lessons promise from · lessons from mexico for the hemisphere nafta’s promise and reality john...

LESSONS

FROM

MEXICO

FOR

THE

HEMISPHERE

NAFTA’s Promise

and Reality

John J. Audley

Demetrios G. Papademetriou

Sandra Polaski

Scott Vaughan

© 2004 Carnegie Endowment for International Peace. All rights reserved.

The Carnegie Endowment normally does not take institutional positions on public policy issues; the viewspresented here do not necessarily reflect the views of the Endowment, its officers, staff, or trustees.

Printed with soy-based ink on recycled paper.

ABOUT THE AUTHORS

John J. Audley is a senior associate at the Carnegie Endowment for International Peace, where he directs the Trade, Equity, and Development Project. Before joining theEndowment in April , he was the trade policy coordinator at the U.S. EnvironmentalProtection Agency, where he was responsible for developing and presenting EPA positionson U.S. trade policy.

Demetrios G. Papademetriou is co-director and co-founder of the Migration Policy Institute,www.migrationpolicy.org. His work concentrates on the North American borders andmigration agenda, immigrant settlement and integration, and migration managementthroughout the advanced industrial world. Previously, he was a senior associate at theCarnegie Endowment for International Peace, where he co-directed the InternationalMigration Policy Program.

Sandra Polaski is a senior associate with the Carnegie Endowment’s Trade, Equity, andDevelopment Project. Her work focuses on international labor policy in the context oftrade, development, and multilateral relations. She served from ‒ as the SpecialRepresentative for International Labor Affairs at the U.S. Department of State.

Scott Vaughan is a visiting scholar with the Carnegie Endowment, focusing on the WTO and NAFTA. He previously held positions with the North American Commission for Environmental Cooperation, the World Trade Organization, the United NationsEnvironment Program, and the Royal Bank Financial Group (Canada).

For print and electronic copies of the introduction and the full-text report in English and Spanish, visit www.ceip.org/pubs.

Table of Contents

Introduction

John J. Audley

Jobs, Wages, and Household Income

Sandra Polaski

The Shifting Expectations

of Free Trade and Migration

Demetrios G. Papademetriou

The Greenest Trade Agreement Ever?

Measuring the Environmental Impacts

of Agricultural Liberalization

Scott Vaughan

This report is the product of each of its primaryauthors’ research and years of experience working in trade policy. In addition, the report was greatlyinfluenced by research papers prepared by the following people:

Francisco Alba Fernando Barceinas Paredes David BarkinFrank BeanGeorge DyerB. Lindsay LowellCarlos Salas PaezEdith Pacheco Martha Ileana RosasJ. Edward Taylor Antonio Yúnez-NaudeEduardo Zepeda Miramontes

El Colegio de México (COLMEX) has been ourresearch partner from the beginning, and we wish tothank General Academic Coordinator Jean FrancoisPrud’Homme for the exceptional research conductedby his colleagues. In particular, the work done byAntonio Yúnez-Naude and his colleagues at thePrograma de Estudios del Cambio Económico y laSustentabilidad del Agro Mexicano (PRECESAM)was essential to our understanding of the relationshipbetween trade liberalization and agriculture.

We have been privileged to work with an excellentteam of assistants, including Carnegie JuniorFellows Vanessa Ulmer and Jacob Steinfeld, andKristen Dubay, from Duke University. Maria Carlohelped keep us on schedule by mastering travelschedules, contracts, and deadlines. DemetriosPapademetriou at the Migration Policy Institute(MPI) was assisted by Maia Jachimowicz and KevinO’Neil. MPI senior fellow and former head of the United States Immigration and NaturalizationService Doris Meissner provided guidancethroughout the project. In addition to our researchteam, the following people reviewed chapters andgave us their time and suggestions: Chantal LineCarpentier, Paul Miller, Kevin Gallagher, GeorgePerkovich, Ronald Steenblik, Timothy Wise, andDeborah Meyers.

The report would not have been possible withoutsupport from the Carnegie Endowment forInternational Peace. We would also like to extendour gratitude to the Charles Stewart MottFoundation, the Department of Foreign Affairs and Trade of the Government of Canada, and theNorth American Commission for EnvironmentalCooperation for their financial support.

Without the combined efforts of the people andorganizations listed above, this report would nothave been possible. The views expressed in thisreport are those of the individual authors.

John J. AudleySenior Associate and DirectorTrade, Equity, and Development ProjectCarnegie Endowment for International Peace

Acknowledgments

4 NAFTA’s Promise and Reality

Carnegie Endowment for International Peace 5

…a giant sucking sound…—ROSS PEROT, 1994

NAFTA fuels economic growth and dynamictrade, stimulates investment while creatingproductive partnerships, works for small andmedium-sized businesses and provides fairness and certainty. NAFTA partners promoteenvironmental protection, and provide greater job opportunities in North America.

—THE GOVERNMENTS OF THE UNITED STATES,

MEXICO, AND CANADA, 1999

LATIN AMERICAN AND CARIBBEAN COUNTRIES

FACE AN ENORMOUS CHALLENGE: How to growtheir national economies, create good jobs, and gen-erate the revenues necessary to provide basic publicgoods such as human health and environmentalprotection. Their task is burdened by more than two decades of weak economic performance that has failed to create jobs for a workforce expected togrow by . percent a year from ‒. Nearlyone person in ten is out of work. Current per capitaincome stands at a meager ,, and accordingto the Inter-American Development Bank, approxi-mately million people—one out of every threepeople living in Latin America and the Caribbean—earn less than a day. To compound the prob-lem, governments throughout the region admit that,while they may have enacted sound environmentaland public health laws, the laws are rarely enforced,especially in rural areas.

Hoping to avoid another “lost decade” similar to the s, thirty-four governments from theWestern Hemisphere met in to outline anambitious agenda to advance prosperity, democraticvalues and institutions, and security throughout

the hemisphere. Negotiating a Free Trade Area ofthe Americas (FTAA) was central to their agenda.According to the heads of state attending the

meeting, “Free trade and increased economic integration are key factors for raising standards of living, improving the working conditions ofpeople in the Americas, and better protecting theenvironment.”1 Many officials and observers in the hemisphere believed that free trade wouldremedy ailing economies.

In total, Latin American governments are negoti-ating or have completed seventeen different free-trade agreements with member states of theOrganization for Economic Cooperation andDevelopment (OECD). Most recently, in January, the governments of Costa Rica, El Salvador,Guatemala, Honduras, Nicaragua, and the UnitedStates announced the launch of comprehensive tradenegotiations, which are scheduled to be completedby the end of , prior to completion of theFTAA. According to the U.S. Trade Representative,Ambassador Robert Zoellick, the U.S.-CentralAmerican Free Trade Agreement (CAFTA) negotia-tions would further the regional integration theCentral Americans have themselves begun, andthereby complement efforts to promote the successful conclusion of the FTAA negotiations.

Twenty-five years ago, Mexico faced a similar eco-nomic situation, and adopted a similar prescription.Mexico’s earlier economic strategy of import substi-tution and a large role for the public sector hadincreased jobs and economic output, but it had also left Mexico with a crushing external debt thatsparked a major economic crisis in . Mexicanpresident Miguel de la Madrid Hurtado respondedby moving Mexico toward an export economy.Despite considerable domestic opposition, in

Introduction

J O H N J . A U D L E Y

Mexico joined the General Agreement on Tariffsand Trade (predecessor to the World TradeOrganization, or WTO). President Carlos Salinasde Gortari built on de la Madrid’s initial stepstoward liberalization by reducing the size of thepublic sector, promoting land ownership reform,and securing a commitment from the United States and Canada in to negotiate a free-tradeagreement.2 The North American Free TradeAgreement (NAFTA) went into force in ,marking the first major trade deal between developed and developing countries.

What has Mexico’s experience been after twentyyears of trade liberalization and ten years ofNAFTA? How have the lives of Mexicans changed?Has the Mexican government developed thecapacity to create conditions that put Mexicans to work, protect their health and the environment,and give them real alternatives to migration? Inshort, what lessons can be learned by other LatinAmerican countries from Mexico’s attempt to usetrade liberalization with the United States andCanada as its engine for economic development?

OUR OBJECTIVES

This report has two objectives. First, we set out to determine how the quality of life in NorthAmerica, particularly in Mexico, has fared as a resultof trade liberalization in North America. While wetouch on the experience of all three countries, weemphasize Mexico’s experience since the enactmentof NAFTA, as it is more relevant to other devel-oping countries interested in strengthening theireconomic ties with wealthy countries such asCanada and the United States. Our study is dif-ferent from those already done by some researchinstitutions, advocacy groups, and intergovern-mental organizations because we answer this ques-tion about the lessons of NAFTA by analyzing whatconventional NAFTA studies pass over. Our analysisfocuses on people, their communities, and thechoices they make as they attempt to negotiate theirsocial and economic environments. We emphasize

changes in household income, paychecks and pro-ductivity, rural employment, and agricultural pro-duction and land use, and the overall effect of thesechanges on migration and environmental quality.We then examine how NAFTA’s trade rules andinstitutions played a role in these changes. In short,while most positive analyses focus on the macrolevel and most negative analyses rely only on lossesand not gains, our analysis provides a rigorous andbalanced assessment of NAFTA by focusing on itseffects on people’s lives, livelihoods, and households.

Our second objective is to offer insights to othercountries, particularly in Latin America, that areinterested in strengthening their bilateral and multilateral economic ties within the region. Whilenot entirely similar, Mexico’s economic and culturalhistory and rich ecosystem are more closely linkedto those of its Latin American neighbors than to those of the United States or Canada. These similarities mean that NAFTA’s record can offerinsights to other countries as they consider thepotential costs and benefits of agreements such as CAFTA and FTAA.

OUR CONCLUSIONS

■ NAFTA has not helped the Mexican economykeep pace with the growing demand for jobs.Unprecedented growth in trade, increasing productivity, and a surge in both portfolio andforeign direct investment have led to an increaseof , jobs in manufacturing from to. The agricultural sector, where almost a fifthof Mexicans still work, has lost . million jobssince .

■ Real wages for most Mexicans today are lower thanthey were when NAFTA took effect. However, thissetback in wages was caused by the peso crisis of–—not by NAFTA. That said, the produc-tivity growth that has occurred over the last decadehas not translated into growth in wages. Despitepredictions to the contrary, Mexican wages havenot converged with U.S. wages.


■ NAFTA has not stemmed the flow of poorMexicans into the United States in search ofjobs; in fact, there has been a dramatic rise inthe number of migrants to the United States,despite an unprecedented increase in bordercontrol measures. Historical migration patterns,the peso crisis, and the pull of employmentopportunities in the United States provide betterexplanations for the increase in migration thanNAFTA itself.

■ The fear of a “race to the bottom” in environ-mental regulation has proved unfounded. At thispoint some elements of Mexico’s economy aredirtier and some are cleaner. The Mexican gov-ernment estimates that annual pollution damages over the past decade exceeded billion peryear. This damage to the environment is greaterthan the economic gains from the growth oftrade and of the economy as a whole. Morespecifically, enactment of NAFTA acceleratedchanges in commercial farming practices thathave put Mexico’s diverse ecosystem at great riskof contamination from concentrations ofnitrogen and other chemicals commonly used in modern farming.

■ Mexico’s evolution toward a modern, export-oriented agricultural sector has also failed todeliver the anticipated environmental benefits ofreduced deforestation and tillage. Rural farmershave replaced lost income caused by the collapsein commodity prices by farming more marginalland, a practice that has resulted in an averagedeforestation rate of more than , hectaresper year since in the biologically rich regionsof southern Mexico.

Put simply, NAFTA has been neither the disaster itsopponents predicted nor the savior hailed by itssupporters. But while NAFTA’s overall impact maybe muddled, for Mexico’s rural households thepicture is clear—and bleak. NAFTA has acceleratedMexico’s transition to a liberalized economy withoutcreating the necessary conditions for the public and

private sectors to respond to the economic, social,and environmental shocks of trading with two ofthe biggest economies in the world. Mexico’s mostvulnerable citizens have faced a maelstrom of changebeyond their capacity, or that of their government,to control.

In response to the growing challenges facing ruralMexico, many households have developed survivalstrategies to meet basic subsistence needs. Thesestrategies include a mix of increased cultivation ofbasic crops and off-farm employment, often in theinformal sector, and in some cases in maquiladoraplants that have relocated away from the northernborder into the hinterlands. Many rural workershave nonagricultural activities as their primaryoccupations, while relying on sporadic agriculturalwork to supplement their incomes. Mexico’s agri-cultural policies provide commercial farmers withsubstantial support, but do not benefit subsistencefarmers. More than ever, families rely on remit-tances sent home by those who migrate to theUnited States, with or without legal status. Finally,to reduce expenses, rural households also fall backon more traditional approaches to heating theirhomes and feeding their families. The net environ-mental loss associated with an increase in thefarming of marginal land and illegal logging andpoaching for fuel and food places some of the mostimportant biological reserves in the hemisphere at risk of irreparable damage.

Trade agreements do not need to result in this kindof hardship for the world’s rural poor. Negotiatedproperly, they can open doors to new markets whileproviding adequate protections from the stress asso-ciated with exposure to global competition and theincreased pressure on natural resources. Tradeshould not be seen as an end in itself; instead, itshould be used as a tool to strengthen economiesthrough the operation of comparative advantage. At the same time, governments must respond to economic opening with effective policies, such as the deployment of social safety nets and tradeadjustment assistance, and develop and implement


programs that protect labor rights and the environ-ment. As nations consider how best to use tradeagreements to foster development, we offer the following insights:

■ Developing countries interested in freer tradeshould negotiate longer and more gradual tariffreduction schedules for agricultural productsimported from wealthy countries, and negotiatespecial safeguards to protect against the dumpingof subsidized crops. The need for “shockabsorbers” is especially great for the poorest devel-oping countries where agriculture is a principalsource of employment. Regional and bilateraltrade agreements should not allow developedcountries to duck the crucial issue of producersubsidies in agriculture.

■ Trade agreements should allow developing coun-tries to adopt policies that maximize employmentgains from trade by promoting the developmentof domestic suppliers and that do not favorimported components. Whether the suppliers areowned by domestic or foreign firms is not rele-vant; what is relevant is whether the supplierscreate jobs.

■ Developing countries should bargain for mean-ingful financial support for transitional tradeadjustment assistance, from trading partners andfrom international donor organizations. Suchadjustment assistance should include training forworkers and subsistence farmers in new skillsand access to credit that allows and encouragessmall farmers to develop economically and envi-ronmentally sound farming practices. Assistanceto the rural poor should be aimed at allowingthem to transition to livelihoods that are sustain-able in the modern global market—and shouldacknowledge that the process of urbanizationwill continue.

■ Developing countries should adopt and imple-ment policies that help distribute the gains fromtrade more equitably, through better tax and

minimum wage policies and the expansion offreedom of association and collective bargainingrights. They should commit to national actionplans that build environmental infrastructure.Because these policies may be valued by theirwealthier trading partners, developing countriesmay win additional advantages in trade agree-ments by making these commitments.

■ To minimize the environmental implications of trade liberalization for agriculture, and thetendency of export growers to adopt chemical-intensive production methods, trade agreementsshould set standards that allow developing coun-tries to take advantage of the growing demandfor organic food products.

■ The movement of workers is a powerful social and economic force, and countries at all levels ofdevelopment have good reason to discuss tempo-rary migration in a variety of contexts, which mayinclude future free-trade negotiations. However,given the political sensitivity of the issue, migra-tion should not be allowed to jeopardize agree-ments on the movement of goods and capital andon other ways of providing services.

LONG-TERM STRATEGIES

Free-trade agreements should not be thought of asan end in themselves; nor should they be loadedwith unrealistic expectations. Instead, they shouldbe viewed as part of a larger effort toward substan-tive bilateral and regional cooperation towardcommon goals. Migration, labor, and environmentalprotection are examples of topics on which deepercooperation is sorely needed.

Trade liberalization is facing a crisis of legitimacyamong people around the world, from rural farmersin Latin America to cotton producers in Africa tomanufacturing workers in the United States andEurope. Governments can win back public supportfor new trade agreements, but they must changetheir current tactics. First, they must stop making


empty promises that trade liberalization alone willbring new jobs or clean environments, or stem the flow of illegal migration. Second, they mustenhance long-term development and avoid unnec-essary setbacks by strengthening their domesticeconomies’ capacity to respond to shocks whenexposed to the global marketplace. The needs ofdeveloping countries must be taken into account in trade negotiations in meaningful ways that createreal opportunities for development and growth, so that these countries’ citizens can also becomeconsumers in the global economy. That, in thelong-term, is how everyone will achieve greaterprosperity.

NOTES

1 Ministerial Declaration, First Summit of the Americas,Miami, Fla., , available at www.ftaa-alca.org/ministerials/miami_e.asp.

2 Carlos Salinas de Gortari, Mexico: The Policy and Politics ofModernization (Barcelona, Spain: Plaza & Janes, ). Seeespecially parts and .



EMPLOYMENT IS THE MAIN SOURCE OF

HOUSEHOLD INCOME for a large majority of thepopulation in all the countries of North America.Therefore, one of the most basic measures of a tradeagreement’s impact on the well-being of real peopleis the number of jobs gained or lost as a result of the agreement, the quality of those jobs, and thewages paid. A second important and closely relatedmeasure is the effect of trade liberalization on pro-ductivity, or how much workers actually produce inany given work session. If productivity rises, workerscan be paid more without driving up inflation orcutting into business profits. Thus, rising wages canbe sustained over the long term. Rising productivitythat leads to higher wages will expand domesticconsumer demand, stimulating further productionof goods and services and creating a virtuous circleof growth. A third set of economic issues that mustbe addressed in measuring the impact of trade onaverage citizens is how the gains from trade are dis-tributed. There are winners and losers from trade,and it is impossible to assess the effect of trade onsocieties without knowing which groups gained,which lost, and to what degree they were affected.

Beyond these economic effects of trade on realpeople, there is also an important political reason tostudy the employment impact of trade. Politicalleaders often promote trade in general, and partic-ular trade agreements such as the North American

Free Trade Agreement (NAFTA), as job creators. In the United States, for example, then-president Bill Clinton predicted that NAFTA would create, U.S. jobs in its first two years of existence.1

Today, President George W. Bush promotes tradepacts on the same basis, promising that they will“generate high-wage jobs for American workers.”2

When trade pacts are sold to the public and to legislators on the basis of their potential to createjobs and raise wages, it is important to revisit thosepromises, once time has elapsed and data have accumulated, to determine actual results. Such retrospective studies can then be used to guidefuture trade policy.

As with other effects of NAFTA, it is not a simpleor straightforward proposition to tally the impact of the agreement on jobs, wages, and incomes. Still, there are several aspects of NAFTA’s effectsthat can now be estimated with some confidence. In this chapter, I review the impact of NAFTA onjobs, wages, and household income in each NorthAmerican country. The focus is primarily onMexico, however, because the impact of NAFTA on employment has been much greater there than in Canada or the United States. I then discuss thepolicy implications for countries in the hemispherethat are confronting choices on trade that may havesimilar employment impacts.

oneJobs, Wages, and Household Income

S A N D R A P O L A S K I

(Continued on page )


MAIN F INDINGS

JOBS

■ NAFTA has produced a disappointingly small net gain in jobs in Mexico. Data limitations precludean exact tally, but it is clear that jobs created in export manufacturing have barely kept pacewith jobs lost in agriculture due to imports. There has also been a decline in domestic manufac-turing employment, related in part to import competition and perhaps also to the substitution of foreign inputs in assembly operations. About 30 percent of the jobs that were created inmaquiladoras (export assembly plants) in the 1990s have since disappeared. Many of these operations were relocated to lower-wage countries in Asia, particularly China.

■ Mexican agriculture has been a net loser in trade with the United States, and employment inthe sector has declined sharply. U.S. exports of subsidized crops, such as corn, have depressedagricultural prices in Mexico. The rural poor have borne the brunt of adjustment to NAFTA andhave been forced to adapt without adequate government support.

■ NAFTA’s net effect on jobs in the United States has been minuscule, given the size of the U.S.economy and the importance of other trading partners. The best models to date suggest thatNAFTA has caused either no net change in employment or a very small net gain of jobs.

■ NAFTA’s predecessor, the Canada-United States Free Trade Agreement (CUFTA), took effect in1989 and at first led to substantial net job losses in Canada’s traded sectors. After about fiveyears, the losses stopped and export manufacturing began to grow again. A decade after theenactment of CUFTA, manufacturing employment recovered to the levels seen before the tradepact and has continued to grow modestly since then.

PRODUCTIVITY

■ Productivity has increased in all three countries over the last decade. NAFTA and CUFTA likelyplayed a significant role in the observed productivity growth in Mexico and Canada, becauseboth countries cut tariffs deeply and were thereby exposed to competition from their giantneighbor. In the United States, NAFTA probably has played a small or negligible role in produc-tivity growth for two reasons: U.S. tariffs were already low before NAFTA and trade with therest of the world plays a much larger role.

■ The desirable growth in productivity may have had the unwanted side effect of reducing the rate of job growth, since fewer new jobs were created as workers already on payrolls produced more.

WAGES

■ Real wages for most Mexicans today are lower than when NAFTA took effect. This stunningsetback in wages is mainly attributable to the peso crisis of 1994–1995. However, during theNAFTA period, productivity growth has not translated into wage growth, as it did in earlierperiods in Mexico. Mexican wages are also diverging from, rather than converging with, U.S.wages.

■ Since the net impact of NAFTA on U.S. employment is small, the impact on overall wages isalso minor. But a widening gap between the wages of skilled and unskilled workers is partlyattributable to trade, and NAFTA as a factor in U.S. trade is thus likely to account for a portionof the observed growth in wage inequality.


■ Overall real wages in Canada were only slightly higher in 2002 than when CUFTA took effect in 1989, but manufacturing earnings fared somewhat better. This suggests that NAFTA andCUFTA did not have a negative impact on wages, since earnings in nontraded sectors increasedslower than in manufacturing. As in the case of Mexico, productivity increases in Canada significantly outstripped wage increases.

INCOME DISTRIBUTION

■ Income inequality has been on the rise in Mexico since NAFTA took effect, reversing a briefdeclining trend in the early 1990s. Compared to the period before NAFTA, the top 10 percent ofhouseholds have increased their share of national income, while the other 90 percent have lostincome share or seen no change. Regional inequality within Mexico has also increased,reversing a long-term trend toward convergence in regional incomes.

■ Income inequality in the United States increased during the decade before NAFTA and has continued to widen. The growing wage gap between high-skilled and low-skilled workers is oneof the causes, and to the extent that trade is a factor in the wage gap, it is also implicated ingrowing inequality.

■ Despite relatively more equal incomes in Canada than in either Mexico or the United States,income inequality has been on a marked upward trend since CUFTA’s entry into force in 1989.The richest 20 percent of Canadian households have increased their share of national incomeduring the period, while all others have experienced declines. Only the top 20 percent ofhouseholds had higher real incomes in 2000 than in 1989. Because manufacturing wages performed better than wages in most other sectors, it seems clear that trade-induced wagechanges were not the cause of the observed increase in inequality in Canada. Rather, a reduction in transfer payments from government, which play an important role in the incomesof the bottom 40 percent of households, accounts for most of the change. The possibility that increased trade would weaken the Canadian social safety net was a concern of CUFTA opponents, but there is no clear evidence to support a causal relationship.

WINNERS AND LOSERS

■ The experience of each of the NAFTA countries confirms the prediction of trade theory, thatthere will be winners and losers from trade. The losers may be as numerous as, or even morenumerous than, the winners, especially in the short-to-medium term. In Canada, it took adecade for manufacturing employment to recover from the initial displacements caused byCUFTA. In Mexico, farmers are still struggling to adapt to NAFTA-induced changes.

■ The short-to-medium term adjustment costs faced by the losers from trade can be severe, and the losers are often those segments of society least able to cope with adjustment, due toinsufficient skills, meager savings, and limited mobility. It must also be recognized that theremay be permanent losers from trade, due to these limitations.


Mexico

JOBS

Mexico has an abundance of labor. Very high population growth rates through the mid-stranslated into a demographic bulge in the workforcethrough the late s, as people born during theearlier high-growth years matured and began to lookfor work. In addition, during the s and s,women joined the workforce at increasing rates, inpart because of the decline in the reproductive rate,but also out of the need to support householdincomes during recurrent economic crises. Overall,the Mexican labor force grew from . millionimmediately before NAFTA to . million in ,meaning that Mexico needed almost a million jobs a year simply to absorb the growth in labor supply.3

Economic theory suggests that opening to trade willincrease the demand for labor in a labor-abundantcountry and therefore will increase the number ofjobs, the wages paid, or both. Clearly, that would be a desirable effect for a country with a large andgrowing workforce such as Mexico. However, inpractice, the effect of a trade pact like NAFTAdepends on many factors, including which tariffswere reduced or eliminated by each country, at whatpace, and in what sequence. It also depends onother negotiated provisions of the pact—and relatedgovernment policies—that affect decisions aboutinvestment, production, and jobs, and on the overallbalance of gains and losses from the trade agreementas negotiated.

Thus, it is necessary to look at both the eliminationof tariffs on exports from Mexico to its northernneighbors (which could increase exports and there-fore increase jobs) and the elimination of Mexicantariffs on U.S. and Canadian goods (which couldincrease Mexico’s imports from the United Statesand Canada and thereby eliminate jobs in Mexico)to understand the impact of NAFTA’s tariff cuts onMexican jobs. The following discussion focuses ontariff changes between Mexico and the United

States, because trade between Mexico and Canada isa very small part of Mexico’s total trade.4

Under NAFTA, the United States cut tariffs onmost Mexican manufactured goods, with the largestcuts on textiles and apparel, followed by moremodest but still significant reductions on footwear,chemicals, miscellaneous manufactures, and trans-portation equipment. The United States also cutagricultural tariffs and increased quotas, althoughone of Mexico’s main agricultural products, sugar,continues to be restricted through tariffs and quotas.Other Mexican crops face seasonal restrictions thatare scheduled to end by . Meanwhile, Mexicocut tariffs dramatically on both agricultural and live-stock products and virtually all manufactured goodsfrom the United States. Some tariffs will be main-tained on sensitive agricultural products such asmaize and beans until , but in practice theMexican government has already allowed substantialabove-quota tariff-free imports of corn.

The pattern of trade between the two countrieschanged in a number of ways as a result of thesecuts. From Mexico’s standpoint, the cumulativechanges resulted in a shift from a net trade deficitwith the United States before NAFTA to a substan-tial net trade surplus in . The overall net surplusmasks a growing deficit in agricultural trade with theUnited States that is more than offset by a surplus inmanufactured exports from Mexico. Trade in servicesshows a small deficit for Mexico (see Figure ).

Manufacturing Employment. Translating thesechanges in trade patterns into employment impactsis not easy, but approximate numbers of jobs can bedetermined with reasonable certainty. With respectto manufacturing, the task is complicated by dataavailability. The Mexican government tracks manu-facturing employment through two separate dataseries. One survey covers medium-size and largemanufacturing establishments that account for about percent of industrial production, but excludes themaquiladora sector.5 A separate survey coversmaquiladoras, which are export assembly plants.


Overall employment in non-maquiladora manufac-turing in Mexico was lower in than in ,except in microenterprises, which are mainly in theinformal sector.6 Employment in the non-maquiladora manufacturing sector stood at about. million in January , declined sharply duringthe peso crisis, then began a recovery that producedan additional , jobs at its peak in May

before declining again over the past three years. Therecent decline has been caused in significant part bythe U.S. recession. As NAFTA has linked Mexicomore and more closely to the U.S. economy, theU.S. business cycle has come to play a dominantrole in Mexico’s economic fortunes. In May

there were . million jobs in non-maquiladoramanufacturing, about , fewer than whenNAFTA took effect (see Figure ).

The maquiladora program was created by Mexicoand the United States in to allow tariff-free andtax-free imports of materials and components intoMexico for assembly and re-export to the United

States. It is concentrated in the auto parts, elec-tronics, and apparel sectors. The growth inmaquiladora jobs is not primarily attributable toNAFTA, since the program predates that pact, butNAFTA did provide significant tariff cuts on appareland as a result stimulated that subsector of themaquiladoras. At the same time, NAFTA began aprocess of phasing out the unique tax and tariffadvantages of the maquiladora program, whilegranting similar treatment to non-maquiladoramanufacturers in Mexico. Many observers expectthe maquiladoras’ share of Mexico’s manufacturedexports to continue to decline over time.

Maquiladora assembly plants added about ,

jobs between NAFTA’s enactment in January

and the sector’s peak employment in . Theythen shed about , jobs through May .Currently, maquiladoras employ about , moreworkers than they did before NAFTA (see Figure ).Maquiladora plants produce almost entirely forexport, so employment in that sector can be attrib-

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

2001200019991998199719961995199419931,200,000

1,250,000

1,300,000

1,350,000

1,400,000

1,450,000

1,500,000

2003200220012000199919981997199619951994

Figure 1. Mexico’s Trade Balance with the United States, by SectorMILL IONS OF DOLLARS

Figure 2. Non-Maquiladora Manufacturing TOTAL EMPLOYMENT, JANUARY 1 OF EACH YEAR

ServicesAgricultureManufacturing

Source: Compiled by the U.S. International Trade Commission from offi-cial statistics of the U.S. Department of Commerce, Bureau of theCensus.

Source: Mexican National Institute of Statistics, Geography, andInformatics (INEGI), Ministry of Employment and Social Insurance(STPS), Monthly Industrial Survey (EIM).


uted largely to trade (although not exclusively totrade resulting from NAFTA). By contrast, the dataon non-maquiladora manufacturing employmentblend production for export with production fordomestic markets; therefore, it is difficult to deter-mine the proportion of employment attributable toexports. One study suggests that the share of non-maquiladora manufacturing employment associatedwith exports increased by roughly , jobsbetween and , and then declined.7 Ofthose jobs, some , were based on exports tothe United States.

Only part of the growth in both maquiladora andnon-maquiladora export employment can be attrib-uted to NAFTA. The peso devaluation of ‒

gave a very significant boost to all Mexican exports,as the dollar bought more than twice the value ofMexican goods after the devaluation. A study by theU.S. International Trade Commission (USITC)found that the peso devaluation of ‒ had alarger impact on the growth of Mexican exports of

manufactured goods to the United States than allNAFTA-related tariff changes combined.8 If oneuses the USITC’s findings on the relative impact of various factors on changes in Mexican exports tothe United States, NAFTA tariff cuts likely explainabout one-quarter of the total growth in exportmanufacturing jobs (maquiladora and non-maquiladora), or the addition of about ,

jobs, while the peso devaluation, lower transportcosts, and other factors account for the rest.9

The overall reality during the NAFTA years has beenone of strong growth in the volume of manufacturedexports but very disappointing growth in manufac-turing employment. This unwelcome divergencebetween manufacturing output and employmentgrowth emerged in Mexico in the mid-s but appears to have widened since enactment ofNAFTA.10 A number of explanations for thisoutcome have been advanced. One obvious explana-tion is productivity growth, which reduces theamount of job creation for any given level of exports.While productivity did increase in Mexican manu-facturing through most of the s, the gains werefairly modest, and alone cannot account for the veryslow growth in manufacturing employment.

