Abstract

This paper examines the impact of NAFTA on trade as well as migration flows between Mexico,

Canada, and the United States in the textile industry. Several questions are being investigated: Why

did many textile jobs apparently migrate out of the United States in the years after the establishment

of NAFTA? Who gained and lost from the process of readjustment in the textile industry after

NAFTA? The act whether to protect or not to protect the textile industry when a free trade

agreements? The findings show that the migration of many textile jobs out, mostly Mexico was

mainly due to a cheaper and enhanced plants included with a flood of cheap labour compared to the

United States. Certain quarters like the people of Mexico, people of the United States, apparel

companies, and etc both benefits and lost at the same time. The impact on long-term trends were

noticeable, while the short-run impact is more difficult to assess due to competing factors such as

changes in business cycle patterns, immigration laws, economical climate, weather conditions, and

exchange rate movements. Finally, there is the idea that protecting the textile industry from painful

free trade agreement is not a perfect solution, bringing a solid and positive outcome to many with only

a little much to sacrifice for the betterment of the countries’ wealth and dependency.

Introduction

The first major international trade agreement in the world was the General Agreement on Tariffs and

Trade (GATT) formed in 1947. Countries, including the United States and Canada, were members of

this agreement. Mexico joined GATT several years later. Many countries had economies that had

collapsed due to the World War II, so GATT was designed to increase trade liberalization between

countries. The North American Free Trade Agreement (NAFTA) was implemented on January 1,

1994, designed to take away tariff barriers between the U.S., Canada and Mexico. Under the NAFTA,

all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. In

addition, many tariffs were eliminated immediately, with others being phased out over periods of 5 to

15 years.  NAFTA is known in French as ALENA (Accord de libre-échange nord américain), and in

Spanish as TLC (Tratado de libre comercio) or TLCAN (Tratado de libre comercio de américa del

norte). NAFTA promises a lot of benefits but these benefits come at a high price for the participated

countries. NAFTA is a very complex agreement containing many chapters and covers a wide range of

topics essential in the establishment of the agreement but in this particular case the clause and sections

in contrast to textile industries only applied here. NAFTA is not a simple agreement to complete free

trade between three countries, however desirable such an idea might have been at the time.   The treaty

is a complex series of documents compiled in thousands of pages and covering a wide variety of trade

areas, conditions and deadlines. This study will structurely define the ways in which the textile

industry has been affected positively or either way in the respected countries since the implementation

of NAFTA in different degree of levels. Moreover, this paper will explain how it has affected firms in

stages either long term or short term and its results included with some prediction of the aftermath of

the countries’ textile industry. And finally the comparison textile industry after-1994 with the pre-

1994 average annual growth rate in both Mexico and the States is stated.

Migration of textile companies to Mexico

Very according to the Whitehall Textiles Group and Fruit of the Loom Inc case study, the passage of

NAFTA, prompted most textile and garment companies to migrate operations into the nation of

Mexico. Numerically the most dramatic effect NAFTA has had on the textile industry is the increase

in Mexican garment production for export. Critical review of textile and apparel's case studies since

the implementation of NAFTA indicate that, until recently, the textile industry has been the largest

United States manufacturing sector when it comes to employment. North Carolina has been one of the

hardest hit states as a result of the effects of NAFTA on the economy. The textile industry in the state

of North Carolina showed specific decline, according to information provided by the North Carolina

Department of Commerce.  It’s a well known corporate fact that Mexico carries an abundance of

nonunionized workers. However, it has also been noted that secondary reasons for the large scale

closure of textile factories in North Carolina can be attributed to a failure to modernize and launch

policy changes to remain competitive with foreign markets. Statistically, during the first seven years

of NAFTA, 52,419 employees lost their jobs as a result of the closing textile factory. According to the

Autex Research Journal, the most notable impact of NAFTA on the industry's resource is a drop in

employment.  In the year 1994, the US textile employment rate has been on a steady decrease. In

Mexico the wages for worker were much lower and ‘disunionize’. The Mexican industry's wages

and benefits don't even top $2 per hour versus $13 to $14 per hour in the States. Textile and garment

companies could save more on vast production than manpower where are easily available. However,

it is important to note that a reduction in textile employment is U.S is not due solely to the effects of

NAFTA on the industry.  It is worth mentioning that cheap advancements in technology have also

significantly impacted the job migration in the textile industry to Mexico. Mexico has a strong

capability when it comes to skilled and professional labour as such engineers and technician in textile

industry have been operating in the country for over 30 years before even NAFTA was been put into

effect which is cheaper to hire, providing equal level of consultation with the States. Aside from that,

technological advancement and machinery has increased productivity and efficiency in the industry,

but has decreased the need for tangible human interaction in terms of production. 

