practices and improved working conditions.
In each of these two areas, Mr. Chairman, it is true to say
that we have challenges that have yet to be addressed. But the
NAFTA and its side agreement put us in a better position to
deal with them.
In conclusion, Mr. Chairman, NAFTA is very much a work in
progress. It will not be completely implemented until the year
2008. We are monitoring progress closely. We are learning from
our experience. We are using it to improve the agreement as it
goes into force. And we are addressing disputes with Canada and
Mexico forthrightly.
But through the cooperative framework we have built through
the NAFTA, we have avoided and solved many disputes. And taken
as a whole, I think we can be pleased with the record of NAFTA
5 years after its passage. Five years ago, we predicted this
agreement would mean growth, better and more jobs, a rising
standard of living and a higher quality of life. Today, looked
at objectively, we can say that the agreement is keeping these
promises. We do have more jobs. We do have higher wages. We do
have a stronger economy than we did 6 years ago.
Our governments are working more closely together and
accomplishing more than ever before on environmental
protection, on workplace safety, and all of the other issues
that affect the daily lives of our citizens. And most important
of all, our prospects of passing on to our children stronger
than ever the invaluable legacy of peace, cooperation and
progress on the North American continent that we inherited from
past generations are very good indeed.
Thank you, Mr. Chairman.
The Chairman. Thank you, Mr. Fisher. I noticed that you
skipped a number of passages. And I am going to instruct that--
--
Mr. Fisher. May I put the written record in?
The Chairman. Exactly.
Mr. Fisher. Yes, sir. Thank you.
[The prepared statement of Mr. Fisher follows.]
Prepared Statement of Hon. Richard W. Fisher
economic effects of nafta
Mr. Chairman and Members of the Committee, thank you for holding
this hearing on the effects of the North American Free Trade Agreement
(NAFTA) on the U.S. economy, and for inviting me to appear here this
morning, alongside two celebrated public figures.
As you requested Mr. Chairman, I would like this afternoon to
address the impact of the NAFTA on jobs, wage rates, and industry,
especially the American textile industry. I will be using many
statistics and numbers in this hearing. I think it best to preface my
statement by first stating that, perhaps more than most, I know what
lies behind these numbers. I ran a business in the private sector for
twenty years before being asked to serve my country. Second, I am a
Texan who grew up in Mexico. I have spent a great deal of time in deep
South Texas and in Northern Mexico on the very frontier of NAFTA. More
importantly, however, I know what it is like to watch a father lose his
job, or ``be displaced'' in the sanitary parlance of economists. I know
what it is like to have two working parents. I was a ``latch key kid''
before sociologists coined the term. I know that behind every job
number there is a human being, a family, a sense of self-worth and
dignity.
It is against this background that I am here to tell you that NAFTA
is a good thing. Like the music of Wagner, it is not as bad as it
sounds, especially the version to be played by the witnesses who will
follow me today, both of whom are gifted rhetoricians, far more skilled
than I. We benefit from the NAFTA. We would be worse of without it. We
should celebrate it, not condemn it.
nafta at five
Chuck Hayes, the CEO of Guilford Mills Inc. of Greensboro, North
Carolina, a manufacturer of fabric, recently said about the NAFTA,
``This just doesn't help Guilford, it's going to help the
entire [U.S.] textile industry . . . The theory is simple: if
garment makers can be lured to low-cost manufacturing sites in
Mexico, they won't go to the Orient, where they end up buying
fabric from textile manufacturers in Japan, South Korea or
other Asia countries. If they set up in Mexico instead, they
will buy their bolts of cloth from companies north of the
border, such as Guilford Mills and its local plants. To me,
NAFTA was truly the beginning of a renaissance for the textile
industry in the United States.''
Today, the benefits of the NAFTA extend all the way across the
country--through textile mills in North Carolina, automotive brake
factories in New Jersey, fishing resorts in Minnesota, and corn silos
in Nebraska. The NAFTA is touching the lives of workers, farmers,
consumers, mutual fund investors and entrepreneurs all over the United
States.
We as a country are far better off today with the NAFTA than we
would have been if we had let Mexico and Canada keep their borders
closed to U.S. goods and services. The NAFTA and its side agreements
level the playing field, contribute to outstanding U.S. economic
performance, help create jobs and economic growth, and advance
environmental protection and labor rights. We faced a question five
years ago--should we, can we compete in foreign markets, especially the
markets of our immediate neighbors?--and the American people have shown
us that the answer is most definitely yes. NAFTA has proven to be right
for America.
foundations of the agreement
Let me begin my testimony today with some broader context.
America's trade interests are worldwide. Our goods exports are
almost equally divided among four major regions: Asia, Europe, Latin
America and North America. Our trade agenda includes major initiatives
in each region of the world, as well as in the multilateral system that
links it together.
But it is fair to say that we have no relationship more important
to our trade interests, to our fundamental interests in peace and
security, and to the daily lives of our people, than those which are
closest to home. This is true in the narrowest trade policy sense:
Canada is our largest goods export market and Mexico our second. And it
is true in the largest sense of the importance to all Americans of a
peaceful, prosperous, environmentally healthy North American continent.
And it is true for your home state of North Carolina, Mr. Chairman, as
your state exports to the NAFTA countries have increased from $3
billion in 1993 to $5.8 billion in 1998, a 93 percent increase,
reflecting a gain of $2.8 billion.
While the North American Free Trade Agreement is fundamentally a
trade policy which should be judged on its economic results--the topic
on which I will concentrate today--it is also an effort to preserve and
strengthen this cooperative relationship with our neighbors and allow
us to work more closely on issues beyond trade.
before nafta
As Ambassador Rufus Yerxa, my predecessor as Deputy U.S. Trade
Representative, noted in his testimony to the Foreign Relations
Committee in 1994:
``NAFTA is good economic policy and good foreign policy.''
That was the Administration's judgment, and that of the 104th
Congress, because of its potential for fundamentally improving our
economic relationship, and our cooperation in broader areas, with our
two largest neighbors. It addressed significant barriers to American
trade in Mexico, thus building upon the prior accomplishment of the
U.S.-Canada Free Trade Agreement. These barriers included:
Mexican tariffs on industrial goods averaging 10 percent,
approximately more than twice the prevailing U.S. average of
4.0 percent.
Numerous ``buy-Mexican'' provisions and export requirements
for American companies operating in Mexico.
Mexican markets closed to many American service providers,
including financial services, telecommunications, the
professions and others.
Numerous import licensing requirements, combined with high
tariffs for agriculture, which virtually proscribed American
farm and ranch exports.
Weak standards for protection of copyrights, patents and
trademarks.
Very serious border environmental problems, especially in
water pollution and public health, and little history of
cooperation between the U.S. and Mexico on these issues.
Fundamentally different relationships between labor,
government and business, with deeply ingrained roots dating
back to the Mexican Revolution.
The NAFTA addressed all these issues. It created a fundamentally
more equitable trade relationship, equalizing tariff levels and
removing non-tariff barriers to service providers, ranchers and
farmers. And it included innovative side agreements to address labor
and environmental issues, recognizing that our interests in relations
with our closest neighbors go well beyond technical trade issues.
results of the nafta
Agreeing to the NAFTA was a step which demanded courage and vision
from all three countries. In the U.S., of course, NAFTA heightened the
profile of trade agreements in the public eye, but also border
environmental problems, disparity between wage rates, and fears that
American factories would move south. Canadians and Mexicans faced their
own fears about engaging even more directly with the most competitive
workers, entrepreneurs and overall economy in the world.
The National Economy
But the results, five years later, justify the work. In the
broadest sense, together with the continuous reduction of the federal
budget deficit beginning in 1993, and the Administration's support for
increased education and training, the expansion of trade in the past
six years has helped us create the best economic environment our
country has ever enjoyed. Since 1992:
Our economy has prospered. Our gross domestic product has
expanded from $7.1 trillion to $8.5 trillion in real terms
(1998 dollars), and we have the benefit of the longest
peacetime expansion in America's history.
Our country has created jobs. Since the beginning of this
Administration, employment in America has skyrocketed from
109.5 to 127.2 million, a net gain of nearly 18 million new
jobs. Unemployment rates plummeted from 7.4 percent to the
historic low of 4.2 percent reported last month. The
unemployment rate in North Carolina has fallen to 3.1 percent,
due, according to the Greensboro, North Carolina, News and
Record (1/24/99, p. 25), ``primarily by the creation of new
jobs to assist with the record level of exports to Mexico,''
which ``rose from $442.7 million in 1992 to $1.2 billion last
year, according to the Wachovia North Carolina World Trade
Index.''
Inflation has been kept in check and has declined since
1993. For example, consumer prices rose only 1.6 percent in
1998.
The U.S. budget surplus of $70 billion for fiscal year 1998
was the first surplus since 1969, the largest surplus ever, and
the largest surplus as a percentage of our GDP since the 1950s.
And our families have enjoyed higher living standards. Since
1992, average wages have reversed a twenty-year decline and
have grown by 6.0 percent in real terms, to $449 a week on
average. This family prosperity is reflected, for example, in
record rates of home ownership and record rates of investment
by ordinary Americans in the stock market, especially through
mutual funds. Today, according to the Investment Institute of
America, 75 million Americans are invested in equity mutual
funds, up from 25.8 million households in 1992. This is a
revolutionary development unparalleled in all of history.
The NAFTA has contributed to this economic boom by creating fairer
and more open markets for Americans. The U.S. economy has long been far
more open to Mexican goods and services than Mexico has been to U.S.
goods and services. This imbalanced equation is being changed under the
NAFTA, which is opening new opportunities for our workers and industry
to compete.
Since 1993, Mexico has abolished extensive non-tariff barriers that
kept out U.S. goods, such as import licensing, and local content and
trade balancing requirements. And Mexico's average tariff has already
fallen to about 2 percent. As a result, two-thirds of our goods now
pass into Mexico for sales free of any tariff. The NAFTA also builds on
our ties with Canada--the world's largest bilateral trade relationship.
Today, nearly all of the $330 billion in goods traded between Canada
and the United States are traded duty-free.
Americans have taken advantage of these new opportunities. NAFTA
has helped to strengthen the U.S. economy. During NAFTA's first five
years, U.S. goods exports to our NAFTA partners combined increased by
about $93 billion, or 66 percent, to about $235 billion. If we look at
the countries individually, U.S. exports to Canada, our largest trading
partner, increased by about $55 billion or 55 percent to $156 billion.
U.S. exports to Mexico increased by about $37 billion or 90 percent to
$79 billion. Total exports from the Tar Heel State alone to our NAFTA
partners increased 93 percent over the last five years, reaching $5.8
billion in 1998.
Now, these are big numbers, so let me put our NAFTA export
performance into proper perspective. In 1998, the $156 billion in goods
we exported to Canada were as much as we exported to all the countries
of East Asia put together. This year we will export five times as much
to Mexico as to China. Our exports of $79 billion in goods to Mexico
makes Mexico our second largest export market, after Canada.
Two weeks ago, while in Mexico, I drove past some of the
neighborhoods where I remembered playing as a child. As I looked at
those residential areas, at the parks with the lakes where we used to
rent little boats, I saw those boats again, and I saw many children
playing the same games. But what I also saw were potential customers
for American products--clothes, cars, food--the whole range of goods we
make. Our stellar export numbers, in spite of the dramatic exchange
rate crisis and resulting deep economic downturn in 1995, show it is
wrong to categorize Mexico simply as a poor country that cannot afford
to buy the things we make.
In fact, Mexico is a developing and growing country with a very
high propensity to purchase and consume U.S. goods and services to
satisfy its needs, eager for a partnership to keep it developing, and
willing to play by the rules imposed by the NAFTA--even in the worst of
economic times in 1995--so that trade is not a zero-sum game.
NAFTA: An Agricultural Success
The NAFTA has been tremendously successful in increasing U.S.
exports of agricultural goods to Mexico and Canada. Our agricultural
exports to Mexico have grown from $3.6 billion in 1993 to $6.1 billion
in 1998, a 70 percent increase. Exports to Canada have increased as
well, growing from $5.3 billion in 1993 to over $7 billion in 1998.
Mexico is now the third largest market for U.S. agricultural exports,
exceeded only by Japan and Canada. Agricultural exports to Mexico now
account for more than 11 percent of all U.S. agricultural exports.
Exports to Canada and Mexico combined now account for over one quarter
of all U.S. agricultural exports worldwide.
Our export growth to Mexico has been most dramatic in the products
subject to the most trade restrictions prior to the NAFTA. Bulk
agriculture exports increased over a billion dollars between 1994 and
1998; intermediate exports were up over $300 million.
An indication of the importance of agricultural trade with Mexico
comes from the most recent ``Outlook for Agricultural Trade'' published
February 22, 1999 by the Department of Agriculture. USDA predicts
declines in agricultural exports for fiscal 1999 in all major markets--
except Mexico. The projections for Mexico are for an increase in FY
1999 of $700 million dollars in U.S. agricultural exports, which would
mean Mexico's market will be worth $7 billion to the American economy.
As U.S. exports decreased last year due to the Asian financial
crisis and depressed world commodity prices, the relative importance of
the Mexican and Canadian markets to our farmers has grown dramatically.
While Japan purchased $1.4 billion less in 1998 and exports to
Southeast Asia fell by $900 million, exports to Canada and Mexico went
up by about 10 percent, or roughly $1.2 billion in 1998.
State Results
The chart attached to my testimony gives a breakdown by state to
show who is benefitting from the expansion of trade that has occurred
since the NAFTA. Amazingly, our data reveals that every single state in
the union, all fifty of them, have enjoyed increased NAFTA trade. [See
Attachment 1]
This includes the home states of every Member of this Committee. I
am happy to be able to mention that every state represented by the
members of this Committee enjoyed significant gains from trade with our
NAFTA partners. California, for example, saw its exports climb by $12.6
billion, a 95 percent increase. Even the smallest increase percentage-
wise, recorded by Oregon at 29 percent, meant an extra billion dollars
in increased trade. Exports to Mexico alone in some states shot up by
100 percent, 200 percent, and in some cases by more than 300 percent
over the last five years. North Carolina's exports to Mexico, for
example, increased 333 percent, growing from $398 million in 1993 to
over $1.7 billion in 1998. [See Attachment 2]
As a result, we hear of stories like that of General Time
Corporation of Norcross, Georgia, a small manufacturer of clocks, which
saw its sales to Mexico increase 800 percent in 1998, thanks to the
reduction in Mexican tariffs under NAFTA.
Likewise, Goulston Technologies of Monroe, North Carolina, a small
manufacturer of lubricant for synthetic fibers, witnessed its export
sales to Mexican fiber producers multiply more than 250 percent since
the passage of NAFTA, and so increased its staff here in the United
States significantly in order to better serve the Mexican market. After
the passage of NAFTA, tariffs on most of Goulston's products dropped
from 15 percent to zero, giving it a distinct advantage over non-NAFTA
competitors.
nafta and jobs
Each of these stories mean new opportunities for Americans to find
better jobs and improve family standards of living. As a whole, U.S.
unemployment has dropped from 6.7 percent in January 1993 to 4.2
percent here in America in March 1999--a lower rate than that of any
other industrial nation. A lot goes into that figure, but NAFTA and its
facilitation of trade opportunities are part of it, everywhere in the
country. It represents:
Taylor Dunn, a manufacturing firm in Anaheim which makes
electrical vehicles, adding fifty workers because NAFTA cut
Mexico's tariff on their products from 25 percent to zero.
Multiplier Industries in Mt. Vernon, New York, increasing
its employee base by 25 percent as its exports of cell phones
and two-way radios to Canada and Mexico rise.
Farmland Industries of Kansas City, the largest farmer-owned
cooperative in North America, who sold $50 million in wheat,
corn and soybeans to Mexico before NAFTA, today is exporting
$450 million and include beef and pork.
If we look just at the period since NAFTA came into effect, in
January 1991 total non-agricultural employment was 112.3 million. In
March 1999, that figure had risen to 127.7 million. In other words,
that's 15.4 million more Americans with the NAFTA who are able to enjoy
getting a paycheck from a job that didn't exist before. If you look at
the composition of those numbers, we had 18.1 million jobs in
manufacturing in January 1994; in March 1999 that number had risen to
18.4 million. That's 305,000 more Americans in good jobs, contributing
to our industrial base.
The paychecks these workers are now able to bring home are getting
bigger, too. Prior to the NAFTA in 1993, real weekly earnings were
$245.87, by February 1999 the average American paycheck had risen to
$271.77. That's a gain of 6.6 percent. And it's not because Americans
have to work longer--real hourly earnings are up as well, from an
average of $7.39 in 1993 to $7.83 in February 1999, a gain of 6
percent. We're not satisfied with this; we know we can do better. But
the fact is, after a long period of stagnation, wages are finally going
up in real terms.
This reflects in part the effects of the NAFTA. The Administration
estimates U.S. goods exports to our NAFTA partners now support more
than 2.6 million higher-wage jobs. Based on 1998 trade figures, we
estimate U.S. exports to Canada and Mexico support over 600,000 more
jobs now than in 1993. U.S. exports to Canada support an estimated 1.7
million jobs, over 300,000 more jobs than in 1993. Exports to Mexico in
1998 supported almost a million jobs up over 350,000 jobs from 1993.
Generally speaking, jobs supported by exports pay 13 to 16 percent more
than other jobs in the United States. So, by expanding exports, NAFTA
contributes to the creation of high wage jobs.
NAFTA alone has not created all jobs attributed to increases in
exports, and we do not claim that the more competitive environment
existing since NAFTA has not claimed some jobs. But shifts in trade
flows is just one small factor responsible for job dislocation in the
United States. On the whole, the record since NAFTA's passage--
declining unemployment, rising wages, rapid growth and the world's most
competitive large economy for 5 years as judged by independent
experts--speaks for itself.
Looking at individual states, we see similar stories. In North
Carolina, total non-agricultural employment has risen from 3.3 million
in January 1994 to 3.8 million in February 1999, a gain of over half a
million jobs (522,600). The unemployment rate in North Carolina has
fallen from 4.4 percent in January 1994 to 3.1 percent in February
1999, well below the national average.
Manufacturing employment has declined somewhat in North Carolina,
Mr. Chairman, going from 853,700 in January 1994 to 816,200 in March
1999. Total textile mill employment has declined, going from 204,600 in
January 1994 to 162,000 in February 1999, as has total apparel
employment (from 70,100 to 44,700).
Before anyone jumps to the conclusion that the NAFTA is the cause
of the decline in textile and apparel employment in North Carolina or
anywhere else, it is imperative that we examine the changing broader
economic picture and specifically what role the NAFTA has played in the
textile and apparel sector and its trade. Bear with me because this is
a topic we examine a bit later in my testimony.
nafta and specific industrial sectors
In your letter inviting USTR's testimony, the Committee requested
USTR address the industries which have been most affected by the NAFTA.
In 1997, the latest time frame for which such a comprehensive sector by
sector analysis was completed, the Administration conducted a
comprehensive study as required by Congress of the operation and
effects of the NAFTA in 11 industrial sectors, and the agricultural
commodities sector. Those industrial sectors were: automotive vehicles
and parts; chemicals and allied products; computer equipment and
software; four consumer products sectors, namely, household appliances,
household and office furniture, printed products, and recreational
equipment; electronic components; processed foods and beverages;
telecommunications equipment; and textiles and apparel. The study
examined U.S.-Mexico trade and investment patterns in the 12 product
sectors, and revealed that:
Two-way NAFTA trade increased significantly in virtually all
sectors.
NAFTA's reduction in tariff and non-tariff barriers
contributed to increased U.S. exports of motor vehicles,
electronic components, textiles and apparel, computers,
chemicals, and a range of agricultural products, and were a
factor in increased U.S. imports of Mexican textiles and
apparel and light trucks.
U.S. exports grew in nine of 12 sectors, in some cases by
substantial margins, despite Mexico's peso devaluation in late
1994 and subsequent deep recession.
More importantly, U.S. exports in eight sectors enhanced
their share of Mexico's import market since 1993. Market share
was flat in three other sectors. Market share analysis suggests
that the Mexican tariff reductions under the NAFTA provided
U.S. exports an advantage compared to exports from outside
North America.
Mexican exports to the United States also increased in
volume and in shares of the U.S. import market across a range
of sectors. These increases were attributable to factors other
than the NAFTA in most cases.
--Major influences on imports from Mexico were lower prices
due to Mexico's peso devaluation and efficient joint U.S. and
Mexican manufacturing operations that further cut the cost of
Mexican products.
--In key sectors, like auto parts and textiles and apparel,
Mexican market share increases reflected competitive advantages
accruing to U.S. and Mexican producers as a result of co-
production arrangements, which were enhanced by the NAFTA.
--With very few exceptions, such as textiles and apparel and
light trucks, average U.S. tariffs applied to Mexican imports
were already at low levels, or at zero. In fact, 50 percent of
imports from Mexico prior to the NAFTA entered the United
States duty free. Thus, NAFTA tariff reductions did not account
for increased imports from Mexico in many sectors.
--A further indication that Mexican imports did not displace
U.S. production is that U.S. production during the period was
strong and growing in all 12 sectors.
