VIII. REGIONAL INTEGRATION IN HISTORICAL PERSPECTIVE: NAFTA, MERCOSUL AND THE EUROPEAN UNION

Discussion

Russell E. Smith
Washburn University

      These three very interesting and informative papers by professionals active in trade and labor issues from a labor perspective draw together lessons from the now ten years of experience with the North American Free Trade Area (NAFTA) and the Common Market of the South (Mercosur in Spanish; Mercosul in Portuguese), which are the two major trade liberalization arrangements in the Western Hemisphere. These lessons then can be applied to the proposed Free Trade Area of the Americas (FTAA). The experiences of NAFTA and Mercosul can be interpreted in terms of the two crosscutting themes of economic performance of the region and worker rights, including labor participation in the management of the institutional arrangements.
     First, in the area of economic performance, although trade has increased, clear overall economic gains from trade are not apparent. The obvious net winners in these arrangements appear to be the larger and stronger economies of the United State and Brazil with the smaller and weaker economies experiencing mixed results at best. This is in part because of the trade liberalization itself and in part how the liberalization was designed and implemented. Second, in the area of worker rights, although both trade arrangements have worker rights mechanisms that establish principles and intention at the level of the region, there has been little or no systemic improvement in either protective labor legislative or in collective labor rights. The question becomes, then, how to proceed and, more specifically, how to do better in both of these areas within the FTAA and other trade arrangements within the Americas.
     Lance Compa's paper compares the labor and worker rights mechanisms in NAFTA and Mercosur and draws lessons to orient labor advocates in the FTAA negotiations. Compa motivates his paper by highlighting the choice between "rejection" and "engagement" positions on the inclusion of a strong social dimension in trade agreements. He supports the engagement position and argues that the attempt to include a social dimension should be made as the likely outcome of not trying is no social dimension at all, while recognizing that the desired results might not be easily attainable.
     Compa finds both the NAFTA and Mercosur experiences have much that is positive that could be included in future trade agreements. In NAFTA's labor side agreement, the North American Agreement on Labor Cooperation (NAALC), he finds the beginning of an effective labor rights complaint and enforcement policy for national labor laws. He approvingly notes the inclusion of "effective enforcement" provisions in NAFTA-like agreements such as U.S.-Chile, Canada-Chile, and Canada¿Costa Rica bilateral agreements so long as national laws are consistent with fundamental labor rights. In Mercosur, Compa finds strength in the participatory and consultative mechanisms for civil society, the Social and Economic Consultative Forum and the Socio-Labor Commission, both of which include labor and business representatives.
     He argues for using the complaint features of the NAALC and the participatory mechanisms of Mercosur as starting points for subsequent negotiations. The rationale is that they are based on enforcement of existing national labor law, which is already approved and embedded in national societies, and because these mechanisms have already have been agreed upon by the some of the countries in the region. Having been already adopted makes their approval and implementation more likely than would be the case for an arguably tougher labor regime that does not have these roots in the region.
     Although Sandra Polaski's paper covers both economic and labor mechanism aspects of NAFTA, one of its most significant contributions is its discussion of weak employment growth and wage performance in Mexico over the ten-year period from January 1994 to January 2004. The 1994¿2004 period includes the economic recovery and expansion in the United States through 2000 and the recession and weak recovery thereafter and also the Mexican exchange-rate crisis, devaluation, and recession in the mid-1990s. U.S. economic performance is especially relevant to Mexico, because roughly 80 percent of its exports go to the United States. Polaski also notes, somewhat in contrast to Compa, that the NAALC mechanism has produced few concrete gains, either in the cooperation or in the labor rights areas.
     Contrary to the claims of many of NAFTA's proponents during the negotiations in the early 1990s, the overall employment performance in Mexico was particularly weak, with the notable exception of manufacturing employment in the maquiladora sector. Specifically, maquiladora employment grew steadily from 1994 to 2001, even through (and perhaps because of) the exchange-rate crisis before falling in response to the recession in the United States. Maquiladora employment declined to near its still relatively high 1999 level and remained at about that level thereafter. By contrast, in non-maquiladora manufacturing, employment fell during the exchange crisis of the mid-1990s. Although it did recover and reach its period high in January 2000, it fell again in line with the U.S. business cycle to a new post-NAFTA low in January 2004. Although both manufacturing sectors reached employment highs around 2000 and seem to follow the U.S. business cycle, export-oriented maquiladora manufacturing appears to have shown more recent growth and durability than manufacturing for the internal market. Employment in the much larger agricultural sector declined markedly between 1993 and 2002 and more than overwhelmed the arguably small net employment gains in manufacturing attributable to maquiladora export manufacturing. The author does point out, correctly, that employment has been perhaps more strongly impacted by the 1994¿1995 exchange-rate crisis and by the business cycle in the United States than by changes in customs duties and other trade barriers under NAFTA.
