Mexico: Was NAFTA Worth It?

A tale of what free trade can and cannot do

Piedad Urquiza probably doesn't know much about NAFTA, but she knows what it's like to have a steady job. Urquiza works at a Delphi Corp. (DPH ) auto-parts plant in Ciudad Juárez, just across the border from El Paso. The assembly line is a cross section of working-class Mexico, from twentysomethings raised in this border boomtown to veteran hands harking from the deep interior. In the years since NAFTA lowered trade and investment barriers, Delphi has expanded its presence in the country. Today it employs 70,000 Mexicans, who every day receive up to 70 million U.S.-made components to assemble into parts. The wages are not princely by U.S. standards -- an assembly line worker with two years' experience earns about $1.90 an hour. But that's triple Mexico's minimum wage, and Delphi jobs are among the most coveted in Juárez. "I like the environment, I like my colleagues," says Urquiza, a 56-year-old widow who assembles the switches that control turn signals. The daughter of a poor rancher, she dropped out of school after the seventh grade and has relied on her Delphi job to raise six children to adulthood -- and, she hopes, to a better life.

Urquiza and millions of other Mexicans live out daily one of the most radical free-trade experiments in history. The North American Free Trade Agreement ranks on a par with Europe's creation of the euro, China's casting off Marxism for capitalism, and Russia's turbulent embrace of a market economy. It encompasses 421 million people and melds two first-world economies -- the U.S. and Canada -- with a struggling third-world nation, Mexico. When it was formed, the bloc was seen as a bold attempt to demonstrate once and for all the free trade's vast power to turn a developing nation into a modern economy. If anything was a litmus test for globalization, NAFTA was it.


On Jan. 1, NAFTA will celebrate its 10th anniversary. The assessment? The grand experiment was a smashing success on many levels. American manufacturers, desperate for relief from Asian competition, flocked to Mexico to take advantage of wages that were a 10th of those in the U.S. Foreign investment flooded in, rising to an annual average of $12 billion a year over the past decade, three times what India takes in. Exports grew threefold, from $52 billion to $161 billion today. Mexico's per capita income rose 24%, to just over $4,000 -- which is roughly 10 times China's. "NAFTA gave us a big push," Mexican President Vicente Fox told BusinessWeek. Fox notes proudly that Mexico's $594 billion economy is now the ninth-largest in the world, up from No. 15 a dozen years ago. "It gave us jobs. It gave us knowledge, experience, technological transfer."

Just as important, though not easily quantified, the pact has spurred profound political change. Mexicans who backed open markets wanted an open political system as well. Would the long-ruling Institutional Revolutionary Party (PRI) have fallen from seven decades in power in 2000 if Mexico hadn't signed a treaty requiring government transparency, equal treatment for domestic and foreign investors, and international mediation of labor, environmental, and other disputes? It's hard to believe democracy would have come to Mexico as quickly without NAFTA.

Impressive milestones -- and seemingly ample proof that free trade delivers the goods. But rightly or wrongly, a large proportion of Mexicans today believe the sacrifices exceeded the benefits. The Mexican mood is infecting other Latin countries, which after 15 years of gradually opening their own economies to trade and investment are showing pronounced fatigue with the "Washington consensus," the free-market formula preached by the U.S. and the International Monetary Fund. In an August poll of 17 Latin countries carried out by Chile-based Corporación Latinobarómetro, just 16% of respondents said they were satisfied with the way market economics were working in their countries. Thus NAFTA's perceived shortfalls are giving fresh ammunition to free trade's opponents. "Now you have a whole network of people organizing against the Free Trade Area of the Americas and globalization because of what has happened in Mexico under NAFTA," says Thea Lee, the AFL-CIO'S chief expert on international trade pacts.

That's an ironic twist: It was NAFTA, after all, that kicked the global free-trade movement into high gear, spurring forward the Uruguay round of global trade talks in the mid-1990s and setting the stage for China's entry into the World Trade Organization in 2001.

Why have so many Mexicans soured on NAFTA? One problem is that the deal was oversold by its sponsors as a cure-all, a near-magic way to turn Mexico into the next Korea or Taiwan. Ten years later, many think the pact has stopped paying dividends -- and that Mexico has been unfairly neglected by a Washington consumed by the war on terror. Speaking before an audience of Mexican students on Nov. 11, Mexico's envoy to the U.N., Adolfo Aguilar Zinser, characterized NAFTA as "a weekend fling." The U.S., he said, "isn't interested in a relationship of equals with Mexico, but rather in a relationship of convenience and subordination." While Zinser's remarks cost him his job, his words struck a chord with millions of Mexicans. In an October survey by a leading pollster, only 45% of Mexicans said NAFTA had benefited their economy. That's down from the 68% who in November, 1993, saw the pact as a strong plus.