One factor that likely explains part of the phenom-enon is that export manufacturing in Mexico isincreasingly based on a production model in whichcomponent parts are imported, then processed orassembled, then re-exported. In this model, thespillover effect of such operations on the broadereconomy is very limited, because only a narrowrange of processing or assembly operations benefitthe labor market. Forward and backward linkages,such as the stimulation of businesses that supplyparts and materials, are not created, limiting themultiplier effect of any growth in exports. Thispattern is quite clear in the maquiladora sector, inwhich percent of components are imported andonly percent are produced locally in Mexico. Butthe non-maquiladora export sector shows similarpatterns. The intrafirm production carried out bymultinational firms operating in Mexico in sectors

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

1,300,000

1,400,000

2003200220012000199919981997199619951994

Figure 3. Maquiladora Employment in Mexico TOTAL EMPLOYMENT, JANUARY 1 OF EACH YEAR

Source: INEGI, Monthly Indicators of the Maquila Industry.

such as the auto and electronics industries dependsheavily on imported inputs. It seems probable thatMexican manufacturers that previously suppliedinputs to large manufacturing firms have lost asignificant share of input production to foreign suppliers, and thus account for part of the weaknessin manufacturing employment.11

Another important factor in the decline ofdomestic manufacturing employment is that someMexican manufactures have been displaced directlyby imports. The limited employment growth thathas occurred in manufacturing for the domesticmarket has been mainly in very small firms and in the informal sector, with low pay and usuallywithout benefits.

The export manufacturing model in Mexico has alsofailed to generate much growth in jobs at the high-skills end of the spectrum, in areas such as research,engineering, design, and accounting. One study of the skills component of manufacturing jobs inMexico found that in the proportion of skilledlabor in the manufacturing sector was only .

percent.12 The skilled labor component in manufac-turing was actually less than the average share ofskilled labor in the overall economy, . percent.

The limited job creation under the manufacturingmodel currently prevalent in Mexico is of particularconcern when put in the context of other changesthat are likely to affect future employment growthin the sector. Mexico enjoyed the advantage of beingthe first low-wage country to strike a free-tradeagreement with the United States. However, as morefree-trade agreements are negotiated, unilateral pref-erence programs are expanded, and World TradeOrganization (WTO) membership grows, the first-mover advantage is progressively diluted. The acces-sion of China to the WTO, in particular, has meantmounting competition for Mexico’s manufacturedexports, particularly in labor-intensive sectors suchas apparel and electronics. In , China displacedMexico as the second-largest exporter to the UnitedStates (after Japan). It is no accident that Mexico

was the last WTO member to agree to the terms forChina’s accession to the trading organization. Theproliferation of free-trade agreements by the UnitedStates also means that the value of Mexico’s marketaccess advantages will erode as other low-wage coun-tries gain similar access. For example, a proposedfree-trade pact with Central America would add a sizable pool of lower-wage labor to the availableregional labor supply, undermining Mexico’s currentadvantage.

Agricultural Employment. As noted above, Mexicohas had a net trade deficit in agricultural goodswith the United States every year since NAFTAtook effect, except the peso crisis year of ,when the huge devaluation of the peso made mostdollar-denominated products too expensive forMexicans. The agricultural trade deficit existedbefore NAFTA, but it grew after enactment of the trade pact and was larger in than in anyprevious year. Tariffs on the most sensitive crops in both the United States and Mexico have yet tobe eliminated, and so the nature of bilateral agri-cultural trade will continue to evolve. However, the pattern to date challenges the conventionalwisdom that agricultural liberalization is good for the developing country in a trade relationshipwith a developed economy. The one bright spot for Mexico, an increase in exports of fruits andvegetables, has not kept pace with imports of U.S.grains and oilseeds. This may be due in part togreater efficiency among U.S. producers, but it isalso partly due to U.S. subsidies. By one estimate,U.S. corn was sold in Mexico from through at prices percent or more below the cost of production.13

The increasing trade deficit has translated into job losses in agriculture. Agricultural employment in Mexico actually increased somewhat in the lates and early s, employing . millionMexicans at the end of , just before NAFTAcame into force. Employment in the sector thenbegan a downward trend, with . million employed




UNDERSTANDING THE PESO CRISIS—WAS IT RELATED TO NAFTA?

The story of the 1994 Mexican peso crisis is basically a story of huge capital inflows from

1991 through early 1994, then abrupt outflows in late 1994 and 1995. As was the case in

other developing-country financial crises of the 1990s, the volume and ultimately the

direction of capital flows was partly a function of policy choices by the national government and

partly the result of factors outside the government’s control.

The inflow of capital investment in the early 1990s was a welcome change for Mexico after the

lost decade of the 1980s, when the repayment of huge debt from earlier periods suppressed eco-

nomic growth and living standards. A restructuring of that debt through the U.S.-led Brady plan

of 1989, a series of privatizations in the early 1990s, and a rise in oil prices associated with the

1991 Gulf War together helped shake Mexico out of its economic doldrums. Meanwhile, Mexico

began negotiations with the United States and Canada on what would become NAFTA, increasing

investors’ confidence that Mexican products would have access to the huge U.S. market and that

investments in Mexico would be protected under an ambitious investment clause included in the

new trade agreement. An important additional ingredient in the mix was that Mexico undertook

financial liberalization beginning in the late 1980s that eliminated most capital and exchange

controls, allowing much greater capital mobility.

Together, these policy choices accounted for one side of the attraction that Mexico began to hold

for foreign investment and domestic flight capital. The other side was that the same period saw

an economic recession in most of the developed world, beginning with contractions in Europe

and Japan in 1990 and a downturn in the United States in 1991. Monetary authorities in those

countries cut interest rates to try to revive their domestic economies, making higher returns in

countries such as Mexico even more attractive to investors on a relative basis.

During the period leading up to the crisis, Mexico maintained a relatively fixed exchange rate

regime, known as a crawling parity band, through which the peso was pegged to the U.S. dollar.14

Investors viewed this type of arrangement positively at the time. To the extent the government’s

monetary policies were seen as credible, the fixed regime created predictability about the

exchange rate and relieved investors of exchange rate risk.

The renewed inflows of capital were dominated by portfolio capital, that is, investment in govern-

ment bonds and corporate stocks and bonds rather than direct investment in plants and equip-

ment. About 60 percent of the portfolio investment was in bonds. As Table 1 shows, portfolio

investment accounted for 63 percent, 76 percent, and 85 percent of capital inflows in 1991, 1992,

and 1993, respectively. It was only in 1994, when NAFTA took effect, that foreign direct invest-

ment (in factories, equipment, farms, and other businesses) surpassed the shorter-term portfolio

investments.15 Portfolio investment is much more mobile or “footloose” than foreign direct

investment, as the latter entails activities such as actual construction of factories and acquisition

of equipment that may be hard to resell. Investments in Mexican government bonds were particu-

larly short range investments, as most of the bonds were issued for three-month terms.

Table 1. External Portfolio and Foreign Direct Investment in Mexico MILL IONS OF U.S . DOLLARS

Year External Portfolio Investment Foreign Direct Investment

1990 3,369 2,549

1991 12,741 4,742

1992 18,041 4,393

1993 28,919 4,389

1994 8,185 10,972

1995 -10,140 6,963

Source: International Monetary Fund, International Financial Statistics, October 1996.


In February 1994, the U.S. Federal Reserve Board raised interest rates for the first time since the

recession of the early 1990s, in what was to be a series of rate increases as the United States

experienced a strong economic recovery. With the interest rate spread between the United States

and Mexico narrowing, portfolio capital flows to Mexico contracted sharply during the next three

months, to less than one-fifth of their previous level. At the same time, new political turbulence

emerged in Mexico, including the uprising of an indigenous group in Chiapas and the assassina-

tion of the presidential candidate of the ruling party. The Mexican government had to roll over

existing debt (the three-month bonds, called CETES) in this difficult environment. At this point,

the government made two fateful decisions. First, it shifted the public debt out of pesos into

dollar-based securities (called tesobonos) as the three-month bonds came due. It thereby agreed

to assume the exchange rate risk (which investors had previously borne) if the peso’s rate of

exchange with the dollar became unsustainable. The second decision was to continue to “ster-

ilize” funds from international exchange transactions—that is, keep them out of the domestic

money supply. Just as some funds had been kept out of the domestic monetary base as they

flowed into Mexico in the early 1990s (and held as foreign exchange reserves), so now the outflow

was covered by those reserves, allowing the Bank of Mexico to intervene to maintain the peso in

its parity band for most of 1994. This allowed the government to prevent a collapse of the peso

and an economic contraction during the first three quarters of 1994, the period leading up to the

Mexican presidential election.

However, by the end of 1994 these reserves were almost exhausted. The government did not

publish data that would allow the exact situation to be known, but investors and speculators

began to expect that the government would run out of reserves and be forced to devalue the

peso. To beat that eventuality, investors scrambled to shift out of Mexican investments and to

trade pesos for dollars in order to do so. In response to the growing demand for dollars and

shrinking foreign reserves, the Bank of Mexico widened the parity band in which the peso could

move from about 2 percent to 15 percent. This was contrary to investor expectations (and,

indeed, government indications) that there would be no devaluation. Coming on top of the other

pressures that had been building, there was a run on the peso. The Bank of Mexico suffered large

reserve losses over the next two days and on December 22, 1994, announced that the peso would

be allowed to float. Within ten days the peso had depreciated 55 percent. Continuing to fall, it hit

a low of 7.64 to the dollar by the end of 1995.

In evaluating the policy choices of the Mexican government with hindsight, it is useful to

remember that until 1994 Mexico was often held up as a model of economic development by U.S.

and multilateral financial institutions. But significant aspects of Mexico’s apparent success in

attracting international capital were built on a factor—low world interest rates—over which Mexico

had no control. Mexico compounded this vulnerability by relaxing all controls over capital flows

through its aggressive financial liberalization policies, so that it had no levers under its control

when investor sentiment changed. The capital inflows were huge compared to the size of the

economy, inflating it like a bubble. The “shock” of the capital outflows was therefore also very

large. The peso crisis became the first financial crisis of globalization, with others to follow. In light

of the Mexican experience, it seems clear that very large capital flows, especially flows of footloose

portfolio capital, can be destabilizing to any macroeconomic policy regime in developing countries.

The United States has recently adopted the position that trade partners must eliminate all existing

capital controls as part of any free-trade agreement. But Mexico’s experience with financial liberal-

ization, which predates NAFTA, clearly demonstrates that this is not a prudent policy for a devel-

oping country interacting with much larger global financial forces. Developing countries would be

wise to resist demands that they eliminate capital controls as part of free-trade agreements.


at the end of , a loss of . million jobs.16

While not all of that reduction can be attributed to NAFTA, other forces that affected trade, such asthe sharp devaluation of the peso during ‒,pushed in the opposite direction, toward greatergrowth of Mexican exports over imports. In fact, was the one post-NAFTA year in whichMexico had a surplus in its agricultural trade withthe United States, and agricultural employment did improve modestly for a short period thereafter.However, once the peso stabilized, the agriculturaltrade balance again turned against Mexico and agricultural employment resumed its decline.During this period, Mexico was also liberalizingtrade with other partners, so the entire impactcannot be ascribed to NAFTA. But the WTO hasdetermined that Mexico reduced its agriculturaltariffs much more for the United States than forother trading partners.17 Thus, agricultural tradeliberalization linked to NAFTA is the single mostsignificant factor in the loss of agricultural jobs inMexico (see Figure ).

The release of labor from the agricultural sectorlargely offset the employment gains in the exportmanufacturing sector that occurred after NAFTAtook effect. As noted earlier, it is impossible toestablish precisely what proportion of the . milliongain in export manufacturing jobs (at the peak ofemployment in ) and the . million loss inagricultural jobs between and was directlyattributable to NAFTA. However, it is clear that thesum of the effects of the trade pact to date has notbeen a strong net gain in overall employment andmay have been a small net loss of jobs for Mexico.Further, the long-term effects are still uncertain, asmost manufacturing tariffs have now been elimi-nated, while the most sensitive agricultural tariffshave yet to come down.

While the evolution of trade-related employmentsince enactment of NAFTA is disappointing, thesubstitution of manufacturing jobs for agriculturaljobs is generally considered positive for development,representing a move up the production ladder.However, as noted above, there are some reasons for concern about the Mexican manufacturing sector.These include the limited development of forwardand backward manufacturing linkages that wouldmultiply job creation, the erosion of Mexico’s first-mover advantage, and the decline in jobs in manufacturing for domestic consumption.

Service Sector Employment. NAFTA has had littledirect effect on employment in the service sector,because most services are not traded and those thatare, such as financial and telecommunications services,are not very labor intensive. Mexico has had a smalltrade deficit in services with the United States, so any impact on employment is likely to be negative,although not large. Nevertheless, the service sector is key to an overall understanding of the Mexicanemployment situation, because it is here that mostMexicans find employment. It is also the epicenter ofthe growth in the so-called informal sector. The shareof total employment found in the service sectorincreased from percent immediately before NAFTA

6,000,000

6,500,000

7,000,000

7,500,000

8,000,000

8,500,000

200220012000199919981997199619951994a1993

Figure 4. Mexican Employment in Agriculture EMPLOYEES

Source: INEGI/STPS, National Employment Survey (ENE). Note: Agriculture actually refers to the primary sector, which alsoincludes fishing, forestry, and trapping. a. Data for 1994 not available.



HOW RURAL HOUSEHOLDS SURVIVE 18

The rural economy in Mexico has changed dramatically over the past decade, as a result

of NAFTA, other trade pacts, and changing government policy. These factors have thrust

the rural population into a maelstrom of change beyond its capacity to control. While

some medium- and large-scale farmers have adapted to new market opportunities—often with

the support of the Mexican government or foreign investment—much larger numbers of subsis-

tence farmers have fared poorly. Rural households already suffering from low standards of living

are under increasingly severe strain, while alternative economic activities are often unavailable

or unpalatable.

In response, many rural households have adopted complex survival strategies that involve

a mix of increased cultivation of basic crops, some diversification of agricultural production,

increased day labor, and increased off-farm employment, often in the informal sector and in

some cases in maquiladora plants that have relocated away from the northern border and into

the hinterlands. It seems clear that these strategies also involve increased migration to other

parts of Mexico as well as migration to the United States, although reliable data on either type

of migration are not available. Despite the dispersal of work, sometimes to faraway locations,

the families and communities involved maintain some cohesion as social and economic units. For

example, rural households increasingly depend on remittances from household members who

migrate, whether to other parts of Mexico or to the United States. Remittances from the United

States have set records each of the last few years, amounting to US$9.8 billion in 2002 and on

course to reach at least US$12 billion in 2003 at current rates.19

Rural Mexicans’ diverse survival strategies help to explain some surprising developments

that run counter to economic predictions but are well documented in Mexican statistics. For

example, production of maize on irrigated lands (mainly larger commercial farms) has declined

since cheaper, subsidized U.S. corn was allowed into Mexico and subsidies for water use were

reduced. However, maize production on nonirrigated, rain-fed land (overwhelmingly small subsis-

tence plots) increased when household incomes contracted sharply during the severe recession

that followed the peso crisis in 1995. Production has continued at similar levels, despite imports

of cheaper U.S. corn (see Figures 5–8. Data for 2001 and 2002 are preliminary).

Subsistence farmers produced primarily for their own consumption, although some of the

increase was also destined for local markets. Either the cheaper imported corn did not reach

markets in remote areas due to poor roads and other factors, or the lack of cash income influ-

enced the “grow or buy” decision. An additional factor appears to be the preference for native

varieties of maize over imported corn, among both rural and low-income urban families, which

has helped to sustain the market for traditional maize and for value-added food products using

maize as an input, such as tamales, posole, and sopes.

It also appears that as more rural workers have moved into nonagricultural activities as their

primary occupations, a substantial number continue to perform some work in agriculture.

Mexico’s main statistical agency, the National Institute of Statistics, Geography, and

Informatics (INEGI), began to include a special series of questions in its household survey

in less urbanized areas in the 1990s, designed to elicit more information on rural economic

behavior.20 The survey showed that about 7 million people were involved in agricultural

activities in 2000.21 However, when questioned further about their activities during the

previous six months, an additional 1.5 million people who reported their principal employment

as nonagricultural indicated that they had in fact worked in the agricultural sector at some

time during that period.22 This represents an augmentation of the agricultural workforce by


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

20011997–20001995–961993–941991–9317,000

17,500

18,000

18,500

19,000

19,500

20,000

20,500

2002200120001999199819971996199519941993

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

20022001200019991998199719961995199419939,000

10,000

11,000

12,000

13,000

14,000

15,000

2002200120001999199819971996199519941993

Figure 5. Maize Imports to Mexico THOUSANDS OF METRIC TONS

Figure 6. Total Maize Production in Mexico THOUSANDS OF METRIC TONS

Figure 7. Total Irrigated Maize Production in Mexico THOUSANDS OF METRIC TONS

Figure 8. Total Rain-Fed Maize Production in Mexico THOUSANDS OF METRIC TONS

Source: Mexican Secretary of Agriculture, Livestock, Rural Development, Fisheries, and Nutrition (SIAP-SAGARPA), available atwww.siap.sagarpa.gob.mx.


about 20 percent for some parts of the year, presumably those times requiring the greatest

labor, such as the times of sowing and harvesting. This part-time agricultural activity by

workers employed elsewhere helps to explain how agricultural production on small farms has

been maintained despite the sharp decline in overall agricultural employment that appears in

the main employment data.

Day laborers, somewhat surprisingly, were more likely to work for small landowners (40 percent

of day laborers) than for larger commercial agriculture or ranching operations (30 percent). The

remaining workers were hired by ejidos, the communities of small-scale farms comprising the

poorest segment of agricultural property owners.

A small proportion of rural households and communities have succeeded in establishing market

niches for resources such as environmental services and ecotourism, and for products that can

be certified as “organic,” “sustainable,” or “artisan,” all of which command more favorable prices

in international marketing schemes (see chapter 3 for further discussion

of these niche activities).

As already noted, remittances from household members who have migrated have become

an increasingly important factor in the overall survival of rural households and the surprising

staying power of rural communities. In addition to international flows, domestic remittances

(transfers from within Mexico) are also an important factor in cash income for rural households.

The remittances are used partly for consumption, but are also used for production purposes. For

example, they allow subsistence farmers to surmount credit constraints to purchase agricultural

inputs that ordinarily would be financed through borrowing. This is particularly important in light

of the collapse of rural credit in recent years.

The portrait that emerges from these varied economic activities is of a population that combines

nonagricultural activities and urban jobs (in Mexico and abroad) with continued agricultural

production and remittances. The evident goal is to sustain the life of rural communities as both

an alternative to and insurance against the precariousness of the informal economy, urban shan-

tytowns, and illegal migration, which loom as the main alternatives for poor rural households.

took effect to percent in . Most of this growthwas due to absorption of labor from the agriculturalsector, which decreased from . percent of employ-ment in to . percent in (see Figure ).23

As discussed above, displacement of subsistencefarmers, in part because of increased agriculturalimports from the United States as a result of NAFTAtariff cuts, led rural households to struggle to main-tain adequate income levels. Mexico has no unem-ployment insurance program, and so displacedworkers must find alternative employment. Due tosluggish employment growth in manufacturing, aswell as the limited skills of many agricultural workers,employment was found (or created) mainly in low-pay, low-productivity jobs in the service sector such asdomestic work, street vending, and personal servicesand repairs. Much of this was in the informal sector,which comprises self-employment, employment inmicroenterprises, and other forms of employmentthat do not provide benefits such as health care andpensions.24 Overall, the informal sector grew duringmost of the s, with employment in informal jobsapproaching percent of all employment in Mexicoin and , following the peso crisis and thesubsequent economic contraction. After economicgrowth resumed in the late s, the informal sectorshrank somewhat, but still accounts for about

percent of Mexican jobs.25 This reservoir of low-wage, low-productivity workers shows no sign ofbeing absorbed by Mexico’s export sector in theforeseeable future.

WAGES AND PRODUCTIVITY

Real wages in Mexico are lower today than whenNAFTA took effect. This stunning setback in wagescannot be attributed primarily to NAFTA, however.Indeed, wages today are below their levels.Most of the decrease in real wages observed over thelast twenty years can be traced to two periods ofsharp wage declines. The first was during the debtcrisis of the early s, when a devaluation of thepeso and contractionary policies designed to achievemacroeconomic stability and meet the terms

demanded by international holders of Mexico’s debtled to a sharp drop in wages. The second declineoccurred as a result of the peso crisis of ‒.

When the peso was sharply devalued in each crisis,the cost of imported goods and the rate of inflationboth shot up, while wages were constrained by thegovernment’s monetary and wage-setting policies.Wages gradually recovered after each of thosemacroeconomic shocks. However, they did not growenough in either recovery period to return to pre-vious levels. This pattern is true of both traded andnontraded sectors of the economy, as well as foremployees of small, medium, and large firms.26

While NAFTA is not the cause of the two major setbacks in Mexican wages, it is striking that a free-trade agreement that dramatically increased exportsand foreign direct investment has not done more to increase wages and living standards for averageMexican workers—or even for workers in mostexport firms—relative to pre-NAFTA levels. Tradetheory suggests that a country with an abundance oflow-skill labor (such as Mexico) that opens to tradewill experience increasing returns (wages) to its low-skilled workers. However, wages for productionworkers in both maquiladora and non-maquiladoramanufacturing are still below pre-NAFTA levels.Some analysts have suggested that, for a variety of reasons, trade increased the demand for highlyskilled labor in Mexico relative to the demand forless skilled workers.27 But even for highly educatedworkers in the manufacturing sector (such as profes-sional, technical, and administrative staff ), real wagesin the late s were below those in , with the only exceptions occurring in a few regions along the U.S. border.28 This same pattern holds for othersectors of the economy. Workers with universitydegrees and even postgraduate study received lowerreal wages in than in .29 The disappointingwage performance has occurred despite the fact thatMexican workers’ productivity has increased sinceNAFTA took effect (see Figure ).

Increasing productivity is a necessary condition forsustainable increases in wages, since over time an



economy can only afford to consume what it pro-duces. But increased productivity is not sufficient toguarantee wage increases. Wage outcomes willdepend in part on supply and demand in labormarkets, and in part on the quality (and any bias) ofinstitutions that have been established to determinehow the gains from productivity are distributed. Atpresent, labor market supply continues to exceeddemand in most categories of labor in Mexico, con-tributing at least a partial explanation for poor wageresults. In addition, the increasing integration ofglobal production as a result of liberalized trade andimproved protections for foreign investors hasmeant that, for many categories of unskilled andsemi-skilled labor, competition is found not only innational labor markets but also internationally, asfirms make production and sourcing decisions basedin part on labor costs in various countries. Theaccession of China and other low-wage countries to

the WTO has increased the supply of labor thatfirms can tap while still being guaranteed access fortheir output to the world’s rich markets, includingthe United States. Differences in tariffs and trans-portation costs may not offset larger differences inunit labor costs. (Unit labor costs reflect the combi-nation of wages and productivity).

While labor market supply, demand and footlooseglobal production undoubtedly contribute to thedecoupling of wages from productivity seen inMexico, it is also the case that Mexican institutionshave been biased against wage increases. Forexample, it has been government policy to holddown the minimum wage over most of the last twodecades. This has been done both to increase globalcompetitiveness of Mexican labor and exports andto meet structural adjustment goals. The minimumwage determines many other wages in Mexico,

-2%

0%

2%

4%

6%

8%

ServicescManufacturingbAgriculturea

Figure 9. Average Annual Employment Growth by Sector, Before and After NAFTA

Figure 10. Manufacturing Productivity and Real Wages in Mexico INDEX: 1993=100

Source: INEGI/STPS, National Employment Survey (ENE).a. Primary sector includes agriculture, fishing, forestry, and trapping. b. Secondary sector includes mining, manufacturing, and construction. c. Tertiary sector includes transportation, utilities, communications,trade, financial, and social services. Mexican data are currently underrevision by the STPS and INEGI.

Source: INEGI/STPS, Monthly Industrial Survey (EIM), EconomicInformation Bank (BIE), Indicadores Economicos de CoyunturaNotes: Productivity and wage data cover both production and non-production workers. The maquiladora sector is not included in this data series. Wages include salaries, bonuses, and benefits. Data for1993–2002 are annual averages; 2003 is January–September average.

1984–19931993–2002

ProductivityWages

which are set as multiples of the minimum, and sothe impact is felt beyond the lowest-paid jobs.Further, unionization and collective bargaining,among the main institutional mechanisms for deter-mining how gains from productivity increases willbe distributed between employers and workers, havebeen repressed in Mexico through weak labor laws.In the maquiladoras, for example, it is a widespreadpractice for employers to conclude “protection contracts” with corrupt or nonexistent trade unions.Since Mexican labor law allows only one union tohold a contract in a workplace, these contracts pre-clude efforts by workers or more legitimate unionsto bargain for wage increases. There have beennumerous substantiated allegations of Mexican laborauthorities allowing employers to collude with non-representative unions to avoid vigorous collectivebargaining.30

INEQUALITY AND POVERTY

Gauging the effects of trade on real people requiresan assessment of trade’s impact on inequality andpoverty, because the gains and losses from trade arenot distributed evenly. Inequality in Mexico is high,as it is in much of Latin America. This is a cause for concern because it undermines social stabilityand political cohesion. Furthermore, societies withhighly unequal economies have been shown toreduce poverty less effectively and at slower ratesthan more equal societies.31 Some studies have alsoshown that overall growth is reduced over the longterm by highly unequal income distributions, thusconstraining the incomes of all.32

Income inequality had been declining in Mexico forseveral decades up to the early s, but it reversedcourse after the debt crisis of and the resultingmacroeconomic contraction and structural reforms.Inequality then increased for most of the followingdecade, but began to abate again in the early s,the years immediately before NAFTA. However,since inequality has again been on the rise.Compared to the period before NAFTA, the top percent of households have increased their share

of national income, while the other percent havelost income share or seen no change.33

Income inequality in Mexico has a geographicdimension as well. Historically, Mexico’s southernstates have been poorer, while the regions around the capital and along the U.S. border have been relatively more prosperous. From to , targeted government policies led to an increasingconvergence in per capita income among regions.However, following the macroeconomic crisis of thes, the long trend toward convergence in regionalincomes first stopped and then reversed, withregional inequality widening again in the s.34

The share of people living in extreme poverty inMexico has followed a similar pattern, shrinkingdramatically during the s and s (from

percent to percent ) and then increasing after the debt crisis. Like economic inequality, the inci-dence of poverty increased through the remainder of the s (reaching percent by ) and thenbegan to decline somewhat in the early s, withthe extreme poverty rate at percent when NAFTAtook effect. Poverty surged again during the pesocrisis of ‒, to over percent. Since then, ithas again declined, but at percent the proportionof Mexicans living in poverty is still slightly higherthan the level seen in the late s.35

The United StatesJOBS

The impact of NAFTA on the United States’economy, employment, and the welfare of its citizensis significantly less than its impact on Mexico orCanada, for several reasons. The U.S. economy ismuch larger than that of either of its neighbors; it is less dependent on trade because of its huge (andwealthy) domestic market; and only one-third of itstotal trade is with its NAFTA partners. Further, U.S.tariffs were substantially lower than those of Mexicoand Canada before NAFTA (and its predecessor,


CUFTA), and its tariff reductions were proportion-ately much smaller than the tariff cuts made bythose countries. Since NAFTA has had a muchsmaller overall impact on the U.S. economy, itsimpact on jobs, wages, and household incomes inthe United States is also much less than in Mexicoand Canada.

The actual impact of NAFTA on U.S. employmenthas been sharply disputed by proponents and criticsof the agreement. Widely diverging estimates have been produced. Generally, analysts on bothsides of the question have approached the task by estimating the number of manufacturing jobs supported by a given level of exports and then multiplying the growth in exports to Canada andMexico by that figure to arrive at job gains. Usingthis methodology, the U.S. Trade Representativeestimates that , jobs have been created due to NAFTA.36 Critics, on the other hand, apply the multiplier formula to imports, as well, with one study attributing a net loss of , jobs to NAFTA.37 Advocates of NAFTA resist applying the multiplier formula to identify jobs lost due to imports, since it is not certain that all importedgoods substitute for U.S. goods that would havebeen produced in the absence of trade.38 However,it is clear that NAFTA, like all trade agreements,has produced both winners and losers, and so esti-mates that focus only on jobs created and not thosedestroyed offer no insight into the agreement’s netemployment effects. Further, this methodologydoes not distinguish between changes in trade dueto NAFTA and changes caused by other tradeagreements, such as that creating the WTO, anddoes not take into account the impact of exchangerate fluctuations on trade. Due to these limitations, the estimates of the employment impact of NAFTAby both proponents and opponents have beenunpersuasive.

The USITC recently developed a model tomeasure the impact of NAFTA and four othertrade agreements on the U.S. economy that represents an advance over earlier studies.39

The model assumes that there is no net gain or loss of jobs due to NAFTA. This assumption isbased on trade theory, which suggests that in full-employment economies, job composition will shift but there will be no net change in totalemployment. Labor market adjustment will occurby means of rising wages in the sectors that benefitfrom trade. However, the model can be used toestimate the order of magnitude of job gains orlosses by changing the assumption about how labor markets adjust to changes in trade.

The USITC model estimates that the combinedeffects of NAFTA and CUFTA had a positive impacton total compensation to U.S. workers of approxi-mately billion in , compared to a scenariowithout the two agreements.40 As noted, the modelassumes that the entire change occurred throughchanges in wages. If one assumed instead that wageswere rigid and that the full adjustment occurredthrough increases in the number of jobs rather than


200220001998199619941992199019881986198427,000,000

27,500,000

28,000,000

28,500,000

29,000,000

29,500,000

30,000,000

30,500,000

Figure 11. U.S. Employment in Manufacturing EMPLOYEES

Source: United States Bureau of Labor Statistics, Current Population Survey.Note: Manufacturing also includes mining and construction.

increases in wages, the USITC model would producea maximum net gain of , jobs. However, formost of the period since NAFTA took effect, theUnited States has been at full employment. Underthat condition, it is likely that gains from trade havetranslated into higher wages rather than additionaljobs. On the other hand, with U.S. unemploymentrising in the last three years, it is reasonable toassume that some of the NAFTA/CUFTA impactwould now be seen in increased employment ratherthan higher wages. Since wages are not rigid and theeconomy is currently not at full employment, thismodel suggests that the overall impact of NAFTA onU.S. employment lies somewhere between a net gainof , jobs and no net change.

An important limitation of the USITC model,which it shares with other methodologies, is that itdoes not capture the effect of investment decisionsto relocate production from the United States toMexico or Canada. To the extent that those deci-sions are based purely on market access (tariff andnontariff ) considerations, the USITC model willcapture them. But NAFTA also included importantprotections for U.S. investors that had not existedbefore the agreement, and those investor benefitsmay also affect decisions on where to produce.Further research and modeling work is needed to assess these effects.

Whether the net impact of NAFTA on employmentis a small net positive, as the USITC model sug-gests, or neutral or weakly negative, as further elabo-ration, including research on investment impacts,might show, it is known that about a half-millionU.S. workers lost jobs as a result of the agreement.While these lost jobs were likely offset by other jobsgained, the impact on losers is an economic andpolitical concern. A useful source of information onNAFTA’s impact on job loss can be found in datacompiled by the NAFTA Trade AdjustmentAssistance (NAFTA-TAA) program. This U.S. gov-ernment program provides benefits for workersaffected by NAFTA beyond those included in ageneral U.S. trade adjustment assistance program.

As of September , a total of , workers had been certified as having lost employment due to NAFTA under the NAFTA-TAA program. Adetailed analysis of earlier NAFTA-TAA data showedthat about half of the job losses were due to produc-tion shifts to Mexico.41 The apparel industry pro-duced the greatest number of NAFTA-TAA certifiedjob losers, about percent of those eligible underthe program, followed by electronics ( percent),automobiles and parts ( percent), and fabricatedmetals ( percent). Other industries accounted for percent or less of those certified eligible.

