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Monday, 10 March , 2008 / ermes

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.”

nafta.jpgWrong About Mexico

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.

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  1. Lino Di Scozia / Mar 21 2008 12:36 PM

    The real trade questions

    Instead of attacking NAFTA, focus on jobs, the border and infrastructure.

    By Robert A. Pastor
    Los Angeles Times, March 6, 2008

    In their debate before the Ohio and Texas primaries, Barack Obama and Hillary Clinton expressed skepticism toward free trade and sharp criticism of the North American Free Trade Agreement. Though intent on restoring the reputation of the United States as a cooperative partner in the world, they concluded by sending an ultimatum to our two neighbors, Canada and Mexico: Either renegotiate the labor and environmental provisions to make them enforceable, or forget NAFTA.

    Their criticism of NAFTA is unwarranted, but it was particularly disappointing that they did not seize the opportunity to address the new North American agenda that has emerged since NAFTA.

    Notwithstanding the promises of its proponents, NAFTA’s goals were to reduce and eventually eliminate trade and investment barriers, and it did that. From 1993 to 2006, trade among the three countries nearly tripled — to $846 billion from $289 billion. Canada and Mexico became our two largest trading partners. Foreign direct investment quintupled, tying the economies closer together and forging continental firms. If one measures success by whether a trade pact achieves its goals, NAFTA was a success.

    Of course, the public’s main concern with free trade is the effect on jobs. But in the first seven years of NAFTA — the period when trade soared — the number of new, relatively higher-paying U.S. jobs grew by 22.7 million. All (or perhaps even much) of the credit cannot be given to NAFTA, but it surely cannot be blamed for net job loss. Over the decades, there has been a steady decline in jobs in manufacturing and agriculture, but most economists conclude that is owed more to technology than to trade, and it reflects a natural progression to a more productive, service-oriented economy.

    There is nothing wrong with improving the enforcement of NAFTA’s labor and environmental provisions, but as a prescription for correcting the mistakes of trade agreements, it is filled with ironies. First, the United States was the author of these provisions, largely for political reasons, and Mexico and Canada accepted them. Second, the United States is the main culprit in failing to comply with the agreement.

    Further, better enforcement won’t solve our trade or job problems. U.S. firms do not move to Mexico to escape environmental laws or for lax labor laws. They do so for several reasons, one of which is the lower cost of labor — but if that were the only reason, all would move to China.

    In their hurry to attack NAFTA, Obama and Clinton missed the real issues. NAFTA accelerated economic and social integration, but the three governments have not kept pace. Two-thirds of trade goods are delivered on trucks, but the countries have built no new roads. The income gap between Mexico and its northern neighbors has not narrowed. Immigration from Mexico to the U.S. has grown worse, but so too has the flow of guns from the U.S. to Mexico. The border, which was supposed to have been flattened by NAFTA, has developed massive speed bumps since 9/11, turning the North American advantage into a disadvantage.

    This extensive post-NAFTA agenda is what needs political attention. No two countries are more important to the U.S. in trade, energy, migration or security than Canada and Mexico. If we want to compete against China and Europe, we will need to build on our free-trade pact to create a North American customs union with a common external tariff. We should be working together on improving the environment and providing a safety net for all our workers. We need joint plans for infrastructure, immigration and dispute resolution.

    Instead, leaders in Canada, the U.S. and Mexico all have been intimidated by parochial, antiglobalist forces. They have sought protection in private meetings with chief executives, thereby provoking the very suspicion that the critics fear — that the governments are conspiring to merge into a North American Union. The real problem is quite the opposite: They are doing almost nothing related to North America.

    One of the most important tasks for the new U.S. president will be to restore America’s prestige in the world, but that will not happen until the world sees that we treat our neighbors with respect.

    Robert A. Pastor, a professor and director of the Center for North American Studies at American University, is writing the forthcoming book, “The North American Idea.”

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