Mexicans are feeling aggrieved because they see themselves simultaneously ignored by American policymakers while being yoked more firmly to the U.S. economy than ever. With the U.S. in a slump for the past three years, that has been a hard relationship to endure. Mexico's economy will grow by 1.5% at best this year, a poor showing for a developing country.


But in a larger sense, Mexicans also feel shortchanged by globalization. They thought they would be America's biggest workshop. That honor now belongs to China, whose workers often earn a fraction of what Mexicans do. Mexican policymakers thought even more trade pacts would deliver additional benefits: That's why Mexico has signed trade agreements with 30 other countries, more than any other nation. Sure enough, consumers got cheaper and better goods. Yet local manufacturers of everything from toys to shoes, as well as farmers of rice and corn, are struggling just to survive the onslaught of cheap imports. Ordinary Mexicans hoped NAFTA would generate enough jobs to keep them at home. Instead, the jobless are flocking in ever-greater numbers across the border. Voters figured that somehow NAFTA's gains would be translated into better schools. Yet a cash-starved government is still struggling to deliver the minimum in teachers, classrooms, and books. Vital but controversial reforms that pressed on Mexico before NAFTA -- such as modernizing the power sector and overhauling the leaky tax code -- are an even more difficult sell now that political power is split among several parties.

Do Mexico's woes disprove the value of free trade? Few would argue that Nafta was a waste. "If we didn't have Nafta, we'd be in far worse shape than we are today," says Andrés Rozental, president of the Mexican Council on Foreign Relations. If NAFTA has disappointed, it is in large part because the Mexican government has failed to capitalize on the immense opportunities it offered. "Trade doesn't educate people. It doesn't provide immunizations or health care," says Carla A. Hills, the chief U.S. negotiator in the NAFTA talks. "What it does is generate wealth so government can allocate the gains to things that are necessary."

If a government does not allocate the new wealth correctly, the advantages of free trade quickly erode. That is Mexico's plight. "NAFTA wasn't an end unto itself but a means to something, and that something was precisely the need to go further in reform," says former Mexican President Carlos Salinas, one of NAFTA's principal architects. "It's like Alice in Wonderland -- you have to run faster and faster if you want to stay in the same place. Globalization won't wait for you."

The outcome of Mexico's struggle to regain the momentum is of vital interest not just to Latin America but also to the U.S. The Bush Administration has made trade a vital part of its hemispheric agenda. Washington wants to hold up Mexico as a model of what unfettered commerce can do for developing countries. Besides, the U.S. wants a stable, prosperous Mexico to keep buying U.S.-made goods, to provide ever more jobs to Mexico's poor, and to stem the flood of illegal immigration and drugs. Mexico's ability to get to the next stage will also show whether low-wage economies around the globe can hold their own against the Chinese juggernaut. "Mexico cannot compete sewing brassieres and tennis shoes," says Roger Noriega, U.S. Under Secretary of State for the Western Hemisphere. "They cannot compete with China -- who can? Mexico has to modernize so it can move forward."

NAFTA has already proven a powerful impetus to reform. Mexico did not hike its import tariffs when the peso crisis of 1994 hit. Encouraged, Washington stepped in with a $40 billion bailout package that helped Mexico stabilize its finances and return to the capital markets in just seven months. Although wrenching, the devaluation turbocharged NAFTA by dramatically lowering the costs of Mexican labor and exports. The government's fiscal discipline has earned Mexico a coveted investment-grade rating on its debt. And the current recession is mild by historic standards -- more a downturn linked to the business cycle than a cataclysmic meltdown. Most analysts see growth quickening to 3.5% next year as the U.S. recovery picks up steam.

Yet even with a rebounding economy, Mexico will not generate enough jobs to accommodate its fast-growing workforce. While U.S. companies praise the work of their Mexican employees, they now make it abundantly clear that there are other, cheaper locales. The numbers tell the tale. An assembly line worker in Mexico earns $1.47 an hour; his counterpart in China makes 59 cents an hour, according to a recent McKinsey & Co. report. Top Delphi executives have warned for months that some production may be shifted to China because of the many cost advantages it offers over Mexico. "Delphi and other automotive suppliers are courted every day by other countries, not only with lower-cost labor but also with new incentives and tax breaks," says David B. Wohleen, president for electrical, electronics, safety & interior. "Mexico will need to significantly pick up the pace to remain a competitive alternative," he warns.