Lowered Mexican tariffs and other barriers through the NAFTA
encouraged market-driven coordination of production across the
U.S.-Mexican border.
--In major sectors such as auto parts, computers,
telecommunications equipment, and textiles and apparel,
products made in efficient joint manufacturing operations on
both sides of the border are displacing imports from other
countries in thc U.S. market. In the case of textiles, for
example, Asian production, which uses no U.S. fibers or inputs,
has been replaced by Mexican and Canadian production, which
does.
--Moreover, many other inputs from Mexico--such as apparel,
motor vehicles, computers, and telecommunications equipment--
contain substantial levels of U.S. content.
Capital expenditures in the United States exceeded U.S.
direct investment in Mexico by large margins across the range
of sectors. Burlington Industries, for example, is planning on
capital expenditures of $300 million for plants in Mexico,
while spending $350 million to upgrade its plants in
Mississippi and other areas of the United States.
nafta and textile & apparel industries
Mr. Chairman, your letter of invitation noted that this Committee
is particularly interested in NAFTA's effect on the textile industry,
therefore, I will focus on this sector in some detail.
NAFTA Textile Provisions
The textile industry in the United States was a strong supporter of
NAFTA when the agreement was negotiated and when it came before
Congress. There were several reasons for this. The most important were:
NAFTA's strong rules of origin, which requires regional
input, generally from the yarn production stage onward, to
qualify products for preferences under the agreement;
the opening of Mexico's market (of some 90 million people)
to U.S. exports of textile products, on a reciprocal basis; and
the Customs enforcement provisions, which work to ensure the
integrity of the agreement, and additionally, establish
mechanisms for the NAFTA parties to cooperate to prevent
illegal (extra-regional) textile transshipment from entering
NAFTA markets.
The five years that have passed since NAFTA came into force have
proven the merits of this agreement for the textile industry. In a
statement to the Ways and Means Committee in September, 1997, Carlos
Moore, Executive Vice President of the American Textile Manufacturers
Institute, said:
``In ATMI's view, NAFTA is the model of what a trade
agreement should be: fair, balanced, reciprocal. By any
measure, NAFTA has provided significant benefits for the U.S.
textile industry . . . [A]ll the NAFTA partners have increased
their exports of textiles to each other. This is what NAFTA
promised and this is what NAFTA delivered to its textile
industries.''
General Textile and Apparel Trade
In addition to stimulating U.S. textile exports, the NAFTA rules of
origin result in a high concentration of U.S. fabric and other inputs
in apparel imports from Mexico. Under NAFTA, Mexico has become our
largest supplier of imported apparel, and almost 60 percent of the
value of U.S. textile and apparel imports from Mexico (in 1998) were
comprised of U.S. content (for example, formed and cut fabric). Imports
from Mexico in 1998 were almost five times the 1993 level, on a
quantity basis, while imports from China, Taiwan, Hong Kong and Korea
increased by only one percent during that period. Imports of textiles
and apparel from Mexico and Canada were 11.8 percent of our total
sector imports in 1993 (in quantity terms) and imports from China,
Korea, Hong Kong and Taiwan were 32.5 percent of the total that year.
By 1998, imports from our NAFTA partners had grown to 23.2 percent of
our total sector imports and imports from China, Korea, Hong Kong and
Taiwan had declined to a share of 20 percent. Mexico and Canada are now
our first and second largest suppliers of textiles and apparel (in
volume terms).
In contrast to the trade with Mexico, textile and apparel imports
from our large, traditional Asian suppliers contain virtually no U.S.
inputs. NAFTA has thus shifted production and trade to the North
American region, which created significant opportunities for U.S.
producers, helped to preserve jobs in the United States, increase
efficiencies, and to strengthen the industry's global competitiveness.
American-Made Textile & Apparel Exports
NAFTA has also helped promote exports of American-made textiles and
apparel. Prior to NAFTA, Mexico's average tariff on U.S. textile and
apparel products was 16 percent, whereas the average U.S. tariff on
imports from Mexico was 9.1 percent. Under NAFTA, tariffs were
immediately eliminated on over one-fifth of U.S. exports to Mexico, and
by January 1, 1998, Mexico has eliminated tariffs on 93 percent of U.S.
yarn and thread exports, 89 percent of U.S. fabric exports, 60 percent
of U.S. exports of made-up textile products and 97 percent of U.S.
apparel exports.
U.S. exports of textiles and apparel to Mexico increased by 182
percent between 1993 and 1998, increasing from $1.6 billion to $4.5
billion. U.S. shipments to Canada during that period rose by 72 percent
to $3.4 billion.
Added together, this means in just five years, our exports of
textiles and apparel products to our NAFTA partners more than doubled,
reaching almost $8 billion in 1998, of which over $1.3 billion came
from North Carolina alone, up from $366 million five years ago. [See
Attachment 3]
Mexico's exports to the United States increased from $1.8 billion
in 1993 to $7.5 billion in 1998. Canada's exports to the United States
rose from $1.1 billion to $3.1 billion during this period.
In 1998, U.S. exports to Canada and Mexico accounted for 47 percent
of total U.S. sector exports, up from 36 percent in 1993, reflecting a
combined export increase of 115 percent to NAFTA partners during the
period. U.S. sector exports to Canada and Mexico were more than fifteen
times greater than U.S. exports to China, Taiwan, Hong Kong and Korea
combined, and more than three times as large as exports to Japan and
the (15-nation) European Union combined. NAFTA accounted for 75 percent
of the total increase in U.S. textile exports between 1993 and 1998.
Employment in Textiles & Apparel
With respect to employment in textiles and apparel, production jobs
have been on a downward trend for nearly three decades. This
development is related to the effects of enhanced productivity,
technological improvements, international competition and other
factors. Notably in the textile industry, total production has
increased since passage of NAFTA. Thus, Americans are making more
textiles today than before NAFTA. We know this much: if we didn't have
the NAFTA, there would be less employment in the textile industry in
America today.
Employment has continued its long-term decline, but wages in the
industry have risen very substantially--in fact, more rapidly than
wages for Americans in general--since NAFTA's passage. Between 1973
(the peak year for textile and apparel employment) and 1993, the number
of production workers in the U.S. textile and apparel sector declined
from 2.4 million to 1.7 million. Between 1993 and 1998, employment
declined by 297,300 to a level of 1.4 million workers. At roughly the
same time, however, the following occurred:
the combined value of shipments by the U.S. industry rose
from $148 billion in 1993 to approximately $164 billion
(estimated) in 1998;
productivity in the industries rose by 18.3 percent;
wages for production workers in the textile industry
increased 17 percent between 1993 and 1998; and
wages for production workers in the apparel industry rose 20
percent.
It is true that the U.S. faces a growing trade imbalance in
textiles and apparel (growing from $31.5 billion in 1993 to $47.5
billion in 1998), but it is important to recognize that the trade
balance can hardly be identified as the principal cause of job loss in
the industry, since real production in the U.S. increased slightly over
the period.
A major factor in all this is technology. The loss of apparel jobs
has been primarily among assembly workers, while employment levels for
more-skilled, higher paying jobs such as cutting, computer-aided design
and manufacturing (CAD-CAM), marketing, product development and
distribution have remained stable. In addition, advances in
productivity have to a degree allowed U.S. textile and apparel
manufacturers to maintain or increase output through automation and
technological improvements while requiring fewer workers. And increased
competitiveness resulting from restructuring, technological
improvements and production sharing has enabled the industries to
increase the value of their shipments.
To be internationally competitive in the global marketplace, U.S.
producers of textiles and apparel have improved their productivity,
concentrated on specialized products, and established a presence in a
growing number of foreign markets. NAFTA has enabled U.S. producers to
optimize production and manufacturing investments in North America and
has generated increased economic activity and enhanced export prospects
for textile and apparel producers in the United States. The NAFTA has
made a significant contribution to our industries' ability to maintain
global competitiveness, a critical long term goal.
All other things being equal, the NAFTA has helped stem the job
losses in textiles and apparel, given that it has improved the
competitive situation of the industry regionally and globally. Or, to
put it another way, in the absence of the NAFTA, and all other things
being equal, the competitive position of the industry would likely have
eroded and the likely job losses greater.
promoting investment in the u.s.
The experience of the textile industry, while unique in certain
respects, thus offers some larger lessons. On the whole, the NAFTA has
helped create a more competitive North American market, stimulating
more investment that benefits us all. Investment decisions can now be
made to a greater degree on rational economic and commercial grounds
than was the case prior to the NAFTA.
Our largest trade sector with Mexico, autos and auto parts, is a
significant example. Prior to NAFTA, Mexico's trade regime set
extremely high import barriers and essentially forced manufacturers to
invest in Mexico if they wanted to sell in Mexico. This created a
structural trade deficit in autos and parts which we are still
addressing today.
In 1993, the last year before NAFTA was implemented, we shipped
only 3,000 new passenger vehicles to Mexico. By 1997, U.S. exports of
motor vehicles had increased over 750 percent, to over 140,000 units.
Mexico is now our second largest auto export market.
Imports from Mexico have also grown from 330,000 motor vehicles to
790,000 units in 1997. While substantial, the rate of growth (139
percent) is far less than the rate of growth enjoyed by our exports
(750 percent).
However, what is more significant is the recent reversal of trade
and investment trends that began well before the NAFTA. In 1997, U.S.
exports of both vehicles and parts grew much more rapidly than
imports--by nearly 39 percent compared with import growth of 11
percent. For vehicles only, exports increased by 55 percent in 1997
over 1996, while imports increased 2.3 percent.
U.S. employment in the motor vehicle and equipment sector increased
by over 14 percent from 1993 to 1998, rising by over 120.000 new jobs.
In terms of investment, the United States ranked number one worldwide
for automotive investment from July 1995 through June 1997. Mexico was
tenth, Canada ninth.
Thus, NAFTA has helped raise, rather than lower, capital investment
in the United States. The amount of U.S. direct investment abroad, on a
historical cost basis, reached $25 billion in Mexico and $99 billion in
Canada, according to the latest figures available. Part of this is
because NAFTA is eliminating requirements that forced U.S. firms to
invest in Mexico if they hoped to sell in Mexico. In contrast, the
total amount of U.S. direct investment abroad has reached $860.7
billion. That means our investment in Mexico is less than 3 percent of
our interests world-wide. The idea that we are facing a massive shift
of capital investments to Mexico, and the jobs that go with them, is
simply wrong.
All of these figures, incidentally, pale in comparison to the stock
of non-residential investment here in the U.S.A., which amounted to
$8.7 trillion in 1997, the latest year data is available. We are not
creating conditions for jobs to move overseas--we are creating
conditions for firms and workers to prosper right here in America.
nafta and the trade balance
Let me also address the relationship between NAFTA and our trade
balance. A number of observers have claimed the bilateral trade
deficits that we have with Mexico and Canada are a function of the
NAFTA and its implementation. However, economic analysis shows no sound
rationale for this assertion.
The major causes of the shift to a bilateral deficit with Mexico
were macroeconomic and exchange rate forces: the sudden and unexpected
peso devaluation and the subsequent depression in Mexico when domestic
consumption declined 15 percent in 1995. In addition, the U.S. economy
was growing, in contrast, and consuming more than it produced. The
NAFTA, if anything, was a force helping to limit the deficit--and
certainly any decrease in U.S. exports--given that the NAFTA continued
to require that Mexico reduce its barriers to U.S. goods and services.
It is important to remember that Mexican tariffs were far higher
than U.S. tariffs and U.S. tariffs were very low on Mexican goods even
before the NAFTA. Therefore, the elimination of this disparity is in
our interests. You may recall that in the early 1980s Mexico went
through a financial crisis, and in response, raised tariffs and imposed
import licensing restrictions that sharply cut U.S. exports--by 50
percent--with a resultant decrease in estimated jobs supported by those
exports to Mexico of over 200,000. The NAFTA protected us from a
similar outcome in the 1994-95 crisis.
A study by an economist at the Dallas Federal Reserve, for example,
supports this view on the deficit issue. Mainstream economic thought
will not attribute the bilateral deficit with Mexico to the NAFTA.
protection during the asian financial crisis
The NAFTA's role in protecting us from the worst effects of the
Asian financial crisis has been at least as important as its role in
the 1995 peso crisis.
By bringing down, keeping down, and even lowering further, tariffs
and other barriers, it allowed our exports to Mexico and Canada to grow
by $13 billion in 1998. Exports to Mexico were up 11 percent last year
from 1997; exports to Canada were up 3 percent. Meanwhile, our exports
to the entire world were down by about 1 percent in 1998. Without our
exports to the NAFTA countries, our overall exports would have been
down 4 percent. Our NAFTA partners now account for a third of all our
exports, and growth in our NAFTA trade has helped to shield our economy
from the Asian financial crisis.
We now export three times as much to Canada as to China, Hong Kong
and Taiwan combined. As our exports to the Pacific Rim dropped by $26
billion last year, this growth in exports to our NAFTA partners
protected jobs in manufacturing, farm and service sectors, and incomes
of blue and white collar workers, Democrats and Republicans, whites,
blacks, and Hispanics--all across America.
nafta & the environment
Let me now turn away for a moment from the direct economic issues
associated with NAFTA.
In our relations with our immediate neighbors, we have concerns
that extend well beyond trade. We expect that growth should come hand
in hand with a higher quality of life and the advancement of basic
values--clean air, clean water, public health and protection for our
natural heritage; safety, dignity and elementary rights for working
people; a common front against crime and corruption. NAFTA has allowed
us to improve our working relationship with Mexico and Canada in these
areas as well. We have huge challenges that are not yet addressed, but
the NAFTA and its side agreements put us in a better position to deal
with them.
Environmental protection is an example. Through the Commission on
Environmental Cooperation, created by NAFTA's environmental side
agreement, we have reached agreement with our neighbors on conservation
of North American birds and created a North American Pollutant Release
Inventory. The CEC has also helped us devise regional action plans for
the phase-out or sound management of toxic substances, including DDT,
chlordane, PCBs and mercury. Important cooperative work is also
underway on environmental enforcement, as the Environmental Protection
Agency has trained hundreds of Mexican environmental officials in the
past five years, and Mexico has substantially increased its budget
resources and inspections related to environmental law compliance since
the NAFTA passed.
The NAFTA is also helping our countries reduce the costs of
environmental protection. The United States and Canada, for example,
have established protocols for the coordinated review of certain new
pesticides, such as those that are designed to be safer replacements
for older, more risky pesticides. By sharing data review
responsibilities, joint reviews lower regulatory costs, expedite
registration of safer pest-control tools, increase the efficiency of
the registration process, and provide more equal access to pest
management tools by farmers across North America. Joint reviews have
been announced for diflufenzophr, which could significantly reduce the
total application of herbicides on corn in the United States (with most
of the reduction resulting from the decreased use of atrazine, a
chemical that reaches groundwater), and cyprodinil, which is effective
against a range of disease organisms including scab on apples and
blossom blight and brown rot in stone fruits. Cyprodinil is a reduced-
risk chemical pesticide, presenting lower risks to human health than
traditional chemical pesticides.
Likewise, the North American Development Bank has begun fourteen
projects in border towns which will reduce water pollution and improve
health on both sides of the border. To choose an example close to my
home state, Juarez broke ground last November for its first waste-water
treatment plant. That is going to mean better health and cleaner water
for a million people in Juarez, another million in El Paso, and for
towns and villages all along the upper Rio Grande. A similar project
has opened on the American border near San Diego and Tijuana, which
will remove effluents from the water, which were being emitted well
before NAFTA.
In addition, the environmental side agreement and the BECC/NADBank
agreement have provided important avenues for citizen participation on
environmental matters. Pursuant to a mechanism established under the
environmental side agreement, citizens and citizen groups in all three
countries have filed submissions with the CEC containing claims that
there has been a failure to adequately enforce the environmental laws
of one of the NAFTA countries. One of the submissions led to the
preparation of a factual record on the development of the pier in
Cozumel, Mexico. Following the issuance of the factual record, the
Mexican government declared the area of the Cozumel Reef a national
marine park and stated its intent to implement a management study of
Cozumel Island. The BECC, the NADBank and the CEC meet regularly with
the public and have created mechanisms for the inclusion of public
input in decision-making.
In this important area of environmental improvement, as with the
reduction of barriers to trade in goods and services, NAFTA is
incomplete--it remains a work in progress. Yet, as the Dallas Morning
News pointed out in its editorial on January 4 of this year, NAFTA is
``the `greenest' commercial pact ever, and the U.S., Canadian and
Mexican environments are better off with it than without.'' NAFTA has
represented a significant step forward in the environmental aspects of
trade.
nafta & labor
On the labor front, NAFTA's Agreement on Labor Cooperation has
generated our largest cooperative effort on labor anywhere in the
world. It covers occupational safety and health, employment and
training, industrial relations, worker rights and child labor and
gender issues, and allows citizens to draw attention to labor practices
and improve working conditions.
This has led to important tangible benefits. For example, a labor
tribunal reversed itself and granted a union registration in the Maxi-
Switch case; a secret ballot union representation vote was conducted
for the first time in Mexico in the GE case, and by government
employees in the Fisheries Ministry. Mexico's Federal Government
intervened in an effort to resolve the very contentious Han Young case;
and the Mexican Supreme Court struck down state restrictions on union
organizing as unconstitutional. In addition, Mexico has taken other
steps to advance the rights of workers, including promulgating new
safety and health regulations and nearly tripling funding for
enforcement of worker rights, including in child labor.
Likewise, the NAALC has helped stimulate citizen involvement in
labor issues, through the filing of twenty separate submissions to the
labor commission. Submissions in 1998, for example, led to ministerial
consultations on freedom of association and safety and health issues in
the Mexican states of Baja California Norte and Mexico. Earlier
consultations led to a trilateral conference on the labor rights of
women workers in North America, and a work program of trilateral
seminars in Mexico City, San Antonio, and Monterrey on union
registration, certification, elections, recognition and union
democracy.
future of the nafta
Mr. Chairman, the NAFTA is a work in progress. It will not be
completely implemented until 2008. We are monitoring progress closely
and we are learning from our experience, using it to improve the
agreement as it goes into force. Our trilateral work program has more
than 25 committees and working groups, each advancing the work of the
Agreement. We have made an effective trilateral work program a priority
and put in place a new high level oversight mechanism within our three
Governments.
No trade agreement, of course, can put an end to all our disputes.
We have yet to resolve our concerns on land transportation with Mexico,
for example, but we continue to work on the issue. Furthermore, we have
very important issues pertaining to high-fructose corn syrup and sugar,
and telecommunications barriers with Mexico. We want to work together
to address the nemesis of piracy in the area of intellectual property
rights, particularly copyright piracy. And we need to further perfect
NAFTA's potential to improve the environment and labor conditions of
its signatories, especially Mexico.
With Canada, we have serious concerns on a range of agriculture
matters and major market access impediments facing our magazine
publishers and other media and entertainment industries. Furthermore,
we have the ongoing challenge of enforcing our largest bilateral
sectoral agreement anywhere in the world--the U.S.-Canada Softwood
Lumber Agreement.
But through the cooperative framework we have built through the
NAFTA, we have avoided or solved many disputes. For those that remain,
the question is how far we have to go to solve them and how fast to do
it.
conclusion
In conclusion, Mr. Chairman, we can be very pleased with the record
of NAFTA five years after its passage.
Five years ago, we predicted that this agreement would mean growth;
better and more jobs; rising standards of living; and a higher quality
of life. Today, we can say that the agreement has been an invaluable
force for all these objectives. Our governments are working more
closely and accomplishing more than ever before on environmental
protection, workplace safety, and all the other issues that affect the
daily lives of our citizens. And the agreement allows us to pass on to
our children, stronger than ever, the invaluable legacy of peace,
cooperation and progress on the North American continent that we have
inherited from past generations.
The bottom line on NAFTA? It has helped our country prosper. It has
facilitated, through a reduction in barriers, a dramatically expanded
volume of American-made goods and services sold to Canada and Mexico.
It has reduced the damage the Asian financial crisis has caused in our
country and our continent. It has encouraged us to work more closely
than ever before with our neighbors--as we have to if we are to
ultimately succeed--on crucial topics from narcotics to environmental
protection and improvement of labor standards. It is a winner. I am
proud of it. And I am determined to tell its story wherever I go.
Thank you very much.
[Attachment 1]
Biggest Winners with the NAFTA--by State
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Export Value Growth 1993-1998
Export Growth Rate (1993-1998) 1998 Share of Export Market (in billions)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Alaska...................................................... 128.2% Vermont.................................... 90.7% Texas......................................... $14.4
Nevada...................................................... 123.2% Michigan................................... 72.5% California.................................... $12.6
Kentucky.................................................... 108.5% Montana.................................... 65.5% Michigan...................................... $12.0
Alabama..................................................... 105.1% Indiana.................................... 64.1% Illinois...................................... $5.0
Kansas...................................................... 96.8% North Dakota............................... 63.2% Ohio.......................................... $4.8
North Carolina.............................................. 95.8% Iowa....................................... 56.8% New York...................................... $4.8
California.................................................. 95.1% Ohio....................................... 52.6% Indiana....................................... $3.2
South Carolina.............................................. 95.1% Mississippi................................ 52.1% Pennsylvania.................................. $2.9
Louisiana................................................... 93.7% Texas...................................... 51.8% North Carolina................................ $2.9
Mississippi................................................. 91.9% South Dakota............................... 50.0% Minnesota..................................... $2.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Massachusetts Institute of Social and Economic Research (MISER).