WAGES AND PRODUCTIVITY

Because the net impact of NAFTA on overallemployment in the United States is small, the impacton wages is also likely to be minor at the nationallevel. Still, important changes have occurred in thestructure of U.S. wages that most studies attribute in part to trade; consequently, NAFTA is likely toaccount for some of those observed effects. The mainstructural change is the widening gap between thewages of skilled and unskilled workers that has beenobserved for the last three decades. There is a largeliterature that attempts to explain this divergence,with most economists identifying technologicalchange as the main driver of this increasing gap. Butmost analyses find that trade has also played a role.While estimates of the impact of trade on low-skillwage depression vary depending on the methodologyof the study, many researchers attribute about

percent of increased earnings inequality to trade.One study estimates that percent of the growingwage gap can be attributed to a combination of tradeand immigration.42 This is potentially relevant to adiscussion of NAFTA impacts, because immigrationfrom Mexico to the United States has increased sincethe agreement took effect, contrary to many predic-tions (see chapter for more discussion). Otherstudies look not at overall trade but at the growth of global production chains, or outsourcing, whichallows U.S. manufacturers to maintain the high-skilled parts of production processes in the UnitedStates while sending low-skilled operations abroad.43


This would tend to raise skilled wages (or depressunskilled wages) through the operation of supplyand demand. To the extent that NAFTA reducedtariff barriers for the cross-border shipment of inter-mediate goods and provided greater guarantees forinvestments, it undoubtedly contributed to theobserved growth of shared production between theUnited States and Mexico. However, this trend isalso evident with respect to U.S. production chainsinvolving many other low-wage countries.

Since the early s, unit labor costs in U.S. manufacturing have fallen, because productivityhas grown faster than wages. This decoupling ofproductivity from wage increases is seen in all ofthe NAFTA countries. In Mexico, the decouplingbegan after enactment of NAFTA, and in Canadait began after CUFTA took effect. In the UnitedStates, the trend began in the s, when U.S.manufactured goods faced a serious challenge in the U.S. market from European and Asianimports. While this failure of wages to keep pacewith productivity growth cannot be attributeddirectly to NAFTA or CUFTA, it is clear thatincreasing economic integration has allowedemployers to capture a greater share of productivitygains than had been the case in the three countriesduring the period when their economies were lessopen to trade. It is not surprising that the trend inMexico and Canada is so closely aligned with theadvent of NAFTA and CUFTA, respectively, giventhat the United States is the dominant tradingpartner of each country. The U.S. economy, onother hand, was more affected by multilateral tariffreductions effected in successive rounds of GeneralAgreement on Tariffs and Trade (GATT) negotia-tions, because two-thirds of U.S. trade is with partners other than Canada and Mexico. The likelychannels through which this phenomenon operatesare many, including the integration of global labormarkets for certain types of labor through out-sourcing and production chains, which increase theavailable supply of low- and medium-skilled laborrelative to demand. It is also likely that the relativebargaining power of labor is reduced by the possi-

bility of outsourcing or plant relocation, evenwhen it does not actually occur.

INEQUALITY

Economic inequality in the United States has beenincreasing for most of the last two decades. Sincethe early s, the richest quintile (top percent)of U.S. households has increased its share ofnational income from percent to over percent.44 Meanwhile, each of the other four house-hold quintiles has seen its share of national incomedecrease. The growing wage gap between high-skilled and low-skilled workers is one of the causes,and to the extent that trade is a factor in the wagegap, it is also implicated in growing inequality.

CanadaJOBS

The impact of NAFTA on Canada cannot be under-stood without combining NAFTA’s effects with thoseof its predecessor, the Canada-United States FreeTrade Agreement (CUFTA), which took effect onJanuary , . NAFTA incorporated the provisionsof CUFTA and also liberalized trade between Canadaand Mexico. But trade with Mexico continues to be a small share of Canada’s total trade—less than percent of Canadian exports go to Mexico and . percent of its imports are from that country.Therefore, the main impact of NAFTA/CUFTA onemployment in Canada and the Canadian economyin general can be traced to the phasing in of theCUFTA provisions.

A recent study by Daniel Trefler of CUFTA effects on employment advances the level of analysis relative both to earlier studies of the Canadian experience and to studies that examine U.S. andMexican employment impacts.45 The carefully constructed model examines the effects of CUFTAon employment, wages, and productivity in manufacturing industries in Canada. It controls


for several other factors, such as the business cycle,that might account for changes. Trefler finds that in those industries that were most affected byCanadian tariff cuts and therefore were mostexposed to import competition, employment fell by percent. In the export-oriented industries thatexperienced the largest U.S. tariff cuts and thereforebenefited most from the agreement, there was noincrease in employment.46 Insofar as Canadian tariffcuts under CUFTA were deeper than U.S. tariffcuts, the greater impact on import-competingindustries is not surprising; but the lack of any netjob creation in export industries is noteworthy. Thisresult runs counter to the findings of earlier studies,which found that employment losses in U.S. andCanadian industries that compete with imports weremore than offset by employment gains in export-oriented industries. Those studies suffered fromserious methodological flaws, but the direction ofthe results seemed intuitively logical based on tradetheory and they were widely accepted, despite actualobserved net job losses. The Trefler study calls intoquestion whether a net positive impact on jobs fromtrade liberalization can be inferred, at least betweentwo industrialized countries and in the short-to-medium term (see Figure ).

Trefler did find that both groups of industries experienced fairly strong productivity gains.47

Over the medium term (in this case, a decade),employment in the Canadian manufacturing sectorrecovered, and by achieved levels last seen in .48 Growth continued in and ,

with manufacturing employment hitting a peak in of . million jobs, about , more than pre-CUFTA levels, before declining again in therecession that began that year. In addition, themanufacturing sector constitutes a slightly largershare of the Canadian economy (. percent in) than its counterpart in the United States(. percent the same year), which suggests that the productivity gains may have helped thelong-term survival of Canadian manufacturing,although exchange rate movements undoubtedlyplayed a role as well. The industries that showed

positive employment trends by the late sincluded automobiles and auto parts, electronics,plastics, and, somewhat surprisingly, apparel.49

That industry underwent significant restructuring,with higher-skilled operations becoming a largershare of employment than sewing and other lower-skilled jobs.

WAGES

Overall real wages in Canada were only slightlyhigher in than in , but manufacturingearnings fared somewhat better.50 This suggests thatNAFTA/CUFTA or trade more generally did nothave a negative impact on Canadian wages, sinceearnings in nontraded sectors increased slower thanin manufacturing. As in the case of both Mexicoand the United States, productivity increases inCanada significantly outstripped wage increases, inboth manufacturing and nonmanufacturing sectors(see Figure ).

INEQUALITY

Incomes in Canada are relatively more equal than in either Mexico or the United States, butinequality has been on a marked upward trendsince .51 The richest percent of householdsincreased their share of national income, from .

percent of total income that year to . percent in , while all other households experienceddeclines in their share. Only the top percent of households had higher real incomes in

than in . The other percent of Canadianhouseholds saw real incomes decline from

to and then recover slightly, but not enough to make up for the earlier decline.

Given the relatively better performance of wages inmanufacturing than in most other sectors, it seemsclear that trade-induced changes in wage incomepatterns do not explain the decline in incomes for percent of Canadian households and theincreasing economic inequality in Canada over theNAFTA/CUFTA period. However, a significant



factor in household income in Canada is transferpayments from the government, particularly to thebottom percent of households, and these declineddue to cuts in government funding for socialprograms and changed eligibility requirements. For example, since NAFTA/CUFTA took effect, the proportion of unemployed workers receivingunemployment benefits declined from percent to percent. This decline is attributable to anumber of factors, including macroeconomic policy.However, a strong concern of NAFTA/CUFTAcritics was that trade opening to the United Stateswould put downward competitive pressure onCanada’s social safety net, which in most cases wassuperior to that of the United States. It cannot beruled out that liberalization of trade was a factor inthe downward pressure on unemployment insuranceand other social benefits in Canada, or the cause of widening gaps in disposable household income.Further studies are needed.

Learning from the NAFTA Experience

At ten years, the long-term effects of NAFTA onemployment, wages, and incomes in the countriesof North America cannot yet be judged.52

However, short- and medium-term impacts cannow be assessed on the basis of substantial, accu-mulating data.

EMPLOYMENT

The most important result of the NAFTA experi-ence, and the most surprising when compared withpredictions of political advocates and opponents, isthat the trade agreement has produced disappoint-ingly small net gains in employment in the coun-tries of North America. In Mexico, employmentdestruction in domestic manufacturing and agricul-

200220001998199619941992199019882,500,000

2,700,000

2,900,000

3,100,000

3,300,000

3,500,000

2002200019981996199419921990198880

90

100

110

120

130

140

150

160

170

Figure 12. Canadian Employment in Manufacturing EMPLOYEES

Figure 13. Manufacturing Productivity and Real Wages in Canada INDEX: 1988=100

Source: Statistics Canada, Labour Force Survey.Note: Manufacturing also includes mining and construction.

Source: Statistics Canada, Canadian Productivity Measures.

ProductivityWages


■ In agriculture, the transition times negotiated by

Mexico were too short, and the government did not

adopt sufficiently vigorous rural adjustment poli-

cies to help subsistence farmers adapt to the new

trade conditions. Developing countries with signifi-

cant employment in subsistence agriculture should

carefully consider the sequencing of liberalization,

to allow the absorption of rural workers into other

sectors that expand due to liberalized access to

foreign markets, before basic crops are liberalized.

■ In negotiations over agricultural trade, developing

countries should also insist on terms, including

special safeguards, that will prevent a wealthier

trading partner from dumping or distorting trade

through domestic or export subsidies.

LEARNING FROM NAFTA

■ The experience of NAFTA shows that trade pacts

will shift the composition of jobs, with some

winners and some losers, but cannot be expected

to create a net gain in jobs in economies that are

at full employment, such as the United States and

Canada. In developing economies with surplus

labor, such as Mexico, the NAFTA experience

demonstrates that trade pacts cannot be counted

on to produce much, if any, net employment

growth in the absence of other targeted policies.

Policies to maximize employment gains from trade

would include measures to promote supplier and

support industries as well as terms in the trade

agreement that reward rather than discourage the

use of domestic inputs in the production of

exported goods.

ture has all but swamped job creation in exportmanufacturing. In the United States, NAFTA hashad either a neutral or very small net positive effecton employment. Meanwhile, in Canada, CUFTAled first to a significant net decrease in jobs intraded sectors, followed by a slow recovery ofemployment to pre-CUFTA levels after ten years,then a continued increase in subsequent years. Thepolitical and rhetorical claims for trade as an engineof net job growth are not borne out by experience,at least in the medium term.

Such claims have always been at odds with the pre-dictions of trade theory. In theory, if an economy isat full employment before opening to trade, theshifting of resources into different productive activi-ties based on comparative advantage will not resultin a net gain or loss of jobs, but rather in a differentmix of industries and employment. The gains fromtrade in a full-employment economy would be seenin rising wages and incomes, according to basictrade theory. The United States and, arguably,Canada have been at full employment during mostof the NAFTA period. Thus, the lack of anysignificant job growth due to NAFTA in Canadaand the United States is not at odds with the predic-

tions of economic theory, although it certainly contradicts the claims of NAFTA boosters. What issurprising, even from the perspective of economictheory, is the weak job creation in Mexico, which isfar from full employment.53 As noted earlier, it isimpossible to determine with certainty the preciseshare of agricultural job losses and manufacturingjob gains in Mexico that resulted directly fromNAFTA. However, the trade pact has been the mostimportant factor in Mexico’s changing pattern oftrade, and the overall growth of jobs in all tradedsectors since has been very weak. It is thusevident that NAFTA has not been a robust jobcreator, even for the low-wage, labor-abundanttrading partner.

The experience of Mexico also suggests that adeveloping country with a high proportion of itslabor force in low-productivity agriculture shouldnegotiate very long transition periods for thephaseout of tariffs on basic crops. The negative sit-uation currently faced by Mexico also demonstratesthat a developing country must use that transitiontime aggressively to prepare the rural populationfor the wrenching adjustment it will face. Policiesshould be adopted to shift farmers to competitive

employm

ent


wages

■ Increased productivity appears to be a likely gain

from trade, based on the North American experi-

ence. However, if such productivity gains are

to be shared with workers as rising wages, the

institutions and public policies that affect wage

outcomes should be strengthened. Countries with

weak laws and institutions related to freedom

of association and collective bargaining should

address these problems in conjunction with trade

liberalization. Minimum wage policies may need to

be reconsidered; dispute resolution mechanisms,

such as arbitration, could also be strengthened.

crops, to develop alternative sources of employ-ment in rural areas, and to invest heavily in educa-tion to prepare the population for more modernoccupations. Another important factor for Mexicowas that some of its most important basic crops,such as maize, were exposed to competition fromsubsidized U.S. crops that are sold at artificiallylow prices, sometimes below the cost of produc-tion. Further, U.S. policy on agricultural subsidieschanged significantly in ways that were not fore-seen during the NAFTA negotiations, mostnotably in the passage of a farm bill in thatincreased subsidies. Successful competition will beimpossible for the developing country under suchcircumstances.

PRODUCTIVITY

The one employment area where a clear positiveimpact has been seen during the NAFTA period isthe growth of productivity in all three NorthAmerican countries. At least in Mexico andCanada, which cut tariffs deeply and were exposedto competition from their giant neighbor, NAFTAlikely played a significant role in the observed pro-ductivity growth. In Canada, increased productivity

may have contributed to a medium-term revivaland perhaps even long-term survival of the manu-facturing sector.

However, the strong productivity growth in theUnited States and somewhat weaker growth inMexico and Canada may have had the unwelcomeside effect of reducing the pace of job creation inthe three countries, as workers produced more andfewer new jobs were created.

Throughout North America, there has been adecoupling of productivity growth from wagegrowth over the last decade.

WAGES

Real wages for most Mexicans are lower today thanwhen NAFTA took effect. This stunning setback inwages is mainly attributable to the peso crisis of–. However, during the NAFTA period,productivity growth has not translated into wagegrowth, as it did in earlier periods in Mexico.Mexican wages are also diverging from, rather thanconverging toward, U.S. wages, as trade theorywould suggest.


Because the net impact of NAFTA on U.S. employ-ment is small, the impact on overall wages is alsolikely to be small. But a widening gap between thewages of skilled and unskilled workers is partlyattributable to trade, and NAFTA as a factor inU.S. trade probably accounts for a portion of theobserved growth in wage disparity within theUnited States.

Overall real wages in Canada were only slightly higherin than when CUFTA took effect in , butmanufacturing earnings fared somewhat better. Thissuggests that NAFTA/CUFTA did not have a negativeimpact on wages, since earnings in nontraded sectorsincreased slower than in manufacturing. As in the caseof Mexico, productivity increases in Canadasignificantly outstripped wage increases.

In all three countries, the evolution of wages andhousehold incomes since NAFTA took effect hasbeen toward greater inequality, with most gainsgoing to the upper percent of households andhigher-skilled workers. While this trend is clearlycompounded of many factors, more open tradeappears to be implicated as one element—alongwith continental and global competition over thelocation of production—that restrains wage growth.

Whether productivity gains lead to higher wages alsodepends on the nature and quality of the institutionsthat determine the distribution of productivity gainswithin a society between the return to workers ashigher wages and the return to investors as higherprofits. Institutions that govern the ability of workersto organize unions and bargain collectively over wagesare important determinants of distribution, as are gov-ernment mechanisms such as minimum wage policies.

INCOME DISTRIBUTION

Income inequality has been on the rise in Mexicosince NAFTA took effect, reversing a brief down-ward trend in the early s. Compared to theperiod before NAFTA, the top percent of house-holds have increased their share of national income,while the other percent have lost income share orseen no change. Regional inequality within Mexicohas also increased, reversing a long-term trendtoward convergence in regional incomes.

In a trend that predates NAFTA, income inequality in the United States has been increasing for most of the last two decades. The growing wage gap betweenhigh-skilled and low-skilled workers is one of thecauses, and to the extent that trade is a factor in the


income

distribution■ Countries opening to trade should first strengthen

social safety nets to assist those who lose as a

result of trade-induced economic restructuring.

Developing countries negotiating with wealthier

trading partners should seek financial assistance

from these countries, as part of the trade

package, for transitional adjustment programs.

Developed countries should strengthen their trade

adjustment or general social safety net programs

with a view to addressing the uneven conse-

quences, for citizens, of opening to trade.

LEARNING FROM NAFTA

■ If the gains from trade are to be shared widely

throughout a country, the institutional mecha-

nisms that govern how costs and benefits of

economic change are distributed may need to be

strengthened. Government measures that affect

income distribution, such as tax and transfer

mechanisms, should be reviewed and fortified

to deal with the impact of trade opening.


wage gap, it is also implicated in growing inequality.Incomes in Canada are relatively more equal than in either Mexico or the United States, but inequalityhas been on a marked upward trend since CUFTA’sentry into force in . Because manufacturingwages have performed better than wages in mostother sectors, it seems clear that trade-induced wagechanges are not the cause of the observed increase ininequality. Rather, a reduction in transfer paymentsfrom the government, which play an important rolein the incomes of the bottom percent of house-holds, accounts for most of the change. The weak-ening of the Canadian social safety net, whichgenerates these transfer payments, was a concern ofCUFTA opponents, but there is currently no clearevidence to support a causal relationship.

The experience of each of the NAFTA countriesconfirms the prediction of trade theory that therewill always be winners and losers from trade. Thenumber of losers may equal or even surpass thenumber of winners, especially in the short-to-medium term. In Canada, it took a decade for man-ufacturing employment to recover from the initialdisplacements caused by CUFTA. In Mexico, ruralfarmers are still struggling to adapt to NAFTA-induced changes. The short-to-medium term adjust-

ment costs faced by the losers from trade can besevere, and the losers are often those segments ofsociety least able to cope with adjustment, due tolow skills, meager savings, and limited mobility. Itmust also be recognized that there may be perma-nent losers from trade, due to limitations of educa-tion, skills, geographic isolation, and other factors.

Because the impacts of trade are uneven, govern-ments should establish mechanisms that help offsetthe losses suffered by those in declining sectors.Trade adjustment assistance should provide incomesupport to workers and small farmers during transi-tional periods, as well as funds for training for newoccupations. Such policies are highly desirable com-plements to trade pacts. A trade adjustment assis-tance program exists in the United States, and abroad social safety net in Canada serves many ofthe same ends, although both countries’ plans havecritical gaps that should be addressed and bothplans need financial strengthening. In Mexico,budget constraints and policy choices have pre-cluded the establishment of even the most basicunemployment insurance. The harsh impact ofagricultural trade liberalization on Mexican subsis-tence farmers has not been offset by appropriategovernment policies.

NOTES

1 William J. Clinton, Remarks at the Signing Ceremony forthe Supplemental Agreements to the North American FreeTrade Agreement, September , . Public Papers of thePresidents of the United States, vol. , (Washington,D.C.: U.S. Government Printing Office, ).

2 Remarks by the President at the Signing Ceremony for Chileand Singapore Free Trade Agreements, September , ,

available at www.whitehouse.gov.3 Maria Elena Vicario, Sandra Polaski, and Dalil Maschino,

North American Labor Markets: A Comparative Profile(Washington, D.C.: Secretariat of the North AmericanCommission for Labor Cooperation, forthcoming). Theauthors’ calculations are based on data from the MexicanNational Institute of Statistics, Geography, and Informatics(INEGI) and the Ministry of Employment and SocialInsurance (STPS).

4 In , percent of total Mexican exports went to theUnited States, while . percent went to Canada; percentof total Mexican imports were from the United States and .

percent were from Canada. (The data for Canada are fromStatistics Canada, National Income and ExpenditureAccounts; for Mexico, from INEGI, System of NationalAccounts; and for the United States, from the Bureau ofEconomic Analysis, National Income and Product Accounts.)

5 INEGI, Monthly Industrial Survey (EIM). This survey alsoexcludes microenterprises (small businesses with fewer thanfive employees that operate in the informal sector).

6 Ibid.7 Enrique Dussel Peters, “Industrial Policy, Regional Trends

and Structural Change in Mexico’s Manufacturing Sector,”in Kevin J. Middlebrook and Eduardo Zepeda, eds.,Confronting Development: Assessing Mexico’s Economic andSocial Policy Challenges (Palo Alto, Calif.: Stanford UniversityPress, ).

8 The Impact of Trade Agreements: Effect of the Tokyo Round,U.S.-Israel FTA, U.S.-Canada FTA, NAFTA, and theUruguay Round on the U.S. Economy, publication no.

(Washington, D.C.: U.S. International Trade Commission,August ), available at www.usitc.gov.

9 Ibid.10 Rogelio Ramirez De La O, “What Has Changed in the

Performance of Employment and Wages in Mexico afterNAFTA?” paper prepared for the Third Seminar on Incomeand Productivity of the North American Commission onLabor Cooperation (February ), available atwww.naalc.org/english/publications.

11 This effect could be amplified by a tendency in Mexicanmonetary policy to overvalue the peso as a means of control-ling inflation. This disadvantages Mexican producers whenthey try to export, while imposing less of a burden on U.S.multinationals using Mexico as an assembly platform, sincethe movement of components into Mexico and of finishedproducts out will largely cancel out or at least smooth outthe exchange rate effects.

12 These figures are for overall manufacturing. The definitionof unskilled here is possession of up to twelve years of formaleducation, while skilled is defined as possession of thirteenyears or more. José Romero and Alicia Puyana, The MexicanEconomy after Two Decades of Trade Liberalization, .Paper on file with the author.

13 United States Dumping on World Agricultural Markets,Cancun Series Paper no. (Minneapolis: Institute forAgriculture and Trade Policy, ), available atwww.iatp.org.

14 Very gradual downward adjustments in the peso wereallowed through this crawling parity band in which the pesowas allowed to depreciate against the dollar at a very smallpreannounced rate, which was . pesos per dollar formost of the period. This regime resulted in an exchange rateof . pesos to the dollar in , depreciating to . pesos tothe dollar in early .

15 International Financial Statistics (Washington, D.C.:International Monetary Fund, October ).

16 North American Labor Markets (see note ), based on INEGINational Income and Expenditure Survey (ENIGH) andSTPS/INEGI National Employment Survey (ENE).

17 World Trade Report (Geneva: World TradeOrganization, August ), available at www.wto.org.

18 This section draws on two papers commissioned for thisreport: David Barkin and Edith Pacheco, The ChangingMeaning of Work in Rural Latin America, July ; andAntonio Yúnez-Naude and Fernando Barceinas Paredes, The Agriculture of Mexico after Ten Years of NAFTAImplementation, July (see acknowledgments).

19 John Authers, “Mexicans Send More Than Billion BackHome in July,” Financial Times, September , , basedon data from the Bank of Mexico. Remittances from theUnited States provide more foreign funds than either foreigndirect investment or tourism.

20 INEGI, ENIGH, special “module” with questions on agri-cultural activity during the preceding semester of the survey.The survey, conducted during the second trimester of everyodd-numbered year during the s, was designed toimprove understanding of rural labor patterns by inquiringabout agricultural employment for those people whose prin-cipal occupation was nonagricultural. Data prepared byEdith Pacheco and David Barkin.

21 Differences between agricultural employment data discussedhere and elsewhere in this paper arise because this seriesincludes the economically active population aged twelveyears and older, whereas the main employment data is forthe economically active population aged fifteen years andolder.

22 ENIGH special module for rural households (see note ).23 North American Labor Markets (see note ). 24 There are a variety of definitions of the informal sector. The

definition used here was developed for STPS by ClaraJusidman in . It takes into account establishment size,the position held, and the industry involved.

25 North American Labor Markets (see note ).


26 Carlos Salas and Eduardo Zepeda, “Employment and Wages:Enduring the Costs of Liberalization and EconomicReform,” in Kevin J. Middlebrook and Eduardo Zepeda,eds., Confronting Development: Assessing Mexico’s Economicand Social Policy Challenges (Palo Alto, Calif.: StanfordUniversity Press, ).

27 See, for example, Raymond Robertson, “Trade Liberalisationand Wage Inequality: Lessons from the MexicanExperience,” World Economy, vol. , no. (June ), pp.‒.

28 Carlos Salas and Eduardo Zepeda, Wages and Productivity inMexico: Theoretical and Empirical Issues, July , papercommissioned for this report, on file with the author.

29 The Mexican Economy (see note ), based on data from theMinistry of Labor and Social Welfare National EmploymentSurvey.

30 The labor side-agreement to NAFTA includes provisions forpublic petitions to any of the member governments if laborrights violations occur in any of the other NAFTA countries.Several petitions have been filed alleging interference withfreedom of association and collective bargaining rights inMexico. The petitions were filed with the U.S. NationalAdministrative Office, the body that administers the agree-ment for the United States. While expressing its findings indiplomatic terms, the National Administrative Office foundsignificant shortcomings in this area in many cases (seewww.dol.gov/ilab/programs/nao).

31 See, for example, Martin Ravallion, “Can High-InequalityDeveloping Countries Escape Absolute Poverty?” World BankPolicy Research Working Paper no. (Washington, D.C.:World Bank, ). The World Bank web site provides a usefulsummary of research on this topic at www.worldbank.org/poverty/inequal/abstracts/index.htm.

32 Dani Rodrik, Where Did All the Growth Go? External Shocks,Social Conflict and Growth Collapses (Cambridge, Mass.:Kennedy School of Government, Harvard University, )provides a political-economic model. Other models are cataloged at the World Bank web site (www.worldbank.org/poverty/inequal/abstracts/index.htm).

33 North American Labor Markets (see note ). Data based onINEGI, ENIGH, and The Mexican Economy (see note ).

34 Gerardo Esquivel, Sources of Regional (Non) Convergence inMexico (Washington, D.C.: World Bank, ), available atwww.worldbank.org.

35 Diana Alarcon and Eduardo Zepeda, “Economic Reform orSocial Development? The Challenges of a Period of Reformin Latin America,” Journal of Development Studies, forth-coming.

36 U.S. Trade Representative, NAFTA at Eight, May ,available at www.ustr.gov.

37 Economic Policy Institute, NAFTA at Seven, April ,available at www.epinet.org.

38 Apparel imports, for example, come from many countriesbecause of the quota system that exists under the globalAgreement on Textiles and Clothing. Apparel imports fromMexico may have displaced imports from other countriesrather than U.S. production.

39 The Impact of Trade Agreements (see note ). The USITCmodel is based on a computable general equilibrium modelbut uses actual trade flows and other macroeconomic andmicroeconomic data from the U.S. economy for the period‒. It controls for such factors as exchange rateshocks to isolate the effects of NAFTA tariff changes. It alsotakes into account the phased-in nature of the agreementand the growing share of trade in the U.S. economy.

40 In The Impact of Trade Agreements (see note ), the USITCestimates that U.S. labor income would have been

billion less if not for the effects of five trade agreements,including the Tokyo and Uruguay rounds of the GeneralAgreement on Tariffs and Trade (GATT), NAFTA, CUFTA,and the United States-Israel Free Trade Agreement (p. ).Separately, the study finds that percent of the totalimpacts attributable to all five agreements were contributedby NAFTA and CUFTA (pp. ‒).

41 Mary Jane Bolle, NAFTA: Estimated U.S. Job “Gains” and“Losses” by State over ⁄ Years (Washington, D.C.:Congressional Research Service, February , ).

42 George J. Borjas, Richard B. Freeman, and Lawrence F.Katz, “How Much Do Immigration and Trade Affect LaborMarket Outcomes?” Brookings Papers on Economic Activity,vol. (), pp. ‒.

43 Robert C. Feenstra and Gordon H. Hanson, GlobalProduction Sharing and Rising Inequality: A Survey of Tradeand Wages (University of California, San Diego, andNational Bureau of Economic Research, ).

44 North American Labor Markets (see note ). Data derivedfrom the Current Population Survey, U.S. Bureau of theCensus.

45 Daniel Trefler, The Long and Short of the Canada-U.S. FreeTrade Agreement (University of Toronto, Canadian Institutefor Advanced Research, and National Bureau of EconomicResearch, December , ), available atwww.chass.utoronto.ca/~trefler/fta.pdf.

46 The study actually showed a percent employment loss inthe export industries, but it was statistically insignificant.

47 However, the average annual productivity gains during thisperiod were significantly less than those observed in thes and s.

48 North American Labor Markets (see note ). Data based onLabour Force Survey, Statistics Canada.

49 Ibid.50 Ibid. Data based on Survey of Employment, Payrolls, and

Hours, Statistics Canada. 51 Ibid. Data based on Survey of Consumer Finances, Statistics

Canada.52 For CUFTA, fourteen years of experience and data are avail-

able.53 The basic trade model assumes that capital and labor are

immobile. In the real world of capital mobility, internationalinvestors may shift production of labor-intensive products toa labor-abundant country such as Mexico if they are assuredof access to a rich market such as the United States.Additional labor would be employed, creating net employ-ment growth.



THE POLIT ICAL PASSIONS SURROUNDING

THE UNITED STATES’ RATIF ICATION of theNorth American Free Trade Agreement (NAFTA),and the exaggerated claims about the trade agree-ment’s effects, in many ways confused, rather thaninformed, the discussion about NAFTA’s aim. TheU.S. debate’s progression from the understandablehyperbole that accompanies the “selling” of politi-cally contentious policies to dire “if NAFTAratification fails” scenarios was particularly unfortu-nate. Such rhetoric virtually guaranteed that anysubsequent assessment of the agreement’s valuewould be burdened by unrealistic expectations inareas that were strictly secondary to NAFTA’s goalof promoting trade and cross-border investment byreducing tariffs and other barriers.

Migration may well be one of these areas—althoughit could hardly be of greater consequence for theMexican public and, in some ways, the U.S. public.Indeed, an evaluation of NAFTA through the lensof migration is fraught with immense difficulties.Concurrent major economic events in both Mexicoand the United States since NAFTA came intoeffect—ranging from the Mexican economic crisisof the mid-s and the peso’s devaluation toremarkably strong U.S. economic growth later inthat decade—as well as migration’s deep and struc-tural roots in the two countries’ historical relation-ship, confound the process of isolating and

accurately measuring NAFTA’s precise effects onmigration from Mexico to the United States. Suchan evaluation must nonetheless be attempted, if forno other reason than the fact that free trade andmigration are so intimately linked in the public’smind. My evaluation will assess whether NAFTAlived up to predictions of the trade treaty’s effect onmigration, and explore what can be learned fromNAFTA when migration is under consideration infuture trade negotiations.

A Review of Key Findingsand Observations

Ten years ago, both U.S. and Mexican officialsargued passionately that NAFTA, by encouragingjob growth in Mexico, would reduce illegal immi-gration from Mexico to the United States. So far,these hopes seem dashed. Although Mexican jobopportunities in the export sector increased (mostlyin manufacturing), net job gains have been modestat best, and, depending on the timing of the meas-urement, even flat. Furthermore, average wages inthe two countries have hardly begun to converge. In part because of these factors, but also because ofrobust U.S. demand for low-wage labor and otherstructural forces, illegal immigration from Mexicohas risen sharply since despite increasingly

twoThe Shifting Expectations

of Free Trade and Migration

D E M E T R I O S G . PA PA D E M E T R I O U

vigorous border enforcement efforts that com-menced at roughly the same time as NAFTA.Indeed, by most estimates, the population of unau-thorized Mexican immigrants in the United Statesmore than doubled between and (withmost of that growth after ), and has continuedto grow strongly in the new century.