Gaining sides in the enactment of NAFTA

Putting to the textile industry as textiles and apparel, positive impact seems to outweigh the negative

impact upon enactment of NAFTA. his industry size can be defined by analyzing three relevant

information: gross national product (GNP), employment rates, and the amount of establishments in

this particular specific sector both in the Mexico and United States. The study states that NAFTA

helped Mexican manufacturers to practise to U.S. technological innovations more quickly and likely

had positive impacts on the jobs qualitatively and quantitatively. Mexico has a strong capability when

it comes to skilled and professional labour as such engineers and technician in textile industry as

American companies have been operating in the country for over 30 years before even NAFTA was

been put into effect, they have brought their technical expertise with them. There are more established

R&D centres in Mexico, as well as technical centres of excellence to train workers in higher skilled

areas later on when NAFTA was implemented. This benefits Mexico in the other way round that

enables them to compete with Asian imports which was a lucrative industry for them. Moreover

textile companies in the United States need not worried of shortage of short or long term

skill/unskilled labour as Mexico is the place where cheap and efficient labour lies. The

Mexican industry's wages and benefits don't even top $2 per hour versus $13 to $14 per hour in the

States. It's not good for workers in the U.S., but indirectly ensuring the long-term survivability of

these companies." Another finding was that since NAFTA went into effect, several economists have

noted that it is likely that NAFTA contributed to Mexico’s economic recovery directly and indirectly

after the 1995 currency crisis. Mexico responded to the crisis by implementing a strong economic

adjustment program but also by fully adhering to its NAFTA obligations to liberalize trade with the

United States and Canada. NAFTA may have supported the resolve of the Mexican government to

continue with the course of market-based economic reforms, resulting in increasing investor

confidence in Mexico. The swift growth rate of Mexican imports since the second half of the 1980s

was induced not only by the elimination of non-tariff barriers to foreign trade, but also by the

expansion of domestic demand amidst a persistent appreciation of the real exchange rate. Facilitated

access to external funds resumed at that time and likewise played a role. After decades of tightly

restricted access to foreign products, Mexican consumers began to eagerly satisfy their demand for a

wide variety of goods and brands from abroad. However, to some extent, such import demand also

mirrors the strong relations between exporting firms and foreign suppliers. The case of maquiladoras,

which make up the most successful export sector to date, is typical because they rely on imported

inputs and materials, and have weak relations with local suppliers. Another factor that boosted import

penetration to the domestic market, and that should not be ignored, is the breakdown of some internal

linkages in Mexico domestic productive structure, as local producers, as such in the textile industry

have been put out of business by foreign competition. Applied studies (inter alia by Aroche, 2005;

Moreno-Brid, 2001; Pacheco-Lopez, 2004) revealed that, in the last fifteen to twenty years, the

Mexican economical structural dependence on imports has increased significantly. These results

indicate that the long-term income elasticity of demand for imports (essentially manufactured goods)

like textiles, ie: cotton, apparel, etc has more than doubled over this period where it was previously

valued between 1.31% and 1.56%, it has now risen to almost 3%. This implies that if Mexican real

income is to grow at an annual average long-term rate of 5%, its imports in real terms will need to

expand yearly by 15%. As a benchmark, it is worth recalling that during 1988 and 1999, when the US

economy grew in robust, Mexican exports increased at an average annual rate of 10%. Nevertheless in

the United States side, when NAFTA was enacted, U.S. foreign direct investment (FDI) in Canada

and Mexico more than tripled to $348.7 billion, including the textile industry. Canadian and Mexican

FDI in the U.S. grew to $219.2 billion. NAFTA reduces investors' risk by guaranteeing they will have

the same legal rights as local investors. Through NAFTA, investors can make legal claims against the

government if it nationalizes their industry or takes their property by eminent domain. The main effect

has been a huge increase in United States agricultural exports to Mexico. U.S. agricultural exports to

Mexico have been continuously growing since NAFTA started, despite a decrease in world and

aggregate United States exports. They account for more than seven billion dollars, which is

approximately 6% of the total U.S. exports to Mexico. Another staggering statistic is that United

States agricultural exports to Mexico have doubled since 1994 and U.S. supplies more than 75% of

Mexican agricultural products. The United States exports to Mexico that grew the most in terms of

percentage volume change were cotton, apples, pears, cattle and dairy products. The positive impact

has been a slight increase in United States jobs in the agricultural industry. This was due to the

increased supply of agricultural products. Moreover consumer benefits from lower-priced imports can

be especially large for lower-income workers because a larger share of their income goes for apparel,

footwear, consumer electronics, basic foodstuffs, and other heavily imported products. They need not

spent much on current expensive available items that can burden their savings. Consumers from both

parties could work to more effectively use their comparative advantages and to respond more

efficiently to changing economic conditions.

Losing sides on the enactment of NAFTA

To the side of the States, NAFTA is horrible in the first place as it eliminates the middle class and it

allows company to lower their wages here in the United States threatening to move to Mexico. The

U.S. has suffered a decrease in labour supply as a result of NAFTA. There has been a substantial

decline in employment in the United States textile and apparel sectors. The building of maquiladoras

was largely responsible for this decline. Maquilador as are foreign owned factories in Mexico, most

of which are United States owned. While the United States has shifted many jobs to Mexico because

of these factories, there has been debate about the exploitation of the low-wage workers. Despite this

employment shift, the agricultural industry in the United States has experienced a slight increase in

employment. This boost in United States labour supply in the agricultural industry helps to balance

out the decrease in the textile industry. In fact Maquiladora workers were often exploited; NAFTA

expanded the maquiladora program, in which U.S.-owned companies employed Mexican workers

near the border to cheaply assemble products for export to the U.S. These workers have "no labour

rights or health protections, workdays stretch out 12 hours or more, and if you are a woman, you

could be forced to take a pregnancy test when applying for a job," according to Continental Social

Alliance. U.S. wages were suppressed as not all companies in these industries moved to Mexico.