Various reasons account for the states' performances. The states
with the largest economies and industrial sectors (California,
Illinois, Michigan, New York, Ohio, Pennsylvania, Texas) exported the
most, in terms of value, to our NAFTA trading partners. Border states
(California, Texas, Michigan, Montana, North Dakota, Vermont) take
advantage of their proximity to our NAFTA partners and, along the
southern border, the maquiladora industry. Canada and Mexico are the
largest export markets for these states. The automotive industry
fosters exports from Michigan and Texas. Opening of agricultural trade
has sped the growth of exports for large agricultural states (Arkansas,
Wyoming, Hawaii, Indiana, Iowa, Kansas, North Dakota, and South
Carolina).
[Attachment 2]
Increases in Exports, by State--1993-1998
[In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
NAFTA MEXICO
---------------------------------------------------------------------------------------
Percent Percent
1993 1998 Gain Increase 1993 1998 Gain Increase
--------------------------------------------------------------------------------------------------------------------------------------------------------
California...................................................... $13,298 $25,942 $12,644 95% $5,700 $11,966 $6,266 109%
Connecticut..................................................... 2,036 2,663 627 31% 364 597 233 64%
Delaware........................................................ 850 1,323 473 56% 179 325 146 81%
Georgia......................................................... 2,015 3,594 1,579 78% 360 1,253 893 248%
Indiana......................................................... 6,772 9,975 3,203 47% 1,239 3,349 2,110 170%
Kansas.......................................................... 776 1,528 752 97% 196 524 328 167%
Massachusetts................................................... 3,366 4,382 1,016 30% 393 626 233 59%
Minnesota....................................................... 2,594 4,713 2,119 82% 256 928 672 262%
Maryland........................................................ 820 1,122 302 37% 102 371 269 264%
Missouri........................................................ 1,934 3,026 1,092 57% 577 1,288 711 123%
Nebraska........................................................ 450 742 292 65% 65 161 96 150%
North Carolina.................................................. 2,979 5,834 2,855 96% 398 1,723 1,325 333%
Oregon.......................................................... 1,100 2,050 950 86% 114 499 385 337%
Tennessee....................................................... 2,549 4,341 1,792 70% 703 1,422 719 102%
Wisconsin....................................................... 2,682 4,433 1,751 65% 314 575 261 83%
Wyoming......................................................... 49 88 39 81% 5 7 2 30%
--------------------------------------------------------------------------------------------------------------------------------------------------------
[Attachment 3]
[In millions of dollars]
------------------------------------------------------------------------
Percent
Exports 1993 1998 Gain
------------------------------------------------------------------------
North Carolina's Exports of
Textiles:
Canada......................... $165.1 $441.7 168%
Mexico......................... 39.2 200.4 411%
North Carolina's Exports of
Apparel:
Canada......................... 81.0 160.6 98%
Mexico......................... 80.8 563.2 597%
------------------------------------------------------------------------
The Chairman. Now, I am informed that I was handed a wrong
schedule as I came in hastily. Tell me exactly what the next
two are, Mr. Buchanan and Mrs. Dabbs. All right.
Thank you very much, and I appreciate your coming. And we
will have another discussion one of these days.
Mr. Buchanan. Thank you, Mr. Chairman. I appreciate the
opportunity to, if you will, move around and go ahead of some
of these other distinguished witnesses. I want to say that
Senator Ervin of North Carolina became a good friend of mine
after I testified in front of his committee for about 5\1/2\
hours back in 1973 under somewhat more strained circumstances.
Let me yield. Did you want to make your statement--why do
we not let this young lady make her statement first about the
situation that happened to her, Senator?
The Chairman. Very well.
We welcome you, ma'am. And you may proceed. We have sort of
jousted about here because of a hectic schedule in the Senate,
and I was a little bit late. But we are glad to have you here.
We thank you for coming. And you may proceed.
Mrs. Dabbs. Thank you.
STATEMENT OF MRS. VONTELLA DABBS, HUMAN RESOURCES ASSISTANT,
CATAWBA PLANT OF DELTA MILLS MARKETING CO., MAIDEN, NC
Mrs. Dabbs. Mr. Chairman, Senators, I thank you for
allowing me the opportunity----
The Chairman. Pull the microphone a little closer to you,
please, ma'am.
Mrs. Dabbs. Mr. Chairman, Senators, I thank you for
allowing me the opportunity to come before you to express my
concerns about foreign trade and what it is doing to the
textile industry in my community.
My name is Vontella Dabbs, and I would like to begin my
presentation today by sharing the letters that were written by
myself and my husband, upon which allowed me the honor to stand
before you today.
``Dear Honorable Jesse Helms. Our jobs are going under.
What would you do if your higher up came up to you on Monday
morning and notified you that as of 5 p.m., you would no longer
have a job? How would you take care of yourself and your
family, if you were told that your job is being moved to
another country where labor is cheaper, and that's why you will
no longer have a job? How would you feel?
``Save our jobs. Our jobs are being lost due to the cheaper
labor markets that surround us now. If we, as Americans, lose
our jobs here in the United States, what will become of us?
America has been known as the land of the free and the home of
the brave. How can this be true if we no longer have any way of
surviving?
``As you are well aware, I'm certain, there are more and
more people of different nationalities moving to the United
States every day. Will these people be forced to move back to
where they originated from because the United States is going
under? Textiles has been the No. 1 means of survival for most
of the American people for years and years. This is how the
majority of the people surrounding the area I live in have put
food on the table, clothes on their children's backs, and kept
a roof over their heads.
``Having a job to go to and to plan to save for their
children's future has been the only hope for their children to
be able to attend college and hopefully have a better job than
themselves. Although every parent hopes their children will
have a better life than they have, this will not be possible if
our jobs are lost.
``The hardest part of it all would not be the fact that
your plant may be shutting down. To have to accept the fact
that it is being lost due to cheaper labor in another country
is sad. Mexicans have been coming to the United States for
years for a better life for themselves and their families. Will
they be forced to move back to the life they left?
``If we lose our jobs, this is exactly what will happen.
America will go down under and no longer exist. With no jobs,
there will be no means of survival, no need to have businesses,
grocery stores, shopping centers, entertainment of any sort.
There will be no money for anyone to afford even the bare
necessities of livelihood.
``Without textile jobs in the United States, we will be
forced to move. Why will we need government if there are no
businesses or industries to run? What has happened to the
American dream, the opportunity to go to college, get a job,
buy a home, get married and have a family? A college education
is the only thing a person would have left out of the above, if
our jobs are lost.
``There would be no job to go to every day. The home one
just purchased would be lost due to the inability to pay the
mortgage. Your family would no longer be a happy one, due to
the task of looking for good, steady work and trying to keep
your children from starving.
``Would your family be forced to live in one State while
you live in another to survive? One would have to do what is
necessary to try to hold the family together.
``Please consider the effect losing our textile jobs would
have on America alone. We need our jobs. And with the economy
like it is today, many people are already working full- and
part-time jobs to make ends meet and to save for their child's
college education.
``How does someone who just got married come home and tell
his wife, who happens to be with child, `Honey, I lost my job
today. No, I didn't get fired. They're moving our jobs to other
countries for cheaper labor. Honey, the answer to your question
is: I don't know how we're going to make it.' ''
I would like to follow that letter that I wrote with one
that my husband wrote in support of myself.
``Dear Honorable Jesse Helms. My wife has made her living
working in the textile industry for the past 8 years and 5
months. Recently she was told that her place of business is up
for sale. Later she found that it is due to the cheaper labor
market we are faced with today.
``We need textile jobs still today. Not only do they
provide yarn for government paraphernalia, but also the denim
most of us have worn for years. How will the United States of
America survive without textiles?
``Some Americans have only had job experience in the
textile industry. What will common, every day, middle- and
lower-class people do for survival, if our jobs are swept from
under our feet? I'm sure you wouldn't want to go to work one
day and find that the only type of job you've ever known how to
do would no longer exist.
``We need our jobs. Please consider that some of us are
less fortunate than others and were not blessed to have a job
title such as lawyer, doctor or nurse. Save our American
textile jobs, as well as others. It is the only means of
survival for some people. Whether the job is white collar or
blue collar, everyone in a family is affected when a parent or
the only parent loses his or her job for any reason.''
I would now like to read my presentation for this
afternoon.
I was born and reared in North Carolina, in the small town
of Maiden. I currently am employed as a human resource
assistant in the Catawba plant of Delta Mills Marketing Co.,
located in Maiden.
Our plant makes cotton yarns that we use to weave cloth for
the apparel manufacturers. Many of you probably wear pants that
have been woven by my company, if you wear any kind of khaki
pants.
I come to you today not as an expert in any field, not as a
politically motivated person, but simply as an American that is
deeply concerned for both my future and the future of my family
and friends. I cannot quote you statistics or give you fancy
computer-generated data to support some theory about foreign
trade. What I can give you are honest and heart-felt feelings
about what is going on in our community as related to the
foreign trade agreements and the people that work in textile
plants.
Maiden, NC, the very small town I grew up in, is located in
Catawba County, just a short distance from the Gaston, Lincoln
and Mecklenberg County areas of North Carolina. Being just 30
miles away from Charlotte, NC, Maiden is closely located to one
of the most progressive and business-friendly regions of the
country.
For the ones of you not familiar with North Carolina,
Maiden is located right in the middle of where the furniture
and textile industries took root and grew during the past
century.
There is not a family in our area that has not been part
of, or at least influenced by, the textile industry over the
years. At one time, the payrolls from textile plants in the
Gaston, Lincoln and Catawba County areas were the main forces
that drove the economy.
I come before you today to ask for your help. I am not here
asking for a handout or any special treatment. The textile
industry has for many years been in a transition toward
modernization and meeting the demands of today's business
environment.
In my opinion, we have done a pretty good job of that. We
have reduced cost, increased production, protected our
environment and given job security to thousands of workers in
modern, safe plants. Yes, we still have some plants, and even
some companies, that have chosen not to keep up with the global
business environment. But for the most part, the companies that
are smart have done whatever has been necessary to be part of
the modern, global business world.
Today these modern textile companies and plants are
threatened by one thing that I feel can put an end to our
entire industry. This threat is that we are not being given a
fair opportunity to compete with foreign business on a level
playing field.
Many of the well-intended laws, treaties and trade
agreements enacted over the past years have made the
competition between domestic and foreign textile business
unfair in favor of the foreign producers. These treaties, laws
and trade agreements have not really opened up the world to the
American textile industry as was intended.
But instead, they have opened our borders for foreign
manufacturers to flood our country with goods produced with
near slave labor and in deplorable condition of workers.
These agreements have also created an incentive for
American manufacturers to close the doors of domestic
manufacturing operations and go south to Mexico and to the
Caribbean to invest millions of dollars in foreign countries.
And by doing this, they are putting thousands of hardworking
Americans out of a job.
No matter what we do in the United States textile industry,
whether we modernize even more or become even more
technologically advanced or whatever, we will not be able to
overcome the unfair advantage that our laws and rules have
given foreign manufacturers and the products manufactured in
foreign lands.
I do not remember who said it, but several years ago, I
heard something that was supposedly said by a Senator. He said
something to the effect that the textile industry was an
antiquated and backward industry that should just be written
off just like the steel industry was. I do not know who said
that or even if a Senator really said it, but I do know that
some of the things coming out of Washington make the
hardworking people in the textile plants in North and South
Carolina feel that everyone in Washington feels that way.
The company I have worked for during the last 8 years,
Delta Woodside Industries, Inc., headquartered in Greenville,
SC, just announced last month that they are splitting up our
company into groups and selling them off. This is being done
because, despite our efforts to modernize and become more
competitive, the business is being taken by foreign
manufacturers.
This is just one of many incidences that have come about
within the last few weeks and months in our area. Burlington
Industries just announced that they were closing down some nine
plants in our area and other parts of North and South Carolina.
One, a very large denim weaving plant in Mooresville, NC, was
among the plants being shut down.
A few weeks later, Burlington then announced that they are
opening a denim weaving operation in Mexico. I could cite you
numerous other operations in North and South Carolina that have
also been closed down due to the foreign business and many
others that have been closed down and the manufacturing move to
Mexico and/or the Caribbean area.
The current laws make it more enticing for companies like
Burlington Industries, Parkdale Mills, Delta Woodside and
others to build plants in Mexico and the Caribbean rather than
spend money to keep our plants in the United States running and
getting more productive.
It is obvious to us all, especially the ones of us that
work hard every day to make ends meet, that something is not
right. More appropriately said, something is just not fair. The
people that we elect to represent us are giving away our
industry and also giving away our livelihood.
I am young enough that if something were to happen to my
job in the textile industry, I could probably go out and find a
job and make a decent living. But to look around our plant that
is typical of most textile plants and see people that would not
be able to get another job if something were to happen to our
plant makes me feel sick.
I have written all of my North Carolina Congressmen and
Senators about my concern and have gotten some very nice
replies from some of them. Many of them voice my same concerns
over the loss of jobs in our industry, but none of them have
offered a solution to our life-threatening situation. With the
passing of the North American Free Trade Agreement, the textile
industry has felt a terrible blow to our future existence.
And now, an extension of NAFTA in the form of H.R. 2644,
the United States-Caribbean Trade Partnership Act, and also
H.R. 1423, the African-American and Opportunity Act seems to be
heading us to even more unfair competition and more of an
unlevel playing field.
I do not know everything about these newer treaties, but I
do know that NAFTA has hurt the ones of us that work in the
textile plants of North Carolina. These other agreements appear
to be similar kinds of trade agreements that I fear will doom
our industry.
Again, I did not come here as an expert or asking for
favors. All I want is for you to fully understand and recognize
what the people working in the textile industry are facing. You
need to feel the same sense of urgency that a textile worker
feels when he or she is told the plant is going to be shut down
because the yarn or cloth they make can be made cheaper in
Mexico.
You know the feeling you get in your stomach when you start
down the hill of a roller coaster? That is the same stomach-
wrenching feeling that these workers feel. Think about the last
time you felt that roller coaster sensation in your stomach,
and you will know how thousands of hardworking American people
have felt recently. That is the feeling they had when they went
home and told their families that they no longer had a job
because the company they had worked for for many years was
moving their plant to Mexico or just closing down.
Think about that feeling today and tonight when you go
home. Put yourself in the shoes of these people. We deserve
better from our own country.
I want to again thank Senator Helms for this opportunity to
bring my concerns before this committee. I also thank you for
your time and attention.
The Chairman. Mr. Buchanan----
Mr. Buchanan. Thank you, Senator.
The Chairman [continuing]. I know you are interested in
those comments.
Mr. Buchanan. Well, I think that they were eloquent, and
they were moving. And they are reflective of, as of last year,
something like 120,000 textile and apparel workers in the
United States of America lost their jobs in a ``Goldilocks''
economy when the stock market was doing well.
And the manufacturing base and particularly textiles and
apparel are being slaughtered by these trade agreements. And,
quite frankly, it is primarily in the Carolinas and places like
that. And we have an eloquent personal witness to relate
exactly what is happening there. And I am honored to be here
beside her.
The Chairman. It is an honor to have you, sir.
STATEMENT OF MR. PATRICK J. BUCHANAN, COLUMNIST, WASHINGTON, DC
Mr. Buchanan. Thank you, sir.
Senator, I would like to focus on the entire NAFTA
agreement in the 5 years since we have had it, both the promise
and performance and a number of aspects of that agreement.
First and foremost, the United States was sold, I believe, a
bill of goods when we were told we would become partners with
one of the finer governments on earth.
As my former colleague and friend, Henry Kissinger, said
about the Government of Carlos Salinas, ``I know no government
anywhere that is more competent.'' Within 18 months of that
statement, President Salinas had fled just ahead of a posse.
And his brother Raoul was discovered to have $300 million in
various foreign and American banks. I think brother Raoul is
right now in a penitentiary in Mexico, and I do not know where
President Salinas is.
But I do know from our standpoint a far more grievous
development was the movement by the Colombian cartel of its
base of operations immediately before the passage of NAFTA to
the border between Mexico and the United States, where they
began buying up trucking and manufacturing plants in order to
use them to transfer their shipments away from the Caribbean,
which had become increasingly dangerous, across the southern
border of the United States.
Post-NAFTA, Mexico has become the prime source of the drugs
and narcotics that are killing and poisoning American children
in the tens of thousands every single year. The Congress of the
United States has itself been reluctant to certify the
Government of Mexico as a reliable partner and ally in the war
on drugs. And this was our partner in NAFTA.
Well, I do not know, have any first-hand knowledge, of any
slur on the reputation of President Zedilla in any way or any
scandal. There is no doubt that the American press corps with
some justification uses the term ``narco-democracy'' to
describe the Government south of the border. So as for NAFTA as
an agent of governmental reform, I think it has left a little
bit to be desired.
Let me talk now about the trade impact, Senator. We were
promised that the United States surplus with Mexico, which we
ran for three straight years and for years before NAFTA, that
that would grow. But what happened is, every year subsequent to
NAFTA, the U.S. trade surplus has disappeared. It vanished in
the year of NAFTA, the first year of NAFTA.
And Mr. Fisher was very eloquent in describing the American
exports that are going abroad to Mexico and Canada. And he did
not get in in any depth to the imports, which is a little but
like saying the Redskins scored three touchdowns on Sunday
without mentioning that Dallas scored six. If you take a look
at the total trade deficit since NAFTA with Mexico alone, it is
$84 billion in goods and services total deficit. We ran a
surplus not a single year.
Mexico now sells us 10 times as many automobiles as we sell
Mexico. And it is a valid question as to where Mexico might
have acquired an auto industry. General Motors now has 50 parts
and assembly plants located just across the border in Mexico
and not a single one in Texas along the border of Mexico.
Volkswagen, which used to have its plant up in western
Pennsylvania in the Monn Valley, where my mother grew up--the
Monn Valley is a very depressed area. The Volkswagen plant up
there has been shut down, and Volkswagen now produces something
like 450,000 vehicles a year in Pueblo in Mexico.
Tijuana has become the TV-making capital of the world.
Americans do not make many TV's anymore. I believe almost all
of our television manufacturing plants have been bought up by
others or moved out of the United States.
Now how many jobs have been lost as a consequence of NAFTA?
I think the formal claims are 200,000 under the act by which
some of the unemployed, where the people lose jobs, receive
some benefit. But the informal estimates range from 300,000 to
600,000.
My understanding is 70 percent of the lost jobs are in
manufacturing, which again last year lost about 350,000 jobs in
a very, very good economy for the rest of us. Now manufacturing
is the yellow brick road to the middle class for working
Americans and those Americans who graduate from high school and
men and women get married. It has always provided an easy road
to the middle class, the working people in this country.
Nineteen dollars an hour is still the manufacturing wage in
America.
But we have lost in the last 40 or 50 years half of our
manufacturing jobs in terms of the percentage of our
population. It used to be 30 percent. It is now 15 percent. As
I said, manufacturer workers get $19 an hour in the United
States. The average is about $1.50 an hour in Mexico.
Now if you leave General Motors, you lose your job in
General Motors, you are going to get a job, but you and your
wife may be working at Wal-Mart. You know, during the campaign
of 1996, Senator, when I was campaigning, a fellow told me, he
said, ``Pat, these fellows are right. There are lots of jobs
out there. I know because I've got three of them.'' And a lot
of that is happening out there in middle America.
Now let us talk about the exports to Mexico. My
understanding is roughly about a fifth of our exports to Mexico
are consumer goods for the Mexican people. But we are exporting
heavily plants and factory equipment and parts for assembly in
Mexico, which means we are exporting jobs to Mexico.
Senator, I will be candid. If we continue with these open
border trade policies with nations who have hardworking people
who will work for 10 percent of American wages, every large
industrial and manufacturing plant in this country is
ultimately at risk.
Now the argument has changed on NAFTA. It used to be that
our surplus is going to grow. Then the argument became our
deficit is temporary. And now the argument is that deficits do
not matter. And that is latest argument we have heard.
Now let me talk a little bit about agriculture. It is true
that agricultural exports to Mexico and Canada are up some 35
percent. But agricultural imports are up 57 percent. And the
reason is simple: The devaluation of the currencies of both
Canada and Mexico. The Canadian dollar, I believe, when we
negotiated with Canada earlier than the original NAFTA with
Mexico, I believe, was 84 cents to the dollar. It has been down
to 64 cents.
The Mexican peso, as we know, collapsed at the end of 1994.
And the effect of this is to create a fire sale, basically, of
goods from the devalued currency into the United States, whose
currency remains the same. And the effect is to put a virtual
Smoot-Hawley tariff on American goods headed south.
Now a business I do know a little bit about is the Florida
winter tomato market, because one of the fellows I went to high
school with is or was one of the biggest producers in Florida.
