ISBN 92-2-111415-5
ISSN 1020-5322
First published 1999

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Contents

Foreword

This paper consists of chapters written by four separate authors: Bruce Campbell of the Canadian Centre for Policy Alternatives, Andrew Jackson of the Canadian Labour Congress, Mehrene Larudee of Williams College and Teresa Guttierrez Haces of the National Autonomous University of Mexico. Bruce Campbell coordinated its preparation. The four chapters assess the labour market effects of the signing and initial implementation of NAFTA, the North American Free Trade Agreement, from respectively an overall, Canadian, the United States and Mexican perspective. None is particularly happy with what they see, viewing the operation of NAFTA as globalization on their own doorstep and in many ways finding it wanting. Many in Canada fear that labour standards are being pushed down to the United States levels, or else that continuing devaluation of the Canadian dollar is required in order to compete, and failing either, that the United States corporations are withdrawing from Canadian plants. In the United States many fear that the threat of relocation of corporate activities to Mexico is enough to resist higher wage claims and other union activity. In Mexico the lower wage maquila, export-oriented sector, increasingly sets the tone for labour relations and wages overall. Furthermore the very initiation of NAFTA may have prompted investor expectations and subsequent capital inflows into Mexico to an extent that the authorities could not handle, leading to the 1994/95 peso crisis and devaluation. However, the authors also note that NAFTA has some protectionist elements in its local content rules which restrict the activities of third country enterprises. The concept of NAFTA, especially the economic ties between North America and Mexico was ambitious (and even closer Canada-US economic ties are also sensitive). Little or no new institutional machinery, only the relatively toothless side agreements especially on labour, accompanied it. NAFTA's creation was market driven and it seems it has not yet acquired consensual backing.

Gek-Boo Ng
Chief
Employment and Labour Market Policies Branch

I. CUFTA/NAFTA and North American labour markets: A comparative inquiry

1. Introduction

In its broadest sense, the North American Free Trade Agreement (NAFTA) which absorbed and replaced the Canada United States Free Trade Agreement (CUFTA), is an international treaty which serves as a vehicle for advancing and consolidating the neoliberal restructuring and integration of national economies and states in North America. It provides a legal framework which embeds the principles of market supremacy and international competitiveness. As the Canadian head of the OECD said in an interview with the economics editor of the Toronto Star: "these free trade agreements are designed to 'force adjustments on our societies.' Countries, he said, should push the pace of adjustment...by reducing social benefits that encourage the unemployed to turn down low paying jobs."⁽¹⁾

North American integration is a corporate-driven process. Trade and foreign investment growth amongst the three countries has far outstripped the growth of the three economies. Fifty large corporations (mainly US-owned) account for 70 per cent of United States-Canada trade. (Rugman 1995) This pattern is likely similar for overall NAFTA trade. FDI is even more concentrated. It should come as no surprise, therefore, that NAFTA and the accompanying restructuring of the state reflects the strategic interests of transnational capital.

NAFTA's role and its effects can only be fully understood within a broader policy and historical context. Moreover, any assessment of its labour market impacts must take into account the different economic, social, and political structures and institutions in each country and the strategies and actions of the main actors. These differences help to explain differences in labour market responses. We will attempt in our analysis to capture these complexities and contribute to an understanding of CUFTA/NAFTA's role and effect in the larger constellation of policies that have induced the "structural adjustment" of North American labour markets.

The thesis of this paper is that policy (national and international) is a major determinant of labour market outcomes. Neoliberal policies (of which CUFTA/NAFTA is a cornerstone) operate in a mutually reinforcing and cumulative way. These policies also interact in a mutually reinforcing and cumulative way with corporate strategies and with technological changes. Over time, these have had a generally adverse effect on employment and income conditions of a majority of working people and their families in all three NAFTA countries. It is our contention that this is not an unintended consequence of these policies. Underlying these policies are relations of power and its redistribution: from workers to corporations, from low and median income to high income earners, from wages to profits, from governments to the market.

What benchmark date should we use in assessing the Agreements impact. CUFTA negotiations began officially in 1986, although the Canadian government had publicly declared its intention to negotiate more than a year earlier. The deal was signed January 1, 1988 and came into effect on January 1, 1989. The neoliberal reign in Canada dates formally from the Mulroney government in 1984, although it had been gaining ascendance in policy circles for the previous ten years. The Mulroney government brought in significant privatization and deregulation measures during its first term of office - the deregulation of the energy, financial, transportation and foreign investment sectors, the privatization of public airline, oil, aircraft, telecommunications and satellite companies etc. These measures were then entrenched in CUFTA, which in turn provided the impetus for further restructuring - for example, in banking, telecommunications, rail transport - which continued under NAFTA and the subsequent Liberal government.

Full employment policies were supplanted by "natural rate of unemployment" policies. Monetary policy cut inflation in half (to under 5 per cent) by the mid-1980s. In the 1988-91 period the monetary screws were tightened even further, squeezing inflation down to under 2 per cent and jacking up unemployment into the 10-12 per cent range, four points above the United States rate. The federal corporate tax rate was cut in the late 1980s from 36 per cent to 28 per cent and the top federal income tax bracket was reduced from 35 per cent to 29 per cent.

The formal benchmark for neoliberal ascendancy in the United States dates from the Reagan presidency in 1980, although the consensus among policy makers had been building throughout the 1970s. Paul Volker preceded Reagan by a year as chair of Federal Reserve and had already initiated the era of extreme monetary austerity. It was Reagan who in his presidential campaign first floated the idea of a continental "common market" stretching from "the Yukon to the Yucatan." The Reagan Administration launched an aggressive drive to deregulate, privatize and downsize the United States civilian public sector, particularly social programmes like unemployment insurance and welfare while massively increasing military spending. Monetary austerity created a major recession and huge foreign capital inflow, both with worldwide reverberations. Together with tax cuts, these policies created a huge fiscal deficit and foreign debt build-up. Reagan also took a hard line against unions inspiring a wave of corporate and legislative attacks on organized labour. The Reagan government also attacked the Canadian government's interventionist orientation, especially its national energy and foreign investment review policies. The United States monetary policy in large part triggered the 1982 Mexican financial crisis, and then, along with the IMF put together a financial bailout package which pushed Mexico to alter its economic development path. The structural adjustment programme contained the basic neoliberal prescription:⁽²⁾ investment and trade liberalization, domestic deregulation and privatization, public sector cutbacks, and inflation controlling monetary policy and other forms of wage restraint.

Mexico's structural reforms began in 1983-84. the first stage culminated with GATT membership in 1986 followed by a dramatic opening of the Mexican economy - lowering of tariffs and non-tariff restrictions on trade, and loosening of foreign investment rules. The Salinas regime (1988-94) accelerated these policy changes and in 1990 entered into NAFTA negotiations with the United States (which Canada subsequently joined) to consolidate and lock-in the transformation of the Mexican economy. NAFTA was signed on December 17, 1992 and, after the negotiation of the labour and environment side-accords demanded by incoming the United States President Clinton, was ratified and came into effect January 1, 1994. Almost a year later, triggered by massive capital flight, Mexico was engulfed in a severe financial and economic crisis.

In summary, the key benchmarks in the history of neoliberal restructuring and integration (depending on the country) are: 1980, 1982, 1984, 1986, 1989 and 1994. The periods of economic recession for the United States were 1981-82 and 1991-92. Canada's slumps were roughly coincident with the United States, though deeper and longer during the 1990s. For Mexico the deepest periods of economic crisis were 1982-88 and 1995-96. The transformation in Mexico has been deeper and the crises much more severe and prolonged than the United States or Canada.

Reforms (including NAFTA) have been supported by a consensus of elites in all three countries, though they have met with widespread resistance amongst the general population. For example, it is unlikely that neither CUFTA in Canada nor NAFTA in the United States would have survived a referendum. The Salinas government sold NAFTA to the Mexican people as their ticket to first world-style prosperity, stifling critical political debate on its merits.