Is NAFTA, then, responsible for this increase inmigration, as some of its critics had predicted? I donot believe so. The analysis points instead to apicture in which the financial crises and restruc-turing in Mexico that both preceded and followedthe trade agreement’s enactment, the continuinginability of Mexican job creation efforts to keep upwith the million or more new workers entering theMexican labor force annually, the booming U.S.economy, and the strong migration networks tyingthe two countries have had a far more powerfuleffect on migration than NAFTA.

The overarching lesson from the analysis is clear:NAFTA-like free trade and investment agreementsneither neutralize nor cause the forces that drivepeople to migrate. NAFTA has neither rescued norgutted the Mexican economy, and net changes inemployment during a short but eventful ten yearshave not been significant enough to offset the pres-sures and incentives for migration. Policy makers,then, should not expect free-trade agreements to“solve” migration problems. The economic andsocial realities that drive migration will endurethrough and behave independently of such agree-ments. In the end, acknowledging these realities andengaging in the sensible and coordinated—evenjoint—management of migration may be the onlyviable option.

Migration management cannot be focused exclu-sively on controls, however. Managing the migrationspigot more effectively implies recognition and regulation of the demand for more permanent immigration and temporary work visas in bothcountries—in other words, it requires the morethoughtful expansion of legal migration channels

and taking joint responsibility for the immigrationprocess itself. This is the only way to do better in themigration area at least until the economic growththat trade agreements and other policy initiatives candeliver in the longer run can modulate the demandon both sides of the migration divide.

On NAFTA’s tenth anniversary, however, one addi-tional question is still relevant. Are free-trade negoti-ations and agreements a valid forum for addressingmigration per se? The NAFTA negotiators’ answerwas a very timid “maybe.” The agreement completelyignored the larger issue of low-skill labor migrationwhile allowing professionals in sixty-three occupa-tional categories to accept employment anywherewithin the NAFTA space. But such “largesse” wasapparently just a short-lived occurrence. In subse-quent U.S. free-trade agreements with Chile, Jordan,and Singapore, as well a Canadian agreement withCosta Rica, the United States and Canada haveretreated from this approach. This clearly indicateshow difficult the negotiations on the movement of“natural persons” for the purpose of employment arelikely to be in negotiations over the Free TradeAgreement of the Americas (FTAA), the CentralAmerican Free Trade Agreement (CAFTA), and theWorld Trade Organization (WTO).

I argue that the only viable solution to fundamentaldisagreements over migration in the foreseeablefuture lies in bilateral and, gradually, regional coop-eration. To the extent that NAFTA-like exercisesmake such cooperation more viable—as NAFTA hasdone in many ways—free-trade agreements canbecome down payments on the long-term invest-ment in “habits of cooperation.” Indeed, tradeagreements should not be seen as the last word oneither bilateral or regional relationships, but as partof an ongoing process of engagement. To borrowloosely from Winston Churchill’s views about thepromise of a united Europe, broad relationshipsbetween and among neighbors are living things thatgrow and adapt in response to shifting on-the-ground conditions. NAFTA-like agreements canthus make important contributions to the growth


of more successful “living things,” which can in turnset the stage for further cooperation on migrationand other deeply divisive issues.

A final observation may still be of value as theWestern Hemisphere’s leaders attempt to concludethe Free Trade Area of the Americas’ negotiations by the deadline. The failure to stem illegalimmigration across the U.S.-Mexican border aptlydemonstrates that people will continue to capitalizeon the economic promise of migration whether or not their government approves. In the case ofNAFTA, sharp growth in the movement of goodsand capital has proven to be no substitute for themovement of people. When the NAFTA partnersdecide to focus more squarely on workableapproaches to managing migration, and look foradditional bargaining chips in trade or other negoti-ations, smarter policies that work with, rather thanagainst, both the market mechanism and humannature need to be an important guidepost to anyserious effort.

NAFTA’s Mobility Provisions:Political Climate and Outcome

NAFTA put in place a common set of rules ofconduct on trade, commerce, and investment forthree countries already engaged in the exchange of large amounts of goods and the movement ofsignificant numbers of people. In fact, citizens ofeach party to the treaty have long made importantcontributions to the economic lives of the other twocountries, from the labor of Mexican workers datingback more than a century in the United States (andbeginning much more recently in Canadian agricul-ture) to the exchange of executives and specialists ofmultinational corporations, as well as students andprofessionals of all types.

It was not clear at first how open the three partieswould be with regard to the movement of people.The Office of the U.S. Trade Representative was at

best noncommittal on the issue, while many of itsnegotiators viewed openings in migration as anacceptable price to pay for openings in the trade and investment environment that their principalconstituent—the U.S. business community—demanded. Arrayed against that position were the principal domestic agencies that led the actualnegotiations on mobility, as well as the U.S. StateDepartment’s Bureau of Consular Affairs. Theseagencies brought to the negotiating table not onlythe technical expertise necessary to conduct thenegotiations but also the sense, reinforced throughfrequent consultations, that the U.S. Congresswould not support too great a widening of mobility.

Complicating the issue further were two additionalfacts. Canada and the United States already hadagreed, under the Canada-United States Free TradeAgreement of (CUFTA), to make provision forthe movement of business persons, investors, andabout sixty classes of professionals. These individualscould cross the border without visas for oftenunspecified periods of time and were encumberedby only a few procedures—a fact grounded in partin the special treatment of each other’s citizens thatgoes back to the middle of the nineteenth century.In many ways, CUFTA’s mobility provisions werethus an evolutionary step forward in a relentlesslyintegrating bilateral economic bloc, as well as theproduct of a United States that was more confidentand “open” than at any time since. The fact thatCanada already had in place a mature and well-administered immigration system, that in manyways paralleled that of the United States, alsocreated a climate of confidence in the Canadians’ability to deliver on their obligations.

In contrast, bringing Mexico on board by matchingthe mobility provisions of CUFTA was in manyways revolutionary, in that Mexico had little in theway of an immigration “system” and it was not clearhow quickly or efficiently it could meet any of itsobligations in this regard. The reality that the visarefusal rates of Mexicans attempting to enter theUnited States exceeded percent of applications,



almost exclusively on grounds that the applicantwould seek unauthorized employment in the UnitedStates, was an additional complication.

Mexico’s initial position on labor mobility was quitedifferent from the views of its northern neighbors.Mexico was interested in opening a broad dialogueon all forms of migration between itself and its twoprospective partners. However, Mexico also made it clear that it was not willing to jeopardize thebroader economic relationship by insisting on thisposition. “Migration” was swiftly taken off of thenegotiating table by the United States when theadministration of President George H. Bush con-cluded that proceeding with any substantial migra-tion provisions could sink the overall agreement inthe U.S. Congress. Mexico proved compliant andthe issue became moot when Mexico removed partsof the Mexican petroleum sector from the negoti-ating table.1

With the United States and Mexico having thusagreed to protect their most politically sensitive“sectors,” U.S. negotiators still faced a politicaldilemma on mobility. The CUFTA mobility provi-sions had created the “TC” visa, which essentiallyhad tracked the U.S. immigration legislation of thetime (the “H” nonimmigrant visa as it stood at thetime). The H visa category, however, had beenreconfigured dramatically in new legislation in .Although the CUFTA provisions were grand-fathered in, extending these provisions to Mexicowould modify U.S. law in an area where the U.S.Congress guards its primacy with considerable zeal.

In the end, NAFTA adopted a slightly refined set ofthe CUFTA mobility provisions, with one majorexception: Mexico accepted inferior treatment for itsprofessionals relative to that granted to the profes-sionals of the two other parties to the agreement.Canadian and U.S. businesspersons, investors, andprofessionals were provided a rules-based system andpredictable access to the entire NAFTA space bymeans of the harmonization of standards, proce-dures, and most licensing and certification require-

ments. Mexicans, however, would still be requiredto obtain a visa prior to U.S. entry (but not forentry into Canada). More significantly, in anotherbow to U.S. congressional sensitivities, Mexicanprofessionals would have to meet certain additionalprocedural requirements, and the total number ofvisas available to them could not exceed , in anyyear until .

Mexico has come nowhere near that number ofentries at any time during the last ten years, for twomajor reasons. First, the temporary employment ofMexican professionals under the resulting one-year,but nominally renewable without limit, “NAFTA”or “TN” visa entails a significant amount of paper-work. As a result, many U.S. immigration attorneysof Mexican TN visa applicants advise them to makethe extra effort (and pay the additional feesrequired) to obtain the H-B visa, which “guaran-tees” them a six-year residence. The H-B visa holdsanother distinct advantage over the TN visa: It doesnot require its holders to demonstrate to the U.S.immigration authorities that they do not intend toabandon their Mexican residence, that is, that theydo not intend to become U.S. “immigrants”—arequirement that becomes more problematic thelonger the worker remains in the U.S. Second, thereis no evidence to indicate that the Mexican govern-ment has sought to publicize widely the availabilityof the TN visa or argue strongly (that is, engage the issue at the higher political levels) for removingsome or all of its unequal provisions. The best expla-nation for this passivity is Mexican official ambiva-lence about the TN visa’s possible acceleration of the already substantial “flight” of talented Mexican professionals to the United States under other visas: a variant of the “brain drain” set of concerns.2

A brief analysis of temporary worker flows amongthe three NAFTA partners shows a significantincrease in both NAFTA and non-NAFTA workers.Most striking is the growth of temporary Canadianand U.S. professional workers in Mexico. WithNAFTA, the Mexican government established forthe first time a formal process for admitting foreign


professionals, thus allowing both domestic andforeign companies to tap the United States’ andCanada’s formidable comparative advantage in high-skill services (see Tables –).

Notably, there was hardly any discussion aboutNAFTA’s modest openings in the authorized move-ment of certain types of professionals in the NAFTAratification debates in the United States. Instead, asubstantial part of that debate focused on whetherNAFTA would lead to a significant decrease in theunauthorized movement of people across the U.S.-Mexican border. United States and Mexican govern-ment officials echoed each other in their claims that,by promoting economic growth in Mexico throughincreased trade and foreign investment, NAFTAwould reduce the pressure for illegal immigrationacross the United States’ southern border. Mexican

president Carlos Salinas Gortari repeatedly expressedthe hope that Mexico would export goods, notpeople.3 The U.S. attorney general at the time, JanetReno, argued:

We will not reduce the flow of illegal immigrantsuntil these immigrants find decent jobs, at decentwages, in Mexico. Our best chance to reduce illegalimmigration is sustained, robust Mexican economicgrowth. NAFTA will create jobs in Mexico—jobs forMexican workers who might otherwise cross illegallyinto America.4

The logic underlying these arguments was not new.The idea that free trade and foreign investment canact as development catalysts, and thus as at leastpartial substitutes for migration, had given birth tobilateral public policy cooperation as early as ,

Table 2. Flow of Temporary Workers and NAFTA Professionals to Canada from the United States and Mexico, Fiscal Years 1994 and 2001

Type of Entry FY1994 FY2001

United States Mexico United States Mexico

Non-NAFTA Workers 16,791 5,207 15,613 11,011

Management 1,053 4 592 11

Professional 8,058 104 7,895 162

Skilled and Technical 4,896 28 4,879 83

Intermediate and Clerical 856 4,848 658 10,465

Elementary and Laborers 396 13 332 35

Not Stated 1,532 210 1,257 255

NAFTA Professionals 6,385 34 8,236 101

Source: Unpublished data provided by Citizenship and Immigration Canada.Note: Numbers reflect individuals granted work authorization.

Table 1. Flow of Temporary Workersa and NAFTA Professionals to the United States from Canada and Mexico, Fiscal Years 1994 and 2001

Type of Entry (Visa Category) FY1994 FY2001

Canada Mexico Canada Mexico

Non-NAFTA Workersb 23,992 24,885 61,437 113,586

Treaty Traders and Investors (E1/E2) 3,123 278 3,704 3,354

Workers with Specialty Occupations (H1B) 3,527 3,256 16,454 14,423

Intracompany Transferees (L1) 6,482 2,632 22,838 15,723

NAFTA Professionals (TN) 24,826 11 92,915 2,571

Source: The Yearbook of Immigration Statistics, Bureau of Citizenship and Immigration Services, various years.a. Numbers include trainees, visitors for whom employment is incidental to the purpose of their visit, spouses and children. They reflect admissions,not individuals. In some cases, an individual may enter the country several times.b. Includes the following temporary worker visa categories: E-1, E-2, H-1A, H-1B, H-2A, H-2B, H-3, J-1, L-1, O-1, O-2, P-1, P-2, P-3, Q-1, and R-1.


with the establishment of the Border IndustrializationProgram (BIP).5 BIP factories along the Mexican sideof the border were allowed to import inputs tariff-freefor assembly in Mexico and then re-export finishedproducts to the United States, also without tariffs,beginning the maquiladora phenomenon that wouldbecome so significant by the beginning of theNAFTA era. BIP was not, as it turned out, an effec-tive substitute for migration, and some analysts arguethat it may in fact have fueled unauthorized migra-tion to the United States.

NAFTA’s effect on trade and foreign direct invest-ment (FDI) vastly exceeded that of BIP. Over theeight-year period from to , FDI from the United States increased about percent, from billion to billion (see Table ).6

Yet, like BIP, NAFTA did not bring about a decreasein migration from Mexico; in fact, there is no indi-cation that such migration may even be cresting.The explanation for this phenomenon is thatNAFTA’s effects on migration to date have beencaught up in the crosscurrents of several much largertrends and forces. The first is the extensive historyof migration between the two countries, which hasbound Mexican workers to low-wage, low-value-added labor markets in the United States. Thesecond is a demographic surge of new entrants intoMexico’s labor market, which is only now beginningto show signs of exhausting itself. The third is thefact that NAFTA is only one part of a two-decaderestructuring of the Mexican economy that, so far,has served only to promote migration.

Migration Networks and the Inertia of Migration

Migration from Mexico to the United States—as it increased throughout the twentieth century—grew geographically dispersed and, as a social and economic force, more permanent in nature. Therecruitment and social networks tying the two coun-tries are by now so deeply embedded that migrationis an entrenched part of both countries’ economiesand societies. By the s, well after most otherimmigration flows to the United States had begunto include large numbers of women, migration fromMexico continued to involve largely the circularmovement of male Mexican laborers from the ruralstates of central Mexico to the U.S. Southwest. Inthe mid-s, at the peak of the special Mexico-United States agricultural labor arrangement knownas the bracero program (which lasted from about the early s to ), more than a half-millionMexican workers were migrating per year to theUnited States. Yet enough workers were migratingoutside the program’s parameters that the UnitedStates deported more than million Mexicansbetween and without seriously impedingthe ability of U.S. farmers to employ Mexican labor.

Permanent Mexican immigration to the UnitedStates, relative to the more typical pattern of repeatedshort trips northward for seasonal work, was still relatively uncommon in the mid-twentieth centurydespite the fact that the United States’ admissionssystem for permanent immigrants in some ways

Table 3. Flow of Temporary Workers and NAFTA Professionals to Mexico from the United States and Canada, Fiscal Years1994 and 2001

Type of Entry FY1994a FY2001

United States Canada United States Canada

Non-NAFTA Workers 1,173 49 8,743 3,029

Investors 341 22 7,342 2,333

Intracompany Transferees 832 27 1,401 696

NAFTA Professionals 2,628 240 46,335 3,890

Source: Mexican National Institute of Migration (Instituto Nacional de Migración, INM).Note: Numbers reflect work authorizations.a. 1994 data collection began in April.


favored Mexico (and Canada). Specifically, the FirstQuota Act of established a national origin-basedquota system for the Eastern Hemisphere, while theWestern Hemisphere remained unaffected. It was notuntil the amendment to the Immigration andNationality Act that a ceiling of , annual slots,effective from to , was designated for theWestern Hemisphere, with Mexico and Canada thede facto beneficiaries. Permanent admissions fromMexico yet averaged only some , per yearthrough the s, in large part due to the preferenceof Mexican workers for circular migration and ratherstrict procedural U.S. rules, most notably a laborcertification requirement.7 Thus, in Mexicansaccounted for only percent of the total foreign-bornpopulation in the United States.8

Over time, these temporary and permanent move-ments built intricate and durable networks that generated increasing migration flows from Mexico tothe United States. In the s and early s, somebracero workers “leaked” out of the agriculturalsector and into permanent employment. Each per-manent immigrant multiplied the potential immigra-tion from Mexico by enabling family reunification,by arranging jobs for family members and friends,and, in some instances, by financing the unautho-rized migration of other migrants and by providing a temporary social safety net for them.9 By the lates, these networks had matured and had begun tospread. They no longer connected only agriculturalareas, but attracted migrants from other parts ofMexico, including some urban areas, and sent themto major cities in the United States, particularly in

the Southwest, but also in the Chicago and NewYork metropolitan areas. Mexican migrants filled anincreasingly broad range of jobs, moving from theagricultural sector into food processing, low-value-added manufacturing, and personal services. Withthe capping of certain permanent immigrant admis-sions from the Western Hemisphere in , demandfor family immigrant visas began to exceed supply.Legal permanent immigration from Mexico con-tinued to grow through the s, averaging ,

admissions per year from through . Withopportunities for legal admissions remaining grosslyinadequate to meet demand, illegal immigrationfrom Mexico continued to grow.

In , the U.S. Congress passed the ImmigrationReform and Control Act (IRCA). Among otherthings, IRCA provided for the legalization of unau-thorized immigrants who could show they had beenresident in the United States since January , ,

or had worked in U.S. agriculture for a specifiedtime. IRCA also created a system of graduated sanc-tions for employers who hired undocumentedimmigrants “knowingly.” From to , almost. million Mexicans received permanent residency, million of these thanks to IRCA’s legalization pro-visions.10 The law led to an initial decrease in thestock of unauthorized immigrants, but one of its neteffects was to lay the foundation for increased immi-gration in the future. With IRCA’s border controlprovisions essentially unfunded until the mid-sand its controversial employer sanction provisionsdeeply underenforced, illegal immigration resumed.Compounding the problem was IRCA’s failure

Table 4. Foreign Direct Investment in Mexico, 1994–2001THOUSANDS OF DOLLARS

1994 1995 1996 1997 1998 1999 2000 2001a

United States 4,954 5,394 5,178 7,281 5,106 6,747 10,622 15,989

Non-Maquiladora 4,127 4,203 3,959 5,878 3,196 4,303 8,039 14,585

Maquiladora 827 1,191 1,219 1,403 1,910 2,444 2,583 1,404

Other Countries 5,678 2,833 2,511 4,645 2,677 5,418 3,042 2,914

Non-Maquiladora 5,610 2,657 2,314 4,368 2,477 5,084 2,642 2,677

Maquiladora 68 175 197 278 200 334 400 237

Source: Secretariat of the Economy, Mexico (Secretaría de Economía).a. January–September.

to make provisions to address continuing labordemand by widening legal migration channels.Further, the large number of now-legal Mexicanimmigrants provided the foundation for increasedlegal family reunification, but many also likely facili-tated the illegal immigration of friends and family.

The integration of Mexican workers into expandingsegments of the U.S. labor market had been steadilyincreasing for well over fifty years prior to NAFTA.In contrast, NAFTA’s provisions to integrate thegoods-and-services markets of the two countrieshave been in effect for only ten years. Thus, it is no surprise that free trade has had little effect on the twin pillars of Mexican migration to the UnitedStates: intricate networks of social ties and labormarket interdependence.

Rapid Demographic Change

Throughout the s and leading up to NAFTA’simplementation, Mexico’s demographic changeswere putting increasing pressure on the sputteringMexican labor market. While the rates of Mexicaninfant mortality and mortality in general steadilydecreased, birthrates continued to rise, peaking in. They did not begin to decline significantlyuntil after , when the Mexican governmentbegan aggressive family-planning initiatives.Through the s and early s, this demo-graphic momentum translated into a need to absorban ever-increasing number of new entrants into theworkforce each year. In , the annual increase in the population between ages fifteen and sixty-fiveyears reached . million, and growth in theworking-age population plateaued at that figurethrough .11

However, this growth will gradually slow: The pop-ulation of school-age children has begun to decreaseand will continue to do so through at least .Mexico’s National Population Council (ConsejoNacional de Población) estimates that the growth

in the population of economically active people—those who are working or looking for work—haspeaked: The active workforce grew by . millionpeople between and , but is expected togrow by only . million between and ,and . million between and .12 An ever-larger working-age cohort has meant that evenduring periods of steady growth, Mexico’s economyhas faced an uphill battle in generating jobs (andwages) sufficient to maintain the standard of livingof its people. Only now are the cohorts of youngpeople entering the labor market becoming smaller,giving the economy a chance to catch up.

To demonstrate the power of this demographicmomentum during the NAFTA era, consider thatwhen Mexico’s real gross domestic product (GDP)was growing at an enviable annual rate of .

percent in , it was only adding about ,

jobs in the formal sector; it added about ,

in , also a good year for the national economy.However, Mexico’s working-age population grew bymore than twice as many people in those same twoyears. Although estimates of the annual growth ofthe actual workforce vary, it is clear that even in itsbest years, the Mexican economy left hundreds ofthousand of new entrants to the labor force (as wellas their unemployed and underemployed predeces-sors) to choose between the informal sector and, ifthey had the wherewithal, migration.13

Also relevant to Mexico-United States migration isMexico’s continuing process of rural out-migration.Mexico, like many developing and middle-incomecountries, is experiencing a relentless process of ruralout-migration and urbanization—a process thatmost economists and historians consider a naturalpart of economic development.14 In , .

percent of the Mexican population lived in ruralareas. By , this figure had dropped to .

percent, and urbanization continued in the s,with the rural population accounting for .

percent of the total population in and .

percent in .15 Agricultural employment grewbriefly in the late s and early s before


resuming its downward trend. In some cases, indi-viduals migrated directly to the United States; otherschose migration to metropolitan areas in Mexicoinstead. In the latter case, however, when Mexico’scities could not generate sufficient opportunities forthese migrants, many of them wound up under-taking another migration—this time to the UnitedStates. Both of these processes—the demographictransition and urbanization—thus provide furtherreason why it would have been unrealistic to expectNAFTA to have reduced migration pressures in onlyits first ten years of existence.

Economic Crises, StructuralChange, and Emigration

The year marked a watershed in Mexico’s eco-nomic history, and thus also in its migrationbehavior. That year’s economic crisis and the twodecades of economic restructuring that have fol-lowed it increased migration to the United Statessubstantially.

The decision to emigrate—and to return—involves acomplex array of factors. Most obvious is the avail-ability of jobs and relative wages in Mexico and theUnited States—in the latter case, as determined bothby the wages themselves and by the exchange rate.For example, Taylor and Yúnez-Naude found that a percent devaluation of the peso increased migra-tion by percent in a traditional migrant-sendingvillage in Mexico.16 Thus, the devaluation of thepeso and the attendant collapse of Mexican employ-ment and wages brought about a sudden, significantchange in the migration “equilibrium” between thetwo countries. Just as important, the crisis, and theslow recovery that followed, shook confidence in theMexican economy, leading many Mexicans to con-clude that migration to the United States representedtheir best chance of survival and progress.

Of course, an individual’s decision to migrate is notjust shaped by his or her own earning prospects, but

also by family needs and priorities, among otherfactors. The resources sent home by migrants canserve as a form of insurance, by diversifying afamily’s sources of income, and as a source offinancial capital for families who have no access tocredit. These two functions of migration were par-ticularly important as Mexico transitioned from apolicy of heavily protected, state-led import substi-tution industrialization (ISI) to an open, free-marketeconomy.17 This process of structural change,almost by definition, requires and rewards risktakingand new investment. As people lost jobs in sectorsthat had previously been sheltered or subsidized bythe state—many of them moved or were forced intothe informal sector—the insurance and capital func-tions of migration became even more important.More and more families drew on the social networksthat tied them to the United States for assistancewith sending a family member northward.

The result of the crash and the restructuringthat followed led to a clear increase in illegal immi-gration. Apprehensions of would-be unauthorizedmigrants along the border spiked immediately afterthe crash, both in absolute terms and perofficer hours (see Figures and ). They declinedonly in . That drop was in large part caused by two factors: () IRCA’s legalization provisions—especially its requirement that the applicant’s pres-ence in the United States be continuous—resultedin a decrease in circular border crossings; () IRCA’semployer sanctions created enough initial uncer-tainty as to whether unauthorized immigrantswould be able to find jobs as to deter, temporarily,potential crossers. After IRCA’s effects subsided,apprehensions (and, it is believed, illegal entries)rebounded and continued their rising trend.

The economic changes of the s and early salso brought about a change in migration patternswithin Mexico. Although rural-to-urban migrationcontinued, Mexico City and the area around it wasno longer the nation’s chief magnet for internalmigrants. As the ISI-supported industries aroundthe capital disappeared and the middle class they



had supported receded in importance in the neweconomic environment, as the medium-size cities ofMexico’s northern border states and the maquiladoraassembly factories located in those cities becamemore attractive. Nevertheless, the jobs that migrantsfound in the border states were not always substi-tutes for the jobs once found around Mexico City.The maquiladoras employed mostly women, paidpoorly compared with many other manufacturingemployers,18 and had extremely high workerturnover. For energetic young men looking for asteady job and a way up, the maquiladoras provedno substitute for heading north.

NAFTA was clearly just another step—albeit a hugeone—in the course toward economic (and political)liberalization that Mexico set for itself in the earlys. It was hoped that NAFTA would be themissing piece to complete Mexico’s new economicpuzzle, delivering employment opportunities andconsistent wage growth to Mexican workers andcurbing emigration. Many observers warned,however, that change could not be accomplished

overnight, that NAFTA would likely be justanother step in Mexico’s necessary, but painful,restructuring. Since restructuring had deliveredonly more migration up to that point, skeptics cautioned that it was unrealistic to expect NAFTAto reduce international migration in the short-to-medium term.

NAFTA’s Effect on Migration

As it turned out, the skeptics were right. By mostmeasures, illegal immigration to the United Statescontinued to increase after NAFTA came intoeffect. Apprehensions along the U.S. southwesternborder also continued to increase, from about, in to more than ,, at theirpeak in .19 The population of unauthorizedMexican immigrants grew as well: The Immigrationand Naturalization Service (INS, which sinceMarch became part of the Department ofHomeland Security, DHS) estimated that the

200320011999199719951993199119891987198519831981197919770

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

200320011999199719951993199119891987198519831981197919770

140,000

280,000

420,000

560,000

700,000

840,000

980,000

1,120,000

1,260,000

1,400,000

Source: Office of Immigration Statistics, Department of Homeland Security, provided in Frank Bean and B. Lindsay Lowell, Unauthorized MexicanImmigration into the United States: IRCA, NAFTA, and Their Migration Implications. Paper commissioned for this report, on file with the author, 2003.

Figure 1. Southwest Border Officer Hours, Fiscal Years1977–2003OFFICER HOURS

Figure 2. Southwest Border Apprehensions, Fiscal Years1977–2003APPREHENSIONS


number of Mexicans present in the United Stateswithout authorization rose from million in

to . million in , increasing from . percentto . percent of the estimated total unauthorizedpopulation in the United States.20 According tothese estimates, percent of the growth in thetotal unauthorized population between and was due to Mexican immigrants. It is not surprising then that the average growth of the totalunauthorized population during the decade washigher in the years after NAFTA went into effectthan in the years before. Demographer JeffreyPassel obtained similar findings using differentmethods, estimating that there were . millionunauthorized Mexican immigrants in the UnitedStates in .21

Meanwhile, the trend toward geographic and eco-nomic dispersion of Mexican-born individuals in the United States continued. The Mexicancensus revealed that several states that did not have atradition of northward migration had begun sendinglarge numbers of migrants to the United States,

among them Oaxaca, Guerrero, Puebla, Hildalgo,Veracruz, Morelos, and the state of Mexico, as wellas the capital district itself. An increasing proportionof migrants were from urban areas.22 Mexicanmigrants also spread to nontraditional destinations in the United States: States such as North Carolina,Kentucky, Minnesota, and Arkansas saw increases of their Mexican-born populations of more than, percent between and .23

The characteristics of migrants also appeared tohave changed. Nonrandom surveys of Mexicanmigrants taken at popular border crossing pointssuggested that from to , migrants becameless likely to have had a job in Mexico, less likelyto have migrated before, and more likely to beundocumented. The average length of intendedstay increased as well.24 Additionally, by the s,only a minority of Mexican migrants surveyedworked in agriculture—in either Mexico or theUnited States. (Figures and illustrate the recentgrowth of the Mexican-born population in the United States.)

0

1

2

3

4

5

6

7

8

9

10

200019901980197019600

5%

10%

15%

20%

25%

30%

35%

20001990198019701960

Figure 3. Growth of the Mexican-Born Population in the United StatesMILL IONS

Figure 4. Percentage of Growth of the Mexican-BornPopulation in the United States

Source: Migration Policy Institute analysis of 2000 Census Bureau data and Campbell Gibson and Emily Lennon, Historical Census Statistics onthe Foreign-Born Population of the United States: 1850–1990 (Washington, D.C.: U.S. Census Bureau, 1999).

Free Trade and Migration Forces

THE PESO CRISIS AND RECOVERY

NAFTA’s entry into force was quickly overshadowedby the “peso crisis” of . The results of the crisiswere an immediate devaluation of the peso by morethan percent, a GDP that shrank .

percent from the previous year, an increase in out-right urban unemployment from . percent in

to . percent in ,25 and a large movement ofworkers into informal-sector employment. Theeffects were not unlike those of the crisis: Largenumbers of formal-sector jobs were lost, real wagesin Mexico dropped severely relative to those in theUnited States, and confidence in the Mexicaneconomy was badly shaken. In one public opinionpoll taken during the thick of the crisis, in March, only percent of those polled said theythought that economic conditions would improve in the next year.26

The response of many Mexicans was similar to thatshown in the crisis: Few jobs in Mexico, highrelative wages in the United States, and uncertainprospects for the future added up to good reason to head up the well-trod path northward.Apprehensions along the border jumped in ,and continued to increase in .

Similarly, while the NAFTA negotiations probablypromoted some of the exuberant investment inMexico that led up to the peso crisis, the crisisitself cannot be attributed to the trade agreement.Further, the political ties developed in the courseof the NAFTA negotiations and the thickeningeconomic linkages secured by NAFTA clearlyplayed a strong role in encouraging the UnitedStates to engage in the unprecedented bailout thatmitigated the crisis. If it had any effect, NAFTAlikely dampened the effects of the economic crisis.

THE BOOMING U.S. ECONOMY

In , real U.S. GDP grew by percent from the previous year, beginning a remarkable period of sustained growth that lasted until .27

Unemployment stood at . percent in anddescended to . percent by , the lowestaverage rate since .28 The tight labor marketprovided ample jobs for low-skilled Mexican immi-grants, making them a critical part of the robustgrowth of many sectors of the U.S. economy andplaying a key role in drawing additional migrantsto the United States. Of particular note was theincreasing importance of Mexican workers in the U.S. personal services sector—a developmentthat provided a strong indicator that the NAFTA-abetted increase in the trade of goods and high-skill, high-value-added services was not going to provide an adequate substitute for migration.

Surprisingly to some, however, the downturn in the U.S. economy, exacerbated by the attacks ofSeptember , , did not bring about an observ-able decrease in Mexican unauthorized immigrationto the United States. Not only has the population of Mexican-born individuals in the United States not declined, but other indicators of the size of that population, such as remittances and CurrentPopulation Survey-based estimates of the number of Mexicans in the United States, have continued to rise. Furthermore, although apprehensions alongthe border dropped in , possibly indicatingdecreased illegal migration inflows, deaths of migrantsalong the border have remained tragically frequent.