Now what happened is, when Mexico devalued by about 50 percent,
that doubled the price of U.S. tomatoes in Mexico, but it cut
immediately in half the price of Mexican tomatoes in the United
States. It was instantaneous.
Now the President of the United States made a commitment
during the NAFTA negotiations. If something happened because of
price advantage or unfair price advantage, and certainly a 50-
percent cut in the value of your currency in about a single
month, is at least that. Here is President Clinton's statement.
He said, ``I am committed to take the necessary steps to ensure
that the USTR, the trade rep, and the ITC take prompt and
effective action to protect the U.S. vegetable industry from
price-based import surges from Mexico.''
Well, the protection did not come from that price-based
import surge from Mexico. And 100 tomato farmers down in
Florida lost their farms. Others are getting out of the
business. And Paul Demare, a good friend of mine, someone you
can spend a long time talking to on the telephone about how he
is a patriotic American and what he thinks his Government did
to him or failed to do in terms of keeping its promise.
But the key point here, in this winter tomato industry down
in Florida, is that these Florida winter tomatoes are produced
on farms that are subject to U.S. fertilizer and pesticide
regulations, to workers protection acts, to the minimum wage,
to Social Security, to health protection, to child labor and
OSHA. That is American farms. And the Congress of the United
States passed all of these laws, and Presidents have signed
them.
Mexico tomato farmers do not meet any of those standards.
Is that fair competition?
We were told that illegal immigration from Mexico would be
reduced. But we faced some of the worst years in our history
post-NAFTA. There are 5 million illegals now in the United
States, and 400,000 come in every year, mostly from Mexico.
They are an increasing share of the Federal and State prison
population.
Senator, when a first world country throws open its borders
to a large country like Mexico, whose wages are at Third World
levels, two things will happen. The manufacturers will head
south in search of the low and inexpensive labor, and the
labor, which has a minimum wage 10 percent of ours, will head
north to the American minimum wage and the benefits of the
American welfare state, such as they are. And that is exactly
what is happening. It is economics 101.
What good has it done for Mexico? Well, after the
devaluation, real wages in Mexico post-NAFTA, real wages of
Mexican working people are down 30 percent. And those Mexicans
in extreme poverty have grown from one-third of the country to
one-half.
Now here is an area that especially concerns me, Senator.
And Henry Kissinger, again, my old colleague, when he supported
NAFTA, he called it more important than a trade agreement. He
said this is a step toward a new world order. And he is right.
Any free trade zone you establish over a period of time will
call into existence a government to control it.
In 1787, when Hamilton and Washington and Madison put
together their plot and went to Philadelphia to put together an
American free trade zone and take down all the tariffs between
New York and New Jersey and the battle between Virginia and
Maryland over who owns the Potomac, they created a free trade
zone inside the United States. All tariffs among the States
were removed and outlawed.
And that free trade zone called into being a stronger and
stronger national government, which South Carolina found in
1832 and again in 1861 was now a dominant Federal Government.
They were no longer free and independent States that could walk
away.
In Europe 50 years ago, the European coal and steel
community between France and Germany became the European
Economic Community, the common market, and the European
Community and the European Union. And now it is Euro Land. And
now we have a socialist super state sitting on top of the
nations of Europe, which are gradually surrendering control of
their currency, their fiscal policy, their immigration policy,
their tax policy, and ultimately control of the Nation itself.
I believe, Senator, truly that a global economy where all
barriers to trade and all quotas and tariffs are removed, a
global economy will eventually call into existence a global
government. And we already see the embryonic institutions in
the World Trade Organization, the IMF, the World Bank, the U.N.
And any global government, I believe, is a betrayal of our
heritage and our revolution.
And what should be done? I think the Congress and the
President should work together to give the President, with
congressional approval, the capacity to impose immediate
tariffs when a country attempts to get a trade advantage on us
by devaluing its currency.
Second, I believe we ought to have an equalization tax on
all imports, especially imports from unfair traders like China,
that is equal to the cost of the taxes and regulations imposed
on goods made in the USA.
Finally, Senator, let me quote an old Republican named
Theodore Roosevelt. We call him the good Roosevelt in the
household I grew up in.
He said, ``I believe in such measure of protection as will
equalize the cost of production here and abroad; that is, will
equalize the cost of labor here and abroad. I believe in such
supervisions of the working of the law as to make it certain
that protection is given to the man we are most anxious to
protect, the laboring man,'' and I would add the laboring
woman. That is real Republican philosophy.
Senator, thank you very much for the opportunity to speak
to you.
The Chairman. Thank you, Mr. Buchanan. You are eloquent as
always.
Now we have a bit of a problem. We have four rollcall votes
in the Senate beginning at 4 o'clock back to back. That means
for an hour and a half, maybe an hour and 45 minutes, we will
not do very much here. Let me suggest this, that instead of
doing the questions orally, that we submit them in writing. And
would you respond to them in writing? And our staff will work
with you in doing that as well. And in that way, we can hear
the fourth and final witness for much of the time.
Thank you again to both of you for coming. And again, Mrs.
Dabbs, I am proud of you. God bless you.
Mrs. Dabbs. Thank you very much.
The Chairman. Now we will hear from Mr. McMillion. Doctor,
you may begin. We are delighted to hear from you. And your full
statement will be printed in the record as it is read.
STATEMENT OF DR. CHARLES W. MC MILLION, MBG INFORMATION
SERVICES, WASHINGTON, DC
Mr. McMillion. Thank you, Mr. Chairman. I am happy to be
here this afternoon to help you begin to set the record
straight on the global economic policies and the market forces
that now undermine United States and world security and
prosperity. I am sorry our Ambassador left. It is good to be in
a hearing with a fellow ``latch key'' Texan, although I have to
say I am a little surprised to be accused of being a gifted
rhetorician. But it is very nice to be here today, and I
appreciate the testimony of those who preceded me.
You know, the cynicism of the American people and others is
maybe nowhere more justified than with a steady diet of broken
promises and the misleading spin that they are fed every day
concerning international economic matters. And I think we have
heard some of that this afternoon.
NAFTA has served as a hopelessly flawed model for a very
particular type of ideological and special interest experiment
in economic globalization. Even the shortsighted benefits of
NAFTA for the trans-national financial and business community
have been the result of the $41 billion taxpayer bailout for
speculators and investors in Mexico that was arranged in 1995
at the end of NAFTA's first year by the U.S. Treasury and the
IMF.
Even before Mexico's debt crisis spread to Asia in the
summer of 1997, the International Labor Organization was
already pointing out the worst global unemployment crisis since
the 1930's. And this human crisis, of course, has worsened very
considerably over the past 2 years, despite perhaps $200
billion in additional bailouts and the United States operating
as the customer of last resort for much of the world's
production.
I would welcome the opportunity to discuss with our
Ambassador and anyone the so-called ``Goldilocks'' U.S.
economy, which has enjoyed the strongest bull stock market in
our history, along with the lowest unemployment and inflation
rates in a generation. It has also given us the first negative
personal savings rates since 1933 and the highest household
debt levels on record.
But perhaps most importantly, and I have a chart \1\ here
that maybe someone can put up, or I will just point to, is that
the United States plunged from the world's leading banker
during the post-World War II period to by far the world's
biggest debtor with a net foreign debt--we were biggest world
banker just a decade or so ago--with a foreign debt that now is
approaching $2 trillion.
---------------------------------------------------------------------------
\1\ The charts referred to throughout Mr. McMillion's oral
presentation can be found in his prepared statement which begins on
page 36.
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But virtually the only consideration ever heard of today's
special interest globalization starts with an out-moded
assumption that it provides net overall benefits. That is the
starting point for legitimate conversation about today's trade
and globalization policies. This is pervasive, and not just
where it belongs--it really belongs in trans-national corporate
public relations.
That is what they are supposed to do--but also in major
media reporting and congressional and administrative hearings
and in trans-national funded think tanks and universities.
It is filled with evocative pictures of lights being turned
on in Prague, Concorde jets and beautiful women, as well as
references, of course, to creative destruction and the fact
that you have to break eggs to make omelets. The financially
correct position is to religiously ignore or distort all of the
facts and blindly champion more expansion of special interest
globalization. Again, we heard quite a bit of that this
afternoon.
I would like to now briefly outline the major U.S. economic
effects of the NAFTA with Mexico and its utter failure in both
its broad macro and its more specific industry intentions.
Of course, it is also regularly reported, and Mr. Buchanan
mentioned this earlier, by law enforcement bodies throughout
the United States that the trade in illegal drugs has been
greatly aided by NAFTA and that its value runs in the scores of
billions of dollars.
Mr. Chairman, I hope you are aware that a recent GAO report
suggests that $6 billion per year is spent by those directly
tied to the narcotics trade just to buy political influence in
Mexico, $6 billion a year. However, of course, this is outside
the scope of my analysis here, but clearly very important to
trade and clearly very important to our relationship with
Mexico.
The North American Free Trade Agreement, just so we are
clear at the start, went into effect on January 1, 1994. NAFTA
was the first ever experiment in rapid and sweeping
deregulation of policies affecting investment and trade between
a very low wage developing country and highly industrial
countries in the United States and Canada.
The agreement between Mexico, with its population then of
94 million people, the United States with our population then
of 260 million and Canada of 229 million, was precedent setting
in very important ways.
Recent special interest assessments of NAFTA that were
referred to by our Ambassador earlier this afternoon, these so-
called assessments of NAFTA's effect used exclusively quite
inappropriate assumptions and grossly distort the scope and the
nature of that agreement to the almost insignificant tariff
reductions of a few percent over 15 years.
As the Ambassador said, from 1993 to 1999, Mexico's average
applied tariffs reduced the price of U.S. exports to Mexico by
8 percent, from 10 to 2, actually 10 to 2\1/2\, by 8 percent.
This was more than offset in just the first 11 months of NAFTA
in 1994 as the official crawling peg used in Mexico raised U.S.
export prices by 12 percent in 1994 before the 50-percent
devaluation of the peso in December 1994. Yet NAFTA's key
provision was to radically shift the regulatory climate for
investment and trade in Mexico, as noted by Gary Hufbauer and
Jeffrey Schott, NAFTA's most celebrated economists among NAFTA
advisors, who have now become experts on China, I see.
In their book in 1993, they say that ``NAFTA contains
precedent-setting rights and obligations regarding services and
investment. The investment obligation of the NAFTA and related
dispute settlement provisions accord national treatment to
NAFTA investors, remove most performance requirements on
investment in the region, and open up new investment
opportunities in key Mexican sectors. The investment provisions
provide a useful model for future GATT trade accords.''
It is only by ignoring this key provision, this key, really
the essence of NAFTA, that our Ambassador can say, as he says
in his testimony, that economic analysis shows no sound
rationale to support the argument that U.S. trade deficits are
a function of NAFTA. So long as you only look at tariff
reductions, that is true.
The key thing, and I have another chart on hot money into
Mexico.
These major new obligations and public parties conferred
precedent-setting rights and guarantees for private speculators
and investors that led to a remarkable reversal of Mexico's
decades of capital flight. Suddenly $60 billion--this is
Mexico, not the United States.
Suddenly $60 billion in global hot money catapulted into
Mexico as NAFTA took shape, turning it briefly into the fast
buck capital of the world, with speculative returns routinely
in the range of 60 and 120 percent per year. I can understand
why our Ambassador, who, in his former life, was a global
manager, thought this was a very good deal.
The celebration of NAFTA's investor focus was not limited
to the financial services and multi-national business
community, but was very widely shared by economic analysts and
pundits on the eve of NAFTA's ratification by a reluctant
Congress.
Hufbauer and Schott noted enthusiastically that ``the
prospect of NAFTA implementation has already generated strong
expectational effects with capital inflows to Mexico estimated
at about $18 billion in 1992'' before NAFTA. David Broder, many
of our top pundits in the major media, chimed in with hosannas,
with celebration, of this investor focus.
Now this promise of massive net private financial inflows
to Mexico was and is the essential engine driving the NAFTA
agreement and its consequences. It is simply not possible to
assess NAFTA's effect, nor to make sense of pre-NAFTA forecasts
separate from these precedent-setting investment provisions and
massive new financial inflows. Remember that Mexico has an
economy 1/28th the size of ours. So multiply $60 billion times
28, and you will see the equivalent in the United States.
Any nation, of course, Senator, as you know so well, any
nation with a net capital inflow must run an offsetting trade
current account deficit. That is, national accounting requires
that a surplus in capital accounts be offset by a similar
deficit in the current accounts.
This was the starting point for economists modeling the
anticipated consequences of NAFTA on Mexico and on the United
States. For example, Hufbauer and Schott assumed that financial
flows would leave Mexico with a global current account deficit
of $10 billion to $15 billion in 1990 and $13 billion to $19
billion annual deficit from the year 2000 until 2010.
They then assumed that this global current account deficit
for Mexico would automatically result in a U.S. merchandise
surplus with Mexico of $7 billion to $10 billion--could you put
that one up, please--through the nineties, and $9 billion to
$12 billion throughout the first decade of the 21st century.
Now these false assumptions are quite important, because
Hufbauer and Schott's confident forecast of 15 years, 15 years,
of substantial, unbroken U.S. trade surpluses with Mexico were
widely used to ridicule--and I am not talking about merely
criticize, Senator, as you know--were widely used to ridicule
those who questioned the wisdom of the agreement.
President Clinton repeatedly cited this study to insist
that NAFTA would create a net gain of 200,000 jobs by 1995. But
unlike some politicians and some professional advocates and
some trusting reporters, Hufbauer and Schott were quite clear
in how they came to forecast job growth from NAFTA. And they
said, ``Our job projections reflect a judgment that, with
NAFTA, U.S. exports to Mexico will continue to outstrip Mexican
exports to the United States, leading to a U.S. trade surplus
with Mexico of about $7 billion to $9 billion annually by
1995.''
And as you can see, Senator--I hope you can see that with
the angle--we have had a rather different outcome. We are
running short of time, and so let me rush forward.
One of the other key assumptions of those who supported
NAFTA was that NAFTA would provide the United States with a key
benefit in trade with Mexico over Europe and Asia and that the
United States would have not only a surplus, but the U.S.
surplus would be at the expense of other countries in the
world.
As we can see, it is really only the United States, the
green line there--the other deficit country is Canada with a
small deficit--the United States' deficit has soared. And we
have gone from a substantial trade surplus in the 5 years
before NAFTA to $65 billion in deficits for the first 5 years
of NAFTA. That is a $16 billion a year change from where it was
to where it is in manufacturing.
We also have a deficit in services. We also have, of
course, a huge deficit in a thing called unilateral transfers.
I might point out, though, that there is this outlier when you
look down at who wins and who loses. The bottom line is the
country current account deficit clearly loses with an $82
billion current account deficit over 5 years, $82 billion over
5 years. And it is even worse, and I will get to that.
But there was one winner. And the winner is investment
income. Those who were managing global portfolios and
speculating and investing in Mexico have done quite well.
Repatriated profits on investments in Mexico have never been
stronger. They have leaped since the NAFTA agreement. The
change there is $2.2 billion per year.
Clearly, the major claims of NAFTA promoters in the United
States, that it would assure not only U.S. trade surpluses with
Mexico but provide disproportionate trade advantages for the
United States over the rest of the world, have not only failed
but have failed spectacularly. There is just no question. And I
do wish that our Ambassador were here.
There are several things in the few minutes that I have
left that I would like to move to quickly, because it is true
that the composition of trade is really what is key. The fact
that we have a trade deficit is extraordinarily important, but
the composition of our trade is quite important.
Just because, Senator, there may be some in the committee
who are not aware, but when we talk about the American economy,
this is not a black box. It is, by definition, comprised of
four components. There are inventories that kind of move back
and forth, but four components.
We have personal consumption, private investment, trade and
government spending. As you can see, trade has been a deficit
and a very large deficit, detracting from our economy for quite
some time, an extraordinarily heavy drag on our economy during
the 5 years of NAFTA, which is one of the reasons that this 8-
year recovery has been one of the weakest of any post-World War
II recoveries, even those recoveries that did not last 8 years,
even after they went through a recession, after 8 years we were
ahead of where we are today.
But the composition of trade is very important. And I know
that we want to talk some about textiles as well. But I was
particularly surprised that our Ambassador pretends to tell
this committee that all States have benefited from the
expansion of trade with NAFTA. Please look at his testimony. He
did not give you trade figures. He gave you export figures.
Senator, Chairman, trade is exports and imports.
A full disclosure of trade would provide both the exports
and the imports and would divide out our $16 billion, $17
billion, $18 billion a year deficit with Mexico throughout the
States. What he has done is very much like a bankrupt company
showing its auditors, or potential investors, only its receipts
without disclosing its expenses. This is extremely misleading
and very unfortunate.
Let me just close then--I wish we had so much more time. I
hope that you will find the time to read my testimony--to go
through the composition of U.S. trade with Mexico.
Let me say first that economists, many economists, using
what I call a buggy whip approach to economics, really have not
changed to understand that trade is now dominated by multi-
national companies moving--and multi-national companies do any
number of terrific things. But in analyzing trade, we need to
understand that trade is not driven by traditional 18th century
competitive advantage.
As Mr. Buchanan mentioned, the United States has an
enormous trade deficit with Mexico in autos. I wish that you
could see the chart, although it is in my testimony. Mexico now
exports more cars just to the United States than the United
States exports to the world, including Mexico.
Mexico is a much larger world exporter of cars than the
United States. This entirely since NAFTA. Because until
economists come to grip with, and until policymakers, Mr.
Chairman, come to grip with the fact that Mexico exports more
cars than we do, they simply are not talking about trade and
21st century economics. They are talking about 19th century
trade and very, very special interests.
And it is not just cars. If you look throughout the
composition of U.S. trade, it is precisely the opposite of what
we always used to teach students, certainly what we learned and
what we used to teach students, and what we believe, and what
is still the case in much of Latin America and much of the rest
of the developing--some of the rest of the developing world. It
is changing quickly.
But in Mexico now, the United States loss--the United
States pays more than it buys for autos, electronics,
machinery, including computers--we pay more for computers from
Mexico than we earn from selling computers to Mexico--mineral
fuels, of course, and precision instruments, and of course
textiles and apparel.
Now, where have we been able to take advantage of our
comparative advantage, this wonderfully technologically,
sophisticated, fantastic country of ours? Where has our
comparative advantage come into play with Mexico?
Our principal export, net export, gain to Mexico is in
plastic and articles. Now that could be high valued-added
stuff. It is not. It is packing material. It is propylene. It
is low-grade, crude material, packaging material principally,
fasteners, buttons and zippers and things for clothes. That is
what we are exporting to Mexico, a principal net gain.
Cereals, we have done very well in cereals. Paper and
paperboard, again boxes and packing material for them to ship
cars and electronics and computers back to us. We send them the
boxes and the packing material; they send us the computers and
the cars.
Organic chemicals, grains, seed and fruit. I could go on.
One other thing of many that I would like to point out in
the very brief time I have--and I apologize for going over--is
that, again, our Ambassador indicates in his testimony that the
trade with Mexico is good because industries associated with
exports pay 15 percent more than the average wage.
Well, that is true. But again, he is only telling you about
40 percent of the story. That is, not even half of the story.
Industries associated with trade--that is, minerals and
mining, agriculture, and manufacturing--pays about 16 percent
or more of the average wage. Even--and I brought a copy of
this, because I do not have it in my testimony, but even before
NAFTA went into effect, the leading NAFTA proponents
acknowledged that jobs displaced by imports from Mexico, even
then, before the explosion in the auto industry and the
electronics, before NAFTA went into place, our imports from
Mexico displaced jobs paying higher wages than were supported
by our exports to Mexico.
In other words, exports pay a higher wage, but imports that
are displaced pay an even higher wage. So you get kind of a
double whammy. Not only do we have this trade deficit, not only
is our trade deficit exactly the reverse of what you would
expect for a developed, sophisticated country trading with a
very under-developed country, but our imports are displacing
very high-paying jobs.
Maybe I should just stop there. There is so much more, but
I hope that we have time for a question or two.
The Chairman. Well, we will not have time for questions.
But written questions will be filed with each of you.
I am going to ask unanimous consent, and I think I will get
it, that the record be kept open for Senators who were unable
to be here. And that they, any Senator, can file written
questions with any of the witnesses.
Now further, I am going to ask unanimous consent, with some
confidence that I will have it approved, or not objected to,
that this hearing be printed. Now all hearings are not printed
in the Senate, as you well know. But I want this to be done up
so it can be easily understood. And I want to use your charts.
And you are going to have to work with staff to supervise how
these are presented in context with your remarks.
Mr. McMillion. Thank you.
[The prepared statement of Dr. McMillion follows.]
Prepared Statement of Dr. Charles W. McMillion
economic globalization: the abject failure of the nafta model
Thank you Mr. Chairman. I am happy to be here this afternoon to
help you begin to set the record straight on the global economic
policies and market forces that now undermine U.S. and world security
and prosperity. The cynicism of the American people--and others--is
nowhere more justified than with the steady diet of broken promises and
misleading spin that they are fed every day concerning international
economic matters.