Once in place NAFTA serves as what Grinspun and Krecklewich (1994) call an external conditioning framework, limiting the range of political choices and enabling the implementation of unpopular measures. For example, major social programme cuts undertaken as part of the "war on the deficit" in Canada were rationalized with: "there is no alternative in this era of free trade and globalization." The choice of policy measures to deal with the peso crisis were similarly justified.

It should also be kept in mind that CUFTA/NAFTA is an agreement in progress. Many of its provisions are being phased in over time (10 years in the case of CUFTA and 15 years in the case of NAFTA.) It mandates a large number negotiations on a variety of areas from government procurement, to standards harmonization and common subsidies rules. It provides the legal architecture which locks in subsequent neoliberal restructuring by the NAFTA countries, and of course prevents backsliding.

2. Key provisions of NAFTA affecting labour markets

NAFTA like its predecessor the CUFTA, is a complex set of documents comprising a text of more than 1000 pages and even larger volumes of national implementing legislation, hundreds of pages of tariff schedules, statements of administrative intent, regulations, a long record of dispute panel rulings, and side-agreements on labour and environment.

NAFTA removes tariffs and other non-tariff barriers on all goods and services impeding governments ability to protect strategic or vulnerable sectors from import competition. It also prevents governments from granting conditional exemptions from tariffs or duty remissions to foreign transnationals as a way of strengthening domestic productive capacity and employment.

Although the two are interrelated, NAFTA's most important provisions apply to investment, not trade, liberalization. It entrenches a set of rules protecting private property rights of investors (corporations, banks, mutual funds etc.) and their investments. Virtually all types of ownership interests, financial or non-financial, direct or indirect, actual or potential, are covered. It liberalizes investment, enhancing its ability to operate free of non-commercial considerations. Codification of these provisions in treaty reduces the risk of a future government unilaterally imposing new conditions or regulations on their investments. The reduction of investment risks is central, enabling for example, transnational corporations to locate production more and more on the basis of cost considerations - labour, taxes, transport, infrastructure etc. free from "non-market" or political, impediments. It enables portfolio or money market managers to freely transfer assets and income into and out of member countries.

The very broad national treatment provisions of NAFTA oblige each member country to treat foreign investors exactly the same as it treats its own national investors regardless of their contribution to the national economy. They create the impetus for powerful alliances between foreign and domestically-owned businesses since any policy to regulate foreign capital will have to be applied equally to national capital. Their combined power to promote further deregulation and resist new regulation is greatly enhanced. Moreover, they remove important industrial policy tools such as subsidies to domestic high-tech firms with stronger linkages effects to the economy than foreign firms have.

It prevents governments from imposing a wide array of performance requirements (from local sourcing and product mandating to trade balancing and technology transfer), tools which have attempted to channel foreign investment to strengthen national industrial capacity and create jobs. It formally maintains, though in vestigial form, Canada's and Mexico's foreign investment screening mechanisms, designed to ensure, with the help of performance requirements, that potential benefits from foreign investment, including job creation, were in fact realized. (It also entrenches the United States "national security" foreign investment prohibitions.)

NAFTA prevents governments from regulating the outflow as well as the inflow of capital. It prevents governments from placing any restrictions on the transfer within the region or outside by any investor at market currency exchange rates, any kind of financial transfer including profits, dividends, royalties, fees, proceeds of sale of an investment, payments on loans to subsidiaries. It also prevents governments from restricting the transfer of physical assets including technological assets. There is a partial exception which allows governments experiencing balance of payment difficulties to impose limited trade and financial controls (excluding investment transfers such as profits and dividends), but only after consulting with the IMF and adopting only those measures which the IMF prescribes. Finally, NAFTA provides comprehensive intellectual property protection (patent, copyright, trademark etc.) for corporations' technology.

NAFTA guarantees investors the right to prompt compensation at "fair market value" for expropriations or measures which are seen to be "tantamount to expropriation"- a vague term for measures which are seen in some way to impair commercial benefits, including any future benefits which might be expected. Claims under these provisions may be adjudicated through various dispute panels, including an international tribunal at which corporations can directly challenge government measures.

It limits the ability of public or state-owned enterprises to operate in ways that are inconsistent with commercial practice and in any way impair benefits expected by private investors of the other countries. This clearly affects the ability of public enterprises to pursue public policy goals that may override commercial goals. It also limits the ability of future governments to re-regulate or re-nationalize once they have been deregulated or privatized (for example as has occurred in airlines, telecommunications, electrical utilities, transportation and energy sectors.) Thus, NAFTA has a built-in bias in favour of the private over the public sector, one which compresses the public space, ratchet-like, locking in every subsequent privatization or deregulation. Finally, NAFTA provides the legal framework for greater private (foreign and hence domestic) penetration into traditionally public areas, notably health care and education.

NAFTA facilitates and accelerates the realization of a privatized, continentalized transportation/communication infrastructure. It facilitates the development of high speed transportation systems that greatly reduce time and costs to the major consumer markets, important factors in industrial location decisions. It contains provisions which facilitate border-crossing for trucks the conduit for almost three-quarters of NAFTA trade. (Although the United States has thus far delayed the implementation of key trucking provisions.) Various north-south highway and rail corridors from Mexico through to Canada are in the process of being constructed or expanded. NAFTA also provides the legal framework for a continentalized telecommunications infrastructure which Mexico and Canada have moved closer to reality in subsequent deregulation/privatization measures.

Finally, NAFTA enables investors to challenge directly (if they do not wish to go through a national government) governments measures at all levels through an international investor-state dispute tribunal which they claim violate their rights. This further reinforces the bias of private sector interests over public policy considerations, putting a chill on any policy or regulation that might be perceived as infringement on investor rights.

3. The North American Agreement on Labour Cooperation (NAALC)

The NAFTA labour side agreement was finalized in September 1993, nine months after the NAFTA was negotiated. It came into being in response to warnings by the United States critics that NAFTA would facilitate the Mexican government's low wage foreign investment-led development strategy - in part by repressing fundamental labour rights - and thereby accelerate the loss of the United States jobs and incomes. This position was supported by incoming the United States president Bill Clinton who, as candidate, expressed concerns that transnational corporations could take advantage of "their ability to move money, management and production away from a high wage country to a low wage country. We could also lose income because those companies which stay at home can use the threat of moving to depress wages as many do today...if you look at the experience of the maquiladora plants...there is certainly cause for concern." (Clinton 1992, cited Levinson 1996.)

The inclusion of an agreement on labour rights as part of NAFTA was indeed an historic precedent, with signatories for the first time in an international trade agreement, acknowledging the link between the exchange of goods and services and the people who produce them; and promising to enforce their own labour laws and promote the 12 labour rights identified.

However the NAALC itself the fell short of critics' expectations. Its prime weakness - inadequate enforcement - stands in stark contrast to the strong enforcement of protections accorded to investors [see Stanford et. al. 1993, Robinson 1993, Levinson 1996, Bolle 1997]. It dealt only with non-enforcement of existing national laws, failing to address problems caused by the absence of laws or regulations. Most important, it did not provide effective means for changing the Mexican record of not enforcing it own labour law, or of changing the propensity of the United States and Canadian governments to weaken their labour laws to attract investment. Neither the National Administrative Organizations (NAOs) housed in each country's labour department, nor the NAALC Council of (Labour) Ministers, nor the NAALC Secretariat, were given sufficient independence or investigatory power to function effectively. Finally, Canadian provinces, which have primary jurisdiction over labour law (90 per cent the work force) were not covered under the NAALC. Thus, only if a sufficient number of provinces agree (as determined by a complex threshold formula) will the NAALC review and enforcement apply to Canada. To date just three provinces have signed on making it only partially in force.

NAALC created three groups of labour rights. Group III rights - workplace health and safety, and illness protection, protections for children and youth, minimum wages-have penalties for violation determined by an arbitration panel only after a lengthy (more than two years) dispute process. The monetary penalties themselves, the equivalent of 0.007 per cent of the value of one year goods trade between the Parties, were seen by many as insufficient.

Group II rights - the prohibition of forced labour, minimum employment standards pertaining to overtime, employment discrimination, gender pay equity, workers compensation, protection of migrant workers - contain no penalties for violation, only review and consultation among the NAOs, the Secretariat and the Ministerial Council and evaluation by outside committee of experts (ECE).

