The North American Free Trade Agreement (NAFTA) eliminated, or will eliminate (by 2009), all trade barriers between Canada, Mexico, and United States. Not long after NAFTA took effect on January 1, 1994, the Clinton Administration made the extension of that agreement (the proposed Free Trade Area of the Americas, or FTAA) its top trade priority. Specifically, President Clinton wants to expand NAFTA to include all of Central and South America, thus creating a free trade zone that would extend from Alaska's Point Barrow in the north down to Argentina's Tierra del Fuego in the south. But such a move is potentially disastrous, as demonstrated by America's five-year experience with NAFTA. This paper will argue against the extension because NAFTA has already had a negative impact on the economy, environment, and welfare of both the U.S. and Mexico, and those consequences will only be compounded by the FTAA.
During the debate over NAFTA, critics charged that Mexico's low wages would result in a ôgiant sucking soundö of American jobs headed to Mexico. And that was before Mexico devalued its currency. Mexico's financial crisis in 1995 prompted the government to devalue the peso, with disastrous results for the average Mexican. The currency devaluation benefited businesses by helping them compete, at the expense of workers, who watched their buying power nearly evaporate in a matter of days. Workers had little say in the matter because Mexico lacks democratic institutions. Thus, by 1996, the hourly average for Mexican workers in manufacturing was $1.50, compared to $17.74 for U.S. manufacturing workers.
Workers in other parts of the economy did even worse: In December 1997, Mexico raised its minimum wage 14 percent in Mexico City, to 30.2 pesos per day (other parts of the country have lower minimum wages tied to lower living costs). That amounted to less than $4 per day (and the peso has fallen further since that time). Mor...