Economics Market Term Paper

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North American Free Trade Agreement (NAFTA). Specifically, it will present the pros and cons of NAFTA, and how it will affect the apparel industry, especially in the California and/or Los Angeles market. It will consider such factors as how it affects the job market, manufacturers, contractors, etc.


The NAFTA agreement has been controversial since it first began in 1992. Many experts felt that the United States would lose a large amount of jobs to Mexico, because of lower wages and fewer trade union restrictions. It created Free Trade between Mexico, Canada, and the United States, and eliminated a large number of tariffs on a sliding scale over the next fifteen years. "On 12 August 1992, the United States, Canada, and Mexico agreed on a plan for free trade that would gradually eliminate tariffs over fifteen years and stimulate trade and investment. While protecting the 1988 free trade agreement between the United States and Canada, this new agreement created the largest common market in total production, with 370 million consumers. It makes U.S. And Canadian industries more competitive by using low-cost Mexican labor, advanced U.S. technology, and rich Canadian resources" (Gianaris 17).

Considering the fact that the economies of the United States and Canada together are about 20 times larger than the economy of Mexico, some critics were surprised NAFTA even got off the ground at all. Many economists worried about this asymmetry in the economies of three so disparate countries. While it seems to be an economic windfall for Mexico, it could create economic downturns in the United States and Canada in many labor-intensive industries, such as manufacturing. (Clement et al. 284-287).

There is strong criticism against NAFTA from politicians and economists, mainly in the United States. The main argument is that low wages in Mexico will send American jobs south because Mexican wages in manufacturing are about one-fifth of those in the United States... The large difference in wages, though, may be balanced by the difference in productivity. It is estimated that American productivity is about five times that of Mexico" (Gianaris 18). For the most part, this analysis has been proven correct. Hundreds of thousands of jobs have indeed traveled over the border to Mexico because of lower wages, production facility costs, and overhead. The minimum wage in most of Mexico is somewhere around $4.60 per day, compared to $5.15 per hour in the United States. While some Mexican workers can receive as much as $16.00 per day in some industries, most Mexicans still live far below the poverty level. It is estimated that wages need to rise at least 300% in order to meet the demands for housing and living costs. "Because of the big differences in wages, many factory jobs have moved to Mexico since NAFTA took effect, and the trend is expected to continue" (Gianaris 18).

In Los Angeles alone, almost 1,000 jobs were lost in the garment industry due to companies moving to Mexico. Guess Jeans is one of the largest companies to downsize due to the import of cheaper Mexican made garments. Levi Strauss, Jantzen, and Olga all moved their operations to Mexico after NAFTA was implemented. Throughout California, 3800 jobs were lost to companies moving to Mexico. Usually, these jobs were replaced by lower paying jobs in the service industries, because the workers could not replace the higher wages they earned from garment manufacturing. (Editors).

NAFTA does provide retraining for workers under the TAA program, but it has severe limitations. "More than 402,981 U.S. workers have been certified as of May 7, 2002 under one special NAFTA unemployment program, NAFTA Transitional Adjustment Assistance (NAFTA TAA). These workers represent only a fraction of the total U.S. jobs lost due to NAFTA. The NAFTA TAA program provides job training and income support to workers who meet very narrow criteria. Only workers who know about and choose to apply for the program are even considered, and only certain types of workers in certain types of companies can qualify" (Editors).

However, Mexico is also an important export market for American textiles, and that market is expected to continue to grow under NAFTA, and many experts believed as Mexico's wages and standard of living increases, this could also boost the demand for more American-made goods and services throughout Mexico. Unfortunately, this has not been the case. "By 1998, the incomes of salaried workers [in Mexico] had fallen 25%, while those of the self-employed had declined 40%. At that point, the average income of the self-employed was substantially lower than that of the salaried labor force. This reflects the growth of low-income employment such as street vending and unpaid family work (for example, in shops and restaurants). After seven years, NAFTA has not delivered the promised benefits to workers in Mexico, and few if any of the agreement's stated goals has been attained" (Salas).

NAFTA does not seem to be an unqualified success in Mexico, and it has certainly affected the economy across the United States. Most experts agree it is nearly impossible to be completely unbiased, and accurately assess the actual number of workers displaced by the NAFTA trade agreement, or any other trade agreement, for that matter. However, it is clear jobs have been lost, and that they affect the economy locally, statewide, and nationally.

As manufacturing jobs were lost, the dollars spent by those textile and apparel workers decreased, affecting a wide variety of other industries, such as construction, manufacturing, and tourism. Manufacturers who moved their operations to Mexico left empty factories, thus affecting the real estate market in the area. New manufacturing sites were not necessary, which affected the industrial building industry. Workers who had to take pay cuts in new careers, or had to go on unemployment did not have the discretionary income available for entertainment, dining out, and high-ticket manufactured items, which in turn created less of a need for production and services in those industries. A lay-off of workers in one area can affect the entire surrounding region's economy, if enough people are laid off.

In addition, in a disturbing trend, many companies have used the threat of moving their operations to Mexico in order to intimidate their workers to accept cuts in wages and/or benefits. With the threat of losing their jobs fresh in their minds, most workers tend to agree to salary and benefit concessions in order to save their livelihoods. Again, as their wages decrease, they have less discretionary income available for extra and impulse purchases, affecting the economy around them.

Even though hundreds of thousands of jobs were lost throughout the country, NAFTA exports did continue to grow through the mid-90s, even while Mexico was undergoing a recession, as the following table indicates:

Table 8.1

NAFTA Export Performance (percentage growth, 1992-96) (Clement et al. 289).

Intra-NAFTA exports

Total NAFTA exports

Intra-NAFTA exports as percent of total

Imports of textiles and apparel also show the same pattern of growth during the same time, and begin to indicate the loss of jobs in these areas, as more and more large U.S. manufacturers began moving to Mexico to produce their clothing.

Imports from Mexico of textiles and apparel, in millions in 1991, were $1,194, and U.S. exports to Mexico, over the same period, were $1,093. With the NAFTA, duties will end within six years of the accord's beginning on goods made from yarn produced within North America. It is projected that U.S. apparel-textile imports from Mexico will rise 60% over the long-term; U.S. apparel-textile exports to Mexico will increase 30%. This market in Mexico is already $6.4 billion. Mexico is the second largest export market for U.S. textiles and apparel products, with sales of $1.6 billion in 1992. Economic development in Mexico as a result of the NAFTA will increase demand for U.S. products. The NAFTA will provide substantial new opportunities for U.S. textile and apparel companies in the Mexican market. Some manufacturing sectors, such as companies which make high-quality fabrics which Mexico is unable to produce, will be particularly benefited by the agreement. Elimination of Mexican tariffs (20% and 15% on apparel and textiles, respectively) will make U.S. products even more competitive in Mexico. Barriers on about 20% of U.S. textiles and apparel exports to Mexico will be eliminated immediately. This covers about $260 million of exports, and such key products as denim, underwear, thread and many household furnishings. Barriers on another $750 million of U.S. textile exports, including yarns, most household furnishings, most fabrics and certain other apparel, will be eliminated in six years. In order to qualify as a NAFTA good, apparel must be produced from North American fabric, that is, fabric that has been woven from North American yarn that has been spun in North America. This "yarn forward" rule for most textiles and apparel restricts the benefit of the NAFTA to North American workers and producers. (Rosenberg 462).

In that the United States tends to trade mostly with the Western Hemisphere, NAFTA was a logical and economical agreement. We…

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