Group I rights - the right to associate, to organize, to bargain collectively and the right to strike, are subject only to NAO review and ministerial consultation. No penalties are provided for violation of these fundamental rights. Allegations of violations cannot even be evaluated by a committee of outside experts. Thus NAALC provides a limited set of penalties for a limited group of rights.

To date (June 1997) there have been 9 complaints filed with the NAOs. Two were combined in a single submission and one was withdrawn before hearings were held. All but one have been filed with the United States NAO. All but one alleged non-enforcement violations in Mexico. All but one pertained to one labour right, the right to organize (i.e. intimidation and firing of workers attempting to join independent unions.) As such, no complaint has gone beyond the NAO review and ministerial consultation stage. Only the most recent complaint, involving pregnancy testing, has the possibility of going to the next stage, independent expert committee evaluation (ECE).

The single complaint filed with the Mexican NAO was against Sprint (February 1995) for closing down a San Francisco telemarketing facility that workers were attempting to organize. The Mexican NAO requested ministerial consultations. One of the outcomes of the consultation was a report by the NAALC Secretariat on Plant Closings and Labor Rights (June 1997) which found that anti-union tactics were widespread in the United States. Another was a United States National Labor Relations Board ruling that the closing was motivated by anti-union bias and an order to the company to rehire the affected workers and compensate them for lost wages. The case is now being appealed by Sprint in the United States courts.

The first two petitions (February 1994) were filed as one by the Teamsters against Honeywell and the United Electrical Workers (UE) against General Electric alleging that the United States companies had dismissed workers for trying to organize an independent union, and that the Mexican government had failed to enforce its laws protecting the right to organize. The United States NAO report did not recommend ministerial consultations concluding that it was not able to make a decision as to whether or not the Mexican government was enforcing its own laws in part because the Mexican government itself had not made a judgment on the allegation of the employees. Instead it recommended a series of trinational workshops to promote discussion regarding freedom of association and the right to organize.

In the Sony case, (August 1994) the International Labor Rights Fund along with three other US and Mexican groups alleged that the company fired workers who tried to organize an independent union at five Sony-owned maquiladora plants. An allegedly rigged election conducted by the official union, the CTM, in collusion with the company subsequently reconfirmed the government union despite worker protests. A second attempt to form an independent union also failed when the government's Conciliation and Arbitration Board, on which members of the government, the corporations and the CTM sit - all with a vested interest in keeping out independent unions - refused to register the union.

The United States National Administrative Office found in its report that Sony had in fact intimidated the workers for trying to organize an independent union and agreed that the workers were gravely hampered by the registration procedure in setting up an independent union. The NAO recommended consultations among the United States and Mexican Labour Ministers. Ensuing consultations resulted in workshops, conferences and reports on union registration.

The long standing practice of blocking the formation of independent unions through its conciliation and arbitration boards was not altered by the NAALC review. No workers have been rehired as a direct result of this complaint.

The Pesca Union complaint (June 1996) alleged that the union which represented the Mexican Fisheries Ministry workers was improperly deregistered in the wake of a government reorganization, and recognition was granted to a rival union. Complainants alleged that members of the arbitration board were in a conflict of interest, violating ILO Convention 87. Studies, reports and ministerial consultations ensued.

In October 1996 a complaint was launched after a Mexican arbitration board allegedly denied union registration to workers at Maxi-Switch (a computer keyboard maker) after the company fired 400 workers for trying to organize an affiliate to an independent union and break the "contract of protection" with the official government-sponsored union. However, the complaint was withdrawn after the board reversed its decision and registered the independent union, one of the complainants. Some have seen this outcome as a the result of the publicity brought to bear on Mexican labour practices through the NAALC process. However, the company subsequently closed and reopened under a different name with the government union (CTM) once again the registered union in the plant.

The most recent complaint (May 1997) was brought by three United States and Mexican human rights groups alleging "a pattern of widespread state tolerated sex discrimination against prospective and actual female workers in the maquiladora sector.." Specifically, it involved mandatory pregnancy testing and denial or withdrawal of employment to those who test positive, thereby avoiding payment of the legal three-month maternity benefit. The United States NAO, as of June 1997, was still reviewing the case.

Despite the dismissal of NAALC as ineffectual by many critics, others argue that their criticism stems from unrealistic expectations about what was achievable and how it could be used. Compa (1997) and Herzenberg (1997) conclude that while common enforceable norms would have been desirable, the reality of wide income disparities and the overwhelming domination of one NAFTA partner, made effective enforcement of domestic law the more practical goal. They emphasize the importance of NAALC as a forum for subjecting countries' labour law to the glare of public scrutiny, as well as its value in stimulating communication, information exchange and building solidarity among labour rights advocates particularly between Mexico and the United States. (Canadian activists have not as yet become as engaged in NAALC.) They emphasize that its potential capabilities have not been sufficiently tested thus far and point out that the Secretariat and other institutional structures are still in their formative stage.

Herzenberg argues that "labour advocates' inability to use the NAFTA side-agreement to reverse specific worker rights violations should be neither surprising nor a primary basis for judging [its] usefulness. Effective use of the side agreement must be understood as part of broader organizing and political mobilization to challenge the ideological dominance of neoliberalism and gain the power to replace it with an alternative development model." [p.6]

4. NAFTA mechanisms which affect employment, incomes and standards

NAFTA in essence codifies a shift in the balance of power in favour of capital and away from governments (the kind that intervene in markets) and labour. By weakening public policy instruments and labour's power at the bargaining table it increases the pressure to level down employment conditions, wages and standards. These changes are being observed globally and as such are key elements of the process of globalization. NAFTA is not a separate phenomenon, but rather the concrete expression of globalization on the North American continent. Thus, when the ILO Director General said several years ago that globalization is eroding government policy instruments "which have such a decisive impact on the level and quality of employment and on domestic policies for social progress." (ILO, 1994:90-94) he could just as easily have substituted NAFTA which is, in effect, continental globalization.

It should be reiterated, however, that national social, political and economic institutions and structures differ from nation to nation as do the strategies of key actors. Therefore, national responses to NAFTA pressures like the response to broader globalization pressures, can be also expected to differ. We identify the following mechanisms associated with NAFTA-style integration.

4.1 Competitive pressure among corporations:
The concurrent deregulation and integration of the continental economy driven by expanding trade and foreign investment, intensifies competition not only among transnational corporations themselves, but also among national companies in trade-sensitive industries. As national markets with different costs and regulatory structures come into closer contact with each other, the pressure to cut costs and restructure through mergers and takeovers, downsizing, closures, relocations etc., increases.

In Canada, the largest wave of corporate restructuring occurred during 1989-1993. Although comprehensive statistics on plant layoffs and closures are not available for the country as a whole, Ontario, which contains 40 per cent of Canada's manufacturing capacity reported between January 1989 and August 1993, 452 permanent closures of major manufacturing facilities. Almost half of these plant closures were by foreign-owned (mainly US) companies. Significantly, 65 per cent of all layoffs during this period were the result of permanent as opposed to temporary, closures, compared to the 1981-82 recession where only 25 per cent of the layoffs were the result of permanent closures.

Increased competition also intensifies the pressure amongst employers to demand worker concessions - wages, benefits, conditions of work - as well as tax, spending and regulatory concessions from governments, especially programmes such as unemployment insurance which strengthen the bargaining power of workers. Finally, it increases the pressure (to the extent that technology permits) to lower costs through production and work reorganization - increasing the use of part-time, temporary and contract workers, and out-sourcing to non-union firms in low wage jurisdictions.

4.2 Immobile labour-mobile capital:
Labour's bargaining power is disadvantaged under NAFTA-style integration because with the exception of a few elite categories (business executives, entrepreneurs and certain professional and technical categories), workers are legally confined by national borders. Culturally, workers are bound to their communities and internal migration let alone immigration, occurs only in exceptional circumstances.

Capital on the other hand, inherently footloose, can move much more effortlessly under its new regime, or threaten to move if labour does not make concessions. There is much anecdotal reporting from both unions and employers and survey research providing evidence of this kind of pressure.