One way to reconcile the increase in the size of theMexican-born population in the United States withthe decrease in apprehensions at the border is tospeculate that the decline in the apprehension ratereflects primarily a decline in circular crossings, asmigrants already in the United States postpone tripshome because they fear challenging the heavily aug-mented U.S. border security. Also, while the U.S.economy has struggled, the Mexican economy hasalso been hurt through its close links to the United


States, giving migrants little incentive to return totheir home country. According to a recent PewHispanic Center study, Mexican-American workersseemed to have suffered the lowest percent growth inunemployment in the United States from September to October ( percent); by comparison,certain other groups in the U.S. labor pool experi-enced increases as high as percent or more.29

Employment prospects for Mexicans in the UnitedStates have remained robust despite the most recentlapse in the U.S. economy, a fact that may haveencouraged immigrants from Mexico to remain.

CHANGES IN BORDER ENFORCEMENT

Beginning in , the U.S. Border Patrol began aseries of “concentrated border enforcement” exercises.Under this strategy, line patrols were drasticallyincreased in high-traffic crossing areas, most of them in urban settings. The strategy sought to makecrossing illegally as difficult and costly as possible by closing off the easiest routes. As noted, it has succeeded in making crossing more difficult, as evidenced by the increased use of “coyotes” (people-smugglers) higher smuggling fees, and the increaseddeaths of unauthorized migrants in remote areasalong the border. However, there is no evidence thatillegal immigration from Mexico has slowed as aresult of the enhanced enforcement.30 Instead, borderenforcement seems to have reinforced the trend awayfrom circular migration and toward longer stays inthe United States, in turn prompting more womenand children to migrate to join men working there.

NAFTA, MEXICAN AGRICULTURE,

AND RURAL OUT-MIGRATION 31

The hope that exports of high-value fruits and vegetables would bring more employment to ruralMexico was balanced by the fear that imports fromthe United States would swamp Mexico’s produc-tion of grain, particularly maize. Maize is a labor-intensive staple crop in Mexico, but Mexicanfarmers produce it far less efficiently than their U.S.counterparts. In regard to the Mexican workforce, it

was feared that open trade would generate intenselabor displacement in the agricultural sector andadditional migration from rural areas—with manyof those migrants ending up in the United States.

A study by J. Edward Taylor and George Dyercommissioned for this report, using data from theMexico National Rural Household Survey, shows that NAFTA did not slow migration from rural areas.Although Mexican exports of fruits and vegetablesincreased considerably after NAFTA was imple-mented, generating additional employment, employ-ment in the agricultural sector declined overall.Migration from many rural communities accelerated,and less of that migration went to other rural areas in Mexico. In fact, an increasing proportion of thatmigration found its way to the United States: Thirtypercent of migrants from rural Mexico were in theUnited States in , versus percent in .From to , migration from the surveyed ruralcommunities to the United States increased by

percent. By , migration to the United States was percent higher than in (see Figure ).


0

100

200

300

400

500

600

200220001998199619941992199019881986198419821980

Source: Analysis of data from Mexico National Rural Household Survey of 2002, in J.Edward Taylor and George Dyer, NAFTA, Trade, and Migration. Paper commissionedfor this report, on file with the author, 2003.

Figure 5. Migration from Rural Mexico to the United States, 1980–2002 HOUSEHOLD MEMBERS : 1980=100


NAFTA does not appear to be the culprit in thisacceleration of rural out-migration, however. Taylorand Dyer found no indication that NAFTA createdany sort of “break point” in the growth of migrationfrom rural areas.32 Rather, migration from ruralMexico to the United States had been acceleratingwell before the onset of NAFTA, and the trend continued afterward. Further, while the expectedincrease in imports in corn and other grains fromthe United States occurred, Mexican corn produc-tion has not been gutted. In fact, annual corn pro-duction averaged about . million tons from

to , almost exactly what it was in the yearsimmediately prior to NAFTA. Neither has therebeen an observable shift in production betweenrain-fed, largely subsistence farms and more com-mercial, irrigated farms.33 In fact, even as agricul-tural prices dropped and Mexico’s trade deficit inagricultural goods with the United States widenedafter NAFTA, Mexico’s agricultural GDP increased.That growth, however, was slower than the growthof GDP as a whole with two exceptions: In

and , overall GDP shrank. (Much of the growthin agriculture was in labor-intensive fruit and veg-etable crops in the northern and western states ofMexico, where exports of many types of fruits andvegetables more than doubled.)

The gains in the value of Mexican agriculture wereaccompanied, however, by a seemingly paradoxicaldecline in employment in the Mexican agriculturalsector, from . million jobs in to . millionin .34 A number of factors besides NAFTAwere at work, however. The first, and one that isoften overlooked, is the natural, perhaps inevitable,process of rural-to-urban movement that all coun-tries experience as their economies advance. Theshare of agricultural workers as a proportion ofMexico’s workforce has declined steadily, from over percent in , to percent in , to lessthan percent and falling since .35 The secondfactor is the continued reform of Mexican agricul-tural policy. Reforms of the ejido system oflandownership that began in have allowedland sales and rentals and have been accompanied

by cuts and changes in the structure of agriculturalsubsidies. Both changes have encouraged increasedproductivity and production, but not always inways that have resulted in greater agriculturalemployment or have encouraged rural people to stay put.

Thus, NAFTA has played only a minor role in thecontinuing acceleration of rural outmigrationduring the decade since its enactment. The choice ofwhether to migrate within Mexico or to the UnitedStates, however, has been shaped by the larger andmore structural general migration forces outlined inthis essay, and by the unavailability and low qualityof jobs in Mexico’s cities.

URBAN EMPLOYMENT AND NAFTA: THE RISE

OF THE MAQUILADORAS AND THE INFORMAL

SECTOR

The crises of and were characterized bythe decimation of salaried jobs in the formal sectorand the growth in jobs in the informal sector—self-employment, jobs in small enterprises, and jobswithout benefits. Employment in the formal sectorhas risen and fallen with the Mexican economy.Until , employment in informal-sector jobsgrew faster than employment in general. The sus-tained economic growth of the late s broughtabout an increase in the proportion of workers informal jobs, but many of these gains have been lostin the downturn of the past three years.

Significantly, a substantial minority of the formal-sector jobs gained—and lost—following enactmentof NAFTA have been in the maquiladora assemblyindustry.36 Both informal employment andmaquiladora jobs are typically poor substitutes for international migration. Average productivity(and thus wages) in the informal sector is very low.Migrant remittances are an essential source ofcapital for many small enterprises, meaning that the informal sector and migration are often comple-ments, not substitutes. Likewise, wages in themaquiladoras are low, turnover is high, and workers

tend to be young and, until recently, overwhelm-ingly female (in , for the first time, the majorityof recorded maquiladora workers were men), whichmeans that the energetic and ambitious bypass or donot stay long in maquiladora jobs.

Thanks in part to increases in foreign investmentand manufacturing exports brought about byNAFTA, as well as social security reforms, informal-sector employment declined in the initial periodfollowing enactment, along with open unemploy-

ment. By one indicator, unemployment andinformal employment together fell from a high of percent of the workforce in to a low of percent in , only to climb to percent in.37 Both rates remain higher than those prior to the crisis, however.

Although the manufacturing sector in general was hit harder by the crisis than the maquiladora subsector, employment in non-maquiladora manu-facturing recovered strongly on the back of exportgrowth, with employment increasing percentbetween its trough and peak; maquiladoraemployment roughly doubled in the same period. In the new century, it appears that the maquiladorasector may be in decline. The combination of the eco-nomic downturn, competition from China and otherlow-wage countries, and the loss, due to NAFTA, ofsome of the maquiladoras’ preferential tariff treatmenthas contributed to a level of employment that, in mid-, was down percent from the sector’s

peak, in contrast to non-maquiladora manufacturingemployment, which was down . percent.

NAFTA and Migration:Promise and Reality

In terms of its effects on illegal migration, NAFTAhas been cruel to both its most vocal critics and its most ardent proponents. It has not decimatedMexican employment, but it has not led to dramaticjob and wage growth. If anything, it has shifted theMexican economy slightly toward greater formal-sector employment, leading one to believe thatMexico’s disappointing economic performance inthe past ten years may well have been much worsewithout NAFTA.

Migration from Mexico to the United States, bothlegal and illegal, has continued to grow. In the ten years that NAFTA has been in effect, vastlyexpanded investment in Mexico and regional trade in goods has not reduced the movement of people—albeit for reasons that probably have as much to do with conditions in the United Statesas with those in Mexico. The fairest conclusion may be that, ultimately, NAFTA’s economic effectshave been dwarfed by much more powerful andenduring forces: robust demand for Mexicanworkers in the United States, enduring and deeplyrooted social networks that promote migration, a demographic boom that is still several steps ahead of the employment creation capabilities of the Mexican economy, and an economy that,like those of many developing countries, has, over the past two decades, suffered repeated gravecrises and a painful process of readjustment.


Looking Ahead

The “age” of selling free-trade agreements to skep-tical policy makers and mass publics by claiming thatthey will reduce illegal immigration may have passed.Yet there are cases in which a different model ofregional integration has reduced migration pressuresenormously. This model, however, goes beyond justfree trade. When Greece, Spain, and Portugal joinedthe European Union (EU), for example, the openingin labor mobility did not bring about a rush of newmigration. This nonevent occurred despite a nearlythree-decade history of labor migration to the EUfrom all three countries. However, the process ofjoining the EU involves much more than opening tofree trade. It is both preceded and followed by exten-sive EU investments in the social and physical infra-structure of candidate and new member states, aswell as by massive annual investments in the memberstates’ agricultural sectors. This last investment aloneconsumes nearly half the European Commission’stotal budget. Furthermore, the EU integrationconcept mandates extensive economic and politicalreforms that enhance the newcomers’ stability andprepares them to take better advantage of thebenefits of membership.

The EU’s model of economic and political integra-tion seems unlikely to be duplicated elsewhere in thenear future. In light of the failures of both free tradeand unilateral border controls to “solve” the problemof illegal immigration, only one other major optionseems open: substituting legal, regulated, safe, andorderly migration for the current system of illegal,unregulated, and disorderly migration. The perversityof the status quo becomes starker when one realizesthat in effect the sovereign prerogative of states tomake immigration decisions to individual migrantsand organized smuggling networks is surrendered.The alternative calls for engaging in a process of usingfurther openings in permanent immigration and sub-stantial numbers of legal temporary work visas tosatisfy a much greater proportion of the developedeconomies’ demand for additional foreign labor and

the less developed economies’ interest in easier accessto the labor markets of the more developed world.

In many ways, the political ties the United States and Mexico developed in the course of negotiatingNAFTA helped to open a number of dialogues onmigration management between the two countriesthat began soon after the agreement’s entry into force.These dialogues dealt with important but often procedural issues at first, but gained in both depthand intensity following the elections of Vicente FoxQuesada and George W. Bush. The momentum dissi-pated, however, soon after the terrorist attacks of

and the subsequent shift in U.S. political attentionand interest. However, the negotiations’ central con-cepts of regularizing the presence of unauthorizedimmigrants, offering Mexico much broader access topermanent and temporary U.S. visas, and taking jointresponsibility for the management of the commonborder live on in the continued interest of several keyU.S. lawmakers who have proposed a variety of newlegislative schemes in this area.38

In the present climate, significant migration agree-ments, if they are to happen at all, will most likelyhappen outside the explicit context of trade accords.Although the mobility of businesspersons andinvestors under trade accords may no longer be con-troversial, the employment of foreigners at variouslevels of skill, education, and experience is a verydifficult political issue for most developed societies.The “toxicity” of going beyond the narrowest possibleareas of mobility has been playing itself out for twoyears now in the inability of the governing coalitionin Germany to pass its immigration reform legisla-tion, and was felt again most recently in the UnitedStates. After approving trade pacts with Chile andSingapore that contained labor mobility provisionsfar more limited than those in NAFTA,39 the U.S.Senate passed a nonbinding resolution stating that“trade agreements are not the appropriate vehicle forenacting immigration-related laws or modifyingcurrent immigration policy,” and that “future tradeagreements to which the United States is a party…should not contain immigration-related provisions.”40


Canada, for its part, has also been cautious inengaging other countries in mobility agreementssimilar to the one it negotiated with Mexico underNAFTA. Canada’s free-trade agreement withChile made NAFTA-like provisions for the tempo-rary employment of professionals, but its

agreement with Costa Rica only provided for thetemporary entry of business visitors and for theemployment of intracompany transferees. However,Canada has continued a somewhat productive dialogue with Mexico on labor migration: It signeda letter of intent stating its intention to expandthe small agricultural guest worker program it has had with Mexico since .

In sum, both the United States and Canada havemapped generally similar paths on migration sinceNAFTA. They have made few commitmentsregarding the ability of foreigners to get access totheir respective domestic labor markets throughtrade agreements, while at the same time runningfairly liberal “unilateral” programs for the temporaryentry and employment of people from all nationsand continuing to engage Mexico on migrationmatters from time to time.

One could take from this analysis the lesson thatmigration agreements cannot be naturally accommo-dated within free trade negotiations. In many ways,this is counter-intuitive. After all, it is during tradenegotiations that the negotiating position of manydeveloping states may be the strongest. The collapseof the Cancún WTO ministerial in September

certainly demonstrates this last point. Furthermore,NAFTA’s brief history shows that free trade cannotserve as a substitute for labor migration, at least in the short term—and that loading a free-trade agreement with mobility provisions beyond thoseappearing in NAFTA will make the agreement politically unpalatable to developed countries. Thelack of substantial progress so far in the WTO discussion of trade-in-services (which could come to include mobility issues that go well beyond those of NAFTA) points to a trend toward more modestcommitments on the mobility of persons.

Regardless of the political moment, there remaincompelling reasons why migration and free-tradeagreements will continue to be thought of—if notacted on—in tandem. First, from a purely economicperspective, there is little difference between trade ingoods and trade in services, and much trade in serv-ices requires the movement of significant numbers of people. Furthermore, economists argue that thepotential global economic gains from even a modestincrease in the movement of workers can be muchlarger than any further increases in the movements of goods.41 These gains only grow as the spectrum ofskills and occupations eligible to move are expandedto allow countries to exploit their comparative advan-tage in services. More convincingly, perhaps, thispotential for economic gains has serious practicaleffects. As NAFTA aptly demonstrates, the rich coun-tries’ voracious demand for workers and the poorercountries’ ample supply create powerful transnationallinkages between labor markets, both because of anddespite official policy. The last ten years clearlydemonstrated the durable need for Mexicans in low-value-added manufacturing and low-skill services inthe United States, but the role of Indian informationtechnology and communication workers (temporaryand otherwise) in the United States in the s pro-vides an equally potent example. Once worker andemployer have begun to turn the potential economicgains of migration into a profitable reality, govern-ments face an uphill battle in disentangling them.

Nor is this analysis unique to the NAFTA partner-ship. Within the FTAA zone, Mexico, Argentina,Brazil, and Chile, among others, are all significantdestinations for workers from other countries, aswell as regional hubs for business. Often, just as in the case of migration from Mexico to the UnitedStates, the driving force is not the government’s legal approach to the movement of people, but thedemands of the economy and the existence of estab-lished migration networks. Regional agreements thatset the terms for the ongoing exchange of businessvisitors and several types of workers among all thecountries of a region may thus be worth pursuingon their own merit—independently of, or parallel


to, negotiations on trade and commercial pacts.The United States and Canada already have extensiveprovisions for the temporary employment of foreignworkers outside the context of international agree-ments. As negotiations continue on CAFTA andFTAA, and in the WTO, as well as depending onthe level of the developed world’s interest in gainingaccess to foreign markets, it may make sense fordeveloped countries to use limited and regulatedaccess to their labor markets as a bargaining chip.The bargain can be seemingly simple: Developedcountries desire concessions from developing coun-tries in opening their service sectors that parallel theconcessions developing countries want from devel-oped countries in regard to the movement of people.

The United States, Britain, and many other devel-oped countries have large surpluses in net exports ofhigh-skill services, reflecting their large comparativeadvantage in telecommunications, energy, manage-ment, and financial services. Yet developing countryprotectionism, among other factors, holds services toabout percent of all world trade. The ability ofIndian information technology and communicationprofessionals to work in the United States or ofBrazilian construction companies to operate in theUnited States using a certain proportion of Brazilianworkers might thus be exchanged for increased accessto the telecommunications or financial servicessectors of these countries by U.S. firms. This type of“trade in services” quid pro quo could be tested firstin the U.S.-Mexican context: An agreement on tem-porary movement of low-skill workers from Mexicoto the United States and U.S. access to Mexico’spetroleum sector were first discussed together inNAFTA negotiations, and both countries remainconscious of these two items’ power as bargainingchips.42 Other, equally sensitive bilateral irritants willalso have to be included in any real bargain, particu-larly ones that involve the taking of joint responsi-bility for the management of the common border inways that effectively address each other’s concernsabout drugs, organized crime, and, first and foremostamong U.S. interests at this time, security.Such arrangements will have to deal with the

inevitable—and valid—concern that permittingincreased movement of labor could affect relativewages in sensitive social sectors in developed countries.With stronger social policies and proper regulationand enforcement, however, these fears could go theway of NAFTA’s “giant sucking sound” famouslyevoked in by Ross Perot. If anything, some of theUnited States’ recent experience shows that temporaryworker admissions can function much as one wouldwant them to: Applications by U.S. employers forforeign workers in the high-technology sector climbeddramatically in the late s, when there was enor-mous demand for such workers, but have declinedsharply since the downturn. In other words, theuse of temporary foreign employees responded tomarket forces, and foreign workers employed properlyby U.S. employers did not undercut U.S. workers asthe demand for technical skills ebbed.43

Still left unanswered is the question of how to nego-tiate agreements on the movement of workers. Inthe case of the EU, the nearly completely free move-ment of people takes place in the context of verydeep regional political-economic integration.Another approach, now slowly taking shape in theCaribbean Community, uses the regional tradeagreements’ existing commitments on the mobilityof business visitors and high-skill professionals as astarting point from which to extend mobility toother labor market sectors by gradually eliminatingadministrative barriers and making less-skilledworkers eligible to move. This, in effect, was alsothe approach proposed by India in the WTO’sDoha Development Round, to a tepid reception.

A final approach would not tie migration measuresdirectly to trade agreements. Rather, it would usethe resulting regional or subregional economic inte-gration and cooperative spirit as the context withinwhich to negotiate subsequent mobility agreements.Similarly, a successfully concluded trade pact couldbe used as a political forum for a regional discoursethat concluded with an understanding on migra-tion. The countries of the South American customsunion Mercosur, which experience significant levels


of intraregional illegal migration, has used the tiesbuilt though their trading bloc to negotiate the reg-ularization of unauthorized immigrants.

The most reasonable thing to assume at this time,however, is that neither the FTAA nor CAFTA nego-tiations, when completed, will look much differenton mobility issues from the precedent set by the U.S.agreements with Chile and Singapore. Moreover,absent a sharp turnaround in the U.S. economy,U.S. negotiators may even seek to eliminate any ref-erence to professional entries under the resultingaccords. The direction the United States might wishto follow, however, is not likely to be as easily“imposed” on the other parties as it was onSingapore or Chile. The stated intent of Brazil toobtain larger concessions from the United States inFTAA negotiations, and the tough stance taken bydeveloping countries in general at the September WTO negotiations in Cancún, are indicationsthat there may yet be new developments in themobility of people associated with trade in services.44

Epilogue

This brief evaluation of “NAFTA at Ten” allows usto bury some false ideas and suggest some new pos-sibilities. The idea that free trade by itself can bringabout changes that can control existing migrationflows in the short-to-medium term is clearly wrong.Equally erroneous is the fear that trade agreementswill spur massive movements of people.

International trade is only one of many economicforces affecting migration, and migration itself hasdeep roots in society. Migration and economic integration have not met for the last time, however. The movement of people is an economic force with a power potentially far exceeding that of the movement of goods or capital, and trade agreements will continue to be a forum for discussing—if not concluding—cooperative agreements on the management of migration.

NOTES

1 More information on Mexican expectations leading up toNAFTA is provided in Francisco Alba, Elusive and ChangingMexican Expectations Regarding NAFTA’s Implications onMigration. Paper commissioned for this report, on file withthe author, .

2 A vivid example of Mexican officials’ ambivalence toward theTN visa is the cases of actuaries and plant pathologists.Canadians and Americans in the NAFTA Mobility WorkingGroup have waited for several years for Mexican representa-tives to approve expanding the TN occupational list toinclude these two categories.

3 Demetrios G. Papademetriou, “New Directions for ManagingU.S.-Mexican Migration,” Migration, Free Trade and RegionalIntegration in North America (Paris: OECD, ).

4 “Attorney General Reno Sees NAFTA Benefits in CreatingJobs, Stopping Drugs and Illegal Immigration from Mexico”(press release). The White House, Washington, D.C., October, , available at www.ibiblio.org/pub/archives/whitehouse-papers//Oct/NAFTA-Notes---.

5 The BIP was created partially in response to the end of theUnited States’ bracero program, which had allowed Mexicansto work seasonally on U.S. farms and had promoted therecruitment of Mexican workers by U.S. employers.

6 Interestingly, however, FDI from all other countries fell byalmost percent in and has never fully recovered,perhaps an indication that the United States’ NAFTA advan-tage displaced capital from other countries. The special rela-tionship between the United States and Mexico may bediluted, though, through Mexico’s signing of free-tradeagreements with multistate groupings elsewhere in LatinAmerica, the European Union, the European Free TradeAssociation states, and Israel; Mexico even has an agreementpending with Japan. Correspondingly, Mexico’s advantageousaccess to U.S. markets is also being diluted, by the UnitedStates’ ongoing free-trade agreement negotiations and byChina’s accession to the WTO.

7 In most instances, U.S. employers must obtain laborcertification for those employment-based immigrants andother foreign workers they wish to hire. This process requiresan employer to demonstrate that the foreigner’s presence willnot adversely affect U.S. workers.

8 “Ten Source Countries with the Largest Populations in theUnited States as Percentages of the Total Foreign-BornPopulation: ” (graph). (Washington D.C.: MigrationInformation Source, Migration Policy Institute), available atwww.migrationinformation.org.

9 For more information on these topics, see Binational Study onMigration, Binational Study on Migration between Mexico andthe United States (Mexico City, Mexico: Binational Study onMigration, ); Douglas Massey, Jorge Durand, NolanMalone, and Alfred Buch, Beyond Smoke and Mirrors: MexicanImmigration in an Era of Economic Integration (New York:Russell Sage Foundation, ); Douglas Massey, JoaquínArango, Graeme Hugo, Ali Kouaouci, Adela Pellegrino, and J.Edward Taylor, Worlds in Motion, (Oxford, England:



Clarendon Press, ); Douglas Massey, Rafael Alarcón, JorgeDurand, and Humberto González, Return to Atzlan: TheSocial Process of International Migration from Western México(Berkeley, Calif.: University of California Press, ).

10 Bureau of Citizenship and Immigration Services, TheYearbook of Immigration Statistics (Washington, D.C.: U.S.Department of Homeland Security, various years).

11 Consejo Nacional de Población, La Población de México en elNuevo Siglo (Mexico City, Mexico: Consejo Nacional dePoblación, ). See also U.S.-Mexico Migration Panel,Mexico-U.S. Migration: A Shared Responsibility (Washington,D.C.: Carnegie Endowment, ).

12 Consejo Nacional de Población, Situación Demográfica deMéxico, (Mexico City, Mexico: Consejo Nacional dePoblación, ).

13 Employment figures for formal employment are for tempo-rary and permanent workers covered by the national socialsecurity agency, as reported by the National Institute ofStatistics, Geography, and Informatics (Instituto Nacional deEstadística Geografía e Informática, INEGI).

14 For further discussion see J. Edward Taylor and GeorgeDyer, NAFTA, Trade, and Migration. Paper commissionedfor this report, on file with the author, .

15 INEGI, “Porcentaje de Población por Tamaño de Localidad,-” (table). (Mexico City, Mexico: INEGI).

16 J. Edward Taylor, and Antonio Yúnez-Naude, “AgriculturalPolicy and the Village Economy: A Computable GeneralEquilibrium Analysis,” in Roger Rose, Carolyn Tanner, andMargot A. Bellamy, eds., Issues in Agricultural Competitiveness(Aldershot, England: Dartmouth, ), pp. ‒.

17 Using an ISI policy, Mexico sought to develop local “infant”industries by protecting them from competition from importsthrough tariffs, import quotas, exchange rate controls, subsi-dies, and preferential treatment of capital imports. Mexico’sintense policy of ISI began soon after World War II and deliv-ered fairly steady growth, but it began to falter in the mid-s, when mounting debt, inflation, and capital flight forcedthe devaluation of the peso from the peg it had held with thedollar since . However, rising oil prices sustained ISI inMexico through , when, following a drop in oil prices, theMexican economy went into full-blown financial crisis.

18 Carlos Salas and Eduardo Zepeda, Wages and Productivity inMexico: Theoretical and Empirical Issues, (Table ). Papercommissioned for this report, on file with the author, .

19 This period also saw a simultaneous reduction in thenumber of apprehensions per officer hour of border enforce-ment, a measure that is often used to account for changes inapprehension statistics, themselves caused by changes inresources dedicated to enforcement rather than flows acrossthe border. This indicator should not be interpreted as a reli-able sign that the entry of undocumented immigrants intothe United States was decreasing, or that the pressure tomigrate had decreased. Beginning in , officer hours weregreatly increased in certain high-traffic urban areas under theImmigration and Naturalization Service’s “Enhanced BorderEnforcement Strategy.” The program yielded an initialupsurge both in apprehensions per officer hour and in theprobability of being intercepted, but this effect soon sub-

sided. It appears that migrants adapted by using less tran-sited, albeit more dangerous, entry routes and by turningmore systematically to “coyotes” (immigrant smugglers).Additional reading on this topic is provided in Frank Beanand B. Lindsay Lowell, Unauthorized Mexican Migration intothe United States: IRCA, NAFTA, and Their MigrationImplications. Paper commissioned for this report, on file withthe author, .

20 Office of Policy and Planning, Estimates of the UnauthorizedImmigrant Population Residing in the U.S.: to

(Washington, D.C.: Bureau of Citizenship and ImmigrationServices, ).

21 Jeffrey Passel, New Estimates of the Undocumented Populationin the United States (Washington, D.C.: MigrationInformation Source, Migration Policy Institute, ), available at www.migrationinformation.org.

22 La Población de México en el Nuevo Siglo (see note ). 23 Migration Information Source, “States and Regions Ranked

by Percent Change of the Foreign Born: and ”(table). (Washington, D.C.: Migration Policy Institute, n.d.),available at www.migrationinformation.org.

24 Results from the Northern Border Migration Survey pre-sented in Situación Demográfica de México (see note ).

25 For observers used to interpreting unemployment figuresfrom developed countries, Mexican unemployment figureswill appear to underestimate unemployment by a largemargin. This is in part because outright unemployment is aluxury unaffordable to Mexico’s poor, who take refuge ininformal employment when formal-sector jobs are not avail-able. Additional reading on the effects of the peso crisis onthe Mexican economy and population is provided in J.Edward Taylor and George Dyer, NAFTA, Trade, andMigration. Paper commissioned for this report, on file withthe author, . See also Sebastian Edwards and MoisésNaím. Mexico : Anatomy of an Emerging-Market Crash(Washington, D.C.: Carnegie Endowment for InternationalPeace, ).

26 Peter H. Smith, “Political Dimensions of the Peso Crisis,” inSebastian Edwards and Moisés Naím, eds., Mexico :Anatomy of an Emerging-Market Crash (Washington, D.C.:Carnegie Endowment for International Peace, ), pp. ‒.

27 Bureau of Economic Analysis, “Gross Domestic Product:Percent Change from Preceding Period” (table).(Washington, D.C.: U.S. Department of Commerce,), available at www.bea.doc.gov/bea/dn/gdpchg.xls.

28 Bureau of Labor Statistics, “Employment Status of theCivilian Noninstitutional Population, to Date” (table),in Bureau of Labor Statistics, Household Data AnnualAverages (Washington, D.C.: U.S. Department of Labor,), available at www.bls.gov/cps/cpsaat1.pdf.

29 Arturo Gonzalez, The Impact of the / EconomicRecession on Hispanic Workers: A Cross-Sectional Comparisonof Three Generations (Washington, D.C.: Pew HispanicCenter, ).

30 Unauthorized Mexican Migration into the United States (seenote ).

31 The analysis in this section draws heavily on NAFTA, Trade,and Migration (see note ).


32 Cuts in agricultural tariffs under NAFTA were to be phasedin over a fourteen-year period. However, on many commodi-ties, including maize, the Mexican government has exceededits commitments and declined to exercise the option toimpose “tariff rate quotas.”

33 Historical series data provided by Mexico’s Servicio deInformación Estadística Agroalimentaria y Pesqueria (SIAP,Statistical Information Service of Food, Agriculture, andFisheries) of the Secretaria de Agricultura, Ganaderia,Desarrollo Rural, Pesqueria, y Alimentación (SAGARPA,Secretary of Agriculture, Livestock, Rural Development,Fisheries, and Nutrition).

34 Unrevised and unpublished data provided by the MexicanNational Institute of Statistics, Geography, and Informatics(Instituto Nacional de y Estadística, Geografia, eInformática, INEGI).

35 Michele Veeman, Terence Veeman, and Ryan Hoskins,“NAFTA and Agriculture: Challenges for Trade and Policy,”in Edward J. Chambers and Peter H. Smith, eds., NAFTA inthe New Millennium (La Jolla, Calif.: Center for U.S.-Mexican Studies, University of California, San Diego, ),pp. ‒.

36 NAFTA did not directly benefit the maquiladora sector.Maquiladoras exporting to the United States were exemptfrom tariffs prior to NAFTA, while some of the privilegesaccorded to the sector were dismantled by NAFTA by thelate s, contributing to the sector’s woes.

37 Percentage of workers openly unemployed plus thoseemployed but not receiving a wage or salary. The author’s cal-culations are derived from data from Banco de InformaciónEconómica, “Otros Indicadores de Empleo y DesempleoTrimestral” (table). (Mexico City, Mexico: INEGI, n.d.).

38 For more information on bilateral migration negotiations, seeFrancisco Alba, Elusive and Changing Mexican ExpectationsRegarding NAFTA’s Implications on Migration. Paper commis-sioned for this report, on file with the author, .

39 Chilean and Singaporean professionals can be employed inthe United States only under existing U.S. law and adminis-trative procedures (the H-1B visa). No new visa categorieswere created in the trade agreements with Chile andSingapore, as had been done under NAFTA, and no admin-istrative requirements were waived. The only notable (butotherwise inconsequential) U.S. concession in this area wassimply to carve out a very small number of H-1B visas foreach of these two countries.

40 Senate Resolution , th Congress, introduced July ,

by Senator Sessions. Daily Digest, GovernmentPrinting Office, July , .

41 According to one economic modeling exercise, if in each yeardeveloped countries allowed the temporary entry of a quota offoreign workers equivalent to percent of their workforce, theworld economy would gain billion per year. Thesegains are about the size of the annual GDP of Indonesia orDenmark, and are greater than those that would result fromdropping all remaining tariffs on the trade of goods in thesame model. Other models suggest that world productioncould more than double in the hypothetical case of completely“free” movement of workers. Significantly, the bulk of these

potential gains comes from the movement of low-skilledworkers. To put the first figure in perspective, in admis-sions of new temporary workers (not including workersstaying on multiyear permits issued in previous years) into theUnited States were equivalent to about . percent of the U.S.labor force, while new permanent admissions equaled about. percent of the workforce. The estimated stock of unautho-rized immigrants in the United States in was equivalentto about percent of the U.S. workforce, with about two-thirds of these immigrants being Mexican. For details see L.Alan Winters, Terrie L. Walmsley, Zhen Kun Wang, andRoman Grynberg, “Negotiating the Liberalisation of theTemporary Movement of Natural Persons,” Discussion Paperin Economics no. (Brighton, England: CommonwealthSecretariat, Sussex University at Brighton, ), available atwww.sussex.ac.uk/Units/economics/dp/Wintersetal.pdf.