When it became a choice between joining the union or losing the factory, workers chose the factory.

Without union support, the workers had little bargaining power. The main losing party should

eventually go to Mexico as Mexico's dependence on the U.S. economy has increased markedly.

Although Mexico has implemented a dozen trade agreements which have removed trade barriers with

over 40 countries, more that 80% of Mexican trade is still with the U.S. International investment by

both party, U.S. and Mexico has also been affected by NAFTA. With the removal of Mexican limits

on foreign investment, as well as the removal of tariffs, it has become much more profitable for

Americans to invest in Mexico. Nevertheless it is obvious that the controversy surrounding NAFTA

still exists till this very day difficult to get a consensus on whether the overall effects resulting from

NAFTA are positive or negative for the countries involved. 

Free Trade or Domestic Industry

What is a more important issue today: pursuing free trade or protecting American industries such as

the textile industry? Here, I believe that pursuing the free trade agreement without looking into

vulnerable industry like textile is much better applying. Big economic powers like the States in

particular are not the only losers to consider here. Putting this in a simple analogy, many smaller

developing countries have relied on the quotas to build nascent textile industries of their own.

Countries like Bangladesh, Cambodia, and Sri Lanka, with weak and unstable economic and political

mechanism, becoming dependent on exporting textiles, and they may be seriously affected their

exports will be forced to compete with China and India. The textile factory workers in these countries

—the ones who will soon lose their jobs—represent one of the most vulnerable segments in society.

They include the poorest and least educated citizens in countries where social welfare safety nets are

almost nonexistent. Most often the workers are women, as the global economy has come to rely on

their cheap work. Nevertheless, continuing to enforce textile quotas to protect U.S. firms and workers

will also drive up the cost of clothing and other textiles for the American consumer. The quotas also

stand to pose a significant political obstacle to US-Mexico relations and for international credibility

more broadly, given that such quotas are clearly inimical to the free trade rhetoric so often brought up

by Washington. In exports basis, the U.S. textile and apparel industry is strongly NAFTA dependent,

free trade agreement with about half of total exports going to either Canada or Mexico in 2001. The

picture is different for imports: less than one fifth of sector imports come from NAFTA countries.

However, it’s better to notice that imports from NAFTA partners grew at more than twice the rate of

exports to NAFTA partners between 1993 and 2001, mostly due to strong increases in apparel imports

from Mexico. In contrast, the U.S textile industry has benefited from NAFTA by expanding exports to

both Mexico and Canada, especially of high and good quality textiles. In the current political and

economic climate, it will be difficult to push the free trade agenda. A political backlash against greater

economic openness has been building throughout the Americas 13 since the late 1990s, and it seems

to be reaching its climax in the 2004 American elections. But if, as the evidence strongly shows, free

trade accelerates the process of development, raising output, leading to a convergence of relative

commodity prices, and ultimately reducing poverty and inequality in all three countries, then it is

important to push this free trade process forward, institutionalize it, and extend it to the rest of the

hemisphere. Not only does free trade have positive social and economic benefits, it also has

important political benefits. Reasons for protectionism are many and varied, ranging from the eternal

search for an optimal tariff that will deliver the most favourable terms of trade, while enhancing

government (tariff) revenues, protecting infant industries to narrow and etc. One thing is clear,

however, the integration process cannot be moved forward without political leadership and the

elimination of corruption, securing of contracts and property rights, the reduction of distorting internal

taxation policies, and the creation of a favourable climate for foreign investment. Yes, free trade may

have damaged textile jobs.  However, the agreement has not brought about the death of the workforce.

Throughout the first 15 years of the North American Free Trade Agreement, the United States income

and employment grew steadily which counter-balance the loss they faced during the initial phase of

the free trade. In conclusion, the initial years of a free trade implementation have created a clear and

concise trend revealing increased trade in the next phase of time. The act of protecting vulnerable

sector, textile sector will clearly show a loss of revenue in time to come for a free trade.

Appendix

Autex Research Journal - Home Page. (n.d.). Retrieved July 1, 2009, from http://www.autexrj.org/

Faux, G. P. (1993). The failed case for NAFTA: The ten most common claims for the North American

Free Trade Agreement and why they don't make sense (Briefing paper / Economic Policy Institute) .

Washington, DC: Economic Policy Institute.

Grieco, P. L., Hufbauer, G. C., Schott, J. J., & Wong, Y. (2005). NAFTA Revisited: Achievements and  Challenges (Institute for International Economics) (Institute for International Economics). Washington, DC: Institute For International Economics.