For example, a Wall Street Journal survey of 455 senior corporate executives (September 24 1992) taken just after the NAFTA was initialled, found that 25 per cent would use NAFTA to bargain down wages and 40 per cent would move at least part of their companies' production to Mexico as result of NAFTA.

A 1997 study for the North American Commission on Labour Cooperation (NAALC) by Cornell University researcher Kate Bronfenbrenner, found that "NAFTA has created a climate that has emboldened employers to more aggressively threaten to close or actually close their plants to avoid unionization." Her study of 500 organizing drives and 100 first contract campaigns in the United States found that in manufacturing and transportation sectors, 62 per cent of employers threatened to close and move all or part of their operations instead of negotiating with the union; 10 per cent explicitly threatened to relocate to Mexico and many more implied as much. Where such threats were made, companies were substantially more successful in keeping out unions than where they were not made. (see also Larudee, 1997, in this volume). Since unionized workplaces in the United States and Canada pay their employees 20 per cent to 30 per cent more on average than non-unionized workplaces, it is clear that this having a depressing effect on wages.

4.3 Competitive pressure on governments and regulatory structures:
NAFTA, by opening national economies intensifies pressure on hundreds of national and sub national governments to compete with each other to maintain and attract investment by increasing subsidies (most of which remain legal under NAFTA) and lowering regulations and standards. There are no common rules governing acceptable and unacceptable subsidies or limiting subsidy wars among governments, and only ineffective protections limiting competitive bidding down of labour and environmental regulations to the lowest common denominator. Policy levers such as performance requirements and tariffs which served as sticks to nudge capital to behave in accordance with public policy priorities and discourage capital outflows, have been removed and only carrots remain. Thus, the need to attract investment creates dual stresses: downward pressure on regulations and standards and increased pressure on existing fiscal resources.

This reality is not disputed in official circles. In fact at times it is used to justify specific measures to downgrade regulatory structures (whether or not objectively valid) contrary to commitments made by governments prior to NAFTA. NAFTA provides the external conditioning framework which allows policy-makers to claim there is no alternative in the new economic reality.

For example, a 1996 report by the Canadian government on key issues facing Canada to the year 2005 noted, "As we become more integrated with the United States the efficiency of our regulatory framework...will take on greater importance in corporate decision-making increasing pressure to harmonize with the United States...[For example] labour laws and policies in Canada tend to impose a higher regulatory cost on employers and reduce the flexibility and dynamism of labour markets in Canada relative to those in the United States according to the report, what specifically puts Canada at a disadvantage? "Minimum wages tend to be higher and hours of work and overtime regulations tend to be more restrictive, advance notice and severance rules tend to be more stringent and domestic labour laws are more conducive to the formation and retention of unions."

The social safety net is under the same pressure according to the government's report. "The basic affordability of the system and the benefits payment regime... has a direct consequence on competitiveness...By raising the cost of labour as a productive input such programmes can either drive jobs south or encourage further substitution of capital for labour."⁽³⁾

The government has already taken this advice to heart. Public spending cuts, which accelerated after 1989, moved into high gear under the Liberal government whose "war on the deficit" reduced federal programme spending by one-third in relation to GDP during 1995-97. Programme spending by all governments was cut from 40 per cent of GDP in 1992 to 35 per cent of GDP in 1996. Among the most prominent cuts have been those to unemployment insurance, most of which occurred under the current government - after 1993. As a result, the proportion of the unemployed eligible to collect unemployment insurance dropped from 89 per cent in July 1990 to 43 per cent as of July 1997 and is expected to fall to one-third once the reforms have been fully implemented (CCPA/CHOICES 1998). In an environment of high unemployment the impact of such measures on wage demands is obvious.

4.4 Pressure on fiscal capacity:
The competitive drive to attract and maintain investment increases the pressure to reduce taxes and increase subsidies to capital. The resulting fiscal pressure tends to crowd out social spending: from unemployment and disability insurance, welfare and pensions, to education, training and health care. The pressure to compress workers' wages and reduce their purchasing power also weakens the income and consumption tax bases. The enhanced ability of elite workers to move or threaten to move, either to work in other jurisdictions or to transfer their savings puts additional pressure on fiscal capacity.

Moreover, NAFTA, by enhancing the ability of transnational corporations to internalize their operations, increases the volume and relative importance of already high levels of intra-firm trade and accompanying practices of transfer pricing (where prices of imports and exports are set by managers to show minimum profits in high tax jurisdictions and maximum profits in low tax areas) and so too the pressure to lower corporate tax levels. (Vernon, 1994.)

4.5 NAFTA and Macro-Economic Policy:
NAFTA-style integration and macro-economic policies are bound together as mutually reinforcing pillars of neoliberal strategy. Locking in a regime that allows largely unregulated capital flows, the hallmark of NAFTA, limits macroeconomic policy control especially for the smaller partners. The fiscal pressures engendered by NAFTA have been outlined above as have the constraints on public spending.

In Canada, competitiveness imperatives under NAFTA also shape monetary policy priorities, especially the need for wage control. (The rationale for tighter monetary policy is that the "natural rate" of unemployment - the rate at which inflation is triggered - is higher than in the United States due to larger labour market impediments: more generous social benefits, stronger unions etc.) Competitiveness priorities in a NAFTA environment require disciplining labour through unemployment-induced monetary policy in the short term, and in the longer term, harmonizing the natural rate of unemployment with that in the United States through cutbacks to social benefits, weakening labour standards and other removing impediments to a competitive labour market.

Moreover, severe monetary tightening during 1988-91, by depressing domestic demand, forced business to turn to the more buoyant US economy thereby hastening the desired assimilation of the Canadian economy with its larger partner. The resulting rise in the Canadian dollar added to the pressure on import-competing industries to adjust to the new reality or close down.

Similarly, the interplay of macro-policy and NAFTA was evident during the 1994-95 Mexican financial crisis (see also Larudee in this volume). The Mexican growth and structural adjustment strategy depended on attracting sustained inflows of foreign investment. These flows had stalled in the late 1980s despite massive structural adjustment. NAFTA's role was to deepen and make permanent the liberalized trade and investment climate and thereby attract larger and sustained inflows of foreign capital. A central requirement of the strategy was to preserve and enhance its major competitive advantage: low cost labour. This was done with the help of several domestic policy tools for constraining wages outlined later.

The anticipation of NAFTA raised expectations among foreign investors eager to participate in a new era of Mexican growth. FDI inflows, the productive capital that the government was seeking, did increase in the pre and immediate post-NAFTA period (1989-94). However, three-quarters of the inflows were portfolio and other short-term capital eager to benefit from expected post-NAFTA boom, and lured by high interest rates on Mexican government bonds. Only 15 per cent of the inflow was invested in production, and much of that was invested in export production with weak linkages to the domestic economy. (cited Dillon,1997, 63). Moreover, NAFTA had removed most industrial policy tools to strengthen backward linkages from the export sector to the domestic economy.

Foreign mutual funds flooded into the previously closed Mexican stock market which was now flush with issues of newly privatized state enterprises, sending their values soaring. It also poured into Mexican government bonds which had been bolstered by a peso-dollar exchange rate guarantee. The surge of capital into Mexico prompted a huge increase in imports unmatched by exports, and with it a succession of current account deficits rising to $29 billion in 1994. It also kept the peso high and stable, a key element of the government's inflation control strategy. The high peso and growing external gap reflected the effect of growing import competition on an already precarious domestic sector.

NAFTA, while putting in place a legal framework conducive to the inflow of foreign capital, also removed any capacity to control capital outflow. And flow out it did, with growing magnitude in 1994, nervous in the wake of peasant uprisings and political assassinations, wary of the ballooning trade gap, and lured out by rising US interest rates.

The fragile underpinnings of the Mexican growth strategy quickly unravelled at the end of 1994. Within weeks the peso lost nearly half its value and $28 billion fled the country. The contraction of the economy was deeper than anything Mexico had experienced since the 1930s. (The consequences for Mexican employment and wages have been detailed by Gutierrez in this volume.) The peso crisis prompted a quick response by the United States Administration which put together with the help of the IMF, the World Bank and various central banks, an unprecedented $50 billion bailout package.