Nafta has served as a hopelessly flawed model for a very particular
type of ideological and special interest experiment in economic
globalization. Even the short-term benefits of Nafta for the trans-
national financial and business community have been the result of the
$42 billion taxpayer bailout of speculators and investors in Mexico
arranged in 1995, at the end of Nafta's first year, by the U.S.
Treasury and the International Monetary Fund.
Before Mexico's debt crisis spread to Asia in the summer of 1997,
the International Labor Organization was already pointing out the worst
global unemployment crisis since the 1930s. This human crisis has
worsened badly over the past two years despite another $200 billion in
bailouts and the U.S. operating as customer of last resort for much of
the world's production.
I would welcome the opportunity to discuss the so-called
``Goldilocks'' U.S. economy which has enjoyed the strongest bull stock
market in history along with the lowest unemployment and inflation
rates in a generation. We have also seen the first negative personal
savings rates since 1933 and the highest household debt levels on
record. Most importantly for the future, to pay for trade losses, the
U.S. has plunged from the world's leading banker in the post World War
II period to, by far, the world's biggest debtor with a net foreign
debt now approaching $2 trillion.
Virtually the only consideration ever heard of today's special
interest globalization starts with outmoded assumptions that it
provides net overall benefits. This is pervasive, and not just where it
belongs in trans-national corporate public relations, but also in major
media reporting, Congressional and Administrative Hearings, and in
trans-national-funded ``think tanks'' and universities. If is filled
with evocative pictures of lights being turned on in Prague, Concorde
jets and beautiful women, as well as references to ``creative
destruction'' and breaking eggs to make omelets. The financially
correct position is to religiously ignore or distort all the facts and
blindly champion more expansion of special interest globalization.
Additionally, a cottage industry has developed emphasizing
individual winners and losers in globalization. Aimed at spending part
of the assumed surplus created through globalization, this involves an
emphasis on the ``best practices'' of winners and/or providing job
training, social services and community development for the losers.
This important, age-old political and institutional struggle is
sometimes mistaken for criticism of free trade or globalization by its
participants and others.
This afternoon, I will briefly outline the major U.S. economic
effects of the Nafta with Mexico and its utter failure in both its
broad macro and more specific industry intentions. Of course it is also
regularly reported by law enforcement bodies that the trade in illegal
drugs has been greatly aided by Nafta and that its value runs in the
scores of billions of dollars. A recent \1\ GAO report suggests that $6
billion per year may be spent by those directly tied to the narcotics
trade just to buy political influence in Mexico. However this is
outside the scope of my analysis.
---------------------------------------------------------------------------
\1\ Benjamin F. Nelson, ``Update on U.S.-Mexican Counternarcotics
Efforts,'' Testimony before the U.S. Senate Caucus on International
Narcotics Control, February 24, 1999. (Washington, DC: GAO, March,
1999) p. 2.
---------------------------------------------------------------------------
Nafta's Failed Macro Assumptions
The North American Free Trade Agreement went into effect on January
1, 1994. Nafta was the first-ever experiment in rapid and sweeping
deregulation of policies affecting investment and trade between a low
wage developing country and highly industrial countries. The agreement
between Mexico, with its population of 94 million, the United States
(population 260 million) and Canada (population 29 million) was
precedent setting in other important ways as well.
Recent special interest ``assessments'' of Nafta's effects often
use similar, quite inappropriate assumptions and grossly distort the
scope and nature of the agreement to the almost insignificant tariff
reductions of a few percentage points over 15 years. From 1993 to 1999
Mexico's average applied tariffs reduced the price of U.S. exports by
about 9% (from 10% to 1%). This was more than offset in just the first
11 months of Nafta as the official ``crawling peg'' raised U.S. export
prices by 12% before the peso was forced to seek market rates in
December, 1994.\2\
---------------------------------------------------------------------------
\2\ Tariff levels are discussed in ``Study on the Operations and
Effect of the North American Free Trade Agreement,'' issued by the
Office of the U.S. Trade Representative and related entities,
(Washington, DC: USTR; July, 1997). p ii. On August 1, 1998, the
Governments of the U.S., Canada and Mexico eliminated tariffs on about
600 more 8-digit tariff lines including certain textiles, chemicals,
pharmaceuticals, antibiotics, steel and wire products, watches, toys,
and other goods worth approximately $1 billion of trade annually. The
New Peso was officially pegged at 3.1 = $1 when Nafta went into effect
and regularly reduced in value to 3.6 = $1 by the end of November, 1994
and roughly 10 = $1 in early 1999.
---------------------------------------------------------------------------
Yet Nafta's key purpose was to radically shift the regulatory
climate for investment and trade in Mexico. As noted by Gary Hufbauer
and Jeffrey Schott, Nafta's most celebrated economists among Nafta
advocates: \3\
---------------------------------------------------------------------------
\3\ Gary Clyde Hufbauer and Jeffrey J. Schott, NAFTA: An Assessment
(Washington, DC: Institute for International Economics, October, 1993)
page 2.
In large part, the agreement involves commitments by Mexico
to implement the degree of trade and investment liberalization
promised between its northern neighbors in 1988. However, the
Nafta goes further . . . including protection of intellectual
property rights, rules against distortions to investment
(local-content and export performance requirements), and
coverage of transportation services . . . (Nafta) contains
precedent-setting rights and obligations regarding services and
investment . . . the investment obligations of the Nafta (and
related dispute settlement provisions) accord national
treatment to Nafta investors, remove most performance
requirements on investment in the region, and open up new
investment opportunities in key Mexican sectors . . . The
investment provisions provide a useful model for future GATT
trade accords . . .
Indeed, these major new obligations on public authorities conferred
precedent-setting rights and guarantees for private investors and
speculators and led to a remarkable reversal of Mexico's decades of
capital flight. Suddenly, $60 billion in global hot money catapulted
into Mexico as Nafta took shape turning it, briefly, into the fast buck
capital of the world with speculative returns routinely in the range of
60%-to-120% per year.\4\
---------------------------------------------------------------------------
\4\ Portfolio, direct investment and exchange rate data are
available in International Financial Statistics Yearbook: 1998
(Washington, DC: IMF, 1998) pp. 626-627, and previous years.
---------------------------------------------------------------------------
The celebration of Nafta's investor focus was not limited to the
financial services and multinational business community but widely
shared by prominent economists and pundits. On the eve of Nafta's
ratification by a reluctant Congress,\5\ Hufbauer and Schott noted
enthusiastically that, ``The prospect of NAFTA implementation has
already generated strong expectational effects, with capital inflows to
Mexico estimated at about $18 billion in 1992.'' \6\
---------------------------------------------------------------------------
\5\ One of the best accounts of the Congressional pork bazaar
before the vote passing the Nafta agreement (234 ``For'' vs. 200
``Against'') is by Charles Lewis, founder and executive director of the
Center for Public Integrity. Describing ``The orgy of deal-making that
preceded'' the vote on Nafta, Lewis calculates ``the quantifiable cost
to the taxpayer of the Nafta deals will be at least $300 million'' from
government spending programs created in exchange for votes for Nafta.
His figures do not include massive, private advertising and campaign
contributions by Nafta supporters. See Charles Lewis, ``Nafta-Math;
Clinton Got His Trade Deal, but How Many Millions Did It Cost the
Nation?'' The Washington Post, Dec. 26, 1993.
\6\ Hufbauer and Schott (1993) p. 4. The authors refer to South
Korea's post-war/Cold War experience between 1959 and 1981 to suggest
that the current account imbalance required by such massive financial
flows would be sustainable for Mexico through the year 2010. (p. 15).
---------------------------------------------------------------------------
Issuing ``A Last Minute Pitch for Nafta,'' respected, political
columnist David Broder declared that ``Nafta's approval would ensure
Mexico the flow of investment capital to sustain a growth of 6 percent
to 7 percent a year . . .'' for the next 15 years.\7\
---------------------------------------------------------------------------
\7\ David Broder, ``A Last Minute Pitch for Nafta,'' in The
Washington Post, Nov. 3, 1993.
---------------------------------------------------------------------------
This promise of massive net private financial inflows to Mexico
was, and is, the essential engine driving the Nafta agreement and its
consequences. It is simply not possible to assess Nafta's effects nor
to make sense of pre-Nafta forecasts separate from these precedent-
setting investment provisions and massive new financial flows.
Any nation with a net capital inflow must run an offsetting trade
deficit. That is, national accounting requires that a surplus in
capital accounts be offset by a similar deficit in the current
accounts.\8\ This was the starting point for economists modeling the
anticipated consequences of Nafta on Mexico and the U.S. For example,
Hufbauer and Schott assumed that financial flows would leave Mexico
with global current account deficits of $10-$15 billion in the 1990s
and $13-$19 billion from 2000 to 2010.\9\ They then assumed that this
global current account deficit for Mexico would automatically result in
a U.S. merchandise trade surplus with Mexico of $7-$9 billion
throughout the 1990s and $9-$12 billion throughout the first decade of
the 21st century.
---------------------------------------------------------------------------
\8\ In practice, countries occasionally stray from this accounting
balance either by building up foreign currency reserve, as both Mexico
and China are doing currently, or by spending down its reserve, as
Mexico did through much of 1994.
\9\ Hufbauer and Schott, p. 16.
These erroneous assumptions are quite important because Hufbauer
and Schott's confident forecast of 15 years of substantial and unbroken
U.S. trade surpluses with Mexico were widely used to ridicule those who
questioned the wisdom of the agreement. President Clinton repeatedly
cited the study to insist that Nafta would create a net gain of
``200,000 jobs by 1995.'' \10\
---------------------------------------------------------------------------
\10\ See, for example, President W.J. Clinton, Saturday Radio
Address, Sept. 18, 1993. p. 1 (actually, Hufbauer and Schott forecast
170,000 jobs; the President and others rounded up.)
---------------------------------------------------------------------------
Unlike politicians, professional advocates and naive reporters,
Hufbauer and Schott were quite clear in how they came to forecast net
U.S. job gain from Nafta: \11\
---------------------------------------------------------------------------
\11\ Hufbauer and Schott, p. 14.
Our job projections reflect a judgment that, with NAFTA, U.S.
exports to Mexico will continue to outstrip Mexican exports to
the United States, leading to a U.S. trade surplus with Mexico
---------------------------------------------------------------------------
of about $7 billion to $9 billion annually by 1995.
Similar happy forecasts, predictions of doom if Nafta was not
passed, along with frequent name-calling were widely promoted in the
weeks leading up to the November, 1993 Congressional vote on Nafta.\12\
It should be noted that the U.S. trade surplus with Mexico, which
spiked up in 1992, was already widely known through regular monthly
Census trade reports to be falling sharply by the time these forecasts
were made. Indeed, the U.S. surplus in traded goods with Mexico fell
back to only $1 billion in 1993.
---------------------------------------------------------------------------
\12\ Robert Pritzker, Chairman-elect of the National Association of
Manufacturers claimed in his speech at the National Press Club on
October 26, 1993: . . . Since Mexico began to lower trade barriers in
1987, the U.S. trade balance with Mexico has moved from a $5 billion
deficit to a $5 billion surplus . . . Nafta would continue and even
improve the positive trend. This and other excerpts from his speech,
``For the Record,'' The Washington Post, Oct. 27, 1993. Rightwing
pundit Charles Krauthammer ridicules Congressman Bonior and others in
``The Liberal Betrayal,'' The Washington Post, Nov. 12, 1993 and
reporter Brett D. Fromson catalogs Wall Street warnings of doom that
might follow in ``If Nafta Fails, Will Markets Follow?'' The Washington
Post, November 9, 1993.
---------------------------------------------------------------------------
However, the fundamental error made by Hufbauer/Schott and others
that anticipated U.S. trade surpluses after Nafta, was their assumption
that if Mexico has a current account deficit, the U.S. must enjoy a
surplus of almost equal size. This crude, two dimensional view might
seem an odd assumption in a world of 200 countries each competing for
markets. But it has remained a common, enormously distorting practice
among many slow-to-adapt-to-change U.S. economists including the U.S.
International Trade Commission.\13\
---------------------------------------------------------------------------
\13\ This distorting and parochial practice is so well established
it is rarely noted explicitly in the text of economists' reports. A
rare exception is International Trade Commission. Potential Impact of
the U.S. Economy and Industries of the GATT Uruguay Round Agreements:
Vol I, (Washington, DC; USITC Publication 2790, June 1994) footnote 13,
page 1-6.
---------------------------------------------------------------------------
Certainly there was no pre-Nafta empirical basis to assume that a
Mexican deficit would automatically or primarily create a U.S. trade or
current account surplus. For example, while Mexico had a -$7.5 billion
current account deficit in 1990, the U.S. suffered deficits with Mexico
of -$3.6 billion in its current accounts and -$2.4 billion in
merchandise trade. As Hufbauer and Schott made their forecasts in late
1993 before Nafta took effect, Mexico's current account deficit reached
-$23.4 billion--but Mexico enjoyed a small current account surplus with
the U.S.
MEXICO'S CURRENT ACCOUNTS
[In millions of dollars]
----------------------------------------------------------------------------------------------------------------
Nafta
-------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 \1\1998 Totals
----------------------------------------------------------------------------------------------------------------
Balance on merchandise trade.... -$15.9 -$13.5 -$18.5 -$7.1 -$6.5 -$0.6 -$7.7 -$12.0
Balance on services............. -2.7 -2.5 -2.6 1.2 0.5 -0.5 -0.8 -2.2
Balance on goods and services... -18.6 -16.0 -21.1 8.3 7.1 0.1 -8.5 -14.1
Balance on investment income.... -9.2 -11.0 -11.7 -12.9 -13.0 -12.8 -13.8 -64.2
Unilateral transfers, net....... 3.4 3.6 4.0 4.0 4.5 5.2 5.8 23.5
Balance on current accounts..... -24.4 -23.4 -28.8 -0.7 -2.3 -7.4 -16.5 -55.7
----------------------------------------------------------------------------------------------------------------
\1\1998 estimated from QI-QIII.
Source: International Monetary Fund and Banco de Mexico.
In 1990, Mexico had a global merchandise trade deficit of -$881
million consisting of a $2.4 billion surplus with the U.S. and a
deficit of -$3.3 billion with the rest of the world. Even in 1993 when
Mexico had a merchandise trade deficit of -$13.5 billion, the U.S.
enjoyed a surplus of only $1 billion while the rest of the world
enjoyed a surplus of $12.5 billion with Mexico.
Nafta's promoters wrongly assumed that the agreement would shift
Mexico's trade so as to primarily assure a U.S. trade surplus. However,
in the event, the disproportionate and adverse effect on the U.S. from
Mexico's trade has been worsened sharply since Nafta. In 1994, Mexico's
-$28.8 billion current account deficit consisted of a deficit with the
U.S. of only -$0.5 billion and a deficit with the rest of the world of
-$28.2 billion.\14\ The U.S. surplus in merchandise trade with Mexico
slipped to only $0.7 billion in 1994 (from $1 billion in 1993) while
the rest of the world's surplus with Mexico rose to $17.8 billion (from
$12.4 billion).
---------------------------------------------------------------------------
\14\ U.S. Senator Byron Dorgan and others vainly attempted to raise
with U.S. Treasury officials the issue of the source of Mexico's
current account imbalances during the heated Congressional debate over
a $50 billion U.S. taxpayer guaranteed stabilization loan in early
1995.
U.S. CURRENT ACCOUNTS WITH MEXICO
[In billions of dollars]
----------------------------------------------------------------------------------------------------------------
Nafta
-------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 \1\1998 Totals
----------------------------------------------------------------------------------------------------------------
Balance on merchandise trade.... $4.9 $1.0 $0.7 -$16.6 -$18.4 -$15.5 -$16.8 -$66.6
Balance on services............. 0.5 0.1 -0.7 -3.6 -3.8 -4.0 -4.5 -16.6
Balance on goods and services... 5.4 1.1 0.0 -20.2 -22.2 -19.5 -21.3 -83.2
Balance on investment income.... 2.3 2.2 4.2 3.3 4.9 4.7 5.0 22.1
Unilateral transfers, net....... -3.2 -3.4 -3.6 -3.8 -4.2 -4.5 -5.0 -21.1
Balance on current accounts..... 4.6 -0.1 0.5 -20.7 -21.5 -19.3 -21.3 -82.3
----------------------------------------------------------------------------------------------------------------
\1\1998 estimated from QI-QIII.
Source: U.S. Dept. of Commerce.
These disproportionately adverse effects on the U.S. were
intensified to an extraordinary degree since the second year of Nafta.
Since 1995, Mexico's current accounts have again steadily worsened to
near -$17 billion in 1998 and total perhaps -$56 billion over Nafta's
first five years. Even this result for Mexico was achieved only because
of an unprecedented surplus of more than $20 billion per year with the
U.S. since 1995. That is, in 1998 Mexico suffered a near -$40 billion
current account deficit with most of the world offset by a $21 billion
surplus with the U.S. The only clear U.S. winner under Nafta is
investment income which has soared to new record highs.
Indeed, during the first five years of Nafta, the U.S. suffered
total current account losses to Mexico of -$82 billion while the rest
of the world enjoyed a surplus from Mexico of $138 billion. Mexico's
current account losses in five years of Nafta totaled -$56 billion.
While investment income has continued to enjoy record gains, there
is every reason to expect that the U.S. current account and trade flows
of both goods and services will continue to be disproportionally and
adversely affected by Nafta-based trade with Mexico.
U.S. CURRENT ACCOUNTS WITH MEXICO
[In millions of dollars]
------------------------------------------------------------------------
Before 1991- After 1994- Annual
93 98 Changes
------------------------------------------------------------------------
Balance on merchandise trade..... $7.6 -$66.6 -$15.9
Balance on services.............. 1.0 -16.6 -3.7
Balance on goods and services.... 8.6 -83.2 -19.5
Balance on investment income..... 6.7 22.1 2.2
Unilateral transfers, net........ -9.7 -21.1 -1.0
Balance on current accounts...... 5.6 -82.3 -18.3
------------------------------------------------------------------------
Source: U.S. Dept. of Commerce.
Mexico's current account deficit is again deepening in 1999 as oil
price declines undermine the value of exports despite the highest non-
oil trade surplus ever with the U.S. (Appendix) However, rather than to
allow the peso to weaken normally beyond the current 10 pesos/$1 US
dollar rate to moderate its current account deficit, Mexico must now
give considerable priority to its foreign debt obligations and current,
desperate re-financing needs. For this reason, and to attack inflation
which is near a 20% annual rate, financial authorities have set weekly
``Cetes'' government borrowing rates at 26.8% in early March with
commercial paper rates are 28.6%. Whether through further peso
devaluation or high interest rate consumer austerity, U.S. trade losses
with Mexico seem quite unlikely to improve and likely to worsen in the
year ahead.
Clearly, the major claims of Nafta promoters in the U.S.--that it
would assure not only U.S. trade surpluses with Mexico but provide
disproportionate trade advantages for the U.S. over the rest of the
world--have not only failed but have failed spectacularly.
Notwithstanding this clear and overwhelming data, much confusion
has been created by a powerful effort to ignore U.S. trade (revenues
from exports less payments for imports) and to discuss only the 40-to-
45% of U.S. trade represented by exports. Representative of this
ongoing and constant effort to mislead, President Clinton's letter
transmitting his Administration's legislatively-required assessment of
Nafta's effects boasts only: \15\
---------------------------------------------------------------------------
\15\ Office of the U.S. Trade Representative and others, ``Letter
from President William J. Clinton,'' in ``Study on the Operations of .
. .'' Unnumbered cover page.
Export growth has been central to America's economic
expansion. Nafta, together with the Uruguay Round Agreement,
the Information Technology Agreement, the WTO
Telecommunications Agreement, 22 sectoral trade agreements with
Japan, and over 170 other trade agreements, has contributed to
overall U.S. real export growth of 37 percent since 1993.
Exports have contributed nearly one-third of our economic
---------------------------------------------------------------------------
growth--and have grown three times faster than overall income.
This partial and misleading emphasis on exports often blends into
even more explicitly false statements as in President Clinton's recent
radio address to the nation seeking ``fast track'' authority to extend
Nafta throughout Latin America. President Clinton asserted: \16\
---------------------------------------------------------------------------
\16\ President William J. Clinton, ``Radio Address by the President
to the Nation: August 23, 1997'' Nearly identical misstatements were
made by the President in his high profile ``Remarks on U.S.-China
Relations'' before The National Geographic Society, June 11, 1998.
(Washington, DC: White House Press Office, 1997 and 1998.)
Already, over the last four years, more than 25% of our
---------------------------------------------------------------------------
economic growth has come from overseas trade.
These misleading and plainly false remarks are then widely and
repeatedly reported as fact by even the best national media and become
a baseline for all ``informed'' discussion of every trade issue.\17\
Even before the unfortunate events and misrepresentations surrounding a
former White House intern became public in 1998, Frank Luntz, a
Republican pollster known for lecturing his clients about the
importance of language is reported to have said admiringly:
---------------------------------------------------------------------------
\17\ As the first version of this report was being written,
respected reporter Steve Roberts hosted a discussion of U.S. trade
policy for the popular NPR Diane Rehm program on September 12, 1997.
