NAFTA: Two Mexicos, Two Outcomes

The trade treaty that has increased Mexico's exports and expanded its middle class has left small farmers without a share of the prosperity

Anyone who doubts the transformative power of free trade need only look at Mexico. Since Jan. 1, 1994, when the country teamed up with the U.S. and Canada to create the North American Free Trade Agreement (NAFTA), Mexico has shed its stereotypical image of an emerging market wracked by trade deficits and recurring financial crises. Today, Mexico is better known for its industrious workers toiling in state-of-the-art factories and its engineers fine-tuning jet turbine designs.

There's no question that the country has benefited greatly from NAFTA: Mexico has become the world's 15th-largest exporter, sending abroad $272 billion of merchandise in 2007 ($43 billion of which was oil). It transformed a $3 billion trade deficit with the U.S. in 1993 into a $75 billion surplus in 2007. Mexico went on to sign free-trade agreements with 41 other countries, attracting some $223 billion of foreign investment in 15 years.

Farmers Protest in Mexico City

So, why did tens of thousands of angry Mexican farmers take to the streets in late January, demanding that NAFTA be renegotiated? Because after a decade and a half of free trade, Mexico's economic transformation is incomplete, and many Mexicans are blaming NAFTA for a plethora of problems that have more to do with bad government policies than with free trade.

Jaime Serra Puche, a Yale-trained economist who, as Mexico's Commerce Secretary, negotiated NAFTA in the early 1990s, says the agreement has done what it was intended to do. "NAFTA was meant to help us increase our export capacity and to attract foreign investment, and on those two fundamental objectives, it has been a huge success," he argues. "It's crazy to think that NAFTA could resolve each and every one of our economic problems."

On Jan. 31, 50,000 farmers from around the country converged on Mexico City and marched to the historic downtown plaza, where Mexicans traditionally have aired their grievances against the government. They grazed cattle in a grassy median in front of the Mexican Stock Exchange, burned an old farm tractor, and then motored four dozen other tractors down the city's main avenue. Carrying placards saying "We've had enough! Time to renegotiate NAFTA!" they walked past sleek skyscrapers housing key foreign investors, including HSBC (HBC), Ford Motor (F), American Express (AXP), and a luxury Ritz-Carlton hotel under construction.

The farmers were angry because the government had lifted the final, remaining import tariffs on the most sensitive farm products they produce: corn, beans, sugar, and milk. When NAFTA was negotiated, special 15-year protection was given to those products, so that millions of peasant farmers would have extra time to prepare for competition from heavily subsidized U.S. farmers. But Mexico isn't being flooded by cheap corn: The country consumes more than it produces, and has long imported U.S. corn to make up the difference. What angers farmers, really, is that they're just as poor as they were before NAFTA; the government has done little since then to help them move beyond subsistence farming.

The contrast between the weathered faces and worn clothes of the protesting farmers and the prosperous, suited businessmen who closed their offices early to escape the commotion illustrated the sharp divide between two Mexicos: one that has thrived under NAFTA and another that is still struggling to cope with an open economy.

Rural Poverty Persists

The liberalization of trade that has helped boost Mexican business and expand the middle class has left small farmers behind. Imported consumer goods are beyond their reach. Inflation has dropped to U.S. levels, but the rural poor are unable to join millions of urban Mexicans taking advantage of low interest rates to become first-time home buyers. Not all have benefited from government cash transfers that have reduced rural poverty from 47.5% of the rural population to 32.7%.

Many have given up on farming, instead sending their sons on desperate treks across the border to toil as construction workers or gardeners in the U.S. The $24 billion those migrants send home annually keeps several million families afloat.

Epifanio González farms 25 acres near Tepetlazingo, in Guerrero state, planting corn, beans, chilies, and peanuts. After feeding his nine children, he sells what's left over, netting just $1,000 a year. He receives around $200 annually from Procampo, a government farm subsidy program, but says it doesn't even cover the cost of fertilizer and seeds. "NAFTA has been bad for us—only the big producers benefit and we small farmers are left out in the cold. The government has done nothing for us," grumbles González, 54, who marched in the protest.

Two of González's nine brothers live in New York, where one works as a restaurant cook and the other does odd jobs at a shipping port. They send home $500 a month, the only way the extended family makes ends meet. "Migrating was their only option," he says, hoisting a poster depicting Emiliano Zapata, the peasant hero of the 1910-1920 Mexican Revolution, who demanded expropriation of large landholdings for distribution to the poor. That redistribution is at the root of Mexico's agricultural dilemma today, as small, unproductive plots of land are increasingly subdivided among large families.

Subsidies Favor Large Farms

Many farm subsidies are distributed through politically connected agriculture confederations—which organized the protest march—and much of the money never finds its way into farmers' pockets. "Poor rural farmers have marched every year asking for help, and the subsidies always go to the union organizers or to large farmers," says Luis de la Calle, Mexico's former undersecretary for international trade negotiations.

When Mexico's government eliminated crop price supports under NAFTA, it promised to help small farmers become more efficient, but it has done little beyond handing out small cash subsidies equal to around 15% of a farmer's income. It hasn't helped farmers install irrigation or switch to labor-intensive vegetable crops more appropriate for Mexico's soil and climate; 80% of farmers work on non-irrigated fields of 25 acres or less in size, producing just one crop a year—when enough rain falls. Only 6% of Mexican farms are currently capable of exporting, the Agriculture Ministry says. "The government had 15 years to come up with incentives to convince farmers to plant broccoli and asparagus, but they didn't do that," says Serra Puche.

Instead, it opted for survival of the fittest, handing the lion's share of federal farm subsidies—which will total $22 billion this year—to large farms that can produce corn more efficiently, and that can invest in irrigation systems, packing houses, and refrigerated trucks to become big exporters of vegetables and fruits.

Such aid has helped Mexico become the second-largest exporter of agricultural products to the U.S., with such exports growing from $2.9 billion in 1993 to $11.5 billion last year. Thanks to imports of U.S.-grown feed corn, production of poultry, pork, and beef has tripled, cutting prices by 40% and boosting per capita meat consumption from 86 pounds to 132 pounds in 15 years. Now, says De la Calle, Mexico "should go from exporting lettuce and tomatoes and start exporting salads, turning the countryside into North America's kitchen."

That may be where Mexico's competitive advantage lies. But unless policymakers start coming up with ways of helping 6 million small farmers modernize their operations, more farmers' sons will seek a better life on the other side of the Rio Grande, and more protest marches are sure to occur.

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