The crisis shattered what has been called the NAFTA effect, the widely held perception both inside and outside Mexico that the creation of NAFTA-type environments was the way for countries to embark on a sustained growth path, enabling the prolonged restructuring to finally bear fruit (see Morales 1997). Despite the collapse of the euphoria around NAFTA, the official line in Washington and Mexico City denied any connection between the financial crisis and NAFTA, except to say that without the Agreement the crisis would have been worse.

Both the United States and Mexican governments had much at stake in protecting the credibility of the NAFTA option. The extension of NAFTA-type arrangements throughout the hemisphere is the centerpiece of US foreign policy in the area, and a key strategic goal for corporate America. To acknowledge a connection would be to undermine the credibility of the NAFTA model as a viable solution to their economic problems.⁽⁴⁾ For its part, politically destabilized and ever more deeply indebted ($173 billion in 1995), the Mexican government, dependent on US political and financial support, also denied the link between the crisis and an Agreement for which it had gambled so much of its political credibility.

The huge financial support package assembled by the United States government stemmed the haemorrhage and prevented a default on its external debt payments. Observers, citing the benefits of NAFTA, noted that the collapse of Mexican imports from the United States (and Canada) during the crisis was proportionately much less than from non NAFTA countries. This is not surprising given an export sector that had come to rely so heavily on imported US inputs and as such, was greatly insulated from internal instability. Mexican exports to the United States and Canada grew far more than to non-NAFTA countries. The subsequent inflow of direct investment was also to be expected in light of plummeting labour costs and the new commitment to deregulate the banking, communications and petrochemical sectors imposed as a condition of the bailout.

5. Domestic mechanisms affecting employment, incomes and standards

These mechanisms interact with and reinforce the NAFTA mechanisms affecting employment, incomes and standards.

The mechanism of choice in Canada for disciplining wages has been high unemployment maintained primarily through tight monetary policy⁽⁵⁾. Formal wage and price controls were used in the 1970s to deal with the stagflation problems of that era. Since then, explicit wage controls along with the suspension of collective bargaining rights have been confined to the public sector.

Monetary austerity from the beginning of the 1980s steadily forced up unemployment into the 9-10 per cent range where it has remained throughout the 1990s. As Jackson argues in this project, extreme monetary contraction was deemed necessary by policy makers in Ottawa to force a compression of wage growth which had gotten out line with wage growth in the United States, and was deemed detrimental to Canada's long-term competitiveness in a free trade environment.

Public sector cuts through the mechanism of the "war on the deficit" have also played also a key role in disciplining wages, particularly during 1994-97 This has occurred primarily through the erosion of the non-wage income system (social wage), especially unemployment insurance, welfare and pensions. This increased dependence on wage income at time of profound restructuring and a harsh labour market, serves as an effective restraint on wage pressure in an environment where international competitiveness preoccupations reign supreme.

Canadian unions maintained their numbers throughout the 1980s and so far in the 1990s in contrast to their US counterparts whose numbers have fallen sharply. During 1988-1993, overall union density has been stable at 32.6 per cent of the labour force, although in the manufacturing sector unionization fell from 35 per cent to 33.4 per cent a period of rapid restructuring (see Jackson). The presence of union friendly social democratic governments in several provinces has helped. More recently, hostile governments have attacked labour legislation in several provinces making it more difficult to organize and to bargain effectively.

In the United States, internal mechanisms for constraining wages and other labour costs go back to changes to the National Labour Relations Act in the early post-war period which weakened the ability of unions to organize and bargain collectively. Particularly damaging were exemptions from the rand formula permitting workers in the southern states to opt out of union membership. These so-called right to work states were characterized by low wages compared with northern states and very low levels of unionization. The existence of this union free zone has had a chilling effect on wages and labour rights nationally and has served as a testing ground for both governments and companies' employment relations nationally.

The US tariff exemptions which enabled the creation of the Mexican maquiladora programme in 1965 provided another mechanism for companies wanting to escape higher wages and hassle of a unionized work force. As we shall see in the next section, the maquiladora has evolved into a effective vehicle for disciplining labour in the high wage areas of North America as well as within Mexico itself.

Fractious relations between US employers and unions in an atmosphere of growing international competition in the 1970s and 1980s spawned aggressive union busting and union avoidance campaigns. They were assisted by the anti-union rhetoric and measures of the Reagan and Bush administrations and a weakly enforced National Labour Relations Act. The consequence was a further decline in union density (from 25 per cent in 1979 to 15.5 per cent in 1995), a key factor driving the decline of American wages and growing inequality since the late-1970s. (Mishel et. al. 1997:199.)

The deterioration of labour market conditions, notably the growth of non-standard work has also played a role in constraining wages and increasing inequality. For example, the growth of non-standard work, has greatly reduced the proportion of workers with adequate medical coverage. Medical care, unlike Canada where coverage is universal, is a workplace benefit in the United States. In 1993, 58 per cent of the United States population had employer-sponsored health insurance, down from 66 per cent in 1980. Health coverage for workers with a college degree dropped from 79 per cent to 73 per cent during 1979-93. Coverage for workers with less than high school dropped from 52 per cent to 36 per cent during the same period. One half of private sector wage and salary workers working less than 20 hours per week did not have a health plan; one-quarter working between 20 and 43 hours did not have a health plan. (NAALC, 1997) One-third of full-time workers in small companies (less than 100) did not have a health plan. Fear of losing health insurance has clearly contributed to the general employment insecurity and had a chilling effect on wage demands.

The United States minimum wage has, like Mexico's, consistently lagged behind inflation. The 1995 US minimum wage was 13 per cent below its 1984 level. (NAALC, 1997) Proportionately more women in all three countries earned minimum wage or less.

The United States unemployment insurance system and adjustment and training programmes were greatly cut back during the 1980s, as were welfare and anti-poverty programmes. (Recent modest improvements in the minimum wage and unemployment insurance, and the NAFTA adjustment programme have been overshadowed by further cuts to welfare programmes.) Changes in the tax system under Reagan greatly reduced the burden on the top 10 per cent and especially the top 1 per cent of income earners, weakening fiscal capacity and accentuating income inequality.

Monetary policy has also been an important device for disciplining wages. However, the more advanced decline of labour market institutions and social supports has made the need for monetary policy less compelling than in Canada.

Domestic mechanisms of wage control in Mexico (beyond the policy of apertura and NAFTA) start from the fact that the unions are part of the governing party, the PRI. The leadership of the CTM, the official union confederation, are also PRI politicians and members of the government. Thus, the annual tripartite solidarity agreements (Pactos Sociales) between government, business and labour which have been in place since 1987 have been a very effective vehicle for holding down wage increases below inflation and productivity growth. So has the national tripartite Minimum Wage Commission which, between 1982 and 1988, reduced the real minimum wage by over 70 per cent (US-Office of Technology Assessment 1992:81). The 1995 Mexican minimum wage was 51 per cent below its 1984 level (NAALC, 1997). Real average hourly wages in 1994 had fallen 30 per cent below their 1980 levels, by mid-1996 they had dropped another 25 per cent (Sheiken, 1997).

Unions have been an important government policy tool for controlling worker demands. Furthermore, tripartite labour regulatory bodies have effectively blocked the formation of independent unions and thus more effective worker representation. Practices where companies sign contracts with union agents without the knowledge of workers to keep any union presence out of their workplaces, are commonplace.

The maquiladora has several additional devices for controlling wages besides those already mentioned including: collusion between employers and CTM officials to keep workplaces union-free; employer collusion to set wages; segmentation of skills such that the vast majority of workers are placed in the unskilled category; and a preference for young women who have tended to be more compliant and less militant in terms of workplace demands. (J. Carillo 1990, cited in Kopinak, 1996: 13-14). Lower maquila wages exercise a drag on wages in the rest of the manufacturing sector, and as maquila-like production expands it increasingly sets the tone for employment relations throughout the economy.

The lack of unemployment insurance in an atmosphere of a rapidly growing labour force and few formal sector jobs is a powerful deterrent to worker militancy. Moreover, policies of fiscal austerity and privatization have greatly cut back the Mexican system of social protection (medical care, housing, food subsidies education, pensions) since 1982, reducing both the proportion of workers covered and the extent of coverage.