42 In , the U.S. House of Representative’s Committee onInternational Relations passed a nonbinding amendment toH.R. stating, “It is the sense of the Congress… that anyaccord on migration issues between the United States andMexico should also include an accord to open PetroleosMexicanos (Pemex) to investment by U.S. oil companies andspecific steps to reform Pemex’s operations to make themmore transparent and efficient.” The implied proposal wasquickly rejected by the administration of President Fox. Asof this writing, the bill is in the Senate.

43 In October , the U.S. Congress passed the AmericanCompetitiveness in the Twenty-First Century Act (“AC21”).The counting methodology for H-1Bs, however, has sincechanged. Certain H-1B employees are now exempt fromnumerical limitations, including those employed by institu-tions of higher education related or affiliated nonprofit enti-ties, or nonprofit or government research organizations.

44 NAFTA’s mobility provisions, modest as they are, are nonethe-less noteworthy for their influence on other negotiations. TheWTO’s General Agreement on Trade in Services (GATS)provided a multilateral framework for addressing the move-ment of business visitors and professionals via its “Mode ” ofservice delivery (the delivery of services through the presenceof the nationals of one country in the territory of another).NAFTA, as the most prominent free-trade agreement beingdeveloped at the time, was an important influence on thearchitecture and language of GATS, and the influence of both of these agreements is still very much evident in the discussion of services in trade agreements being negotiatedtoday, such as CAFTA and FTAA. See Julia Nielson, “Current Regimes for the Temporary Movement of ServiceProviders: Labour Mobility in Regional Trade Agreements.”Paper presented at the Joint WTO-World BankSymposium on the Movement of Natural Persons (Mode )under the GATS (Geneva: April ‒, ), available atwww.wto.org/english/tratop_e/serv_e/symp_apr__nielson1_e.doc.


IN 1993, THE CLINTON ADMINISTRATION

hailed the North American Free Trade Agreement(NAFTA) as the “greenest” trade agreement evercompleted.1 Despite this promise, NAFTA and itsparallel environmental accord remain the source of intense debate. A decade after the agreemententered into force, disagreements continue aroundthe basic facts of NAFTA, as well as whether it haskept its pledge of promoting sustainable develop-ment, preserving the environment, and ensuringthat environmental laws guarantee high levels ofenvironmental protection.2 In , Public Citizendismissed the environmental provisions of NAFTAas “meaningless.”3

Measuring the environmental impact of traderemains complex, despite advances that have beenmade in assessment methods, underlying data, and empirical evidence. Environmental quality is subject to change, often unexpectedly and from a myriad of sources. Since free trade affects theeconomy indirectly and often weakly, the impact of trade on environmental quality also tends to beindirect and weak.4

Despite methodological challenges in identifyingcausal links, studies confirm that trade exerts twotypes of pressure on the environment. First, trade canaffect environmental quality through scale impacts.There is rarely, if ever, a linear relationship between

economic scale and environmental impacts, since theformer tends to be offset by more efficient technolo-gies, compositional changes (for instance, from agri-culture to the manufacturing or services sector) or theharmonization of standards among trading partners,all associated with trade liberalization.5 Second, traderules can influence environmental policy directly, byaffecting policy on food safety, the environment, con-servation, and other areas of domestic concern. Thissecond area has remained at the center of the tradeand environment agenda for more than a decade.Despite predictions that the trading system wouldbecome overwhelmed with trade-environment cases,this has not occurred either under NAFTA or theWorld Trade Organization (WTO). A limitednumber of precedent-setting environmentally relateddisputes have occurred involving NAFTA Chapter investor-state disputes.

Environmental reviews of trade liberalization con-tinue to focus on the economic sectors that are mostaffected by NAFTA liberalization schedules, andwhich are environmentally sensitive. These sectorsinclude pollution-intensive industrial and manufac-turing sectors, as well as resource-based sectors, suchas cement, and renewable resource sectors, such asfisheries and forestry.

During the past decade, somewhat less attentionhas focused on the environmental impacts of

threeThe Greenest Trade Agreement Ever?

S C O T T VA U G H A N

NAFTA’s agricultural provisions. Understandingagricultural liberalization (or the failure to liberalizefarm trade) is important from an environmentalperspective. No other sector exhibits such a close,symbiotic relationship as that of terrestrial farmingand the environment.

I examine some changes in U.S.-Mexican farmtrade, and focuses on three principal environmentalissues: (a) the rise in the overapplication of nitrogen,phosphorus, and other agrochemical inputs; (b) thedepletion of groundwater due to increased crop irri-gation; and (c) the vicious circle of poverty andincome divergence, subsistence farming, and highrates of deforestation and changes in land use (thisthird issue being the leading cause of habitat degra-dation and loss of biological diversity in southernMexico).

To assess the effects that NAFTA has had onnitrogen pollution, water scarcity, and biologicaldiversity losses, I examine changes in Mexico-U.S.trade in three crop groupings—wheat, maize, andfresh vegetables and fruit. Trade in each group hasbeen strongly affected by NAFTA-specific liberaliza-tion disciplines (in contrast to what has occurredunder the WTO Agreement on Agriculture),shifting demand patterns as a function of risingincome in some urban areas, fluctuations in droughtconditions and severity, and other factors.

Wheat. U.S. exports of wheat to Mexico haveincreased by percent since . This exportincrease has in turn contributed to an percentcompositional shift in the production of wheat vari-eties within Mexico’s breadbasket region, from breadwheat to durum wheat. The production of both vari-eties in the semiarid regions of northern Mexico isheavily reliant on irrigation drawn primarily fromgroundwater. Over the past decade, groundwatertables have declined by approximately percent inthe breadbasket area of the Yaqui Valley. Durumwheat requires greater total amounts of fertilizerinputs in semiarid regions, compared to bread wheat.Although Mexico’s aggregate consumption of fertil-

izers has remained roughly constant since NAFTA,following the end of state-supported fertilizer subsi-dies, fertilizer use has become more concentrated inlarger-scale, export-oriented farms. During the pastdecade, increases in nitrogen and other chemicalloading from agrochemicals have been recorded ingroundwater in Sonora and other commercialfarming regions.

Nitrogen runoff is the largest pollution source inMexico, the United States, and Canada. It is also theleading cause of eutrophication and algae bloomsaffecting Mexico’s rivers and lakes, the Sea of Cortez,and the Gulf of Mexico. The ecological effects ofnitrogen pollution tend to be greater in Mexico than in the United States, given Mexico’s warmerwaters—which can accelerate algae blooms—andmuch larger concentration of freshwater and coastalmarine biological diversity. The compositionalchange from bread wheat to durum wheat can beexplained largely by structural changes consisting ofvertical integration of durum wheat with upstreamfood processing. Durum wheat is used for the pro-duction of pasta. Since enactment of NAFTA, pastaprocessing has been among the largest recipients offoreign direct investment (FDI) inflows in Mexico,aside from the manufacturing and services sector.Mexico’s exports of all pasta types to the UnitedStates have increased by approximately percentsince NAFTA took effect.

Maize/Corn. U.S. maize exports to Mexico haveincreased by percent since . Increased U.S.imports may pose an environmental risk to tradi-tional Mexican maize varieties. Laboratory testsconducted in confirmed that geneticallymodified corn has been introgressed in Oaxaca andelsewhere. This introduction has occurred despitethe import ban imposed by Mexico on biotech-nology corn seed in . Given that Mexico is acenter of origin for more than forty maize varieties,the risk posed by the genetic contamination of tra-ditional varieties in biologically rich areas, such asOaxaca, may be of global concern. A large propor-tion of U.S. maize imports to Mexico are used as


grain-feed inputs for that country’s quicklyexpanding livestock sector, as well as in the syrupindustry. While most livestock production inMexico meets rising domestic demand (reflecting a change in diet in middle-income households from grains to meat and processed foods), exports to the United States of calves and cattle have alsoincreased since NAFTA. NAFTA has acceleratedstructural changes in the maize sector by way of deepening vertical integration with livestockoperations and the sugar industry. Environmentalpressures associated with the concentration of large-scale confined-animal feedlot operations inMexico appear to resemble environmental pressuresrecorded in the United States and Canada, albeit ata lower level. Finally, a marginal increase in maizeproduction in the United States to serve theMexican market is the cause of increased environ-mental pressures in the United States. Increasedmaize exports from the United States result in anincrease of , tons of nitrogen, phosphorus,and potassium-based loadings to U.S. waterways,with emissions concentrated in the already heavilypolluted Mississippi River Delta.

Fresh Vegetables and Fruit. Since enactment ofNAFTA, Mexican exports of all fresh vegetableshave increased by percent, and exports of freshfruit have increased by percent. Structuralchanges in Mexico’s horticulture sector have beenespecially pronounced since NAFTA took effect,although structural changes commenced with liber-alization reforms introduced in Mexico in the s.On average, export-intensive horticulture farms arelarger, rely on standardized capital inputs such asfertilizers and pesticides, specialize in single crops,and have a far greater propensity toward irrigation,compared to smaller farms serving the domesticmarket in Mexico. Field data suggest that larger,export-oriented farms are less sensitive to smaller,ejido farm holdings, and use greater amounts ofgroundwater irrigation per yield, compared tosmaller farms. Mexico is one of the most water-stressed countries in the Western Hemisphere, andits expansion of exports of fresh fruits and vegetables

is the main anthropogenic cause of this water stress.The export of horticulture products to the UnitedStates represents the transfer of millions of gallonsof freshwater equivalent each year. For example, the export of tomatoes from Mexico to the UnitedStates accounts for the equivalent transfer of approx-imately million gallons of freshwater equivalentto the United States each year since .

Based on these limited examples, I draw the fol-lowing three conclusions. First, there is little evi-dence that the environmental safeguards in NAFTAhave directly improved environmental quality in thefarm sector. To date, none of the environmentalsafeguards inserted in NAFTA or its environmentalside accord—the North American Agreement forEnvironmental Cooperation—have been used inany disputes involving agricultural liberalization. Atthe same time, the accelerated NAFTA liberalizationschedule adopted by Mexico to phase out tariff-ratequotas for maize has opened the maize market tooquickly to imports and related price and employ-ment shocks. During this turbulent transitionalperiod, this market has increased ecological risk inMexico, as well as environmental damage in theUnited States. Finally, the absence in NAFTA of disciplines that can constrain farm subsidies formaize, wheat, and other crops has led to an increasein total subsidy payments in the United States, withthe amended Farm Act, as well as increasedsubsidy payments in Mexico. Increased farm subsidypayments have increased pricing and market fail-ures, resulting in the overproduction of some crops,as well as the excessive application of fertilizers andother capital inputs, which further magnifies envi-ronmental degradation. In addition, the pattern ofsubsidy payments appears to favor large farms oversmaller ones, thereby contributing to the expansionof subsistence farming in marginalized areas in thesouthern regions of Mexico.

My second conclusion is that NAFTA has accelerated the structural shift toward large-scale, commercially viable, export-oriented farms. Clearly, this restructuring began well before


NAFTA, with the introduction of liberalizationreforms in the late s in Mexico. However,recalling the argument of Jeffrey Sachs and AndrewWarner that the opening of the economy throughtrade liberalization is the “sine qua non of the overallreform process,” it is reasonable to assume thatNAFTA has both accelerated and significantly deep-ened structural changes in Mexico.6 In addition, the distribution of subsidy payments has acceleratedstructural changes in the grains and horticulturesector so as to favor large-scale, export-oriented, vertically and horizontally integrated farms. Thestructural shift appears to have increased the concentrations of nitrogen and phosphorus, water-polluting agrochemicals used as inputs in larger-scale farms. Export-oriented farms also appear to usegreater amounts of irrigated water inputs per yield,compared to producers of similar products destinedfor domestic markets. Since farming is the largestconsumer of freshwater by a very wide margin, this structural shift has magnified water scarcity in Mexico.

My third conclusion is that commercially orientedfarms have not delivered environmental benefitsassociated with intensive farming. Those environ-mental benefits typically derive from land-savingeffects associated with an increase in productionefficiency. The main reason for this failure todeliver environmental benefits appears to be thestructure and extent of poverty and the pattern ofincome divergence in southern Mexico. While com-mercial cultivation of some crops has expanded,downward price premiums on staples, such asmaize, has increased poverty in this region. Theaverage deforestation rate in the biologically richsouthern regions of Mexico has exceeded ,

hectares per year since . The leading cause ofdeforestation in Mexico remains poverty, withslash-and-burn clearing and tree felling by poorhouseholds in need of fuel remaining the leadingcauses of forest clearing. In addition, small-scale,rain-fed maize production has increased by percent in marginalized areas, as poor farmersrespond to falling prices.

The environmental costs of deforestation andchanges in land use in Mexico are staggering. Thatcountry is one of the planet’s leading centers of“megadiversity,” home to percent of all knownspecies, of which to percent are endemic.Mexico has the world’s second-highest number of reptile species, and ranks fourth for amphibiansand fifth for mammalian diversity in the world.7

However, the geography of this biological diversitycoincides exactly with Mexico’s geography ofextreme poverty.

Trade theory scarcely hides the unhappy fact thatthere are winners and losers from trade liberaliza-tion. However, people—especially indigenouspeoples in the poorest regions of southern Mexico—maintain an enduring allegiance to their ancestralhomes, community ties, and traditional knowledge,which date back , years. Given that these tiesreach deeper than economically rational decisionmaking, millions of poor farmers who are clearlylosers on the ledgers of free trade remain committedto their lands, despite structural changes in the farmsector that increasingly lock them out of commer-cially viable markets.

The most important environmental challengearising from NAFTA is to build a bridge betweenaspects of the dual farm economy in Mexico—adivide characterized by larger, commercial farms inthe northern and central regions and subsistence,ejido, and small-family holdings. Although commer-cial farming has not taken hold in Mexico to theextent it has in the United States or other industrial-ized countries, this stylized distinction between largeand small is nevertheless useful in showing the tra-jectory of structural changes in the agriculturalsector. Although standard economic theory says thatunprofitable farm production should relocate, thereis nowhere for millions of poor farmers to go, sincethe contraction in Mexico’s agriculture has not beenaccompanied by an expansion in other sectors.

Economic shocks experienced during the adjust-ment period of liberalization often appear to be


intractable. However, innovative solutions that re-engage public institutions and policy, that buildpartnerships with private agriculture and othersectors, and that are intent on nurturing the com-mercial viability of farms are needed for environ-mental reasons alone (aside from compelling socialequity and poverty alleviation objectives), as a meansto slow rates of deforestation and habitat loss, as wellas protect Mexico’s biological diversity. One solutioncan be protected areas. Real spending on naturereserves has increased significantly since , to. billion a year. However, competition amongindigenous groups, communities, and illegal squat-ters in these reserves remains strong, while trust incollective solutions remains fragile at best. Moreover,protected areas have never been a lasting solution to broader, in situ biological diversity protection.

A second solution involves nurturing new commer-cial opportunities in the poorest regions to generatehigher revenue returns to farmers, relative to subsis-tence farming underway in marginal areas. Viablecommercial alternatives that can close part of thepoverty gap do exist in specific market niches, thosethat center on ecofriendly products or anticipatenew revenue streams from emerging environmentalmarkets. Examples include ecotourism, carbonsequestration, and organic and sustainable farming.As in other markets, information failures and structural rigidities continue to constrain Mexico’sfull participation in these quickly growing globalmarkets, in part because of liberalization andmergers in the country’s banking system. With thedramatic consolidation of the banking sector,private credit channels assume that only large-scalefarms are creditworthy, an assumption that leads tothe disappearance of almost all small-scale farmcredit. For example, the leading reason why small-scale farmers abandon their operations and renttheir lands to commercial interests in the Sonoraregion is credit scarcity. Solutions to redress thisworking capital bottleneck now include the cre-ation of the Sustainable Coffee Fund, which is sup-ported by the North American Commission forEnvironmental Cooperation (NACEC), Banamex,

the largest commercial bank in Mexico, the govern-ment of Mexico, and other partners. These effortsshould be expanded, with the active participationof large-scale, U.S.-based produce buyers, wherebya proportion of seasonal contract farming arrange-ments are channeled toward funding sustainableagricultural markets.

NAFTA and the Environment: A Difficult Relationship

The economic gains from NAFTA are typically meas-ured by the kind of statistics cited in chapter . Theseeconomic gains are traditionally calculated by esti-mating gross savings, which is gross national product(GNP) minus public and private consumption.However, in the last decade, efforts have been madeto measure, quantify, and internalize environmentalcosts in standard economic measurements, and someprogress has been made in “greening” nationalincome accounts. This process includes calculatingrelatively explicit costs, such as resource extraction, as well as making depletion calculations from the lossof forestry resources, pollution damages, and otherfactors. Some methods of green accounting rely onstandardized proxies of environmental damage values,such as the per metric ton of carbon emittedthat is used to calculate the marginal global damageof climate change. Other factors, such as soil degrada-tion, the loss of tropical forests, or the loss of fisheriesstocks, are considerable, but extremely difficult toquantify except through site-specific field studies to impute environmental values, based on people’s willingness to pay for their conservation.8

In , the government of Mexico—one of theworld’s leaders in environmental valuation and greenaccounting—estimated that the total value of envi-ronmental damages exceeded billion perannum since .9 If these environmental damageswere included in GNP and gross domestic product(GDP) estimates, then Mexico would have run anecological deficit the equivalent of billion per


year.10 Clearly, NAFTA has not been responsible formost, or even a significant portion, of these totalenvironmental damages. However, they underlinethe fact that economic growth generates considerablepressures on the environment through scale effects.

A decade ago, surprisingly little attention wasfocused on the scale effects of trade-led economicgrowth. Since NAFTA is the first trade accord toinclude explicit environmental provisions and safe-guards, it remains the subject of debate among pro-and anti-globalization activists generally. This debatestill hinges on two regulatory, as opposed to scale,effects:11

■ The free-trade accord would begin a “race-to-thebottom,” as states would lower environmentalstandards to attract investment.

■ If environmental standards remained intactdespite the competitive pressures of free trade,then companies would move production to “pol-lution havens,” places where regulations did notexist or did not matter.

A decade, later, the environmental record ofNAFTA remains mixed. Neither the great benefitsclaimed by proponents nor the overwhelmingdamages predicted by critics have come to pass. Inthe manufacturing sector, which due to its pollutionintensity has been subject to closet scrutiny, NAFTAhas contributed directly to an increase of between and percent in annual gross emissions of carbonmonoxide and sulfur dioxide, due to changes in thepetroleum, base metals, and transportation equip-ment sectors.12 NAFTA has also contributeddirectly to air pollution spikes in the Canadian-U.S.and U.S.-Mexican border regions, as percent oftotal NAFTA trade is transported via truck-trans-port passing through increasingly congested borderpoints.13 NAFTA Chapter energy provisions havecontributed to an increase in carbon dioxide emis-sions arising from increased U.S.-Canadian trade inelectricity, as well as increased Mexican exports ofelectricity to the United States.14

In other cases—notably in the production ofcement, steel, and nonferrous metal industries—theenvironmental performance of Mexican companiessince the enactment of NAFTA has been superior tothat of their U.S.-based counterparts.15 Thisimprovement is partly explained by increased FDIinflows that accelerate the turnover of capital stocksin these sectors, leading to the adoption of moreefficient and less polluting process technologies. Theimprovement is also explained by increased environ-mental awareness within Mexico—as in other countries—since the late s. Regulations intro-duced in the early s strengthened Mexico’s environmental statues and institutional capabilities.U.S.-Mexican cooperative action on a number offronts—notably in tackling environmental pressuresalong the border—has reduced some, but hardly all, environmental pressures. Trilateral cooperationthrough NACEC has supported the internationalbenchmarking of some environmental norms, suchas the harmonization of toxic release data and thedevelopment of criteria for air pollutants among thethree North American countries. The harmonizationof environmental data is an important step towardcomparing the environmental performance of Canada, Mexico, and the United States.16

Environmental awareness has catalyzed other more systemic reforms within Mexico, notably in improving access to information and codifyingpublic participation.17

The good news that NAFTA has not created pollution havens hardly means that NAFTA is envi-ronmentally benign. In addition to the two anti-NAFTA assertions—the race to the bottom and thepollution haven—a third assertion from the NAFTAdebates is that trade is somehow self-cleansing. Thatis, as incomes rise as a result of free trade, the rate ofenvironmental degradation decelerates and graduallyimproves.18 Unfortunately, real-world evidenceshows that only a few pollution indexes decline witheconomic growth, and mostly at the subregionallevel. Most important, pollution reductions takeplace as a result of tightly enforced environmentalregulations combined with the replacement of


capital stock by more resource-conserving technolo-gies.19 While some benefits do occur, evidence suggests that other environmental quality indexesrise almost continuously with income growth,notably greenhouse gas emissions.

The most debated relationship between environ-mental laws and NAFTA rules is in the area of invest-ment. Under NAFTA, private investors are given newopportunities to seek compensation for regulatoryaction taken by NAFTA parties that is tantamount to expropriation. By , ten of NAFTA’s Chapter cases involving allegations of expropriation associatedwith changes in domestic environmental regulationshad taken place. One dispute compelled theCanadian government to modify its import ban on methylcyclopentadienyl manganese tricarbonyl(MMT), and pay damages to a U.S. firm totaling million. Three other cases have resulted in paiddamages totaling million. In response to thesecases, in July the NAFTA parties negotiated aclarification of their intentions regarding investmentrules, designed to minimize national governments’exposure to expropriation cases.20

Notwithstanding the NAFTA Chapter cases, the greatest environmental pressure associated withNAFTA is transmitted through the scale effects ofeconomic growth, to which trade liberalization con-tributes. In the manufacturing sector, environmentalregulations—as strong as they were on paper withthe passage of NAFTA—did not keep pace withrates of economic growth. Mexico’s manufacturingsector has grown by percent per annum sinceenactment of NAFTA, but real spending on pollu-tion monitoring and on-site inspections has fallenby percent over the same period. Overall, air pollution has increased percent per year in themanufacturing sector of Mexico since NAFTA tookeffect.21

Clearly, NAFTA has been solely responsible forneither increased pollution emissions nor the weak-ening of environmental enforcement. All NorthAmerican countries have experienced some weak-

ening of domestic environmental regulations thathas coincided with NAFTA, such as the recent delayof some U.S. Clean Air Act–mandated schedules for emission reductions with the introduction of the Bush administration’s Clear Skies initiative.However, a case cannot be made that the Clear Skies initiative is linked to NAFTA.

Measuring EnvironmentalEffects and Mexico’s FarmSector

Changes in the manufacturing sector provide oneimportant insight into trade-environment relation-ships. However, for many countries, the mostsignificant interaction between trade liberalizationand environmental quality is transmitted within theagricultural sector. This is especially true for devel-oping countries, whose primary exports are agricul-tural products. There are three main reasons why itis vital to examine the environmental impacts ofagricultural liberalization in general, and its impacton Mexico’s farm sector in particular.

Pollution. Farming is the leading source of pollutionin Canada, Mexico, and the United States. Theexcessive application of nitrogen—an importantelement in fertilizers—contributes to high soilsalinity and the presence of air-polluting ground-level ozone, disrupts forest processes, acidifies lakesand rivers, and degrades coastal waters and ecosys-tems through algae blooms and groundwater pollu-tion.22 Since , Mexico’s total consumption ofnitrogenous fertilizers has remained roughly con-stant (see Figure ). However, with the withdrawalof state subsidy support for fertilizers in the mid-s, the pattern of fertilizer consumption hasshifted away from small-scale, undercapitalizedfarms and increasingly toward larger-scale opera-tions. This shift in fertilizer purchases has magnifieda pattern of concentration of fertilizer inputs inthose areas in which more intensive farming is



underway. In addition, imports of nitrogenous fertilizers into Mexico have increased sharply sinceenactment of NAFTA (see Figure ).

A similar trend of increased pesticide imports intoMexico from the United States also occurred duringthe first decade of NAFTA (see Figure ).

As a nonpoint pollution source, nitrogen pollutionis significantly more difficult to monitor and regulate, compared to point-source industrial pollutants.23 (It is uncertain whether the

percent decrease in spending for environmentalmonitoring and enforcement affected, one way or the other, scale effects of rising pollution levelsin the agricultural sector. That is, even if on-siteinspections were unaffected by budget rollbacks—which seems extremely unlikely—inspectors lack the capability to monitor and regulate mostnonpoint pollution sources, with the exception of the livestock sector and perhaps the cotton production sector.)

Freshwater. Agriculture is by a wide margin thelargest consumer of freshwater (see Figure ) inMexico. More than percent of Mexico’s annualwater draws are consumed in farming.24 Waterscarcity is not only the most urgent environmentaland developmental problem facing Mexico, it hasincreasingly become the subject of political anddiplomatic tension between the United States andMexico. In , Presidents George W. Bush andVicente Fox Quesada jointly promised to resolveMexico’s billion gallon water deficit with theUnited States, under provisions of a treatysetting out shared water management quotasbetween the two countries for the Rio Grande.

Biological Diversity. Agriculture is the leading causeof changes in land use, such as the deforestation thatbrings with it habitat destruction. In turn, thesechanges in land use are the leading cause of thedestruction of ecologically rich habitats and biolog-ical and agricultural diversity in Mexico. The loss of biological diversity is of global environmental

2001199919971995199319911989198719850

600,000

1,200,000

1,800,000

2001199919971995199319911989198719850

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

Source: Food and Agriculture Organization of the United Nations (FAO),FAOSTAT online statistical service, www.fao.org (FAO, Rome, 1999).


ImportsExports

ProductionConsumption

Figure 1. Mexico’s Consumption of Nitrogenous FertilizersMEGATONS

Figure 2. Mexico’s Imports and Exports of Nitrogenous Fertilizers MEGATONS


significance, since Mexico houses some of therichest and most important endowments of biolog-ical diversity on the planet, concentrated in itssouthern tropical forests (as well as in its coral reefs).Mexico is home to percent of all known species,of which to percent are endemic. Mexico hasthe world’s second-highest number of reptile species,and ranks fourth for amphibians and fifth for mammalian diversity in the world. Mexico also hasone of the highest deforestation rates in the WesternHemisphere. Since , about . million hectaresof forest have disappeared. While rates have deceler-ated in recent years, more than , hectares offorests have been cleared on average every year since. Poverty remains the leading cause of deforesta-tion, and thus, the extinction of flora and fauna.25

Specifically, the expansion of subsistence farm areasinto marginal lands to increase yields to compensatefor price declines in staple crops such as maizeremains the leading cause of forest clearing, followedby the felling of trees for poor-income householdfuel use. Therefore, there is a strong link between

poverty and biodiversity loss in southern Mexico.The issues I address below are the effect thatNAFTA has had on this poverty-environmentaldegradation nexus, as well as the risk of geneticerosion affecting traditional maize varieties.

Environmental Impacts of NAFTA-Induced Trade in Agriculture

Given the robust relationship between agriculturalland use and environmental quality, I begin my dis-cussion of the contribution NAFTA has made tochanging environmental conditions by examiningthe total changes in U.S.-Mexican agricultural tradevolumes. Table 26 summarizes some of the majorchanges in Mexico’s domestic farm production andin net agricultural imports, which overwhelminglyoriginate in the United States.

20011999199719951993199119890

15,000

30,000

45,000

60,000

75,000

Source: Food and Agriculture Organization of the United Nations (FAO),FAOSTAT online statistical service, www.fao.org (FAO, Rome, 1999).Note: Dotted lines indicate missing data from 1995 and 2000.

Source: Compendio Básico del Agua en México, 2002, Plan Nacional deDesarrollo (PND), Comisión Nacional del Agua (CAN), Secretaría deMedio Ambiente y Recursos Naturales (SEMARNAT).

Figure 3. U.S. Insecticide Trade with Mexico U.S . DOLLARS

Figure 4. Distribution of Mexican Water Use

82.7%Agriculture

12.6%Public 4.7%

Industrial

Imports—ValueExports—Value


The value and volume of North American farmtrade has grown more rapidly than has NorthAmerica’s trade with the rest of the world. Exportsfrom Mexico to the United States have more thandoubled in value, from . billion to .

billion, since enactment of NAFTA, while U.S.exports to Mexico have almost quadrupled, to. billion. Clearly, NAFTA has successfullystrengthened agricultural ties throughout NorthAmerica, particularly between the United Statesand Mexico.

Working from the data on these overall changes, I examine the proportion of U.S.-Mexican tradethat has solely, or significantly, been affected byNAFTA (as opposed to the liberalizing effects ofWTO agreements, as well as important nontradevariables such as climatic fluctuations and drought,market proximity and shrinking transport costs,and changes in consumer food preferences).27 Onan aggregate basis, the impact of NAFTA-specificliberalization on U.S.-Mexican agricultural tradehas been minor; for decades, the U.S. and Mexicanagricultural economies have been moving towarddeeper integration. However, for a typical basket ofagricultural goods, NAFTA has had a significantimpact on U.S.-Mexican agricultural trade.

U.S. exports to Mexico that fall into this categoryinclude maize/corn, rice, sorghum, cotton, processedpotatoes, fresh apples, and pears. Mexican exports tothe United States that have been strongly affected byNAFTA-only schedules include wheat, cattle andcalves, sugar, fresh tomatoes, and cantaloupe.28 Sinceit is impossible to weigh the environmental impactsof production, consumption, and export changes forall commodities involved in trade, I focus only onsome environmental consequences associated withwheat, maize, and fresh fruit and vegetables, all ofwhich have been significantly affected by NAFTA.29

MAIZE

Mexico is a center of origin for Zea mays, the ancestral precursor of modern corn. Approximately million farmers in Mexico, mostly from small-scalefarms, are involved in maize production. Indirectly,some million people depend on maize for theirlivelihood. Traditional maize is not only a staplefood of Mexican diet; it also provides a symboliclifeline connecting traditional and indigenous cultures dating back approximately , years—since the time that maize was first cultivated—with the modern Mexico of today.30

Table 1. Changes in Mexico’s Domestic Farm Production and Agricultural Imports THOUSANDS OF MEGATONS

Average Production Average Production Average Net Imports Average Net Imports

1990–93 1999–2002 1990–93 1999–2002

Wheat 3,799 3,277 917 2,592

Maize 15,965 18,891 1,691 5,751

Barley 418 709 171 145

Sorghum 4,556 5,888 3,547 5,005

Rice 257 308 332 660

Soybeans 273 308 1,747 4,205

Sugar 3,577 4,798 393 -337

Beef 1,202 1,422 -21 191

Pork 803 1,061 47 169

Poultry 908 1,854 70 249

Tomatoes 1,173 2,186 -361 -691

Source: Organization for Economic Cooperation and Development, Agricultural Policies in OECD Countries: Monitoring and Evaluation(Paris: OECD, 2003), available at www.oecd.org.

Although estimates remain difficult to obtain,approximately ‒ percent of U.S. corn is derivedfrom genetically modified (GM) varieties. A debateover the benefits and costs of GM crops has beenunderway ever since biotechnology was approved for some commercial crops in the United States,Canada, and elsewhere in the mid-s.31 Oneresponse to the potential risk of GM crops, was theintroduction of a Mexican ban on the import ofgenetically modified corn seeds in .32 Despitethis ban, in Nature magazine published a peer-reviewed article demonstrating that GM corn hadbeen found growing in Mexican fields.33 Thissparked scientific concern, as well as a highly visiblepublic debate, about the risks of genetic contamina-tion as well as mutation.34 Subsequent independentlaboratory tests conducted by the Mexican govern-ment have confirmed that contamination bybiotechnology corn has occurred in Oaxaca—aglobal center of megadiversity—and elsewhere inMexico. Neither the pathways of that contamina-tion, nor the ecological implications that could arisefrom it, are clearly understood at this time.