With the authority of a neutral moderator, Roberts noted the White
House ``points out'' that trade accounts for more than a quarter of our
nation's growth. ``How can you be critical of those numbers?'' he asks
to no response and apparent common sense.
The Clinton administration is the most linguistically
disciplined operation in the history of modern politics. They
have no shame. That is why what they say is so effective.\18\
---------------------------------------------------------------------------
\18\ Lutz is quoted by Peter Baker in ``White House Finds `Fast
Track' Too Slippery,'' The Washington Post. September 14, 1997.
Although The Washington Post has generally supported President Clinton
and is among the most ideologically zealous and indifferent to fact in
their support of ``free trade,'' it has editorialized that ``On subject
after subject this (Clinton Administration) turns out to be a White
House that you believe at your peril.'' Lead Editorial, The Washington
Post, March 5, 1997.
And yet, statistically trade is a clearly defined and routinely
measured component of the nation's economy--Gross Domestic Product.
Like the number of days in a week or the number of months in a year,
this is not a matter of opinion. It does not lend itself to
interpretation of any kind--political or otherwise. By definition, GDP
consists of four components: \19\
---------------------------------------------------------------------------
\19\ See for example Table B-2, ``Real gross domestic product,'' in
Economic Report of the President: 1999, (Washington, DC: Government
Printing Office, 1999) pp. 328-329.
---------------------------------------------------------------------------
(1) Personal Consumption,
(2) Gross Private Investment,
(3) Government Expenditures,
(4) Net Exports Trade--export revenues less import payments for
goods and services.
COMPONENTS OF THE U.S. ECONOMY--GROSS DOMESTIC PRODUCT: CONSTANT 1992-CHAINED PRICES
[In billions of dollars]
----------------------------------------------------------------------------------------------------------------
Net exports
Total GDP Personal Gross private trade: goods/ Government
consumption investment services expenditures
----------------------------------------------------------------------------------------------------------------
1993............................ $6,389.6 $4,343.6 $863.6 -$70.2 $1,252.1
1994............................ 6,610.7 4,486.0 975.7 -104.6 1,252.3
1995............................ 6,761.7 4,605.6 996.1 -96.5 1,254.5
1996............................ 6,994.8 4,752.4 1,084.1 -111.2 1,268.2
1997............................ 7,269.8 4,913.5 1,206.4 -136.1 1,285.0
1998............................ 7,552.1 5,151.6 1,331.8 -238.3 1,297.3
----------------------------------------------------------------------------------------------------------------
Sources: U.S. Department of Commerce, BEA and MBG Information Services.
The effects of global trade involves very important and complex
issues of productivity and access to vital resources (such as oil)
which are discussed below. However, statistically, international trade
has been a constant drag on the U.S. economy since 1982 with
accumulated losses to the U.S. economy of $1.66 trillion over the past
15 years. Far from accounting for any of the country's GDP growth
during the first six years of the Clinton Administration, net trade
losses reduced real GDP by an average of -$126 billion or -1.8% of GDP
per year.
By definition, a trade deficit means that a country's domestic
firms produce less than its consumers buy. That is, at its most basic
level, trade deficits mean that trade is reducing--not expanding--
overall markets of U.S.-based firms and workers.
This is one of the reasons that, despite the strongest bull stock
market in history and strong consumer spending, real GDP growth in the
past five years has averaged only 3.4% per year and why economic growth
in the current eight years of cyclical recovery has been the second
weakest of any similar modern period. Even those cyclical recoveries
beginning in November, 1970 and in March, 1975 that did not last as
long as the current expansion, had more real GDP growth after seven
years than in the current period--even after the recessions of 1973-74
and 1980! \20\ Only the deep recession of 1982 drove the 1975-1982
growth pattern to be weaker than the current period. While the 1990s
expansion has added 27% to the overall size of GDP, the comparable
period in the recovery of the 1980s added 33% and the 1960s added 48%.
\21\
---------------------------------------------------------------------------
\20\ Certainly another key factor in recent slow growth has been
constrained government spending that skyrocketed in the 1980s. This
peaked in 1992 and actually fell, adjusted for meager inflation, during
the Clinton term as sharp reductions in Federal spending more than
offset spending growth by state and local governments.
\21\ These figures reflect the February 26, 1999 updates and
revisions to quarterly GDP data by the Department of Commerce, Bureau
of Economic Analysis.
---------------------------------------------------------------------------
The official U.S. government report assessing Nafta is particularly
misleading on this key issue of U.S. economic growth. Insisting that
``Strong growth in the United States stimulated U.S. demand for imports
from Mexico . . .'' a chart is presented with side-by-side bar graphs
of GDP and Domestic Demand growth between 1993 and 1996.\22\
---------------------------------------------------------------------------
\22\ Office of the U.S. Trade Representative and others, ``Study on
the Operations of . . .'' p. 13.
---------------------------------------------------------------------------
The graphic shows U.S. Domestic Demand soaring at more than twice
the rate of U.S. GDP growth. This is nonsense. It compares apples with
oranges. What is not disclosed in the graphic or in the text--is that
it shows GDP growth in real, inflation adjusted terms and Domestic
Demand in nominal terms which includes inflation. In fact, comparing
apples with apples, real growth of U.S. consumer expenditures was
marginally slower than real U.S. GDP growth between 1993 and 1996;
Final Sales of Domestic Product was a bit slower than GDP growth; and
Gross Domestic Purchases was only marginally faster than GDP.
Another claim made by advocates for Nafta is to consider the
``total picture of global trade.'' This argument, made by a few
academics such as Sidney Weintraub is that Mexico has been a net
benefit to overall trade by displacing imports from Asia.\23\ It is
argued that this displacement benefits U.S. producers because of
Nafta's requirement of significant local content requirements along
with other efficiency benefits of proximity.\24\ Unfortunately, even
before the current Asian financial crisis, the experience of five years
has shown that soaring U.S. imports from Mexico are not displacing U.S.
imports from Asia but are merely an even faster growing addition to
those imports.
---------------------------------------------------------------------------
\23\ Sidney Weintraub's ``Three Years Later, NAFTA Proves the
Naysayers Wrong,'' The Los Angeles Times, March 2, 1997 and in his full
report, ``Nafta at Three: A Progress Report,'' (Washington, DC: Center
for Strategic and International Studies, 1997) Mr. Weintraub often
writes in the L.A. Times which will not acknowledge his errors.
\24\ See, for example, The American Textile Manufacturers
Institute's recent report ``Free Trade in the Americas,'' February,
1999. Especially pp. 11-12.
In fact, since implementation of Nafta, the U.S. has suffered the
worst dollar losses in history for traded merchandise and for
manufactured goods--a subset of merchandise excluding principally oil
and agriculture. The U.S. merchandise trade deficit soared from -$73.8
billion in 1991 and -$96.1 billion in 1992, to consecutive records
during Nafta of -$166.2 billion in 1994, -$173.7 billion in 1995,
-$191.3 billion in 1996, -$198 billion in 1997, and -$248 billion in
1998. That is, global U.S. merchandise trade losses soared to a record
-$977 billion in the first six years of Nafta.
Global U.S. dollar losses for traded manufactured goods have also
been the worst in history since Nafta as deficits have soared from
-$47.3 billion in 1991 and -$65.9 billion in 1992 to record losses of
-$127.0 billion in 1994, -$144.7 in 1995, -$137.2 billion in 1996,
-$137.3 billion in 1997 and -$197.2 billion in 1998. That is, global
U.S. manufactured goods losses soared to a record -$744 billion in the
first five years of Nafta and will approach -$1 trillion in losses when
the current sixth year is complete.
Imports and trade deficits from Asia have continued to grow rapidly
during the first five years of Nafta. The U.S. auto complex (autos/
trucks/parts) suffered an unprecedented -$80 billion trade deficit in
1998--its third straight record of global losses--as soaring imports
from Mexico merely add to import growth from Asia. Despite strong
consumer demand, the U.S. textile and apparel industry has lost 360,000
jobs over the past five years and suffered its worst trade losses in
history as sharp import growth from Mexico merely adds to import
pressures from Asia.
U.S. global trade performance since Nafta is also the worst on
record as a percent of GDP for periods when the dollar is weak--below
its so-called purchasing power parity (PPP) value.\25\ Global trade
losses have been worse than today only in two periods that were
associated with an unsustainably strong exchange rate for the U.S.
dollar--1970-1974 and 1984-1988. In the first period, with the dollar
based on gold and worth 360 Japanese Yen and 3.6 German Marks,
President Nixon was forced by this concern for trade losses to abandon
the gold standard and allow the dollar to be sharply devalued by market
forces.
---------------------------------------------------------------------------
\25\ Purchasing Power Parity is a traditional ``common market
basket'' tool used by economists before floating exchange rates to
estimate the appropriate rate of exchange between different national
currencies. It continues to be used in estimates of relative living
standards and (inappropriately) for comparing cross-national
productivity levels. The Organization for Economic Cooperation and
Development (OECD) in Paris regularly provides the most widely used
estimates, see OECD, Main Economic Indicators: January. 1999. (Paris:
OFCD, 1999).
---------------------------------------------------------------------------
The second period followed very rapid economic growth,
unprecedented federal budget deficits and extremely high real interest
rates (real GDP grew by 7% in 1984). After having fallen sharply since
1970, the dollar rose to a value of 240 Japanese Yen and three German
Marks. Concerned by widening trade losses, President Reagan organized
the so-called ``Plaza Accord'' in March, 1985 and other activities to
assist world financial markets in reducing the value of the ``too''
strong dollar.
Many prominent economists urged policy-makers in the mid-1980s to
ignore the trade deficit with the assurance that it would be eliminated
when the dollar fell in value to only 220 Yen . . . or 200 . . . or,
certainly by 175 Yen. But the dollar's value fell to as low as 84 Yen
in the spring of 1995 and is today worth only about 120 Yen.\26\ Even
among the various private and government indexes of the dollar's value
that adjust for differentials in inflation and are trade-weighted, the
dollar fell to its weakest level ever in 1995 and remains today at
historically low values. The current OECD estimate of PPP values for
1998 has the dollar worth 163 Yen and 2.01 German Marks. Perhaps it
should also be noted here that the PPP just listed for Mexico in 1998
is 5.03 Pesos per U.S. dollar.
---------------------------------------------------------------------------
\26\ See, for example, C. Fred Bergsten and William R. Cline, The
United States-Japan Economic Problem, (Washington, DC: Institute for
International Economics, 1985).
---------------------------------------------------------------------------
Similarly, during the period of 7% annual GDP growth in the mid-
1980s, -$200 billion annual federal budget deficits, 10% real interest
rates, and an ``overvalued dollar,'' many prominent economists began to
reverse historic understandings of trade. The popular logic became that
the overvalued dollar was causing the trade deficit; the overvalued
dollar was caused by high real interest rates which were caused by the
shortfall of savings which was caused by the federal budget deficit and
by run-away consumer spending.
Trade concerns became secondary to reducing the U.S. federal budget
deficit--a matter emphasized in every G-7 meeting and most trade
negotiations during the mid-to-late-1980s.
This unique logic of the mid-1980s in the U.S. had strong appeal
and was supported by much of the data. However, since 1988, with a weak
dollar, U.S. economic growth far below global averages until 1998, a
sharp decline in the federal budget deficit now become a surplus, the
unique trade logic of the mid-1980s is no longer supported by the data.
U.S. economic growth has been slower than world growth every year
between 1984 and 1997, and the dollar has been well below its PPP value
since 1987.
Today's record trade losses are quite clearly NOT the result of an
overvalued dollar, nor of persistently strong U.S. economic growth, nor
of large federal budget deficits. As before the unique period of the
mid-1980s, today's trade deficit is clearly a major cause--not a
consequence--of the U.S. savings shortages.
Nafta's Failed Industry Assumptions
As important as the failure of the Nafta promoters' macro-level
forecasts are the failure of their forecasts about the detailed
composition of trade. Relying on 18th century economic realities of
national comparative advantage, promoters ignored the extraordinary new
powers of transnational firms and new global production technologies to
assume: \27\
---------------------------------------------------------------------------
\27\ Hufbauer and Schott, p. 23.
Over the long term, the main impact of larger U.S.-Mexican
trade will be higher incomes made possible by greater
efficiency and faster growth. Efficiency in both economies will
be boosted by the tendency of each country to export those
---------------------------------------------------------------------------
goods and services in which it has a comparative advantage.
Perhaps it is an unexamined faith that the content of this old
pattern has not been affected by new technologies and organizational
abilities that leads Nafta promoters to wrongly accuse empirical
analysts of equally obsolete concerns. Reflecting this long and
unchanging tradition, Hufbauer and Schott accuse of embracing a
simplistic ``pauper labor theory'' those who find no support in the
data for their obsolete theories.\28\
---------------------------------------------------------------------------
\28\ Hufbauer and Schott, p. 12. In recent years the most prominent
advocate of this obsolete, counterfactual faith is Paul Krugman. See
his oddly titled ``Does Third World Growth Hurt First World
Prosperity?'' Harvard Business Review July/August, 1994. pp. 113-121. A
detailed critique of some of Krugman's larger errors of fact, logic and
scholarship is in Charles W. McMillion, ``Third World Growth,'' Harvard
Business Review; Sept/Oct, 1994. pp. 181-183.
---------------------------------------------------------------------------
They assure that huge differentials in labor and other production
costs in Mexico compared with the U.S. are still of little importance
to firms or major traded industries because they are offset by the far
higher general levels of U.S. productivity.
Yet the rapid changes in trade patterns have shown quite clearly
for many years that these old truisms have been radically transformed
in the U.S. by modern capabilities of transnational firms. The times
have long passed when the U.S. was a big net exporter of sophisticated
equipment to Less Developed Countries (LDCs) while importing primarily
raw materials, apparel and footware. More recently, the Clinton
Administration has made this same baseless argument concerning oddly-
named ``Big Emerging Markets'' (BEMs) which include Mexico and 17 other
mostly larger LDCs and excludes OPEC. The BEMs include: Argentina,
Brunei, Brazil, China, Hong Kong, India, Indonesia, S. Korea, Malaysia,
Mexico, Philippines, Poland, Singapore, S. Africa, Taiwan, Thailand,
Turkey, Vietnam.\29\
---------------------------------------------------------------------------
\29\ U.S. International Trade Administration, ``The Big Emerging
Markets,'' Business America, March, 1994. More recently, see Jeffrey E.
Garten, The Big Emerging Markets and How They Will Change Our Lives,
(New York: Basic Books, 1997).
The major U.S. imports from BEMs have long been high value added
manufactured goods such as machinery and transportation equipment. Even
with some residuals of the Cold War remaining--particularly in aircraft
and defense related electronics--the U.S. has had chronic and now
rapidly deepening manufacturing trade deficits with BEMs. These key
manufacturing trade losses set new records in each of Nafta's first
five years: -$60 billion in 1994, -$77 billion in 1995, -$82 billion in
1996, -$84 billion in 1997 and perhaps -$120 billion in 1998. This is a
net loss in manufacturing trade to the so-called ``Big Emerging
Markets'' of over -$400 billion during the first five years of Nafta.
By sharp contrast, the U.S. has long enjoyed a trade surplus, or
only a small deficit, in manufacturing trade with developed countries
other than Japan. U.S. trade losses to Japan have been very deep and
persistent.
But U.S. manufacturing trade losses to low wage, low regulatory
cost LDCs are large and growing rapidly. Mexico has only added to these
losses with unprecedented deficits of -$10-to-$12 billion each year
since 1995. Oddly, neither the official government ``assessment'' of
Nafta's affects nor any of the ``independent'' assessments from major
institutions seem to have noticed--much less assessed--this major
change.
As important as the overall shift and imbalance in U.S./Mexico
trade since Nafta, is the industry composition of trade. Agricultural
and steam engine era assumptions of national comparative advantage
upheld by Nafta promoters holds that U.S./Mexico trade, even with
imbalance, will spur productivity and therefore growth and prosperity
for both countries. Each country will specialize in industries where it
is most efficient, increasing net exports in those industries, and will
shift out of industries where it is less efficient, increasing net
imports.
Clearly, as with competitive domestic markets, such specialization
based on productivity and product quality would be a benefit that could
offset some or all of the U.S. losses from trade deficits. These
considerations are quite important in assessing the benefits of U.S.
interstate trade and of U.S. trade with Canada and Europe where
production cost differentials are comparable.
But Mexico is not Canada or Europe and it is preposterous for
economists and politicians to ignore the massive differences in
conditions and commercial patterns. The poorly enforced minimum wage in
Mexico in March, 1999 is 31.91 New Pesos per day--$3.20 per day at
current exchange rates. Compensation for manufacturing workers in
Mexico have officially fallen from -85% below U.S. costs in 1993 to
-90% less than U.S. costs today following five years of Nafta.\30\ It
should be noted that during the past five years total real compensation
per hour for U.S. labor has risen by less than 3%--virtually all this
increase coming in 1998. Real U.S. manufacturing compensation has grown
less than 4% during the period, with most of the increase also coming
in the last year. The widening gap between U.S. and Mexican wages
during Nafta has therefore been the result of falling wages in Mexico
and virtually stagnant wages in the U.S.
---------------------------------------------------------------------------
\30\ U.S. Dept. of Labor, BLS, ``International Comparisons of
Hourly Compensation Costs for Production Workers in Manufacturing,
1975-1998,'' September, 1998. Table 1. USDL 98-376.
---------------------------------------------------------------------------
A new study by Miguel Szekely, an economist at the Inter-American
Development Bank, points out that Mexico's consumers have suffered a
39% drop in purchasing power over the past five years.\31\ The report,
written for the United Nations Development Program, shows that two-
thirds of Mexico's population is now considered ``poor,'' compared with
less than half that was considered so before Nafta. Szekely notes that
it would take five years of very strong economic growth just to
recovery to the high poverty levels that existed in Mexico even a
generation ago. It is now quite difficult to foresee a time when Mexico
can be a significant customer for U.S.-made products.
---------------------------------------------------------------------------
\31\ Reported by Joel Millman in a front page report of the Wall
Street Journal, ``Is the Mexican Model Worth the Pain?'' March 8, 1999.
---------------------------------------------------------------------------
Trade with Mexico, as with other BEMs, is driven not by traditional
efficiencies and inherent comparative advantages of national firms but
by transnational firms taking advantage of tremendous cost savings,
undermining smaller national firms.
For example, Mexico has no ``national'' auto producer.
Nevertheless, in 1998 Mexico exported 99,000 more cars just to the U.S.
than firms producing in the U.S. exported to Mexico and to the rest of
the world combined. Producers in Mexico shipped 587,000 cars to the
U.S. last year while producers in the U.S. exported only 488,000 cars
to the world--including to Mexico. The U.S. paid $28.3 billion for
imported cars, trucks and parts from Mexico in 1998 while earning only
$11.7 billion for mostly outsourced industry ``exports'' to Mexico.\32\
---------------------------------------------------------------------------
\32\ Unit figures are available for auto and truck exports and
production from the U.S. Department of Commerce, Bureau of Economic
Analysis. The dollar value of cars, trucks and parts imports and
exports are available in the BEA's ``International Trade in Goods and
Services: December, 1998,'' (FT900), Exhibit 18.
Indeed, across the entire spectrum of traded industries, it is hard
to imagine how anyone even remotely knowledgeable about U.S./Mexico
commercial patterns could make a case that it is driven primarily by
traditional forces of productivity and national comparative
advantage.\33\ Unfortunately, Nafta proponents do not attempt to make
their arguments based on the data but--despite the awful track record--
merely assert obsolete theories as fact or forecast.\34\
---------------------------------------------------------------------------
\33\ Traditionally, productivity has generally been taken to refer
to the productivity of labor which is relatively fixed in a location.
Today, trade is being driven largely by the productivity of capital
which is instantly and globally mobile driving factor price
equalization.
\34\ Even Nora Claudia Lustig, an insightful scholar of Mexico at
the Brookings Institution, ignores the content of U.S./Mexico trade and
assumes that any increase in the total volume is driven by traditional
productivity and national comparative advantage forces as she joins the
popular celebration of Nafta's ``success.'' See her Nafta: Setting the
Record Straight, (Washington, DC: Brookings Policy Brief No. 20, 1997).
---------------------------------------------------------------------------
Indeed, U.S./Mexico trade patterns are almost the opposite of what
Nafta supporters might believe.\35\ U.S. net export losses to Mexico
are now concentrated in autos and electronics with losses now emerging
in optics and precision instruments, and machinery including computers
and computer components. U.S. net export gains are largely in bulk
commodities such as cereals, oil seed, organic chemicals, pulp wood and
animal fats. Even the few manufactured goods with net export gains are
concentrated in bulk commodities such as plastic boxing and packing
materials, cereal and assorted seeds and fruit.
---------------------------------------------------------------------------
\35\ Importantly, this new post-Nafta trade pattern does NOT now
exist with the Caribbean, and the rest of Latin America where the U.S.
continues to enjoy both overall net export surpluses and surpluses in
the expected high productivity industries of machinery, electronics and
autos.