As with the other NAFTA countries, nonstandard work has grown apace with competitiveness pressures and capital mobility, leaving fewer workers with access to benefits. The huge labour surplus has increasingly been pushed into the informal sector, particularly into self-employment. Although open unemployment has doubled since 1993, complementary measures show the real level of un/underemployment to be much higher (see Gutierrez in this volume).

In Mexico 34 per cent of the labour force received workplace benefits in 1995, down from 39 per cent in 1991, due mainly to the rise in non-standard and unpaid work and the decline of the public sector. In 1993 63 per cent of salaried workers received social security benefits down from 66 per cent in 1991. Among the self-employed, small employers etc., only 2 per cent received employment benefits.

6. The maquiladora

The maquiladora industrial programme was established in 1965 to spur industrialization in the Mexican border region with the United States, though it was soon expanded to include non-border areas as well. The programme took advantage of the United States tariff exemptions which allowed US components to be assembled abroad and re-exported back to the United States duty-free. It's importance as a deregulated export zone, stems not only from the profound effect it came to have on wages and jobs both within Mexico and north of the border, but also as a precursor of the approach taken in NAFTA. Ironically, a much different approach was taken in an agreement signed the same year, the Canada-US Auto Pact, a managed trade agreement which contained production and employment guarantees.

In the early years maquila plants did exclusively routine assembly using unsophisticated and obsolete equipment with a preference for hiring young women. During the 1970s maquila plants were granted exemptions from the rules limiting foreign ownership and exemptions from Mexican labour laws; for example, lengthening the probation period during which employer did not have to pay minimum wage, allowing dismissals without having to pay severance, etc. The maquiladora grew, if unevenly, throughout the 1970s experiencing declines in periods of recession in the United States. It was certainly not perceived as a potential replacement to Mexico's dominant form of import-substituting industrial development. By 1981 it employed 131,000 and generated a considerable amount of foreign exchange.

Under pressure from the IMF, The World Bank and the United States government to move to a deregulated, export-oriented model of economic development (post-1982) the maquiladora became a more important focus for Mexican policy makers. Electrical and electronic equipment, machinery and automotive sectors became priority areas for maquiladora production. The massive devaluation of the peso sharply reduced the cost of Mexican labour making it highly attractive to transnational capital.

While the domestic economy stagnated and businesses failed in large numbers throughout most of the 1980s, the maquiladora sector grew quickly. Also, a growing number of foreign-owned transnational plants, not originally set up under maquila rules, reoriented their production from the depressed domestic market toward exports, becoming, in effect, de facto maquiladoras. US auto companies, the main example, exported back to the United States under the reduced tariff provisions its general system of preferences (GSP).

We discussed earlier how the characteristics of employment relations in the maquiladora kept wages down and have increasingly come to shape employment relations throughout the economy. Since 1975, wages in the "maquilized" industry have been about one-half of wages in the non-maquila manufacturing sector. (Gambril 1994, cited in Kopinak, 1996:14.)

The expansion of more capital intensive production and more flexible work methods in the 1980s have been accompanied by a reduction in wages. Carrillo's study of auto plants (cited Kopinak, 150) showed that when a company converted to export production and transferred operations north to the border area, workers' wages decreased even as advanced technology was introduced. Workers in border plants received on average 60 per cent less than their colleagues making finished products near Mexico city. An unskilled worker in the "old" automotive sector made the same wage as a skilled maintenance mechanic at the border. Carrillo observed a homogenization of wages in all maquila sectors regardless of the technology used.

The position of women in the maquiladora labour market was not improved by the changes in the 1980s. Women were much more likely to have unskilled jobs. Few were able to gain entry into the new supervisory or technician jobs that became available. (Kopinak 1996: 183.)

By the end of the 1980s, exemptions which had been granted to the maquila sector in the previous decade, were extended to the entire economy. For example, foreign ownership limits were removed for all sectors except mining, petrochemicals auto parts and communications. The maquiladora sector which had once been the exception, had become the rule in terms of Mexican industrial strategy. It was the vehicle through which Mexico would become integrated into the global economy. The domestic component of value added in the non-maquiladora export sector dropped steadily from 90 per cent in 1980 to 39 per cent in 1994. (Dillon 1994:74.)

The 1989 government Decree on the Maquiladoras prepared the ground work for the NAFTA that was to follow, creating in microcosm the rules that would later be generalized to the whole economy. Firms that were not legally maquiladoras could shift to export production if they had idle capacity, creating part-time maquilas. The legislation was broadened to include agro-industry, mining, fishing and forestry. This blurring of the lines between the export and domestic production would further facilitate the maquilization of the economy.

NAFTA extended the maquila rules of duty free import and re-export (with duty only on the value-added-almost entirely labour) to the whole economy. By 2001, all duties will be removed. Companies that were able under maquila rules to import components and materials from third countries for maquila assembly and export, duty free, to the United States will no longer be able to do so unless they meet the NAFTA rules of origin, or content requirements. As a result many of these companies are shifting their production of components from other locations, mainly Asia, to North America, mainly Mexico. NAFTA increases in stages the ability of maquila companies to sell in the domestic market, removing all restrictions by 2001 when the name maquila will officially be dropped and become part of Mexico's domestic manufacturing industry. Non maquila companies will have virtually no protection and will either have to adapt their operations or fail in the new maquilized environment. Survival will likely entail entering into some kind of an alliance with foreign capital for access to technology and intermediate inputs.

Historically, the maquiladora has been delinked from the domestic Mexican economy, sourcing less than 2 per cent of its non-labour value-added from within the domestic economy. This applies as well to nationally-owned maquilas which are generally sub-contractors to transnationals, providing the labour, the premises and the administration while the transnational provides the capital, machinery, parts, components and supervision. (Kopinak, 1996, 188). There is evidence that under NAFTA the tie to the domestic economy has become weaker still, falling from its historic average of 1.73 per cent to 1.45 per cent ( Dillon, 1997:74.)

Despite the widely held perception of chronic labour shortage throughout the maquila zone, wages have in fact fallen steadily throughout the 1980s and 1990s. The reason according to Kopinak, (146) and others, is employers who collude to set the terms of employment, unions which don't adequately represent workers, and the government which determines what constitutes a fair day's pay through the minimum wage. This labour market control to keep wages low was pioneered in the maquiladora and is key to the maquilization of the Mexican economy.

Perceived labour shortages have been the result of employers unwillingness to pay higher wages. The absence of effective unions to bargain collectively on their behalf has according to Kopinak (1996, 194-95), led workers to pursue individual and household strategies to maximize their income notably by having more members working. The maquila labour market is heavily tilted against workers. High turnover rates are indicative of workers' frustration and the price employers are willing to pay to keep wages from rising.

The 1994-95 crisis brought another collapse in wages prompting a new wave of expansion and a new migration north to the border region and across to the United States. The jump in illegal arrests prompted renewed toughening of enforcement measures by US officials and measures such as proposition 187 in California to discourage immigration by denying any form of state assistance.

The peso devaluation aided the maquila producers (who conduct their operations in US dollars) by lowering their labour costs. The enclave nature of their production insulated them from the internal turmoil of the high inflation, high interest rates and collapse of internal demand. It accelerated the foreign takeover of Mexican business, and the conversion of Mexican-owned business itself to maquiladora status.

Fuelled by the NAFTA and the peso collapse the maquiladora entered another boom period. Employment jumped by 407,000 or 75 per cent since NAFTA's implementation, from 542,074 in 1993 to 948,658 by October 1997 (INEGI). In 1981, the year before the Mexican debt crisis, there were 131,000 employed in the maquila sector. By 1988 employment had grown to 369,489. Since then another 579,000 workers have been added to the ranks of the maquiladora work force. In 1982, maquila employment made up 5 per cent of manufacturing employment. By 1995 it had surpassed non-maquiladora manufacturing employment. (see Gutierrez.)

