Divided They Want
“The assault on Nafta is a signal that the Democratic Party thinks the U.S. should abandon its leadership role in pushing for modern, democratic capitalism in Latin America.”
By Mary Anastasia O’Grady
March 3, 2008; Washington Post, Page A16
After watching the Obama-Clinton debate in Cleveland on Tuesday, I came away convinced that both candidates for the Democratic presidential nomination want to run this country like Argentina.
In that country, Juan Peron-inspired labor syndicates and their bosses dominate the economy and work hand-in-glove with the state. Together they have ensured Argentina’s isolation from international commerce and investment, and a slow but steady decline in living standards.
This is a sharp left turn for the Democratic Party leadership. One of the most significant global trade-liberalization rounds in the 20th century bore the name of John F. Kennedy. Now Hillary Clinton and Barack Obama, by threatening to dissolve the North American Free Trade Agreement unless it is converted into a cudgel for Big Labor, want to drag us backward.
Mrs. Clinton says that open trade with our neighbors — under Nafta — has been harmful to Americans because our partners don’t play fair. Mr. Obama echoes her sentiments. When Mrs. Clinton threatened to opt out of Nafta unless it is renegotiated, Mr. Obama said, me too.
The assault on Nafta is a signal that the Democratic Party thinks the U.S. should abandon its leadership role in pushing for modern, democratic capitalism in Latin America. But that’s only the half of it. When Mrs. Clinton says she wants “core” labor standards shoved into the pact, it is code language for forcing on the U.S., by treaty, what the U.N.’s International Labor Organization calls “core principles.” The U.S. has signed only two of the ILO’s eight conventions precisely because the others would lead to labor-market rigidity à la Argentina. Big Labor bosses would love that but what about the rest of us? Probably not so much.
Canada got a mention Tuesday. But the whipping boy was Mexico, which stands accused of attracting firms by allowing worker exploitation. If an American lost a job in the past decade, the charge goes, it’s because in Mexico business has no labor obligations. This claim is not only untrue, it is the opposite of reality. Mexico is home to militant, high-powered unions and the most burdensome labor regulation in North America.
Like Argentina, Mexico suffered the tragedy of repressive corporatism throughout most of the 20th century. A one-party system under the Institutional Revolutionary Party — PRI — ruled for more than 70 years, making sure there was no economic or political competition. But in the late 1980s and early 1990s a young, educated class of technocrats began to break the chains of protectionism, isolation and monopoly. Nafta, signed and ratified in 1993, was central to this. Its benefits include greater access to capital and trade for Mexico and also an increase in information flows, which are the source of innovation and progress in any country.
Nafta has done a lot for Mexico but there are some things it can’t cure. Chief among these are the infirmities caused by too much labor-market regulation. Hiring, maintaining and firing a worker is so costly that employers go to great lengths to avoid taking on new employees. This produces an excess of workers relative to demand, depressing wages and benefits.
Yet it is not only high mandated costs that reduce opportunities. Employment in most cases requires union membership — there is no such thing as a “right-to-work” state in Mexico — and if a worker is expelled from the union, he loses his job. This gives union bosses extraordinary power, especially since there is no secret ballot in union elections. Promotions are based on seniority, not merit, so there is little incentive for workers to upgrade their skills or learn new technologies. This harms productivity and helps explain why Pemex, the oil monopoly with one of the country’s most dominant unions, registered a net loss of $484 million last year, when oil prices were sky high. It’s also one reason why the state-owned electricity monopoly known as CLFC is repeatedly unable to cover its costs with earnings and instead requires a federal subsidy every year.
Unions are powerful in another way too. They regularly launch pre-emptive strikes as a way to extract payments from business. Reforma newspaper commentator Sergio Sarmiento observed last week that in Los Cabos on the Baja Peninsula, the Revolutionary Confederation of Workers and Peasants is practicing what he calls “union blackmail” by blockading the Grand Mayan Hotel because the hotelier has contracted with a different labor union. The activists have “terrorized and attacked not only workers but also clients” and the action is “putting at risk $1.2 billion” of investment in the area.
With such harassment, it’s easy to see why many workers end up in the underground economy where exploitation is more likely. According to Isaac Katz, professor of economics at the prestigious Mexican Autonomous Technology Institute, “workers in the tradeable sector or in businesses with foreign investment earn 40%-50% more than those who work for companies not related to trade or foreign investment.”
In other words, far from exploiting workers, Nafta has brought about better conditions. But not for union bosses. Maybe that’s why leaders of Mexico City’s militant electricians’ union — which regularly marches with banners of Che Guevara and Lenin — announced last week that they would go to El Paso this week and meet with Mr. Obama. At a labor rally in Mexico City, the general secretary of the union said that they planned to tell the candidate that the opening of the agricultural sector under Nafta is the cause of migration north and that if something isn’t done, the “social crisis will intensify and tomorrow you’re not going to be able to control it.” This is puzzling since the Obama campaign says “this [the meeting] is not happening and never was.”
What could be done to slow Mexican emigration is to liberalize Mexico’s labor markets. But if last week’s debate is any indication, what the candidates have in mind is not to make Mexico’s labor market look more like the U.S.’s but vice versa.
Write to O’Grady@wsj.com