U.S. TRADE WITH MEXICO: LOSSES ARE CONCENTRATED IN VEHICLES AND ELECTRONICS
[In billions of dollars]
----------------------------------------------------------------------------------------------------------------
Before Nafta After Nafta
Annual balances HITC codes & industries 1991-1993 1994-1998 Annual Change
----------------------------------------------------------------------------------------------------------------
Merchandise totals:............................................. $3.1 -$12.4 -$15.5
----------------------------------------------------------------------------------------------------------------
5 Industries Suffering Largest Net Export Losses Since Nafta
----------------------------------------------------------------------------------------------------------------
87 Vehicles..................................................... -$0.8 $6.5 -$5.6
85 Electrical machinery......................................... -2.1 -5.2 -3.1
84 Machinery and parts.......................................... 2.5 0.3 -2.2
27 Mineral fuels................................................ -3.7 -5.1 -1.4
90 Precision instruments........................................ 0.5 -0.6 -1.1
----------------------------------------------------------------------------------------------------------------
5 Industries Enjoying Largest Net Export Gains Since Nafta
----------------------------------------------------------------------------------------------------------------
12 Misc. grain, seed, fruit..................................... $0.5 $0.8 $0.3
29 Organic chemicals............................................ 0.6 0.9 0.3
48 Paper/paperboard............................................. 8.5 1.2 0.4
10 Cereals...................................................... 0.7 1.2 0.5
39 Plastics and articles........................................ 1.5 3.0 1.4
----------------------------------------------------------------------------------------------------------------
Sources: U.S. Dept. of Commerce, Bureau of Census and MBG Information Services.
Clearly a process that leads the U.S. to specialize in plastic,
cereals, paper boxes, cereals, organic chemicals and assorted fruits
and seeds while moving away from autos, electronics, and machinery such
as computers is not a net positive for the U.S. economy, its workers or
domestic producers. It contributed to the virtual stagnation in overall
U.S. productivity growth in 1994 and 1995 and is one reason that
productivity growth (despite strength in 1996 and 1998) has been the
weakest ever recorded in the current recovery.
However, this upside-down trading pattern is good for the few
transnational firms that are rapidly increasing their production in or
contracting out to Mexico.\36\ Oddly, this contracting out is
uncritically celebrated as ``jobs creating exports'' in all
``assessments'' by Nafta promoters. Yet 46% of all U.S. ``exports'' to
Mexico and 65% of U.S. imports from Mexico were intra-firm transactions
in 1997.\37\ The detailed data of the major traded industries tell an
even more interesting story as 92% of imported vehicles and parts were
intra-firm, 84% of electrical machinery and parts, and 89% of
telecommunications and sound equipment. And of course, these are only
the transactions linked by intra-firm stock ownership and do not
include the many other forms of contract and sourcing relationships.
---------------------------------------------------------------------------
\36\ In Nafta's first year, Mexico became the largest source of
contracted-out production sharing. U.S. International Trade Commission,
Production Sharing: Use of U.S. Components and Materials in Foreign
Assembly Operations. 1991-1994. (Washington, DC: ITC, May, 1996).
\37\ Related Firm trade is defined by the Tariff Act of 1930 to
include transactions between parties with ownership or control of 6% or
more of the outstanding voting stock in its partner. U.S. Dept. of
Commerce, Bureau of Census, ``U.S. Goods Trade: Imports & Exports by
Related Parties: 1997,'' (Washington, DC: DOC, May 14, 1998). Detailed
industry data for Mexico come from a special data run by the Bureau of
Census.
---------------------------------------------------------------------------
The overwhelmingly intra-firm nature of U.S. trade with Mexico
raises a complex set of measurement problems particularly for the
politically sensitive issue of the effect of trade on jobs. Exports
``create'' or ``support'' new jobs only to the extent that exports
represent new production. Certainly, if a firm, closes part of its
production process in California, moves it to Mexico but continues to
supply its new Mexican facility with components, U.S. ``exports'' have
increased but U.S. jobs have been reduced. Other firms that previously
supplied the operation in California and were able to continue to
supply the relocated operation in Mexico would appear as new exporters
even if they sold the operation less than previously.
Although it is not possible to quantify, clearly many U.S. exports
to Mexico are of this contracting out type that ``destroy'' rather than
``create'' jobs in the U.S. Yet the methodology that attributes jobs
created or sustained by exports to Mexico ignores this major
factor.\38\ Even more importantly, while every serious analyst in the
past considered both imports and exports, today Nafta advocates ignore
jobs displaced by imports. There is no substantive basis for this
shamelessly misleading practice.
---------------------------------------------------------------------------
\38\ Lester A. Davis, U.S. Jobs Supported by Goods and Services
Exports: 1983-94, (Washington, DC: U.S. Dept. of Commerce, Economics
and Statistics Administration, Nov. 1996) The current report attributes
729,000 U.S. jobs from exports to Mexico--approximately 14,000 jobs to
each $1 billion in goods exports. There are no country specific data
for services.
---------------------------------------------------------------------------
Today's global economy makes bi-lateral assessments inherently
complex. Nonetheless, the Department of Commerce calculates that it now
requires 14,000 full time jobs to produce $1 billion worth of traded
goods. Ignoring the job displacements from contracting out many U.S.
``exports'' to Mexico, applying this formula to the U.S. net export
loss to Mexico of $16.8 billion in 1998 suggests a displacement of
235,000 higher wage U.S. jobs to Mexico trade. A proper accounting for
jobs lost to contracted out ``exports'' would sharply raise the total
job displacement figure to the range of 300,000.\39\
---------------------------------------------------------------------------
\39\ In February, 1999, total U.S. employment in traded
manufacturing and mining is -931,000 below its 1990, post-recession
levels. While 15.3 million net new U.S. jobs have been created since
Nafta took effect, virtually all have come in services as fewer than
0.3 million net new jobs were created in traded manufacturing or mining
sectors.
---------------------------------------------------------------------------
Also key in any assessment of U.S./Mexico economic relations since
Nafta is the effect of the relationship on the wages of working U.S.
consumers. Again, the recent flood of reports from Nafta promoters are
extremely misleading in their treatment of this important issue. Even
in the Hufbauer and Schott report that was featured in selling Nafta it
was noted that: \40\
---------------------------------------------------------------------------
\40\ Hufbauer & Schott, p. 21. (Their table, p. 16, shows that even
before the U.S. lost its manufacturing surplus with Mexico, export-
related jobs paid $420 per week and jobs displaced by imports from
Mexico paid $424.)
Based on the 1990 composition of trade, the median weekly
wage associated with U.S. exports to Mexico and U.S. imports
from Mexico were practically the same: about $420 to $425 per
week. This calculation is striking because it suggests that
there is no overall tendency for U.S. exports to Mexico to
support high-skilled U.S. jobs, nor for U.S. imports from
---------------------------------------------------------------------------
Mexico to displace low-skilled U.S. jobs.
That is, even by the calculations of Nafta's strongest supporters, in
1990 wages associated with U.S. exports to Mexico paid -$5 per week
less than jobs displaced by U.S. imports from Mexico. Since 1990, as
discussed above, the composition of U.S./Mexico trade has shifted
dramatically in ways that have likely widened this disparity. Imports
from Mexico have grown faster than exports to Mexico since Nafta
implementation, indicating a force of downward pressure on wages.
Kate Bronfenbrenner has documented wide use of intimidation by
transnational interests threatening relocation to Mexico to force U.S.
workers into concessions on wages and benefits.\41\
---------------------------------------------------------------------------
\41\ Kate Bronfenbrenner, Final Report: The Effects of Plant
Closing or Threat of Plant Closing on the Right of Workers to Organize,
(Cornell University, Program on Labor Education Research, September,
1996.)
---------------------------------------------------------------------------
Most important, although it is again not possible to document or
quantify, is the intense market pressure on wages, profits, regulatory
compliance and most other U.S. production cost factors from
transnational production in a nation on the U.S. border with a
population three times the size of Canada. Many Nafta advocates now
attempt to trivialize Mexico's effects on U.S. workers and firms by the
fact that due to Mexico's impoverishment its GDP is only 1/28th the
size of the U.S. economy. Yet with a population of almost 100 million,
Mexico's labor force is growing by well over one million each year--
more than half the size of U.S. labor force growth. This is one
important reason why real compensation per hour for all U.S. nonfarm
workers declined during the five years ending in 1997--even in a time
of cyclical recovery and low unemployment.\42\
---------------------------------------------------------------------------
\42\ The U.S. Dept. of Labor, BLS data series on ``Productivity and
Costs,'' shows real compensation per hour for all nonfarm workers with
an index of 100 in 1992 and 99.9 in 1997 (latest data from release of
March 9, 1999.)
---------------------------------------------------------------------------
Real compensation appears to have grown by 2.6% in 1998, its
strongest rise since 1986. Yet the extraordinary wage and benefit
stagnation of recent years continue to be reflected in many ways.
Consumer debt levels and ratios have reached record highs, personal
savings rates actually fell to negative in late 1998--for the first
time since 1933. Certainly there are many causes for these developments
but there is no question but that Nafta's investment and trade
provisions with Mexico are key factors.
Finally, despite their confident forecasts six years ago, Nafta
advocates now insist that Mexico's recent economic and trade
performance have nothing to do with Nafta but have been driven by a
never before witnessed devaluation of Mexico's Peso.
But Peso devaluations have been a common occurrence in Mexico for a
generation. The 47% devaluation of 1994-95 was less severe than
devaluations in 1982, 1983, 1986 and 1987 and barely worse than those
in 1984, 1985 and 1988. Why was $42 billion in U.S.-tax-payer-backed
stabilization loans necessary to avoid even greater crisis in Mexico
after Nafta's first year? Even with this, why has Mexico suffered its
worst depression since the 1930? Why have Mexican wages fallen 30%
below pre-Nafta levels and the differential with U.S. wages widened?
Why are U.S. trade losses twice as large as ever before and
concentrated, for the first time, in highly productive, high wage
manufacturing industries of autos, electronics and machinery?
As indicated at the outset, the principal reason is the Nafta
guarantees to investors and speculators that have left Mexico
vulnerable to global events, investors and speculators.\43\ Nafta's
investment and trade provisions have clearly failed the vast majority
of Americans as well as Mexicans. The failures of Nafta provide
important lessons not only for U.S. policymakers but for Asia and for
developing and transnational states everywhere. To ignore this
experience and lurch ahead with obsolete theories of globalization
could be a fast track to even deeper and wider trouble.
---------------------------------------------------------------------------
\43\ See especially Chapter 11; Article 1110 of the Nafta agreement
which states: No Party shall directly or indirectly nationalize or
expropriate an investment of an investor of another Party in its
territory or take a measure tantamount to nationalization or
expropriation of such an investment.
This language so clouds the legal concept of a ``taking,'' that
the Ethel Corporation, for example, brought a $251 million lawsuit
against Canada in an autonomous Nafta tribunal charging the attempt to
ban a gasoline additive MMT as a toxin constitutes ``expropriation.''
For a recent overview of a wide variety of cases see ``Trade Pacts
Accused of Subverting U.S. Policies,'' Los Angeles Times, February 28,
1999.
Charles W. McMillion, President and Chief Economist of MBG
Information Services is a former Associate Director of the Johns
Hopkins Univ. Policy Institute, former Contributing Editor of the
Harvard Business Review and a founder of the U.S. Congressional
Economic Leadership Institute. He can be reached by E-Mail at
``[email protected]''
The Chairman. Now I want to thank you for coming and
testifying. You have done an enormous amount of work in
preparing yourself. And I am the sort of fellow that would like
to have the Ambassador and you sitting side by side with boxing
gloves figuratively and----
Dr. McMillion. Mr. Chairman, he is from Dallas, and I am
from Fort Worth. So this goes way back.
The Chairman. I see.
Well, I thank you and I thank the witnesses who have
already departed, with the understanding that these proceedings
will be printed, with my gratitude with you and others.
There being no further business to come before the
committee, we stand in recess. Thank you very much.
[Whereupon, at 4:09 p.m., the hearing was adjourned.]
A P P E N D I X
----------
Responses of Ambassador Fisher to Questions Submitted by Senator Helms
Question. Are you aware that Guilford Mills, along with Cone Mills,
is investing $411 million over the next five years in something called
the ``textile city'' in Mexico where all the bolts will be
manufactured?
Answer. We have seen press reports about these investments. We have
not consulted the companies about these investments but we assume they
are part of the companies' strategies to increase their global
competitiveness. A global strategy, including diverse manufacturing
presences, is a hallmark of most successful large U.S. companies. The
outstanding performance of the United States economy in recent years,
including low unemployment and inflation, strongly suggests that
globalization is, on balance, highly positive for the U.S.
Question. A December 1998 ITC Report states, ``Recent announcements
by several U.S. textile manufacturers to establish or further expand
their textile operation in Mexico can be expected to encourage the
growth of full package services in Mexico'' Isn't that comment--and the
Administration's argument inconsistent with the facts?
Answer. To the extent that a textile company wishes to offer ``full
package services'' (i.e. finished apparel), it makes sense for that
company to locate production where it can most efficiently compete with
imports from the Far East. However, U.S. textile companies are pursuing
a variety of strategies for competing in the U.S. and other markets,
and it remains to be seen how extensively the industry will embrace the
full package concept.
Question. You mentioned that the unemployment rate in North
Carolina is low, and you're right. Nobody is more pleased about that
than me. But I am not so concerned with Charlotte or the Research
Triangle. They can take care of themselves. I am concerned about the
folks in Swain County, where the unemployment is 22%. Or Graham County
where the unemployment rate is 11.5%. In Cherokee County the
unemployment rate was 11.6% before Levi's announced it was closing.
What is your plan for these communities?
Answer. Despite the impressive record of job growth in North
Carolina and throughout the United States, the Administration remains
deeply concerned about the job dislocations in the United States, and
is responding to these concerns in a variety of ways. The best way to
address the problems, at the federal level, is with economic policies
that foster growth, and with investments in training and education so
that all our workers can compete. The communities you cite, located in
the far western corner of North Carolina, have a long history of
economic hardship, well before the NAFTA entered into force. In Swain
County, for example, 27.6 percent of the population was below the
poverty level in 1992, Cherokee County's poverty rate was 20.4 percent,
and Graham's poverty rate was 24.9 percent in 1989. Unemployment rates
have been persistently high. In 1992 for example, the rates in the
three counties, respectively, were 12.9, 9.9, and 25.7 percent. To
address these problems, we would note the following:
In addition to creating a more viable environment for competitive
U.S. textile manufacturing in the U.S. through NAFTA, the
Administration is strongly committed to improving the technology and
manufacturing processes used by the U.S. textile and apparel industry
so that we can keep and generate good jobs in the U.S. through enhanced
productivity. Towards this end, the Department of Commerce administers
grants for technological research to the Textile/Clothing Technology
Corporation in Raleigh and the National Textile Center, a research
consortium of six universities including North Carolina State.
The Commerce Department's Economic Development Administration has a
program for firms which can demonstrate that sales have been adversely
impacted by imports.
The Labor Department has a Trade Adjustment Assistance Program to
assist workers who have jobs that are threatened by, or adversely
impacted, by imports. Since the inception of the NAFTA, a special
program was established for workers threatened by and adversely
impacted by imports from Mexico or Canada.
In Swain County, the Business Microloan Program is funded by the
Small Business Administration (SBA) and can offer loans of $25,000 or
less to meet the financial needs of small businesses. Self-Help also
provides some management assistance to prospective borrowers in
conjunction with these loans. With SBA Guaranteed Loans, Self-Help can
give flexible repayment terms and collateral requirements for a small
business borrowing up to $850,000. SBA also maintains a Tribal Business
Information Center in Cherokee, and oversees the Certified Development
Company (CDC) Program to provide growing businesses with long-term,
fixed-rate financing for major fixed assets, such as land and
buildings. A Certified Development Company is a nonprofit corporation
set up to contribute to the economic development of its community or
region. CDCs work with the SBA and private-sector lenders to provide
financing to small businesses. The local CDC for the areas you cite is
the Smokey Mountain Development Corporation.
Question. According to your argument on global free-markets,
everyone must compete in the global market, and yet when the Asian
economies collapsed, because they couldn't compete, we bailed them out.
When the Mexican economy collapsed, we were there with billions of
dollars.
How is this free trade when we are subsidizing the very
people my constituents are competing against?
Answer. The ``bailouts'' of Mexico and Asia were primarily
financial sector assistance packages, not subsidies. It is in the
national interest of the United States to safeguard the international
monetary system by which all markets operate. In Mexico's case, its
balance of payments policy in 1994 was unsustainable after internal
political shocks precipitated a cessation of capital inflows, causing
foreign currency reserves to fall to intolerably low levels. Mexico was
forced to devalue the peso and to eliminate its large current account
deficit. The Mexican authorities responded to the resulting recession
by firmly implementing a strong economic adjustment program--backed by
U.S. and other international support, and fully respecting its NAFTA
obligations to liberalize trade with the United States and Canada--
which allowed Mexico's banking sector to avoid default on its external
debt, and Mexico's economy to return to its path of steady growth. Our
financial package did not lose taxpayer money, and in fact we made
money for the U.S. Treasury from Mexico's interest payments. In return,
we got commitments to economic reform which led to a rapid return of
growth combined with the NAFTA market-opening disciplines to the
benefit of U.S. economic opportunity, growth and exports.
As the IMF has stated, the Asian crisis unfolded against the
backdrop of several decades of outstanding economic performance in
Asia, and the difficulties that the East Asian countries face are not
primarily the result of macroeconomic imbalances. Rather, they stemmed
from weaknesses in financial systems and, to a lesser extent,
governance. A combination of inadequate financial sector supervision,
poor assessment and management of financial risk, and the maintenance
of relatively fixed exchange rates led banks and corporations to borrow
large amounts of international capital, much of it short-term,
denominated in foreign currency, and unhedged. As time went on, this
inflow of foreign capital tended to be used to finance poorer-quality
investments.
The World Bank, the Asian Development Bank (ADB), and the
International Monetary Fund (IMF), have aided the United States'
efforts to reestablish confidence in the affected countries by
encouraging them to undertake a temporary tightening of monetary policy
to stem exchange rate depreciation; correcting the weaknesses in the
financial system; implementing structural reforms to remove features of
the economies that had become impediments to growth (such as
monopolies, trade barriers, and non-transparent corporate practices)
and to improve the efficiency of financial intermediation; reopening or
maintaining lines of external financing; and maintaining sound fiscal
policy while protecting social spending.
Question. Considering the Africa Trade Bill, please explain how the
USTR suddenly decided it will presume 90% of eligible textile and
apparel items will be considered import sensitive and therefore would
not be granted the import preference according to the CBO?
Do you normally make presumption like that?
Answer. USTR has not provided an estimate or made any assumptions.
We have stated that, should the Congress provide the authority, we
would conduct the normal review of eligible articles before deciding
which to designate for GSP benefits. This review process includes
obtaining ITC advice on the economic effects and multiple opportunities
for written public comment and hearings.
Question. Was it contemplated at the inception of NAFTA that
General Motors would be Mexico's largest private sector employer?
Answer. No. As far as we can determine, the Administration did not
engage in forecasts of the composition of the Mexican labor force in
June of 1990, when Presidents Bush and Salinas agreed to engage in
negotiations for a possible U.S.-Mexico FTA, nor a year later when
negotiations were formally launched, nor in December 1992 when
President Bush signed the NAFTA. The Clinton Administration expected
that the NAFTA would provide greater employment opportunities in all
three countries, but was, and continues to be, much more interested in
employment in the United States than employment in Mexico. Since the
NAFTA entered into force, employment in the United States has grown by
over 15 million new jobs. The unemployment rate has dropped to 4.2
percent, the lowest level in three decades. Wages have risen by about 6
percent in real terms, after a long period of stagnation. U.S.
employment in the motor vehicle and equipment sector increased by over
14 percent from December 1993 to December 1998.\1\
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\1\ Bureau of Labor Statistics, National Employment, Hours and
Earning, Series ID EES31371001, SIC Code 371. Raw figures are 862
thousand for 12/93; 990 thousand for 12/98.
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In the United States, General Motors is ranked second on the
Fortune 500 list in terms of employment in the United States in 1998,
with 594,000 employees, followed by the Ford Motor Company with 345,175
employees. GM is ranked as first on the Fortune Magazine Fortune 500
list in terms of revenue, and is also ranked first in revenue on the
Global 500 list. As a consequence, while it would be hardly surprising
if GM were Mexico's largest private sector employer, we have been
unable to confirm whether this is in fact the situation.