7. Economic opening under CUFTA/ NAFTA

Both Mexico and Canada have undergone fundamental opening of their economies since 1990. Mexico's trade (exports plus imports) doubled as a proportion of GDP from 24 per cent to 48 per cent during 1990-95. Canada's trade rose from 58 per cent to 71 per cent of GDP during this period, see Table 1. The United States, whose trade openness was by far the lowest, saw a moderate increase in trade openness, from 21 per cent to 24 per cent of GDP during this period. (NAALC,1997.)

Both Canada and Mexico were already very trade-dependent on the United States prior to CUFTA/NAFTA, Nevertheless, the share of Canadian exports going to the United States rose sharply, from 71 per cent in 1989 to over 80 per cent in 1996. Imports from the United States, although less-concentrated, also rose significantly, from 64 per cent to 67 per cent in 1995 (IMF).The most open economy to begin with, Canada's exports of goods and services as share of GDP, rose steadily from 28 per cent in 1989 to 42 per cent in 1995 (NAALC,1997). Imports rose at a similar pace in relation to GDP, from 31 per cent to 42 per cent indicating a major reorientation of economic activity. Exports of goods and services grew twice as fast as overall GDP growth during the 1980s and five times as fast GDP during the first half of the 1990s. Foreign investment flows also increased sharply in the free trade era. Canada, the industrialized country with by far the highest level of foreign ownership, saw inflows of FDI rise from $US 4.2 billion per year during 1983-88 to $6.2 billion annually during 1989-96. Outward flows of Canadian-owned FDI also grew rapidly, from $4.3 billion per during 1983-88 to $5.6 billion per year during 1989-96. Inflows and outflows of portfolio capital also grew rapidly. Inflows rose from $11.5 billion per year during 1983-88 to $21.2 billion per year during 1989-96; and outflows rose from $1.5 billion per year to $6.7 billion per year between these two time periods.

Table 1. Macro-economic and trade indicators

Mexico's exports to the United States, like Canada's, became more concentrated, growing from 70.4 per cent of total exports in 1990 as NAFTA negotiations began, to 82.9 per cent in 1993 and continuing to rise to 83.7 per cent in 1995. Import concentration from the United States also rose, though from a smaller base and at a less rapid rate. Mexico's exports as share of GDP did not change much during the pre-NAFTA period 1989-93), fluctuating between 18 per cent and 19 per cent of GDP. Although, they had risen during the early years of the trade liberalization - from 15 per cent in 1985. (NAALC, 1997) However, exports rose sharply to 27 per cent of GDP in 1995, reflecting the structural jolt in the economy. Imports on the other hand, rose in the pre-NAFTA period - from 12 per cent to 18 per cent of GDP-reflecting the deepening of trade and investment liberalization and high peso monetary policy during these years. (Imports rose during the first stage of trade liberalization, from 10 per cent of GDP in 1985 to 12 per cent in 1989.) Imports fell in the wake of the 1995 crisis to 15 per cent, but remained substantially above their pre-1989 level, reflecting to the increased dependence of Mexican manufactured exports on imported inputs.

Comparing the growth of the Mexican economy overall to growth of the export sector, GDP in both the 1980s and 1990s grew at an average annual rate of just 1 per cent. (Growth picked up moderately in the 1990s until 1995 when it contracted by 6.2 per cent.) However, throughout the 1980s and 1990s annual exports of goods and services grew rapidly - 6.6 per cent and 6.8 per cent respectively. (World Bank, 1997.)

The inflow of foreign direct investment into Mexico also increased dramatically during the 1990s, the annual inflow rising from $US1.8 billion during 1983-88, to $6.2 billion per year during 1989-96. Portfolio inflows also increased massively, from a negative $-0.3 per year during 1983-88, to an average $7.7 billion per year during 1989-96. (Of course, these more volatile and speculative flows resulted in a sudden $10 billion outflow in 1995.)

Mexico used its oil wealth to borrow heavily in international markets in the late 1970s. In 1980, shortly before the debt crisis, it had $58 billion worth of external debt. Fifteen years later its external debt had soared to $166 billion and more than doubled from 31 per cent to 70 per cent of GDP. However Mexico was a much more export-oriented economy and the ratio of external debt to exports had declined from 232 per cent to 171 per cent. The ratio of debt servicing costs to exports fell in half, from 44 per cent to 24 per cent. (World Bank, 1997.)

The transformation of the Mexican economy driven by trade and investment liberalization stems from the policies implemented in the wake of the 1982 crisis, a decade before NAFTA came into effect. A key structural change associated with this economic opening was the growth in manufactured exports to the United States using imported inputs or intermediate goods from the United States⁽⁶⁾. While manufactured exports rose from 13 per cent of total exports in 1982 to 84 per cent in 1995, intermediate goods imports rose from 53 per cent to over 80 per cent of total imports in 1995. (Hinojosa et al., 1996: 39.)

The changes were driven by the crisis and the IMF-mandated structural adjustment programme, agreed to and implemented by Mexican policy makers. But they were also driven by the fact that US transnationals had decided to make Mexico an integral of their global competitiveness strategies, as a low labour cost export platform close to the United States market.

The change in the structural relationship between imports and exports was evident during the 1995 crisis when intermediate goods imports from the United States fell only momentarily before resuming their growth in line with manufactured exports. Consumer and capital goods imports from the United States the other hand experienced a deeper and prolonged compression after the peso collapse. In the import substitution era, intermediate goods imports used for domestic production fell to a much greater extent during the 1982 crisis. (Hinojosa, 1996, 38.)

Thus, the demand for Mexican exports (i.e. US demand) is now the key determinant of Mexican imports rather than changes in domestic demand. This, according to Hinojosa, is the main structural difference between two Mexican financial crises. Moreover, this new import-export relationship is growing even faster than the growth of maquila exports "as this strategy of manufacturing for export is adopted by many other regions, sectors and types of firms in the Mexican economy." (ibid, 9) seeking insulation from the demand weakness of the domestic Mexican economy.

In 1986 Mexico joined the GATT and by 1988 the average tariff had dropped to 10 per cent from 25 per cent⁽⁷⁾. At about the same time Mexican policy-makers began to deregulate financial and investment flows. During 1989-94 foreign capital inflows supported a high peso and expansion of imports accompanied by widening trade and current account deficits. NAFTA was seen by policy makers as a tool for enlarging and stabilizing these foreign capital inflows [Hinojosa, 1996:36]. However, this time the financial inflows were largely portfolio capital - equity and bonds rather than bank loans or direct investment. Greater openness has meant greater dependence on international financial markets.

The United States economy, the world's largest, was only moderately dependent on Canada its largest trade partner - 21.5 per cent at the beginning of CUFTA. By 1995 it had barely moved, to 21.6 per cent. Slightly lower dependence on Canadian imports, 18.2 per cent of total imports in 1989, rose slightly to 19.2 per cent in 1995. (IMF) US export dependence on Mexico, its third largest trade partner, also low, increased significantly from 6.9 per cent to 9.0 per cent of total exports during 1989-93, falling back to 7.8 per cent in 1995. US imports from Mexico as a share of its total imports rose steadily throughout the pre and post NAFTA periods - from 5.6 per cent to 6.8 per cent in 1993 to 8.1 per cent in 1995.

The United States economy is far less open than those of Mexico and Canada. There was, nevertheless, a steady overall trade opening, exports rising from 7.2 per cent to 12.4 per cent of GDP during 1984-94, falling back moderately to 11.5 per cent in 1995. Imports also rose steadily during this period, from a larger base of 10.3 per cent of GDP in 1984 to 14.4 per cent of GDP in 1994, falling back to 13.1 per cent in 1995. (NAALC,1997.)

Comparing US export growth to overall economic growth, exports grew during the 1980s at an annual rate of 5.2 per cent, substantially above the annual 3 per cent rate of GDP growth. During the first half of the 1990s the divergence widened - with annual growth slowing to 2.6 per cent and exports rising at an annual rate of 7.3 per cent. (World Bank, 1997).

There was also a large increase in inward FDI into the United States during 1989-96 ($49 billion per year) compared to the 1983-88 period ($34.4 billion per year). More striking, however, was the rise in outward flows of US-owned FDI, from $16.6 billion per year during 1983-88 to $57.2 billion per year during 1989-96. Both inflows and outflows of portfolio investment also increased rapidly. The former jumped from $ 56.8 billion to 139.1 billion per year, and outward flows soared, from $6.1 billion per year to $69.5 billion per year between these two time periods.

