Happy Birthday, NAFTA
The 10th anniversary of the North American Free Trade Agreement, on Jan. 1, comes at a time of increasing opposition toward globalization. American high-tech engineers and software writers are angry about their jobs migrating to India. Europeans are concerned about a decline in their way of life. Latin Americans worry about economic immiseration. Even in China, where free trade has unleashed a torrent of growth, there are questions about how fast the nation can open up without generating political upheaval. NAFTA is a litmus test for all these anxieties. Yet by nearly all hard statistical measures, it has been a great success.
Mexico's per capita income has risen 24% since 1993 to over $4,000, nearly 10 times China's. Exports have grown 300%, from $52 billion to $161 billion. Mexico's $638 billion economy is the ninth largest in the world today, up from 15th a dozen years ago. Its per capita gross domestic product approaches $6,000. Foreigners invest $12 billion a year, three times what India takes in. Equally important, the transparency required for NAFTA's implementation helped Mexico's evolution from one-party authoritarianism to multiparty democracy.
Despite all this, many Mexicans feel betrayed by NAFTA and are disenchanted with free trade. Real wages in manufacturing have stagnated, and U.S., European, and Japanese corporations are shifting some of their factory work to China. In fact, China has just replaced Mexico as the No. 2 exporter to the U.S. after Canada.
Mexicans are learning a hard lesson in what free trade can and cannot do. The truth is that Mexico can become an economically advanced nation only if it follows through on the opportunities afforded it by free trade. The country needs much better education to compete with China and India, and NAFTA can't provide that. It needs cheaper electricity and better roads, and NAFTA can't provide those either.
After 10 years of NAFTA, it is clear that free trade works best in developing countries in combination with effective government policies. China is becoming more competitive with Mexico because its state-owned banks are financing new power plants and highways. Mexico's banks aren't. Beijing offers huge tax breaks to foreign investors who focus on poorer inland provinces instead of the richer coastal regions. Mexico needs to move factories away from the U.S. border to the poorer south but has no serious policy to do so. China demands that foreign companies transfer technology and manufacturing know-how to Chinese partners. Mexico doesn't make such demands. Perhaps it should.
In NAFTA, free trade may have been oversold as the elixir of Mexican prosperity, but even so, the pact has done a remarkable job of raising that country's standard of living. The anti-globalization chorus is simply not acknowledging the progress Mexico has made. Certainly the experience of the past 10 years has fine-tuned the message of free trade. Governments must act in concert with open markets to provide the schools, highways, electricity, and investment incentives for generating growth. But the message remains the same -- free trade promotes prosperity.