     The most interesting result reported by Polaski, however, is that for migration from rural Mexico to the United States. Whereas migration to the United States has been strong and increasing since 1980, previously there had been ebbs and flows related to the U.S. business cycle. Specifically, her data indicated that in 2002 the number of rural Mexican migrants in the United States was about 150 percent higher than in 1995. It is noteworthy that, in the 2000¿2002 U.S. recession, there was no slowing or pause of migration, unlike in the early 1990s and earlier. In fact, the opposite is observed with migration to the United States seeming to accelerate in spite of the recession in the United States. Because the acceleration would be in response to push factors in Mexico, it would appear that the early promise that NAFTA would slow migration from Mexico to the United States was not fulfilled. With regard to development in Mexico itself, she notes that trade liberalization brought increased use of imported inputs, resulting in fewer backward linkages in the Mexican economy, which could explain the weak employment performance in Mexican manufacturing.
     Silvia Portela's paper speaks to the future prospects of the Mercosul project and discusses its origins, successes, and current challenges. The case of Mercosul differs in that, whereas NAFTA is essentially a trade and investment program, Mercosul was designed to be an eventual integration project and customs union that would result in a common market. Based on an Argentina-Brazil integration project of managed intrasectoral trade dating from the mid-1980s debt crisis and redemocratization period, trade liberalization measures in the early 1990s generated increased trade until the antiinflation programs based on fixed exchange rates in Argentina and Brazil took hold.
     Relatively balanced trade flows between Brazil and Argentina were disrupted by Brazil's unilateral devaluation in early 1999. The Argentine crisis and devaluation in 2001 worsened the situation, effectively pushing Argentina down the road of deindustrialization. Other factors working against the consolidation of Mercosul included the distraction of governmental attention provided by the negotiations for a Free Trade Area of the Americas and for a possible free trade agreement between Mercosur and the European Union. New leadership in the member states, however, has led to new interest in the internal integration aspects of Mercosul and also to interest in moving toward supranational Mercosul institutions and more active governmental economic development policies, including in the area of investment in infrastructure. The author supports these efforts and speaks highly of the civil society participation in the Mercosul consultation process through the Economic and Social Consultation Forum while making limited reference to the Socio-Labor Commission. Overall, the author is arguing for the expansion of an equitable Mercosul project as the solution to economic development in the Southern Cone.
     In reviewing the cases presented, the first lesson one draws is that increased trade by itself, even if balanced, is not a stand-alone economic development policy. If not accompanied by local sourcing and backward linkages, employment gains will be modest. Sustained employment gains depend on complementary development policies, including investment, both private and public, especially in infrastructure and other public goods such as education and research and development, and regional and sectoral programs to assure balanced growth and the maintenance of internal markets.
     A second lesson is the sensitivity of growth, investment, and employment to exchange-rate policy, specifically to exchange-rate policy that abruptly collapses. Both the Mexican and Mercosur exchange-rate crises and devaluations illustrate the damage to employment and investment that can occur when the exchange rate is managed for other purposes, such as overvalued to fight inflation or manage the external debt in these cases. One is struck by the weight of the external of debt on these economies, much of whose original principal was contracted decades in the past.
     A third lesson, developed most fully by Compa, is that there are useful existing trade-linked labor mechanisms in NAFTA and Mercosur that could serve as the starting point for an FTAA program. Finally, we note that there is an alternate, arguably more human, model of economic development, integration, and trade on the table in South America that, if allowed to develop, might have much to contribute to well-being in the Americas, especially in light of the disappointing employment experience of Mexico within NAFTA.