NEGATIVE EFFECTS OF NAFTA

NAFTA has produced negative effects in all three countries (U.S., Canada, Mexico), including contributing to wage inequality in the United States (led to middle class shrinkage).

NAFTA did not do enough to protect the environment or to improve working conditions in Mexico. The government had not done enough to improve economic and political conditions in Mexico. This trade agreement has produced disappointingly small net gains in employment in the countries of North America.

The negative situation currently faced by Mexico also demonstrates that developing country must use transition time aggressively to prepare the rural population for the wrenching adjustment it will face. Policies should be adopted to shift farmers to competitive crops, to develop alternative sources of employment in rural areas, and to invest heavily in education to prepare the population for the modern occupation.

US policy on agricultural subsidies changed significantly in ways that were not foreseen during the NAFTA negotiations, most notably in the passage of the farm bill in 2002 that increased subsidies. Successful competition will be imposable for the developing country under those circumstances.

Net impact of NAFTA on US employment is small, the impact on overall wages is also likely to be small. Compared to the period before NAFTA, the top 10 percent of household have increased their share of national income, while the other 90 percent have lost their income share or seen no change. Regional inequality within Mexico has also increased.

In a trend that predates NAFTA, income inequality in the US has been increasing for most of the last two decades. The growing wage gap between high-skilled and low-skilled workers is one of the causes.

In Mexico, rural farmers are still struggling to adapt to NAFTA-induced changes. Trade adjustment assistance should provide income support to workers and small farmers during transitional periods, as well as funds for training for new occupation. Developing countries negotiating with wealthier trading partners will likely need financial assistance from those countries, as part of the trade package, for transitional adjustment programs.