Two Years After NAFTA: A Free Market Critique and Assessment

Two Years After NAFTA: A Free Market Critique and Assessment

November 30, 1995

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The debate over the North American Free Trade Agreement (NAFTA) was characterized as a clash between free trade and protectionism. However, close inspection of the NAFTA proposal revealed not genuine free trade, but a managed trade agreement designed to create a North American trade bloc. Despite the free trade rhetoric behind NAFTA, the treaty itself is a mixture of trade-liberalizing and trade- restrictive elements. For this reason, opposition to the agreement came from a most unlikely source: free market advocates. For free traders — even those who supported the treaty as an incremental step toward freer world trade — the practical experience of managed trade under NAFTA warrants careful scrutiny.

Genuine free trade consists merely of the unilateral lowering of trade barriers such as tariffs, bureaucratic regulations, and administrative penalties. “Free trade” through government negotiations, on the other hand, conditions the opening of markets on reciprocal actions by other countries. Negotiations lead to managed trade agreements, in which mercantilist governments attempt to balance their imports with greater exports. The result is a greater impediment to open markets. The formation of NAFTA has caused respected free-trade scholars, such as Columbia professor Jagdish Bhagwati, to question the wisdom and the theoretical basis of regional free trade agreements.

  • When trade barriers are lowered for members of a trade bloc, they are raised in a relative sense for non-members, causing offsetting trade and investment diversion.
  • Regional trade blocs are a futile attempt to protect domestic industries through administratively arbitrary “rules of origin,” trade barriers applied against foreign products and components.
  • The bureaucracies which implement trade agreement rules are ripe for manipulation and capture by special interests.
  • The explosion of preferential trade compacts makes trade increasingly confusing and risks the fragmentation of world trade into competing defensive blocs.
  • Preferential trade agreements can be used to incorporate interventionist government policies — such as labor, environmental and other social standards for trade.
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The theoretical free market objections to trade blocs have been confirmed by the experience of NAFTA. The treaty’s first two years have been characterized by the typical hallmarks of excessive government: mercantilist planning, environmental controls, industrial policy subsidies, and bailout guarantees.

The North American industrial policy of “production-sharing” anticipated that Mexico would purchase large quantities of U.S. exports. Yet central planning did not produce the results that were scripted under NAFTA: economic growth south of the border, transformation of Mexico into a consumer’s paradise, and the creation of millions of U.S. export-related jobs.

NAFTA also promotes the export of U.S.-style environmental regulations south of the border. NAFTA created a North American Commission on Environmental Cooperation (CEC), headquartered in Montreal, which is now in the process of harmonizing regional environmental standards related to pollution prevention, energy efficiency, climate change, habitat protection, and environmental law enforcement. A variety of new Mexican laws are being patterned after U.S. laws in the areas of hazardous waste, transportation, forestry, fisheries, soil, and water standards. Bureaucratic regulations punish consumers, stifle competition and create trade barriers. The potential long term consequences of NAFTA’s environmental provisions were demonstrated by the filing of several petitions with the NAFTA environmental commission seeking to tighten enforcement of environmental laws. NAFTA threatens to undermine national sovereignty by internationalizing domestic environmental policies.

NAFTA has failed to correct distortions of the market caused by subsidies for domestic producers and exporters. An array of export promotion programs, foreign aid giveaways, and industrial policies continue under NAFTA at the North American Development Bank, the Export Import Bank, and the World Bank.

NAFTA played an integral role in the devaluation of the peso and subsequent Mexico bailout. A NAFTA financial side agreement called the North American Financial Group (NAFG) propped up the peso at an artificially high foreign exchange value. NAFTA helped to conceal Mexico’s financial condition, heightened investment losses, and undermined market discipline when the peso finally crashed. NAFTA’s peso bailout fund would later form the basis for a much larger bailout of Mexico’s foreign debt obligations. NAFTA has distorted trade by destabilizing currency markets, subsidizing investment and banking interests, and generating regionalized inflation.

The free trade hope with NAFTA has been that, despite its flaws, one regional free trade agreement will beget others, producing a gradual expansion of economic liberalism and relatively unrestrained commerce. Yet every increase in cross-border exchange encouraged by NAFTA has been accompanied by a rise in bureaucratic restrictions on international commerce. The treaty did not simply lower tariff barriers between the member countries, it erected new barriers to outside parties and created a new bureaucracy capable of entangling trade policy in a morass of environmental and social concerns. The NAFTA experience should prompt a serious reexamination of negotiated trade agreements by the free trade community.