According to the Office of Automotive Affairs in the Department of
Commerce, in 1998, the U.S. motor vehicle industry (SIC 3711, Motor
Vehicles and Passenger Car Bodies), employed an average of 254,100
production workers per month, a decline of almost 6 percent from the
previous year. These numbers are distorted by the GM strike, which
reduced average employment from the previous July's 256,800 average to
178,000. Without this anomaly, 1998 average employment would have been
higher than reported. Compensation in the auto industry is among the
highest in the United States. Assembly workers garnered average hourly
earnings (in addition to a benefits package) of $21.81 in 1998,
compared with the national average for all manufacturing industries of
$13.49. In 1997 they earned $21.63, compared with the national average
of $13.17. U.S. assembly workers produced an average of 47 cars and
trucks of all weight classes (12 million total) per employee in 1998,
compared with 45 vehicles in 1997. During 1978, the all-time peak
production year, U.S. vehicle output was 12.899 million units. The
349,100 hourly employees each produced an average of 37 vehicles that
year.
Question. When an auto assembly plant moves to Mexico, parts
manufacturers are forced to move down there as well. Is this happening
to many industries? Was this contemplated?
Answer. The NAFTA in fact is changing a combination of Mexican laws
(including quotas, trade balancing and local content requirements)
which had forced firms to move to Mexico in order to sell their
products there. The build-up of the automotive industry in Mexico can
be traced to these rules, which had been in place for three decades
prior to the NAFTA. With the NAFTA, neither assembly plants nor parts
manufacturers are forced by unfair laws to locate in Mexico, and so may
locate plants wherever it makes the most sense.
Although imports of light vehicles from Mexico have grown
significantly in the last few years, it would be inaccurate to deduce
that this must be because automotive assembly plants and parts
manufacturers are flocking to Mexico. The United States remains the
leading location for automotive investment, according to a study
reported in the Fourth Annual Report to Congress on the Impact of the
NAFTA on Automotive Exports (July 1998). From July 1995 through June
1997, markets receiving the most automotive investment in rank order
were the United States, Brazil, India and China. Canada ranked ninth
and Mexico tenth. U.S. and foreign-owned automotive companies continue
to invest in both new and renewed facilities in the United States.
According to the same report, international competition and the
drive to create global sourcing are affecting parts suppliers in
Mexico. Small parts suppliers in Mexico also are having difficulty
accessing credit at reasonable rates whereas larger suppliers have
access to more favorable credit in the international marketplace. Many
vehicle manufacturers tend to favor in-house and long-term suppliers
rather than looking to smaller, less developed firms. These trends,
which are global, will increase competition for smaller independent
Mexican parts suppliers.
Mexico is attempting to make itself a more attractive investment
location as it continues to actively pursue preferential trade
agreements throughout the Western Hemisphere and with the European
Community. As the number of preferential trade agreements negotiated by
Mexico increase, the attractiveness of Mexico as a manufacturing
location will also increase, all other factors remaining unchanged. For
instance, Mexico is now a major manufacturing location for VW's global
operations. VW's Mexican operation undertakes intra-company trade with
its facilities in Brazil, Argentina and Europe, and has access to the
U.S. and Canadian markets. Mexico can also offer a low labor cost to
firms, but this advantage is overwhelmed by the high costs of
transportation, power, and an inefficient infrastructure. The United
States is considered an ideal production location because of the
availability of raw materials, the productivity of its labor force and
other factors, however, these advantages may be affected by tariff
barriers. For example, Mexican exports of automotive products enter
Chile with no tariff while exports from the United States face an 11
percent tariff.
As for other industries, firms are not moving en masse to Mexico.
As I pointed out in my written statement, the stock of U.S. direct
investment abroad, on a historical cost basis, reached only $25 billion
in Mexico in 1997, which is less than 3 percent of the worldwide total
U.S. investment abroad of $860.7 billion. The U.S. is not shifting
massive amounts of capital to Mexico, and the jobs that go with them.
Instead, the facts show U.S. and foreign firms are increasing capital
investments in all three NAFTA countries. The stock of foreign direct
investment in the United States reached $681.7 billion in 1997, while
U.S. firms poured over $1.3 trillion of non-residential fixed
investment into the United States.
Question. Did the proponents of NAFTA think that only low-skilled
apparel jobs would move South of the border or was it foreseen that
fiber, spinning, weaving and finishing plants would necessarily move
South to stay competitive in the U.S. market? What do you say about the
prospects of textile and apparel companies that stay in the U.S.?
Answer. The goal of the NAFTA is to create opportunities for trade
that will lead to new and better jobs in all three countries. The
Administration's record on the NAFTA in its first five years
demonstrates its success in this area. The NAFTA's textile provisions
provide new market opportunities for the U.S. textile and apparel
industries, and counterbalance the labor cost advantage held by Far
East suppliers of apparel. As a result, U.S. exports of textiles and
apparel to Mexico rose by 182 percent between 1993 and 1998, while
exports to Canada grew by 72 percent over the same period.
In 1993, the top suppliers of textiles and apparel products to the
United States were China, Hong Kong, Taiwan and Korea. Together these
countries accounted for 39 percent of total U.S. imports of textiles
and apparel products, while Canada and Mexico accounted for 7 percent.
By 1998, the market share of Canada and Mexico grew to 17 percent,
while the share of those four Far East suppliers was 12 percentage
points below their 1993 share. The benefit to the U.S. of this shift in
the growth of imports is that almost 60 percent of the value of U.S.
textile and apparel imports from Mexico in 1998 were comprised of U.S.
content, for example, formed and cut fabric, while the U.S. content of
imports from the Far East is negligible.
It is not surprising that the rapidly growing Mexican apparel
industry is attracting investment from suppliers of raw materials such
as fabric, including from U.S. companies. However, we believe the
domestic textile industry is, and will continue to be stronger because
of the opportunities to sell to our NAFTA partners, than it would have
been without NAFTA. Moreover, U.S. producers have increased their focus
on home furnishings and industrial products which are less susceptible
to competition from sources with low-cost labor.
Question. You quoted Chuck Hayes of Guilford as saying NAFTA would
be the ``Renaissance'' of the textile industry. Last year his company's
stock was selling for $30, today you can buy it for $9. He is not the
only one in trouble. Of the 82 textile stocks followed by The Apparel
Strategist, 61 are below their price at the end of 1997. 22 of these
stocks are down over 50%, and 11 have lost more than two-thirds of
their value. Please explain again how NAFTA will help the 1.4 million
Americans currently working in the domestic textile industry?
Answer. The industry attributes its current problems to the Asia
economic crisis. In his March 23, 1999 testimony before the House Ways
and Means Subcommittee on Trade, the American Textile Manufacturers
Institute's Executive Vice President Carlos Moore noted that ``In the
home market, the U.S. textile industry has . . . been confronted by a
wave of low-price Asian imports. Overall prices for Asian fabrics have
declined by ten percent since the Asian currency crisis began while
yarn prices have fallen by 23 percent.''
Without NAFTA, the effects of the Asian crisis on the U.S. textile
industry would have been even worse. Mexican plants purchase large
quantities of U.S. components, allowing U.S. companies to increase
exports, enhance efficiencies, and maintain jobs in the United States.
In particular, U.S. employment levels for more-skilled, higher-paying
jobs such as cutting, computer-aided design and manufacturing,
marketing and product development, have remained relatively stable.
Question. Most of our exports to Mexico are capital and
intermediate goods that go into factories where the products are
ultimately exported back to the United States. Very little of our U.S.
exports are ``consumed'' in Mexico by consumers. Please give me a time
table of when you expect a consumption-oriented middle class will be
created, how big it will be and what it is that will then be made in
the United States to sell them?
Answer. The NAFTA is fostering increased economic opportunity. The
composition of Mexico's class structure ultimately depends on the
Government of Mexico's social and economic policies and how the Mexican
private sector reacts to those policies. International trade, while
important, plays a part in this, but as in the U.S., there are other
more important factors impacting the Mexican economy and the makeup of
a ``consumption-oriented middle class.'' Macroeconomic policies and
technological change, for example, are two bigger factors. For that
reason, creating a time table is not possible.
It is important to keep several points in mind on this topic.
First, capital goods by definition are accumulated goods devoted to the
production of other goods, e.g., industrial equipment and supplies.
Mexican purchases of these goods generally do not presuppose the return
of those goods to the United States, but instead presumptively are for
the use of those goods in Mexico to produce other goods. The finished
goods produced, in turn, may be of Mexican origin, U.S. origin, mixed
origin, or non-NAFTA origin, and ultimately may be sold in Mexico, the
United States, or another country. Mexico is not just a way-station for
U.S. goods. In fact, the NAFTA eliminates performance requirements and
other policies in Mexico that precluded Mexican domestic consumption of
certain imports from the United States.
Second, most of what we export to Mexico are not ultimately
exported back to the United States. All of our services exports, for
example, are ``used'' in Mexico. Our leading single export to Mexico is
electrical machinery, but goods for use or consumption account for over
40 percent of the total amount of Mexico's merchandise imports.
Third, a consumption-oriented middle class already exists in
Mexico. Its size and consumption patterns are not necessarily keys to
our export success, since the Mexican ``middle class'' is not the only
buyer of American goods and services. Mexico's middle class was hard
hit by the 1994-95 peso crisis, but except for a slight decrease in
1995, our exports of goods to Mexico have increased every year with the
NAFTA, growing 90 percent over the first five years of the NAFTA by $37
billion, to reach $79 billion.
Question. As you know the number of Mexicans that are considered
poor has increased to almost two-thirds of the population since NAFTA.
Real wages are lower today than they were 10 years ago. How do you
account for this and was it contemplated in the planning for the NAFTA?
Answer. Poverty in Mexico exists for reasons which are unrelated to
the NAFTA. Decades of failed economic policies, including
nationalization, land reform, forced industrialization by following the
import-substitution economic model and mismanagement of exchange rate
policies and other macroeconomic policies, have all exacerbated poverty
levels in Mexico. Although reliable data is scarce, particularly
current data, there is no doubt that Mexico experienced an increase in
unemployment, and a sharp drop in real wages, due to the sudden fall in
output precipitated by the 1994-95 peso crisis. However, the NAFTA
contributed to Mexico's speedy recovery from its crisis, by forcing
Mexico to stay the course of market-based reforms. In fact, employment
growth in Mexico is up 22 percent in Mexico over the last 5 years, an
increase of 2.2 million jobs. Furthermore, wages are higher in export
supported jobs in Mexico when compared to wages in those industries
that produce for the domestic market, and the recent growth in Mexican
exports has generated more of these higher wage jobs.
Although there was no way to forecast the sudden drop in real wages
caused by Mexico's 1994-95 crisis, one of the considerations in
preparing for the NAFTA was the fact that Mexico is a developing
country. By removing barriers to trade, the NAFTA encourages increased
import and export activity, which creates opportunities for economic
development, and new jobs, in all three NAFTA countries. In fact,
employment growth has occurred in all three countries since the NAFTA.
You should also be aware that the United States is working with
Mexico (as well as other countries), through multilateral organizations
such as the United Nations Development Program and the World Bank. The
keys to dealing effectively with issues of poverty and inequality are
to deal with the basics--growth and global competitiveness to provide
jobs, education and health to enhance the capacity of the poorest and
marginal groups.
Question. Illegal immigration and the flow of illegal narcotics
coming into the U.S. through Mexico are growing. They have grown each
year since NAFTA was passed. Why is it that the Administration's
forecasters had it all wrong when they said that NAFTA would actually
ameliorate some of these intractable problems?
Answer. In 1993, the Administration stated the NAFTA will gradually
ease many of the pressures in Mexico that contribute to illegal
immigration across our border. Specifically, a combination of domestic
reforms and NAFTA-related growth in Mexico tends to keep more Mexicans
at home, and it is likely to increase the real wages of low-skilled
American workers. That logic is still at work today, and the available
data indicate the strategy is effective. In the past few years,
Mexico's economy has grown, as has its employment levels which are up
22 percent, or 2.2 million jobs, since NAFTA's enactment, and, not
coincidentally, real wages in the United States have risen by about 6
percent. Without the NAFTA, it is unlikely that Mexico's economy would
have rebounded so quickly from the 1994-95 peso crisis, and Mexico may
have chosen to forego market-based economic reforms, which could have
worsened one of the principal factors inducing illegal immigration,
namely, the scarcity of employment opportunities in Mexico.
Illegal immigration flows should not be attributed to the passage
of the NAFTA. According to the latest annual INS report, about 5.0
million undocumented immigrants were residing in the United States in
October 1996. The population was estimated to be growing by about
275,000 each year, which is about 25,000 lower than the annual level of
growth estimated by the INS in 1994. The undocumented population grows
at varying levels from year to year, but the data available to make
these estimates do not permit the derivation of annual figures to
measure year-to-year changes. However, the similar levels of growth for
the 1988-92 and 1992-96 periods, 281,000 and 275,000, respectively,
suggest that the overall level of growth has been fairly constant over
the past decade.
As for the flow of illegal drugs, the Administration stated in 1993
that NAFTA will reduce tariffs, not customs controls on the border. The
Administration also stated that by promoting U.S.-Mexican cooperation,
the NAFTA can foster a positive atmosphere for further bilateral
efforts to fight drugs.
Today, ten million trucks and cargo containers and ninety thousand
merchant and passenger ships enter the United States annually, carrying
some four hundred million metric tons of cargo. Amid this voluminous
trade, drug traffickers seek to hide approximately three-hundred metric
tons of cocaine, thirteen metric tons of heroin, vast quantities of
marijuana, and smaller amounts of other illegal substances. The U.S.
supply-reduction strategy seeks to: (1) reduce illegal drug cultivation
and production; (2) destroy drug-trafficking organizations; (3)
interdict drug shipments; (4) encourage international cooperation; and
(5) safeguard democracy and human rights. The United States continues
to focus international drug-control efforts on source countries, where
international trafficking organizations are most concentrated,
detectable, and vulnerable to effective law-enforcement action.
A strong partnership with Mexico is critical to controlling the
flow of illicit drugs into the United States. The U.S. has certified
Mexico as fully cooperating in this effort based on an unprecedented
level of cooperation on counter-narcotics and Mexico's own initiatives
in fighting drug trafficking. In 1998, Mexico was second only to
Colombia in combined total drug crop (opium and marijuana) eradication,
after leading the world in eradication in 1995-97. It seized 22.6
metric tons of cocaine, 121 kilos of heroin, 1,062 metric tons of
marijuana, and 96 kilos of methamphetamine. With respect to all but
cocaine, seizure levels were up over 1997.
The United States and Mexico established a High-Level Contact Group
(HLCG) in 1996 on narcotics control to explore joint solutions to the
shared drug threat, to coordinate the full range of narcotics issues
and to promote closer law enforcement coordination. President Zedillo
formalized his government's commitment to counternarcotics cooperation
with the United States by signing the ``Declaration of the Mexican-U.S.
Alliance Against Drugs'' with President Clinton in May 1997. The
binational alliance worked throughout 1997 to produce the ``U.S.-Mexico
Binational Drug Strategy,'' a document released in 1999, which contains
16 alliance objectives, ranging from drug shipment interdiction to
extradition of drug traffickers. Following the controversy in 1998 over
a U.S. money laundering investigation of Mexican banks and individuals
(Operation Casablanca), the two governments agreed on procedures to
improve communication and coordination in cases of sensitive law
enforcement investigations. The Administration's drug control strategy
is effective. In 1997, there were 13.9 million current users of any
illicit drug in the total household population aged 12 and older, down
from the peak year of 1979, when 25 million (or 14.1 percent of the
population) abused illegal drugs. The 13.9 million number represents
6.4 percent of the total population and is statistically unchanged from
1996. Mexico's accomplishments last year included the arrest and
sentencing of important traffickers; implementation of anti-money
laundering laws which increase penalties; major efforts to combat drug-
related corruption; extradition of narcotics traffickers to the United
States; and establishment of an anti-drug media campaign aimed at
preventing young people from turning to drugs.
Our binational drug strategy and the supporting performance measure
of effectiveness system signed by our two presidents in Merida earlier
this year will improve accountability of our joint anti-drug effort. A
long-term commitment by Mexico's government to achieve concrete results
will be needed to disrupt major trafficking organizations and to reduce
the amount of drugs that enter Mexico and the United States. This
commitment was reiterated during President Clinton's recent visit to
Merida.
Question. Has Mexico's foreign debt increased or diminished over
the last five years?
Answer. Calculated as a percentage of current account revenues,
Mexico's total gross external debt has been decreasing every year from
1994 through 1997, according to the Bank of Mexico. Public sector debt
(as a percent of current account revenues) rose in 1995 against 1994,
but has been falling ever since. External debt service as a percentage
of exports of goods and non-factor services fell from an average of
17.8 percent for 1993 to an estimated 13.0 percent in 1998, by far the
lowest among major Latin American countries.
Likewise, as a percent of GDP, total external debt rose from 32
percent in 1993 to 59.2 percent in 1995, but has remained much lower in
recent years (falling to 49.8 percent in 1996, 38.2 percent in 1997,
and 39 percent of GDP in 1998). This places Mexico's external-debt-to-
GDP ratio only slightly higher than the average ratio of 35 percent of
GDP for Latin America.
Mexico's external debt has increased in absolute terms over the
last five years, but recent trends indicate a decrease from the record
high level of external debt reached in 1996. In 1996, Mexico's total
debt outstanding and disbursed, according to the World Bank, reached
U.S.$157.1 billion. In 1997, that amount had fallen to $150.3 billion.
Debt servicing fell from $40.7 billion in 1996 to $37.1 billion in
1997. The vast bulk of Mexico's external debt in 1997 consisted of
private debt, totaling $89.8 billion. Short-term debt followed at $28.5
billion, IBRD lending was $11.3 billion, IMF lending was $9 billion,
and other multilateral lending totaled $5.1 billion.
Mexico's manageable debt burden is helped by close trade and
investment ties with the United States, which absorbed about 80 percent
of Mexico's exports in 1998. NAFTA has helped this encouraging trend in
the overall debt picture by assuring private lenders of continuing
market reforms in Mexico. It has served as a positive force as part of
a larger strategy to integrate Mexico into the global economy and
generate growth. In 1999, the Mexican government and private analysts
expect foreign direct investment, much of which will come from the
United States, to cover up to 75 percent of Mexico's current account
deficit.
Question. Probably no Third World country has been accorded more of
the benefits of the global economy (i.e., massive foreign direct
investment, IMF bailouts, access, and proximity to the richest market
in the world, etc.) but still Mexico has a growing problem with poverty
and unemployment. What does that say for the prospects for the rest of
the underdeveloped countries of our hemisphere? Can the U.S. market be
the engine for everyone?
Answer. There is no doubt that reducing poverty and creating jobs
for its growing population are major challenges facing Mexico and many
other countries in the Western Hemisphere. The question for the United
States is what policies we should encourage in the region that will
best assure these problems are addressed.
This Administration, and in fact the last several Administrations,
have made the case that strengthening democratic institutions and
reforming the economy to open markets are the best ways to ensure long
term growth and development.
There are a number of indicators that suggest the policies Mexico
initiated in 1986 to open markets and privatize, have begun to bear
fruit. For example, according to the World Bank, Mexico's average
annual per capita GNP growth was 0.9 percent from 1976 to 1986 and 0.6
percent from 1987 to 1997. However, for 1996 the growth rate was 4.0
percent, 6.2 percent for 1997 and projected at 2.9 percent annually
from 1998 through 2002. Regarding job creation, the OECD estimates
Mexico has created almost 2.7 million permanent new jobs between August
1995 and the end of 1998. OECD data also shows Mexico's purchasing
power recovering after the peso crisis in 1994 and 1995, from a level
of 46 in 1996 to 56 for 1998.
It is also important to note that this solid economic performance
was occurring during the Asian financial crisis. While Mexico has not
been immune to its impact, its economy emerged largely unscathed, in
substantial part due to the sound economic policies it has put into
place. Thus, we continue to believe that an open, democratic economic
model is appropriate for the hemisphere.
Question. I understand that in Canada it will be considered a
criminal act if foreign owned magazines include advertisements aimed at
Canadian consumers, and that the Canadian government is justifying this
under the guise of protecting Canadian culture. What is USTR planning
to do about this?
Why has Canada refused to adhere to the 1997 World Trade
Organization decision requiring Canada to end this practice?
What is USTR going to do about it?
Answer. In October 1998, Canada introduced Bill C-55, which simply
accomplishes the same result as the measures which were found to
violate the WTO in the 1997 panel decision on periodicals. U.S. and
other foreign-produced split run magazines would be prohibited from
competing in the Canadian market. Bill C-55 would prohibit U.S. and
other non-Canadian publishing companies, on pain of criminal fines,
from using the magazines they produce to advertise directly to Canadian
readers.
Among the four measures the WTO condemned was a confiscatory 80%
tax imposed by the Canadian Government on imported magazines carrying
this type of advertising. The tax put U.S. and other imported magazines
at a significant commercial disadvantage by comparison to Canadian-
produced magazines. Having finally agreed to eliminate the tax on these
advertisements, the Canadian Government is now proposing to ban these
advertisements altogether.
Bill C-55 has passed the Canadian House and is before its Senate
this month. Since January 1999, we have sought to negotiate an
agreement to address fully U.S. concerns before the bill is enacted. We
have made good progress in the last month but a few key issues remain
unresolved; our deadline for resolving this matter is mid-May. While a
negotiated solution is the preferred outcome, the Administration has
made it clear that we will protect U.S. interests and withdraw trade
benefits from Canada if an agreement is not reached.