A scientific consensus exists that the risks to humanhealth from GM foods are low or nonexistent.35

In the United States, biotechnology foods areembedded throughout processed foods that containsoybeans and corn. In the area of food safety, thepotential risks that biotechnology crops pose to theenvironment differ from those normally raised inregard to human health, and include the possibleimpact of GM crops on soil ecology, farmlanddiversity, and even gene flow change.36 A recentstudy by the European Environment Agency hasfound that maize poses a medium to high risk ofpollen-mediated gene transfers from crop to crop,concluding that “evidence suggests that GM maizeplants would cross-pollinate non-GM maize plantsup to and beyond the recommended isolation dis-tance of meters.”37

In addition to recorded cases of GM maize pollina-tion, similar cases in which gene stacking involvinggenetically modified canola have been recorded since

in the Canadian prairies. Affected canola cropsin western Canada appear to be more resistant to her-bicides than conventional (non-biotechnology) crops.

In early , NACEC will finalize an independentanalysis that examines the environmental and conservation risks that science associates with thepossible contamination by biotechnology crops of traditional crop varieties such as Mexican maize.Given the implications of this case for the BiosafetyProtocol of the UN Convention on BiologicalDiversity,38 as well as for the application of the precautionary principle to international trade, the NACEC report will be the most important and controversial ever issued in the ten-year history of that NAFTA-related organization.

The increase in U.S. corn imports also risks weak-ening in situ conservation involving some or all ofthe forty races of maize that are grown in Mexico,with some varieties dating their origin back ,

years. While there has been an absolute contractionin maize production in Mexico since the enactmentof NAFTA, led by a free fall in commercially har-vested crops, production of rain-fed maize hasremained stable. To date, there is little evidencethat NAFTA has undermined in situ conservationof maize. However, the price difference of approxi-mately percent between U.S. corn and Mexicanvarieties suggests that over time the price wedgemay result in U.S. imports crowding out rain-fedvarieties. This substitution will eventually presentsmall-scale farmers with three choices: exit farmingaltogether; diversify the composition of cropoutput; or concentrate on fledgling but potentiallyhigh-growth market niches that award a pricepremium for traditional, organic, and sustainableproduce such as traditional maize. Each presentsformidable obstacles to small-scale farmers. Asnoted in chapter , there are few economic andemployment alternatives for millions of farmers inMexico. At the same time, the quality of soil inmarginal lands makes crop switching very unlikely.Finally, even if market niches for sustainableproduce expand dramatically, this will not alleviate



all pressures on in situ conservation. Therefore, thelong-term erosion of the knowledge base on whichtraditional maize growing is based is one of thegreatest conservation threats directly posed byNAFTA.

In addition to the explanations for the persistence of rain-fed maize identified by Sandra Polaski inchapter , a further reason why rain-fed varietieshave remained stable or increased slightly may betraced to the large proportion of corn imports that are used as grain feed for Mexico’s quicklyexpanding livestock sector.39 Structural changesassociated with the horizontal integration of maizeas an input to confined animal feedlot operationsand slaughterhouses have been dramatic inMexico.40 These structural changes result in a seriesof interlocking environmental pressures that very-large-scale feedlot and slaughter operations pose to environmental regulators.

Environmental pressures from intensive livestockoperations include large volumes of nitrogen, phos-phorus, hydrogen sulfide gases, and atrazine pesti-cide, leading to soils that are overenriched withnutrients while posing threats to local watershedswith runoff that can cause algae blooms, loss ofhabitat, changes in aquatic biological diversity, anddepletion of dissolved oxygen.41 These wastes canalso contain pathogens, antibiotics, and hormones.

Recently, episodes of neurological disorders affectingindividuals living close to these industrial farms havealso been reported.42 Although data from Mexicodelineating different sources of nitrogen pollutionare far from complete, the data that exist point tosome convergence in environmental pressures arisingfrom livestock operations in Mexico with those thatexist in the United States and Canada. This is hardlysurprising, given the strong consolidation of theNorth American livestock sector fueled by mergersand acquisitions during the s. Today, four firmscontrol percent of the U.S. and Canadian cattleand beef market, and a similar pattern of marketconsolidation is underway in Mexico, although at a

slower pace. In the same way that turnkey industrialplant investments incorporate uniform capital stockand management policies, livestock operations inany one location of North America are increasinglysimilar to operations elsewhere.

The main focus of environmental attention has beenon potential risks within Mexico because of U.S.corn imports. At the same time, environmental pres-sures have increased within the United States itself,because of the production increase to serve theMexican market. The percent rise in U.S. cornexports has resulted in a doubling of the proportionof total U.S. production that is destined for Mexico,from to . percent of total domestic production. Iassume that the entire percent production increaseis attributed to NAFTA, and conclude that expandedproduction of corn in the United States destined forMexico generates an additional , tons ofnitrogen-, phosphorus-, and potassium-based pollu-tion per year.43 This increase in pollution is concen-trated in the Mississippi River Delta, already themost polluted region of the United States because of nitrogen runoff and related ecological stress. Inaddition, increased corn production is exacerbatingwater scarcity in those states that have high irrigationintensities for corn production, notably Nebraska,Kansas, and Texas.44

WHEAT

Since enactment of NAFTA, U.S. exports of wheatto Mexico have increased by percent, resultingin a percent increase in U.S. wheat production. Ingeneral, economic models anticipate that trade liber-alization will bring about a shift in the location ofgrain production, with production contracting inindustrialized countries and increasing in developingones.45 However, for wheat and corn production,the opposite pattern took place: U.S. exports toMexico increased, while commercial production in Mexico contracted.

In contrast to maize output, Mexico’s output ofwheat has not altered significantly since enactment

of NAFTA. Instead, wheat production in the YaquiValley—the birthplace of the green revolution for wheat and the breadbasket of Mexico today—remains the region’s leading agricultural activity(accounting for roughly percent of total plantedcrop area).46 However, the composition of wheatproduction in the region has changed dramaticallysince . Then, bread wheat made up the bulk oftotal wheat output. By , bread wheat output inthe region had declined from roughly percent oftotal production to to percent. In breadwheat’s place, durum wheat—which constituted asmall percentage of total production in —nowaccounts for more than percent of the totalwheat output in the Yaqui Valley.

The change from bread wheat to durum wheat has not altered the region’s severe water scarcity.Through a combination of drought and surface conditions in the area, the levels of groundwater—the main source of irrigation for wheat produc-tion—have declined by half since .47 At thesame time, the production shift from bread todurum has directly led to an increase in nitrogenpollution in the region. In arid and semiarid regionssuch as the Yaqui Valley, durum wheat requires asmuch as percent more fertilizer inputs withinirrigated systems than other wheat crops. This compositional production shift has directly led toincreased fertilizer inputs, and increased nitrogenpollution and nitrogen runoff associated witheutrophication in nearby rivers and lakes. Estimatessuggest that the application of nitrogen per hectarein the Yaqui Valley exceeds kilograms, makingthis region among the heaviest users of fertilizers on a per hectare basis in the world.

In Sonora, Sinaloa, and other states where intensivefarming occurs, ecological pressures from nitrogenpollution have risen dramatically. The main sourceof nitrogen pollution in the Sea of Cortez originatesfrom commercial agricultural production in Sonora.Nitrogen pollution is increasing in the Tacana RiverBasin and the Rio Lerma. Eutrophication hassignificantly lowered the inflow time of the Rio

Lerma to Lake Chapala—the largest freshwaterbody in Mexico and a center of rich biologicaldiversity. Uncontrolled blooms of water weeds haveincreased since the late , and now cover morethan percent of Lake Chapala’s surface area.48

Although nitrogen pollution in Mexico is less thanin the Mississippi River Delta or Chesapeake Bay, itseffect is more ecologically destructive in the warmerwaters of Mexico. For example, eutrophication inthe Sea of Cortez is a main source of stress on coralreefs—which have a higher concentration of biolog-ical diversity than most tropical forests—and coastalplankton.49

Durum wheat is used to produce dry pasta and pastaproducts. The food processing sector has been amongthe largest recipients of FDI inflows to Mexico sinceNAFTA investment liberalization disciplines were setout in Chapter . FDI inflows have more thandoubled in Mexico’s food processing sector, to morethan . billion, concentrating on a narrow set ofvalue-added food processing activities, led by pasta(and followed by confectionery products, for whichcorn syrup is increasingly used as an input).50 AsMexico’s domestic production capacity for pastafoods has increased, so too have its exports to theUnited States. Since NAFTA, Mexican exports of allkinds of pasta have grown relatively constantly, from million kilograms in to more than millionkilograms in (see Figure ).

FRESH VEGETABLES AND FRUIT

Horticulture has seen its export earnings roughlytriple since NAFTA took effect, up to . billionin . Since enactment, the volume of fresh vegetable exports has increased by percent, andof fresh fruit, by percent. This production andexport growth has resulted in an increase in the totalarea of cropland dedicated to vegetables and fruit.51

The most pronounced structural change in Mexico’sagricultural sector due to NAFTA has occurred inthe fresh vegetables and fruit sector.52 The mostimportant aspect of this structural change is the


expansion in the average farm size among export-ledproducers in the grains and horticultural sector, anda decline in the number of individual farms engagedin export markets. In the north, northwest, andcentral plateau areas, a smaller number of largerfarms are owned either by wealthy families or bycommercial interests.53 Typically, these farms havestrong links with external markets, through contractfarming (see page ) and ready access to domesticand external credit sources. Larger farms specializein a limited number of monoculture commercialcrops. This specialization entails replacing on-farminputs such as organic pest control and local fodderand composting with pesticides, commercial animalfeeds, and fertilizers. Specialization also entailshigher rates of irrigation per hectare, and thereplacement of traditional seed varieties with hybrid,purchased seeds (as well as biotechnology seeds forcotton crops).54

By contrast, in the southern and southeasternregions of Mexico, there are a larger number ofsmaller farms, with an average size between and

hectares. Farms are either owned by single fami-lies or compose part of ejido (community) hold-ings. Smaller farms produce heterogeneous cropsfor on-farm consumption, barter as well as somelimited farm-gate exchange, tend to use few inputssuch as pesticides or fertilizers, and rely little onirrigation. High obstacles are one reason for thislow level of capital intensity that small farmersface in getting access to all credit sources inMexico. As a consequence of this credit squeeze,up to percent of ejido farmers in some regions(for example, Sonora) have decided to abandonfarming altogether. (This figure is probably muchhigher than in other regions, since less landappears to have been transferred out of commonproperty than originally feared. For those whoremain on the farm, barely percent of house-hold income for ejido farms in some regions isgenerated through on-farm crop cultivation andanimal husbandry.)

As noted in chapter , income divergence withinMexico has increased over the past decade, measuredby any number of indicators. Nowhere is this diver-gence more dramatic than in the farm sector. Froman environmental perspective, poverty in Mexico isconcentrated in regions—particularly in Oaxaca andChiapas—that house some of the world’s richestabundance of biological diversity.

The production of commercial fruits and vegetablesin the northern region leads to nitrogen pollutionsimilar to that generated in the maize and wheatsectors. However, the most significant environ-mental stress that arises from this sector is waterscarcity. On average, one-third of Mexico’s totalcropland is irrigated, one of the highest concentra-tions of irrigated farmland in the world.55 There hasbeen a slight increase in the total amount of irri-gated land in Mexico since NAFTA, as the mostdramatic rise in irrigation occurred during the pre-vious decade (see Figure ).

Research shows that irrigated groundwater forwater-intensive crops such as tomatoes, pecans, and


0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

20022001200019991998

Source: U.S. Census Bureau, Foreign Trade Division (www.census.gov)

Figure 5. Total U.S. Pasta Trade with MexicoKILOGRAMS

Total exportsTotal imports

alfalfa is applied on average more intensively forexport crops than for crops bound for the domesticmarket. Evidence from Sonora demonstrates thatexport crops in the fresh fruit and vegetable categoryconsume to percent more groundwater irriga-tion than crops intended for domestic consumption.

Larger farms use significantly greater amounts ofirrigated water per yield than single-family or ejidofarms. A number of factors explain this correlationbetween farm size and irrigation intensity, beginningwith the degree of technological specialization thatgenerally can be associated with larger farms, as well as the water abundance of the southern regions.Nevertheless, larger farms use irrigation moreintensely in Mexico, suggesting a convergencebetween intensity of irrigation and farm size likethat observed in the United States. (In the UnitedStates, larger farms have a tendency to use irrigationsystems more than smaller farms, and a tendency touse irrigation system more efficiently and accurately.Irrigated farms in the United States also generatetwice the income of their rain-fed counterparts.)56

However, the inverse correlation of farm size andirrigation intensity is more dramatic in Mexico,where a full percent of ejido and single-familyfarms in some regions do not use irrigation of anykind.57 The most plausible explanation for thisabsence of irrigation intensity can be traced directlyto the virtual disappearance of rural credit in thepast decade. As noted, percent of ejido farmers insome regions have abandoned farming altogether,and rented their right of access to groundwater wellsand irrigation systems to larger private or corporatefarm interests.

This pattern of larger farms using greater amountsof irrigated groundwater for export crops is exacer-bated by the structure of ejido ownership, whichconstrains the amount of groundwater extraction soas to ensure an equitable sharing of resources amongeight to twelve owners. By contrast, larger farms arenot constrained by any equitable sharing considera-tions, which suggests that they are less sensitive towater scarcity and water stress signals than are

ejidos.58 In addition, the pattern of water irrigationsubsidy payments is slanted—as subsidy paymentsgenerally are—in favor of larger, commercial farms.As noted below, subsidy payments generally furthercloud scarcity signals, and lead to resource stress andenvironmental pressures.

As a result primarily of water consumption from thefarm sector, water scarcity has become so acute aproblem in Mexico that bulk water transfers—pro-hibited in Canada because of their negative environ-mental impacts—have compensated for regionalwater deficits. In total, agricultural irrigation isresponsible for approximately percent of totalgroundwater draws in Mexico. Of the aquifersin the country, more than face high rates ofdepletion. The greatest concentration of depletedgroundwater sources is in the northern agriculturalregions and in the Lerma-Balsas Basin.59

Irrigation inputs for export crops have been linkedto the U.S.-Mexican dispute over water flows andquotas of the Rio Grande. The United States and


5,000

5,500

6,000

6,500

7,000

2000199819961994199219901988

Source: Food and Agriculture Organization of the United Nations (FAO), FAOSTAT online statistical service, www.fao.org (FAO, Rome, 1999).

Figure 6. Irrigated Land in MexicoTHOUSANDS OF HECTARES

Mexico have established water-sharing quotas forthat river, under a treaty administered by theInternational Boundary and Water Commission.Since , Mexico has run a deficit with the UnitedStates that now exceeds billion gallons of water.Mexican authorities blame severe drought condi-tions for their decision to withhold northward waterflows from Mexico into Texas. In turn, farmers inTexas have faced acute water shortages, leading to a percent decline in crop output in some regions.Some of these farmers, and state and other officialsin the United States, allege that some of the

billion gallon deficit has been diverted to water-intensive agricultural production in Mexico, withexports destined for the United States.60 (In earlySeptember , the two countries announced atimetable for Mexico to begin paying down thewater deficit.)

When one considers this water deficit with theUnited States, and mounting water scarcity withinthe export centers of northern Mexico, it is alsoworth noting that Mexico’s horticultural exports

are the equivalent of transferring millions ofgallons of freshwater each year to the UnitedStates. While it is impossible to calculate this nettransfer in water equivalents for all agriculturaltrade, I will consider here the example of a singlecrop, tomatoes. Figure illustrates the expansionof tomato exports from Mexico to the UnitedStates since . As noted, exports of tomatoesincreased by percent since , with tradegrowth strongly affected by NAFTA. Water makesup approximately percent of tomatoes byweight. A proxy estimate of the water transfersfrom Mexico to the United States alone throughtomato exports is roughly million gallons offreshwater per year since .61

LAND-SAVING BENEFITS AND INTENSIVE FARMING

NAFTA is neither the sole cause, nor, in most cases,the primary cause of growing environmental pres-sures associated with Mexico’s agricultural sector.Mexico’s changing agricultural patterns date back to the s, when the government encouragedexport-oriented agricultural production by facili-tating large-scale farming through land law reforms.That said, NAFTA liberalization in maize, wheat,and fruits and vegetables has accelerated and deepened this trend toward export-oriented, chemical-intensive production.62 The key question is whether this shift toward intensive farming has, on a net basis, delivered environmental benefits, aswell as the obvious environmental costs associatedwith pollution and water stress.

One tenet of the green revolution is that, despitelocalized increases in pollution, environmental benefits can accrue based on large-scale, intensivefarming. These benefits arise from land-saving andland-offsetting effects of intensive farm produc-tion.63 With the increased reliance on capital inputssuch as fertilizers, pesticides, and bioengineeredseeds, production efficiency increases on average,either by reducing the total amount of land neededfor comparable yields or by increasing the yield perhectare of existing land use. This increase in produc-


150,000

250,000

350,000

450,000

550,000

650,000

750,000

850,000

950,000

200120001999199819971996199519941993199219911990

Figure 7. Tomato Exports from Mexico to the United States METRIC TONS


tion efficiency reduces pressure on farms to convertadditional lands, including marginal lands or forests,to meet the rising demand for food. A stylizedimage of this hypothesis is that of a seesaw: Themore that specialization and intensive farming goesup in one region, the more that land-use pressuresassociated with extensive farming recede elsewhere.

Although the extent of potential benefits is specificto the region under consideration, Pedro Sanchezand others have argued that, as a rule of thumb, forevery hectare of land that is converted into intensivefarming, between and hectares of tropicalforests will be conserved elsewhere.64 In the UnitedStates, for example, intensive farming has been esti-mated to “save” million hectares of forests thatotherwise would have been cleared for farming.

In areas with smaller, low-productivity, unprofitablefarms, the lack of access to working capital meansthat environmental problems associated with fertil-izers and pesticides are almost entirely absent.However, more serious from an environmental perspective is the strong link between impoverishedsouthern rural areas and changes in land use, deforestation, and habitat destruction and fragmen-tation.65 Rural poverty is the leading cause of environmental degradation in the Lacandonjungle—among the richest habitats on the planet.Poor farmers continue to clear tropical forests toplant crops. However, since the nutrient composi-tion of tropical forests is concentrated in thebiomass of trees above, and not in the soil foundbelow, farmers usually get only one crop per seasonbefore soils are exhausted of nutrients, and they areforced to move elsewhere to clear additional forestsfor more cropland or grazing areas.

However, evidence from Mexico and elsewhere nowshows that land-saving benefits that could arise fromintensive farming are neither automatic nor of themagnitude observed in industrialized countries suchas the United States. One reason for this failure todeliver automatic land-saving benefits may be thatthe returns of the green revolution began to bottom

out some years ago.66 For example, soil degradationarising from high levels of salinity has reduced cropoutput in many commercial farming regions.

Diminishing returns of intensification may partiallyexplain why the expansion of commercial farms inthe northern and central regions has not resulted in forest-saving benefits in the southern regions.However, the most plausible explanation for thefailure of land-saving benefits to occur is the structural bifurcation of Mexico’s farm economy.Productivity gains occurring in the northern andcentral regions have little or no impact on subsis-tence farming and associated land clearing in thepoorest, southern regions of Mexico. The simplestexplanation is that the seesaw does not work,because it has become unhinged in the middle.NAFTA accelerated and deepened the structuraldivide between large-scale, vertically integrated,export-oriented farms and small-scale, subsistencefarms to the extent that no market signals are trans-mitted between the two. (Even in well-functioningmarkets, increased economic opportunities can alsolead to an expansion of crop areas.)

In well-functioning markets, as the total amount of available land shrinks, farmers will increasecapital inputs as the principal means of increasingyields. The single most important catalyst of more intensive farming is land scarcity. In Mexico, onepotential cause of land scarcity—particularly in thesouthern regions—is the nature reserves throughoutMexico, with a total land coverage of priority bio-sphere reserves. In the past, these reserves were littlemore than “paper parks”—lines on a map with littleor no budget for enforcement. However, with thesupport of the U.S. Agency for InternationalDevelopment, the Global Environment Facility, Pro Natura, and other groups, the newly establishedMexican Fund for Conservation of Nature has atotal funding base for all protected areas of .

billion per year.67

Despite increased spending, some of which can beattributed to more general environmental cooperation


that NAFTA has supported, nature reserves inMexico remain chronically underfunded and underenforced, which leaves them vulnerable toillegal land use, animal husbandry, and competitionamong indigenous groups and others.68 Since, bydefinition, setting aside protected areas creates losersin the immediate regions in which reserves arecreated, neighboring residents have a high propen-sity to cheat, by way of illegal logging, land clearing,and corruption and nonenforcement among parkofficials.69 Therefore, potential land-scarcity signalsthat could originate from reserves, which would in well-functioning markets lead to land savingsthrough intensive farming, are probably notaffecting land-use decisions in Mexico.

Other, nontrade factors clearly contribute to the dete-rioration of pricing and other signals linking com-mercial and small-scale farms. Four are noted below.

Farm Subsidies. As in other countries, the pattern ofsubsidy payments in Mexico supports large-scalefarms over small ones.70 Although farm-sectorlobbyists argue that farm subsidies generally areneeded to support farm income, payments are notbeing channeled into the most impoverished areasof southern Mexico. At the aggregate level, onlyone-quarter of total farm subsidies support farmincome. By contrast, percent are directed tooffset capital costs of various production inputs—such as fertilizers, herbicides, machinery, and farmfuels, as well as to change the market value offarmland. Since extensive farms by definition do notspecialize in capital inputs, most farm subsidies aredirected toward larger, intensive farming operations.For example, the structure of water irrigationsubsidies disproportionately favors large-scale farmsover small ones, while the pattern of paymentsunder the PROCAMPO and ASERCA programsalso appears to benefit large-scale farmers.71

Moreover, PROCAMPO payments are intended tobolster land saving by supporting liberalized,intensive farming. However, they have had theopposite impact in the Yucatan Peninsula, whererates of deforestation have accelerated by as much as

percent, largely because PROCAMPO increasedland values, which had the effect of acceleratingland clearing rather than intensification on existinglands (see Figure ).72

The environmental impacts of production subsidiesare well documented,73 and include overproductionand excessive application of agrochemicals, irriga-tion, and other production inputs. AlthoughNAFTA was hailed as an environmental agreement,its failure to include strict disciplines that constrainfarm subsidy payments has rendered various envi-ronmental safeguards (with the possible exception offood safety standards) powerless to minimize envi-ronmentally damaging subsidy payments. NAFTAhas therefore been no more successful than theWTO in constraining subsidy payments in NorthAmerica, most recently seen in the United States inthe increase in total farm payments under the

Farm Act. This increase in subsidy payments in theUnited States is closely related to an increase insome subsidy payments in Mexico.74

Contract Farming. The bias of subsidy paymentstoward commercial farms is reinforced by theincreased reliance on contract farming as a primaryavenue of Mexican agricultural exports to theUnited States, especially for fresh vegetables andfruit. Contract farming is hardly unique to Mexico,nor can it be attributed to NAFTA.75 The mainenvironmental effect of contract farming is theimposition of production criteria by suppliers ongrowers. Typically, these criteria cover not onlyprice, quantity, and quality, but some productionspecifications, including the mandated use of fertil-izers, pesticides, and other technical specificationsthat only larger farms can afford.76 Field research inGuanajuato shows that contract buyers exclusivelyengage in business with large-scale growers. This isdone to reduce transaction costs. Average farm sizein Guanajuato for farms under contract is

hectares, more than ten times the average size of anejido.77 For tomato farms in the region, the averagefarm size is , to , hectares. Supply con-tracts explicitly set out requirements for pesticides,


fertilizer, and other production inputs (for example,plastic sheet covers for tomato farms).

Narrowly speaking, NAFTA has had no bearing on how private commercial contracts betweenexporters and buyers are negotiated and imple-mented. However, the structure and pattern ofexport growth in the horticultural sector has beenstrongly affected by NAFTA. This expansion hasled to structural changes favoring larger farms,which in turn are strongly favored by large-scalebuyers entering into contract farm arrangements.The structure of these arrangements suggests at thevery least a tension among NAFTA liberalization ofsome barriers (notably tariffs and tariff-rate quotas),the diminished role of spot markets, and theirreplacement with consolidated markets servinglarge-scale, oligopolistic buyers.

Disappearing Rural Credit. The pattern of larger,export-oriented farms supported by subsidies andcommercially engaged through contract farming ismagnified by the dramatic retreat of all commercial

credit from smaller farming operations. With theconsolidation of Mexico’s banking sector during thes78 (see Figure ), credit policy and risk man-agement procedures have become more homoge-neous, and have explicitly turned away from thefinancing of smaller-scale businesses of all kinds.Banks in Mexico have complained to the WorldBank about the lack of “creditworthy” clients, andcredit is increasingly directed to larger corporationsand government agencies.79

As commercial credit evaporated for all small enter-prises, Banrural, the public development agency forrural credit, was until the sole credit source forsmall farms in Mexico. However, immediately uponits creation, Banrural shrank the number of out-standing loans by half.80 Even with this rationaliza-tion of credit policy, the performance of Banrural hasbeen miserable by any standard. In , percentof its portfolio was nonperforming. The collapse anddismantling of public agencies and credit institutionscoincided with the dramatic consolidation of private-sector capital that was clearly unwilling to fill the


-30%

-20%

-10%

0

10%

20%

30%

40%

50%

60%

CattleEggsChickenWheatMilkSorghumMaize 200120001999199419900

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Source: Organization for Economic Cooperation and Development,PSE/CSE database, 2002 (www.oecd.org).

Source: Economic Commission for Latin America and the Caribbean(ECLAC), “Foreign Investment in Latin America and the Caribbean,”2002, www.eclac.org.

Figure 8. Producer Subsidy Equivalent: Mexico Figure 9. Foreign Share of Banking Assets

OECD average 2002Mexico 2002

Mexico

Argentina

Chile

Brazil


void left by public microfinance policy in full retreat.(In May , the World Bank announced a

million loan to liquidate Banrural and begin again,with a new rural credit agency devoted to low- andmiddle-income farmers.)81

The scarcity of farm credit has profoundly affectedland-use decisions. As noted above, the leadingreason why single-family farms and ejido farmers insome commercial regions rent their lands to privatecommercial interests is the absence of rural credit.82

Evidence also suggests that whatever farm creditwhich is extended tends to favor intensive farming.That is, farms that receive credit usually defer deci-sions about fertilizer dose amounts to the recom-mendations of credit authorities, who recommendan “excessive” use of fertilizers.83 In addition,financing extended through contract farmingappears more plentiful, and much cheaper. U.S.-denominated farm loans to support exports in theYaqui Valley have interest rates of to percent,while peso-denominated farm credit—if it is avail-able—is between and percent. (Black marketrates can exceed these levels per month.)84

The Cost of the DualEconomy on BiologicalDiversity

It is impossible to quantify the total value ofMexico’s tropical and other forests, environmentalservices derived from wetlands and other habitats,and biological diversity. One of the few global esti-mates, by Constanza et al. (), suggests that thetotal annual value of the world’s ecosystem functionsis approximately trillion.85 Although thisstudy is useful in suggesting the order of magnitudeof environmental values, it has come under criticismon various fronts, largely on methodologicalgrounds.

At the same time, it is clear that most environmentalvalues—but particularly those values associated withbiological diversity—remain uncounted, under-valued, and external to market prices. In one smallstep to redress this externalization problem,numerous environmental valuation field studies havebeen conducted in Mexico. The combined economicvalues suggested by these studies are impossible toaggregate, since they rely on different methodologiesand baselines, generally consist of decentralizedresearch (unlike the climate change agenda, which isconducted under the UN Intergovernmental Panelon Climate Change), and tend to concentrate onvery small areas, such as lagoons or specific parts oftropical forests or coral reefs.86

Despite the difficulties in valuing Mexico’s forestsand biological diversity, we know with certainty thatthose values are substantial, conservatively runninginto billions of dollars for direct values such as eco-tourism. Other values are more difficult to quantify.For instance, the value of a single wild-grass peren-nial grass variety related to maize is estimated to be. billion per year.87 Potential revenues fromcarbon sequestration are in the range of .

million to million for Mexico’s forestrysector alone, depending on the price per ton ofcarbon equivalent in world markets.88 The value ofpossible carbon sinks from low-till farming, as wellas grasslands and commercial and other forestationprojects outside tropical regions, is much higher. Rather than attempt to quantify the full value ofMexico’s biological diversity that has been put atrisk because of the cycle of rural poverty andchanges in land use from slash-and-burn clearing,one could take the more practical approach of iden-tifying practical and achievable policy options as ameans of gauging the transfer of benefits associatedwith conservation of Mexico’s biological diversity.Some of these benefit transfers are noted below.They include ecotourism and shade-grown andorganic produce, both of which gain their marketand revenue value precisely because of the worthconsumers place on biological diversity.

Lessons andRecommendations

Structural changes under way in Mexico’s agricul-tural sector did not begin with NAFTA, nor hasNAFTA been the sole cause of these changes.However, structural changes influenced largely by NAFTA in the horticultural and grains sectorsreinforce and magnify changes that are furtherinfluenced by other, non-NAFTA forces, such as the liberalization of the financial services sector andconsolidation of export farms through subsidy payments and contract farming. Moreover, NAFTAhas prompted action among rural communities toreopen the trade agreement to take into account thevulnerability of communities to trade, including theadoption of the National Rural Accord by commu-nities in the spring of .89

NAFTA has reduced some pricing distortions, bylowering or eliminating tariffs and tariff rate quotas.At the same time, NAFTA has failed to constrainthe use of farm subsidies, which have deepenedpricing and market failures and accelerated environ-mental degradation through overcapacity. Structuralchanges linked with trade growth have introducednew forms of market failure, in particular thereplacement of spot markets for fruit and vegetableswith concentrated markets patronized by oligopolybuyers exerting high levels of buying power throughcontract farming. A similar oligopoly in the privatebanking sector helps explain the virtual disappear-ance of private credit for small and mid-sized enter-prises, in particular small-scale farms.

Those worst affected by structural changes associatedwith trade liberalization and trade growth are Mexico’spoor farmers. Alan Winters observes that the poor indeveloping countries are disproportionately affected bytrade liberalization: Adjustment periods for the poorare long and very costly. Winters concludes that theindustrialized countries can offer little guidance todeveloping countries in addressing the problems of thepoor who have been adversely affected by free trade.90

The most important challenge from an environ-mental perspective alone is to address the plight ofsmall-scale farms in Mexico, by identifying commer-cially viable revenue sources that are equal to orgreater than the subsistence income derived fromsubsistence farming on marginal lands.91 Given the strong pull that southern farmers, indigenouspeoples, and communities in the region feel towardtheir land, providing grants for employmenttraining and relocation—even if financing wereavailable—would not break the circle of poverty and environmental degradation.