7.1 Trade and manufacturing employment
As economic liberalization and integration have proceeded under NAFTA, manufacturing sector employment has fallen in all three countries-not only in relation to the rest of the economy but also in absolute numbers. Canada has been hardest hit, with a contraction of 255,000 or 12.8 per cent during 1988-96 (table 2), more than three times the United States decline of 802,000 or 3.8 per cent during this period (see tables 2 and 3)⁽⁸⁾. The first phase 1988-93, saw the biggest shrinkage, 375,000 or 18.8 per cent in Canada and 1,763,000 or 8.3 per cent in the United States. During this stage there was a recession in both countries, although more severe and prolonged in Canada due to deeper restructuring and to a tighter monetary policy. In phase II (1993-96) there was a partial recovery of employment in most sectors in both countries.

In Mexico the manufacturing sector as a whole declined only slightly, from 1.41 million to 1.37 million during 1990-1995. But this masked a profound structural shift. Maquiladora sector employment grew by 433,000 or 117 per cent during 1988-96 while the non-maquila sector employment fell - per cent during the same period. It coincided with a rapid growth of manufactures exports, mainly to the United States. Manufactures grew from 18.6 per cent of total exports in 1985, the beginning of the apertura, to 37.5 per cent in 1988. By 1995, manufactured exports had grown to $80 billion from $38 billion in 1988, increasing its share to 83.7 per cent of the total. Intermediate imports grew at a similar pace, reflecting the high import content of exports.

In the transportation equipment sector (mainly automotive), which accounts for about 30 per cent of NAFTA trade Canadian employment was steady (-0.4 per cent), with some fluctuation, during 1988-96, while US employment fell by 300,000 or 12.7 per cent. The maquila auto sector grew by 86,000 or 116 per cent during this period. Electrical/electronics sector employment in Canada fell by 40,000 or 25 per cent during 1988-96, and in the United States it contracted by 133,000 or 6.5 per cent. Maquiladora employment in the electronics sector (the largest) grew by 94,600 or 98 per cent during this period. Textile and clothing employment in Canada contracted by 47,000 or 26 per cent during 1988-96, and by 323,000 or 17 per cent in the United States.

Table 2. Canada: Manufacturing employment

Table 3. United States: Manufacturing employment

Both Canada and Mexico (post 1994) have seen their merchandise trade surplus with the United States increase under free trade, though their current account surplus is much smaller because of the large net outflow of interest and dividend payments to the United States. The relationship between changes in trade balances, however, and employment changes is not straightforward. An improvement in trade balances does not necessarily mean an increase in employment. Employment also depends on a variety of interrelated factors all of which are affected by integration under NAFTA. These include: changes in trade and investment with non-NAFTA countries; macroeconomic policy (fiscal and monetary) and performance (including output, income and aggregate demand); nature and changes in the structure of wages (eg., the displacement of high income jobs and replacement with lower income jobs, or the decline in union bargaining power); cross-border movement of capital (eg. production facilities); the level and changes in import content of exports (affected by, for example, the ownership structure); changes in the labour intensity of exports and imports including its sectoral composition; level and changes in intra-firm trade (and accompanying transfer pricing).⁽⁹⁾

By way of example, we looked at the changes in trade balances between Canada and the United States in the 21 major manufacturing categories (two-digit SIC codes) during 1998-96 and compared these to Canadian employment changes in these sectors [table 5]. Bear in mind that the export share of manufacturing output in Canada rose from 40 per cent to 60 per cent during this period.

8. Comparative portrait of NAFTA economies and labour markets⁽¹⁰⁾

The United States was the world's largest economy in 1995, 12 times larger than the Canadian economy, and 27 times larger than the Mexican economy. Canada's GDP per capita was four-fifth's of the United States level. Mexico trailed far behind at just over one-quarter of the United States level and just over one-third of Canada's per capita GDP (NAALC 1997).⁽¹¹⁾

The Mexican economy grew hardly at all during the 1980s and mid-1990s, and with population growing rapidly, GDP per capita fell 14 per cent during the 1980s and another 6 per cent during the first half of the 1990s. This is a staggering collapse of living standards, especially when compared with the three previous decades when growth averaged close to 7 per cent per year and per capita GDP grew almost 4 per cent per year.

The Canadian economy slowed considerably in the 1980s compared with the post-war golden age. Nevertheless, with a slower growing population, GDP per person still grew 24 per cent. The situation changed markedly in the free trade era as the economy stagnated and GDP per capita actually declined 2.8 per cent during 1990-95. [Personal income per capita declined even more rapidly - 5.1 per cent during 1989-96.] The United States economy maintained a steady if slower growth path in the 1980s declining somewhat during the 1990s. Consequently, per capita GDP grew 20 per cent during the 1980-90 and 6.2 per cent during 1990-95. That growth, as we shall see later, has been more unevenly distributed.

8.1 Employment and unemployment
In 1995 the United States accounted for 73 per cent of the North American labour force, with Mexico holding 19 per cent and Canada 8 per cent (table 4). The Mexican labour force grew 48 per cent, almost three times as fast as the United States and Canada labour force during 1984-95, the result of higher population growth in previous decades as well as the faster entry of women into the labour force.

The United States and Canada had similar labour force participation in 1995 (66.7 per cent and 64.8 per cent respectively) while Mexico's was lower (59.6 per cent) due to the lower Mexican female participation rate (37 per cent) compared to the Canadian (58 per cent) and US (59 per cent) participation rates. Mexico had higher a male participation rate (84 per cent) than either Canada (73 per cent) or the United States (75 per cent) and the male participation rate increased during 1984-95 compared to the United States and Canada whose rates dropped.

Mexico had proportionally almost twice as many youth (15-24 years) participating in the labour force (29 per cent) as either the United States (14 per cent) or Canada (17 per cent) in 1995. The United States had the highest participation rate of older workers (55-64 years) in the work force: 57 per cent in 1995, up from 54 per cent in 1984. Mexico's rate was 53 per cent, up from 41 per cent in 1984. Canada had the lowest older worker participation at 48 per cent, down from 52 per cent in 1984. This reflects the greater need to work longer due to insufficient retirement income in the United States and especially in Mexico. The Canadian rate reflects higher and growing early retirement driven in part by fewer job opportunities.

Mexico, has a large informal employment sector (estimated at 38 per cent of total employment in 1988). The informal sector is a subsistence sector characterized by very low earnings, no benefits and a high degree of precariousness. It includes household domestic work, employees, employers and piece workers in establishments with fewer than five workers, (excluding formal sector self-employed as well as professional and unpaid workers). It has grown steadily as job opportunities in the formal economy have been unable to absorb the rapidly growing labour force. The need to survive makes unemployment an unaffordable luxury for most.

The high proportion of employment in the primary sector also distinguishes the Mexican economy from the US and Canadian economies: 24 per cent compared to 3 per cent and 4 per cent respectively. The service sector in Mexico is proportionately smaller, accounting for 54 per cent of employment, compared with 74 per cent in both Canada and the United States. The vast majority of employment growth in all three countries during 1984-95 was in the services sector - 96 per cent in Canada, 98 per cent in the United States, 91 per cent in Mexico (1991-95). Manufacturing accounted for similar share of employment in all countries in 1995: 15.3 per cent in Canada, 15.8 per cent in Mexico, and 16.4 per cent in the United States.

Non standard work - part-time, temporary, self employment and multiple job holding  - has grown steadily in all three countries during 1984-95 despite some cyclical fluctuation. The proportion of part-time workers has grown in all three countries; up in Canada from 14.8 per cent to 18.6 per cent of the employed work force during 1984-95; up in the United States from 17.6 per cent to 18.5 per cent; and up in Mexico from 25.6 per cent to 26.6 per cent (1991-95). The involuntary part-time work force grew fastest in Canada and actually fell in the United States, reflecting the lower US unemployment rate.

Table 4. Labour Market Indicators