One source of hope may originate in markets thatare taking shape because of environmental consider-ations. The global market for environmental goodsand services remains fragile and incoherent.However, evidence suggests that small-scale, under-capitalized farms can gain a comparative advantagein several environmental market niches such asorganic goods, precisely because they cannot affordfertilizers, herbicides, pesticides, and GM seedlings.Consumers in Europe, Japan, the United States,and Canada are showing an increased preference forproduce that is not grown with pesticides or otherinput. For example, the global market for organicfoods alone exceeds roughly billion a year,and remains the fastest-growing segment of thefood industry, recording sales volume increases of to percent per year. The North Americanmarket for certified, shade-grown, sustainable coffeeis million on the retail side, while the globalmarket value (including noncertified coffees thatare marketed as sustainable, bird-friendly, organic,or under other labels), is million per year inretail sales.92

Mexico is the world leader in shade-grown organiccoffee; similar opportunities exist for other crops,including traditional maize varieties, cocoa, spices,honey, and palm. The environmental benefits ofthese kinds of products are well documented insome cases. For example, coffee grown under treecanopies typically has percent more on-site birdlife, compared to sun-grown coffee raised on plan-



tations that clear forests.93 Similar markets for ecotourism and eventually carbon sequestration are likely to channel new revenues into southernMexico.94

Although these markets are small, they requirecapital to overcome market failures, as well as to differentiate their products in the market throughlabeling, certification, and the use of geographicindicators, and to arrange transportation and over-come intermediary market barriers. One ofNACEC’s outstanding contributions is to create aspecial fund to support small-scale, community, orcooperative-based shade-grown coffee certificationand export promotion in Oaxaca, Chiapas, andother regions of southern Mexico. Among the sup-porters of the fund are Banamex and the govern-ment of Mexico. This fund is building one bridgebetween the two farm economies of Mexico.Working with the reconfigured coffee subsidy pay-ments can make it possible that Mexico’s povertycircle can be broken thanks to new markets thatvalue environmental attributes.

This chapter has described a series of issues that,taken together, continue to affect agriculture inMexico. These include trade liberalization promptedby NAFTA, the liberalization and consolidation ofthe financial services sector, the concentration ofvertically integrated sectors within Mexico’s farmeconomy, the effect of agricultural subsidies, and theincreasingly important pull that contract farming isexerting on the production decisions of farmers.NAFTA is not the cause of these issues’ emergence,

but it remains the focal point of most liberalizationreforms undertaken in Mexico since . From anenvironmental perspective, these liberalization issuesare linked together by a chain of poverty affectingpoor farmers, indigenous peoples, and communitiesin southern Mexico. Initiatives that support sustain-able niche markets will not break this chain ofpoverty and environmental degradation. However,evidence from market analysis and sales shows signs of hope that new income sources from greenmarkets can bolster environmental protection by opening new revenue sources to the poor.

Neighboring countries in Central and SouthAmerica have different histories, economic and envi-ronmental endowments, social traditions, and levelsof economic reform. At the same time, many ofthese countries share a common environmental her-itage, from the Meso-American biological diversitycorridor to rich ecosystems of coastal marine andtropical forestry areas in South America. There is no one-size-fits-all formula for how to anticipate the environmental effects of trade liberalization.However, we do know that the poverty-environmentnexus in the agricultural sector will be affected insimilar ways, as in Mexico during the s.Anticipatory policies include ensuring that workingcapital is available to small farms when it is mosturgently needed during the transitional period of lib-eralization; that liberalization schedules do not openvulnerable markets too quickly; that discrete envi-ronmental markets are supported; and that environ-mental monitoring and data are focused from theoutset, to track and offset scale impacts of free trade.

NOTES

1 In September , President Bill Clinton declared thatNAFTA would “lead to improvements in the environmentand increased investment on the Mexican side of the borderin environmental cleanup.” Carol Browner, the administratorof the U.S. Environmental Protection Agency, went further,stating that NAFTA was the “the most environmentally sensitive trade agreement in history.”

2 NAFTA Preamble, CEC Article , BECC/NADBank, Article, Section .

3 Public Citizen, NAFTA Chapter Investor-State Cases:Bankrupting Democracy, September , www.citizen.org.

4 Evidence showing a robust, linear relationship between tradeliberalization and economic growth is weak and uneven,with that relationship generally inferred by measuring therelative openness of an economy. A strong empirical caseexists showing that open economies grow quicker than doclosed ones. Measures of economic openness vary, butinclude indicators of trade liberalization such as tariff andsubsidy levels. See, for instance, Robert J. Barro,Determinants of Economic Growth: A Cross-Country EmpiricalStudy (Cambridge, Mass.: MIT Press, ); and MichaelFerrantino, The Dynamic Effects of Trade Liberalization: AnEmpirical Analysis (Washington, D.C.: U.S. InternationalTrade Commission, ).

5 The literature on environmental review methodologies isextensive. See, for example, Dale Andrew, ed., Assessing theEnvironmental Effects of Trade Liberalization Agreements:Methodologies (Paris: Organization for Economic Cooperationand Development, ); and Sarah Richardson, ed., Assessingthe Environmental Effects of the North American Free TradeAgreement: An Analytical Framework (Phase II) and IssuesStudies (Montreal, Canada: North American Commission forEnvironmental Cooperation, ).

6 Jeffrey D. Sachs and Andrew Warner, “Economic Reformand the Process of Global Integration,” Brookings Papers onEconomic Activity (Washington, D.C.: Brookings Institution,).

7 Estrategia nacional sobre biodiversidad de México (Comisión Nacional para el Conocimiento y Uso de la Biodiversidad [CONABIO]: ),www.conabio.gob.mx/institucion/conabio_espanol/doctos/catalogo.html.

8 See Kirk Hamilton and Michael Clemens, “Are We SavingEnough for the Future?” in Expanding the Measure of Wealth(Washington, D.C.: World Bank, ). See also RobertRepetto et al. Wasting Assets: Natural Resources in theNational Accounts (Washington, D.C.: World ResourcesInstitute, ).

9 In the Mexican study, measurement of environmentaldamages relied largely on pollution indicators, notably airpollution indicators such as carbon dioxide, sulfur dioxide,nitrogen oxides, ground-level ozone, and airborne dioxins,with damages focusing on indicators such as increased mor-tality and morbidity impacts associated with air pollution;increased cancer risk from long-term, low-dose exposure to

toxic substances; increased gastrointestinal illnesses from pol-luted drinking water; and damages to human health or moredirect cleanup costs from hazardous wastes.

10 Kevin Gallagher, Economic Integration, Environment, andDevelopment: Assessing the Mexican Experience, forthcoming.

11 For a summary of NAFTA’s environmental provisions, seeDaniel Magraw, ed., NAFTA and the Environment: Substanceand Process (Washington, D.C.: American Bar Association,). For a discussion of the politics of environment inNAFTA, see John Audley, Green Politics and Global Trade(Washington, D.C.: Georgetown University Press, ).

12 Kenneth Reinert and David Roland-Holst, “The IndustrialPollution Impacts of NAFTA: Some Preliminary Results,” inScott Vaughan, ed., The Environmental Effects of Free Trade(Montreal, Canada: North American Commission forEnvironmental Cooperation, ).

13 Rachel Poynter and Sheila Holbrook-White, “NAFTATransportation Corridors: Approaches to AssessingEnvironmental Impacts and Alternatives,” in Scott Vaughan,ed., The Environmental Effects of Free Trade (Montreal,Canada: North American Commission for EnvironmentalCooperation, ).

14 North American Commission for EnvironmentalCooperation, Challenges and Opportunities in NorthAmerica’s Evolving Electricity Market (Montreal, Canada:North American Commission for EnvironmentalCooperation, ).

15 Economic Integration, Environment, and Development (see note). See also Marisa Jacott, Cyrus Reed, Amy Taylor, andMark Winfield, “Energy Use in the Cement Industry in NorthAmerica,” paper presented at the Second Symposium onAssessing the Environmental Effects of Trade, North AmericanCommission for Environmental Cooperation (Mexico City,Mexico, March ), available at www.cec.org.

16 See North American Commission for EnvironmentalCooperation, Taking Stock (Montreal, Canada: NorthAmerican Commission for Environmental Cooperation, ).For an overview of the mandate and work of the commission,see Gary Hufbauer et al., NAFTA and the Environment: SevenYears Later (Washington, D.C.: Institute for InternationalEconomics, ); Carolyn Deere and Daniel Esty, eds.,Greening the Americas: NAFTA’s Lessons for Hemispheric Trade(Cambridge, Mass.: MIT Press, ); and Jan Gilbreath,Environment and Development in Mexico (Washington, D.C.:Center for Strategic and International Studies, ).

17 Among the first public meetings ever held between thefederal government of Mexico and members of nongovern-mental organizations took place in the early s, whenenvironmental issues related to the proposed construction ofa wharf in Cozumel were discussed. Since then, public con-sultations have become a regular feature of government inMexico, extending to a range of public issues. For anaccount of some of these public consultation practices, seeTimothy Whitehouse, ed., Public Access to Government-HeldEnvironmental Information: Report on North American Law,d ed. (Montreal, Canada: North American Commission forEnvironmental Cooperation, ).



18 In the midst of the NAFTA debate in , two economists—Grossman and Krueger—demonstrated that some indexes ofpollution increase at the early stages of economic development,but then begin to decrease after a certain level of income isreached. The income turning point changed with the particularpollutant, but was in the range of ,‒, per capitaGDP. The theory, known as the Environmental Kuznets Curve,was adapted from the work of Simon Kuznets, for his work inshowing the relationship between level and inequality ofincome. The Grossman-Krueger hypothesis has sparked a verylively debate in the literature. See, for example, D. Stern,“Progress on the Environmental Kuznets Curve?” Environmentand Development Economics, vol. (), pp. ‒;Theodore Panayotou, “Demystifying the EnvironmentalKuznets Curve: Turning a Black Box into a Policy Tool,”Environment and Development Economics (special issue: TheEnvironmental Kuznets Curve), vol. , no. (), pp.‒; and K. G. Maler, “Environment, Poverty, andEconomic Growth,” in B. Pleskovic and J. Stiglitz, eds.,Annual World Bank Conference on Development Economics(Washington, D.C.: World Bank, ).

19 See Susmita Dasgupta, Hemamala Hettige, and DavidWheeler, What Improves Environmental Performance?Evidence from Mexican Industry (Washington, D.C.: WorldBank, ).

20 See Howard Mann, Private Rights, Public Problems: A Guideto NAFTA’s Controversial Chapter on Investor Rights(Winnipeg, Canada: International Institute for SustainableDevelopment and World Wildlife Fund, ). Afternumerous attempts to reach settlement, on July , , thegovernments of Mexico, Canada, and the United States issueda clarification regarding NAFTA’s Chapter . The statementaddresses three issues: First, it makes clear that Chapter does not preclude the parties from providing public access todocuments submitted to or issued by a dispute panel. Second,it attempts to limit the scope of the legal terms “minimumstandard of treatment” and “full protection and security” byrestating a principle in customary international law regardingminimum standard of treatment. Finally, it limits efforts byinvestors seeking damages under NAFTA only to infractionsthat may arise under Chapter disciplines, not other ele-ments of the agreement. The full text of this statement can befound at the U.S. Trade Representative’s web site,www.ustr.gov/regions/whemisphere/nafta-chapter11.pdf.

21 Economic Integration, Environment, and Development (seenote ).

22 Charles Driscoll et al., “Nitrogen Pollution: Sources andConsequences in the U.S. Northeast,” Environment, vol. ,no. (September ).

23 R. Ford Runge, “Positive Incentives for Pollution Control inNorth Carolina: A Policy Analysis,” in D. Huisingh and V.Bailey, eds., Making Pollution Prevention Pay (New York:Pergamon Press, ).

24 Sistema Unificado de Informacion Básica del Agua (),Agua en México, Secretaria de Medio Ambiente y RecursosNaturales (SEMARNAT) and Comisión Nacional del Agua,Mexico City.

25 Food and Agriculture Organization of the United Nations,

“Forestry Data” (Rome: Food and Agriculture Organization ofthe United Nations, ), available at FAOStat, www.fao.org.

26 Organization for Economic Cooperation and Development,Agricultural Policies in OECD Countries: Monitoring andEvaluation (Paris: Organization for Economic Cooperationand Development, ), available at www.oecd.org.

27 Mexico’s food consumption has changed as GDP per capitahas risen on average. Consumption is moving away fromunprocessed bulk commodities and toward higher-valuefoods such as meat, fresh fruits, dairy products, andprocessed foods. At the same time, rates of malnutrition andhunger have also increased.

28 Steven Zahniser and John Link, eds., Effects of NAFTA on Agriculture and the Rural Economy (Washington, D.C.:U.S. Department of Agriculture, July ), available athttp://ers.usda.gov/publications/wrs/.

29 There are more than different agricultural products tradedamong the NAFTA countries, each with different environ-mental characteristics depending not only on the specific cropbut on the climate, soil, water, and other factors affecting howthat crop is cultivated (or in the case of aquaculture and live-stock, produced). Unlike in the electric power generatingsector, there are no standardized or uniform emissions factorsfor these agricultural goods, with the possible exception ofcotton. Given important differences in the environmentalcharacteristics of different crops, it is not feasible to extrapolatemore general or net environmental impact stemming fromNAFTA liberalization from the three examples discussed inthis chapter. Even if these differences were not so pronouncedamong crops, environmental quality indicators are generallydisaggregated, making it difficult to compare changes in pollu-tion with changes in water scarcity or biological diversity.

30 Alejandro Nadal, “Maize in Mexico: Some EnvironmentalImplications of NAFTA,” in Sarah Richardson, ed., Assessingthe Environmental Effects of NAFTA: An AnalyticalFramework (Montreal, Canada: North AmericanCommission for Environmental Cooperation, ).

31 The debate over the risks to health and the environmentfrom GM foods and crops is far from settled. For example,there is now a scientific consensus that the risk to humanhealth from consuming the current range of GM foods islow or nonexistent. A recent scientific panel report of thegovernment of the United Kingdom concluded that “onbalance...the risks to human health for GM crops currently onthe market are very low. But depending on the crops developedGM food may present greater challenges in risk management inthe future” (UK Government Science Panel Report, July), available at www.gmsciencedebate.org.uk.

32 Chantal Line Carpentier and Hans Herrman, Maize andBiodiversity: The Effects of Transgenic Maize in Mexico: IssuesSummary (Montreal, Canada: North American Commissionfor Environmental Cooperation, ).

33 D. Quist and I. H. Chapala, “Transgenic DNA Integressedinto Traditional Maize Landscapes in Oaxaca, Mexico,”Nature, vol. (), pp. ‒.

34 After attacks led by the biotechnology industry and others,Nature retracted the article in mid-, which in turnfueled an international scandal around the risks of GM


contamination to the environment. Editorial Note, Nature,vol. (April , ) p. .

35 The July UK Government Science Panel Report (seenote ) found that it was “very unlikely [that GM crops]would invade the country-side and become problematicplants.” However, the panel recommended that moreresearch be conducted on the environmental effects of geneflow and on herbicide tolerance of GM crops.

36 Ibid.37 Katie Eastham and Jeremy Sweet, Genetically Modified

Organisms: The Significance of Gene Flow Through PollenTransfer (Copenhagen, Denmark: European EnvironmentAgency, ).

38 The Biosafety Protocol of the UN Convention on BiologicalDiversity entered into force in mid-. The objective of theBiosafety Protocol is to protect biological diversity frompotential risks posed by living modified organisms resultingfrom biotechnology. The Protocol establishes an advancedinformation agreement to ensure that countries importingliving modified organisms are able to make informed decisionsprior to that importation taking place. Since the focus of theProtocol is on trade in living modified organisms, it is unclearif it would have any bearing on unintentional or accidentalcontamination. While Mexico has signed and ratified theProtocol, neither Canada nor the United States has done so.

39 For an insightful discussion of the relationship among tradeliberalization, structural changes in markets, and verticalintegration, see David Hummels, Jun Ishii, and Kei-Mu Yi,“The Nature and Growth of Vertical Integration in WorldTrade,” Journal of International Economics, vol. , no. (June ), pp. –.

40 Rosamond Naylor, Walter Falcon, and Arthur Puente-Gonzalez, “Policy Reforms and Mexican Agriculture: Viewsfrom the Yaqui Valley,” Economics Program Paper no. ‒

(Mexico City: CIMMYT, ). 41 C. Ford Runge, “Feedlot Production of Cattle in the United

States and Canada,” in Sarah Richardson, ed., AssessingEnvironmental Effects of the North American Free TradeAgreement: An Analytical Framework (Montreal, Canada: NorthAmerican Commission for Environmental Cooperation, ).See also Jerry Speir, Marie-Ann Bowden, David Ervin, JimMcElfish, and Rosario Perez Espejo, Comparative Standards forIntensive Livestock Operations in Canada, Mexico, and the U.S.(Montreal, Canada: North American Commission forEnvironmental Cooperation, ).

42 Jennifer Lee, “Neighbors of Vast Hog Farms Say Foul AirEndangers Their Health” New York Times, May , , p. .

43 See Frank Ackerman, Timothy Wise, Kevin Gallagher, LukeNey, and Regina Flores, “Free Trade, Corn and theEnvironment: Environmental Impacts of U.S.-Mexico CornTrade under NAFTA,” working paper no. - (Medford,Mass: Global Development and Environment Institute),June . See also Chantal Line Carpentier, TradeLiberalization Impacts on Agriculture: Predicted versusRealized” (Montreal, Canada: North American Commissionfor Environmental Cooperation, December ).

44 Corn production in the United States is not only the biggestuser of farmland, but also the greatest consumer of commer-

cial nitrogen and phosphate fertilizers, making up percentof total U.S. sales. In addition, U.S. corn production is asignificant user of pesticides. The highest concentration ofnitrogen pollution is found in the Mississippi River Delta—where more than half of total U.S. farm production is con-centrated—where it moves over long distances and into theGulf of Mexico. In recent years, incidences of hypoxic zoneshave increased in occurrence and severity. The main herbicideused in corn production is atrazine, which has been foundextensively in groundwater wells. For a comprehensive reviewof the environmental effects of corn production, see C. FordRunge, King Corn: The History, Trade and EnvironmentalConsequences of Corn (Maize) Production in the United States(Washington, D.C.: World Wildlife Fund, ).

45 See, for example, Kym Anderson and J. Drake Brockman,Trade and Environment Policy Issues: Implications for the Asia-Pacific Region (Canberra, Australia: Australian Pacific EconomicCooperation Committee, ). Reprinted in abridged form inthe Business Council Bulletin, vol. (April ), pp. ‒.

46 B. L. Turner et al., Illustrating the Coupled Human-Environment System to Vulnerability Analysis: Three CaseStudies (Palo Alto, Calif.: Stanford University, ), available at www.pnas.org.

47 Enrique Aguilar, Pricing of Irrigation Water in Mexico,paper presented at the Irrigation Water Policies: Micro and Macro Considerations, World Bank, Agadir Morrocco, June ‒, , available athttp://Inweb.worldbank.org/ESSD/ardext.nsf/ByDocName/eventsagadirconference.

48 Jose de Anda, Sergio Quinones-Cisneros, Richard French,and Manuel Guzman, “Hydrologic Balance of LakeChapala,” Journal of the American Water Resources Association,vol. , no. ().

49 North American Commission for Environmental Cooperation,The North American Mosaic (Montreal, Canada: NorthAmerican Commission for Environmental Cooperation, ).

50 Jorge Mattar, Juan-Carlos Moreno-Brid, and Wilson Peres,“Foreign Investment in Mexico After Economic Integration,”(Mexico City: CEPAL-ECLAC, July ), www.networkideas.org/featart/sepmexico.pdf.

51 Antonio Yúnez-Naude and Fernando Barceinas Paredes, The Agricultural of Mexico after Ten Years of NAFTAImplementation (Washington, D.C.: Carnegie Endowmentfor International Peace, ), available at www.ceip.org.

52 A variable used by Yúnez-Naude and Paredes (see note ) toestimate structural change in the fresh fruit and vegetablesector measures the value of agricultural monthly exports andimports (totals and per crop) in constant pesos using realexchange rate indexes for . The discussion above alsorefers to structural changes outside this definition, includingSchumpeterian definitions of market structure transformationand innovation, including vertical and horizontal integration.

53 The shift to intensive farming in the grains and horticulturesector may be much greater than the overall shift in the agri-cultural sector. Some studies suggest that the contribution thatmodern farms make to Mexico’s GDP has remained roughlyconstant at between and percent since the early s.

54 Dennis Henderson, “Between the Farm Gate and the Dinner


Plate: Motivations for Industrial Change in the ProcessedFood Sector,” The Future of Food (Paris: Organization forEconomic Cooperation and Development, ).

55 Favia Echanove Hacuja, “Working under Contract for theVegetable Agro-Industry in Mexico,” Culture and Agriculture,vol. , no. (Fall ).

56 Lee Christensen, Soil Nutrient and Water ManagementSystems in U.S. Corn Production (Washington, D.C.: U.S.Department of Agriculture, April ).

57 See note .58 Ibid. 59 Jose Maria Martinez, Aquifers and Agro-Chemicals in a

Border Region: NAFTA Challenges and Opportunities forMexican Agriculture (Montreal, Canada: North AmericanCommission for Environmental Cooperation, ).

60 Travis Phillips, “Behind the U.S.-Mexico Water TreatyDispute,” report no. - (Austin, Texas: House ResearchOrganization: Texas House of Representatives, April ,).

61 This does not include a net account of total water transfersin tomatoes, since the United States also exported tomatoesto Mexico, although at a much smaller level. As indicated inFigure , about . million metric tons of tomatoes wereexported from Mexico to the United States from to, or approximately , pounds per year. One metricton of water is the equivalent of . gallons of water,making the average equivalent of exported water ,,

gallons per year. Approximately percent of all Mexicantomato exports on average are bound for the United States.A conservative, or lower bound, estimate therefore suggeststhat roughly million gallons of freshwater equivalents arecontained in these exports.

62 NAFTA and trade liberalization generally have affected farmsize in Mexico in much the same way they have affectedaverage farm sizes in the United States and Canada.According to the International Trade Commission, averagefarm size in the United States increased from acres to acres from to , while the number of farmsdeclined from . million to . million; U.S. InternationalTrade Commission, “The Impact of Trade Agreements:Effect of the Tokyo Round, U.S.-Israel FTA, U.S.-CanadaFTA, NAFTA and the Uruguay Round on the U.S.Economy,” August, publication no. (Washington, D.C.:U.S. International Trade Commission, August ). Seealso Trade and Environment Policy Issues, note .

63 P. A. Matson, W. J. Parton, A. G. Power, and M. J. Swift,“Agricultural Intensification and Ecosystem Properties,”Science, vol. , no. (July ).

64 P. A. Sanchez, Properties and Management of Soils in theTropics (New York: John Wiley & Sons, ).

65 Patricia Bouillon, Ariana Legovini, and Nora Lustig, RisingInequality in Mexico: Household Characteristics and RegionalEffects (Washington, D.C.: World Bank, September ).These authors show that the Gini coefficient increased from. to . between and , and the mean-logdeviation grew by percent during the same period.

66 David Lee, Paul Ferrara, and Christopher Barrett,“Changing Perspectives on Agricultural Intensification,

Economic Development and the Environment,” in David R.Lee and Christopher B. Barrett, eds., Tradeoffs or Synergies?Agricultural Intensification, Economic Development and theEnvironment (New York: CABI Publishing, ), pp. ‒.

67 The North American Mosaic (see note ). 68 An insightful analysis of the history of public participation

in Mexico’s protected areas is provided in Martha Rosas,Participatory Environmental Policy Processes: The Case ofAdvisory Councils in Protected Areas in Mexico, unpublishedthesis (England: University of Sussex, ).

69 David Pearce, How Valuable Are the Tropical Forests (paperpresented at the Séminaire Développement Durable etÉconomie de l’Environmement, Paris, December ), available at www.iddri.org/iddri/telecharge/mardis/pearce.pdf.

70 One exception is payments for production of coffee, thelargest export crop in Mexico. In , annual paymentsthrough the Mexican Coffee Council of approximately million in coffee subsidies extended higher paymentsto all organic farms (the majority of which are small-scale),as well as higher payments for coffee grown in mountainregions. It is too early to tell if this subsidy structure issufficient to reverse the effects of decades of payments thatfavored large coffee plantations.

71 ASERCA (Support Services for Agricultural Marketing) wascreated in and originally designed to provide supportfor farmers to pay for marketing expenses, such as storageand transportation. PROCAMPO (Farmers Direct SupportProgram) was created in and provides direct payments(decoupled income transfers) to farmers based on the size oftheir holdings. In response to criticism that they favor large-scale farms, reforms have been announced in July forASERCA programs so that payments will cover all states,with varying farm sizes within states, for ten crops: maize,wheat, sorghum, sunflowers, canola, cotton, rice, soy, andtwo other crops used as grain feed for cattle.

72 B. L. Turner, J. Geoghegan, J. Eastman, D. Lawrence, andH. Vester, Land Cover and Land-Change in the SouthernYucatan Peninsular Region: Refining Models and Projectionsof Deforestation with Application to the Carbon Cycle, BioticDiversity, and Regeneration Capacity, Sustainability andVulnerability, available from the National Aeronautics andSpace Administration at http://lcluc.gsfc.nasa.gov/products/pdfs/AnPrgRp/AnPrgRp_TurnerBL.doc.

73 See, for example, David Ervin, C. Ford Runge, E. Graffy, W.Anthony, S. Batie, P. Faeth, T. Penny, and T. Warman,“Agriculture and the Environment: A New Strategic Vision,”Environment, vol. , no. (July/August ), pp. ‒,‒; Hakan Nordstom and Scott Vaughan, Trade andEnvironment: Special Study (Geneva, Switzerland: WorldTrade Organization, ).

74 See Karel Maynard, Stephanie Dionne, Marc Paquin, andIsaack Pageot-Lebel, The Economic and Environmental Impactsof Agricultural Subsidies: An Assessment of the U.S. FarmBill and the Doha Round (Montreal, Canada: North AmericanCommission for Environmental Cooperation, ); andJoseph Cooper et al., Some Domestic Environmental Effects of U.S. Agricultural Adjustments under Liberalized Trade: APreliminary Analysis (Montreal, Canada: North American


Commission for Environmental Cooperation, ), bothavailable at www.cec.org.

75 Campbell’s began contract farming arrangements in Mexicoin , followed by Del Monte in . Today, there are several frozen-food companies operating in Mexico,including Green Giant and Birdseye. See M. A. Barron and E. Rello, “The Impact of the Tomato Agro-Industry on the Rural Poor in Mexico,” Agricultural Economics, vol. (), pp. ‒.

76 Between and , U.S. growers received an increas-ingly smaller percentage of retail value for their produce,while the consolidation of the retail sector has meant that ahigher share of retail value has gone to distributors and mar-keters. See The Impact of Trade Agreements: Effect of the TokyoRound, U.S.-Israel FTA, U.S.-Canada FTA, NAFTA, and theUruguay Round on the U.S. Economy, publication no.

(Washington, D.C.: U.S. International Trade Commission,August ), available at www.usitc.gov.

77 Of the eighteen frozen-food companies operating in Mexico,

percent have their operations in Guanajuato. Roughly percent of all vegetables grown in Mexico are from Guanajuato,which generates one-quarter of total agricultural revenues.Leading fresh crops are broccoli and cauliflower. In that state,approximately , hectares, on farms, are cultivatedunder contract. Buyers with purchase contract arrangementsinclude Green Giant and Birdseye. See “The Impact of theTomato Agro-industry on the Rural Poor in Mexico,” note .

78 Under the Foreign Investment Law, foreign ownershipof banks was limited to percent, increasing to percentin . In , amendments allowed for full majority own-ership by foreign interests. Similar reforms have been enactedby other Latin American countries, notably Colombia in, Bolivia and Brazil in , and Costa Rica in .However, the changes in Mexico’s laws have been thedeepest.

79 World Bank, “Product Document for a Proposed RuralFinance Development Structural Adjustment Loan in theAmount of . million,” report no. (Washington,D.C.: World Bank, May , ), available at www.world-bank.org. See also Emmanuel Baldacci, Luiz de Mello, andGabriela Inchaute, “Financial Crisis, Poverty and IncomeDistribution,” working paper no. ⁄⁄ (Washington,D.C.: International Monetary Fund, ).

80 B. L. Turner et al., Illustrating the Coupled Human-Environment Systems for Vulnerability Analysis: Three Case Studies, March , available at www.pnas.org.

81 World Bank, “World Bank Approves Million Loan to Reform Banking Sector in Mexico,” press release(Washington, D.C.: World Bank, June , ).

82 During –, percent (by area) of the production ofwheat—the main crop in the Sonora region—was underejido control, compared with percent owned privately, and percent rented by ejidos to private interests. By –, percent of wheat production was controlled by ejidos;

percent was controlled by the private sector and percentwas rented to private farming interests.

83 Rosamond Naylor, Walter Falcon, and Ivan Ortiz-Monasterio, “Policy Reforms and Mexican Agriculture:

Views from the Yaqui Valley,” CIMMYT Economic ProgramPaper no. - (Palo Alto, Calif.: Stanford University, ),available at http://yaquivalley.stanford.edu/publications.

84 Ibid.85 R. Constanza, D. Arge, R. de Groot, S. Faber, M. Grasse,

B. Hannon, K. Limburgh, S. Naeen, and R. O’Neil, “TheValue of the World’s Ecosystem Services and NaturalCapital,” Nature, vol. (), pp. ‒.

86 The three general approaches to economic valuation are (a) esti-mates of averted behavior; (b) hedonic pricing estimates, usingchanges in real estate-type prices as a proxy; and (c) contingentvaluation, based on questionnaires of the willingness-to-pay(WTP) type. Approaches generally give some proxy of the totaleconomic value (TEV) of the environmental resource beingvalued, based on the following stylized estimate: TEV = directuse value + indirect use value + option value + existence value.

87 A. C. Fisher and W. M. Hanemann, Option Value and theExtinction of Species (Berkeley, Calif.: California AgricultureExperiment Station, ).

88 Scott Vaughan, Chantal Line Carpentier, and ZacharyPatterson, Mexico and Emerging Carbon Markets: InvestmentOpportunities for Small and Medium-Sized Companies(Montreal, Canada: North American Commission forEnvironmental Cooperation, ).

89 The main demands of the farmers included a moratoriumon all agricultural provisions of NAFTA, emergency andlong-term agricultural development programs, viable ruralcredit institutions, government investment in rural infra-structure and communities, food safety and quality for con-sumers, and recognition of the rights of indigenous peoples.

90 Alan Winters, “Trade Liberalization and Poverty: What DoWe Know?” GTAP Working Papers, (West Lafayette, Ind.:Purdue University, June ), available at www.gtap.org.See also William Easterly, The Elusive Quest for Growth(Cambridge, Mass.: MIT Press, ); and World Bank,Globalization, Growth and Poverty: Building an InclusiveWorld Economy (policy research report) (Washington, D.C.:World Bank, ).

91 The author is grateful to Dan Biller, World Bank Institute,for this insight regarding benefits transfers.

92 Daniele Giovannucci, Sustainable Coffee Survey of the NorthAmerican Specialty Coffee Industry (report prepared for theNature Conservancy, the Summit Foundation, the NACEC,the Specialty Coffee Association, and the World Bank, July), available at www.cec.org.

93 A. Brezinski and Scott Vaughan, Measuring Consumer Interestin Shade-Grown Coffee: An Assessment of the Canadian, Mexicanand U.S. Markets (Montreal, Canada: North AmericanCommission for Environmental Cooperation, ).

94 A long-standing challenge for developing-country exportersattempting to differentiate products in the marketplaceinvolves the cost of often multiple certification and labelingschemes to convey to consumers some environmental charac-teristics of sustainable products. Mexico’s biological diversityresearch and policy group (CONABIO) recently hasexplored highly innovative ways of using geographic indica-tors to distinguish, for consumers, different sustainable prod-ucts being produced in rich ecosystem areas such as Chiapas.


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