No one feels the China threat more keenly than Daniel Romero, president of the National Council of the Maquiladora Export Industry. Mexico's maquiladora industry, which assembles goods for export using imported parts and components, had been around since the mid-1960s. But it blossomed under NAFTA, with the number of plants rising 67%, to 3,655 in just seven years. Yet more than 850 factories have shut down since 2000 -- some due to decreased demand for their products in the U.S., others because companies have relocated production to cheaper spots, especially China. Maquila employment is down more than 20% from its October, 2000, peak of 1.3 million workers.

Romero and a group of maquiladora managers traveled to China last year. They came away dispirited. "They have extremely aggressive tax incentives, low salaries, very aggressive worker training, and a supply chain that allows them to have immediate access to the latest technology," says Romero. Adding to Romero's woes: This year, China overtook Mexico to become the No. 2 exporter to the U.S. after Canada.

While manufacturing struggles to counter the China threat, the agriculture sector is still reeling from the competitive shock of NAFTA. One consequence was the virtual wipeout of Mexico's small farmers by a flood of subsidized U.S. food imports. Some 1.3 million farm jobs have disappeared since 1993, according to a new report by the Carnegie Endowment for International Peace, a Washington think tank. "NAFTA has been a disaster for us," complains Julián Aguilera, a pig farmer from the northern state of Sonora. He and 800 of his peers have staged several big demonstrations to protest a 726% increase in U.S. pork imports since the agreement took effect. "Mexico was never prepared for this," says Aguilera, who has been raising pigs for 28 years, just like his father before him.

Nor was the U.S. As the campesinos lost their livelihood, they headed to the border. By most estimates, the number of Mexicans working illegally in the U.S. more than doubled, to 4.8 million between 1990 and 2000. Despite tightened security along the 3,200-km border in the wake of September 11, hundreds of thousands of Mexicans continue to risk life and limb each year to reach America. The money they send back to their families will total $14 billion this year, more than the $10 billion or so in foreign direct investment Mexico expects to receive in 2003.

The mass migration has turned rural hamlets into ghost towns. Tiny farm plots lie fallow, their modest adobe farmhouses shuttered. The owners have gone to "el otro lado," the other side. Panindícuaro in Michoacán, one of Mexico's poorest states, has one the highest incidences of migration: State officials figure that one out every seven people leaves for the U.S. Panindícuaro's parish priest, Melesio Farías, recently held a funeral mass for a father in his mid-thirties who died trying to cross the Arizona desert. "I tell them to forget the U.S. and to work at home," says Farías. "But if Mexico can't offer them jobs, why should they stay here and live in poverty?"


If NAFTA has not delivered on all its promise for Mexico, the country's leadership certainly must shoulder part of the blame. Salinas' band of technocrats and their successors, with their U.S. degrees and their devotion to free trade, didn't do enough to prepare vulnerable sectors of the economy for NAFTA's competitive onslaught. Long-promised programs to help 20 million campesinos switch to export crops never materialized.

Nor has the government offered inducements to channel foreign investment into areas of the country where it is most needed. Mexico's six border states, along with the capital, nabbed 85% of all foreign direct investment last year. Little has been done to foster a local supplier network for the import-dependent maquiladoras. Less than 3% of the industry's parts and components are sourced in Mexico. "Mexican society at large and a good chunk of the economy have failed or refused to adjust to globalization," argues Luis Rubio, who heads the Center of Research for Development, a Mexico City think tank. "And the Mexican government has done absolutely nothing to help."

This laissez-faire attitude is in stark contrast to China. There, state-owned banks have bankrolled lavish investments in industrial parks, power plants, highways, and other infrastructure to provide low-cost facilities for foreign manufacturing plants. Multinationals that wanted to sell everything from cars to telecom equipment were required to source as many components as possible from domestic suppliers, and the government was not bashful about demanding that foreign companies transfer advanced technology and manufacturing knowhow to Chinese partners. As a condition for its WTO entry in 2001, China is gradually phasing out these policies. But its domestic companies now have a head start

Even if China-style tactics are not possible, Mexico could still hone its competitiveness. The PRI under Salinas took advantage of its monopoly on power to ram through a range of bold and painful reforms that paved the way for NAFTA. Now under a multiparty system, the country's politicians are reluctant to take the difficult steps to ensure that Mexico remains attractive to investors. The country will need to spend $50 billion over the next five years to upgrade its power grid. But legislation to open the constitutionally protected sector to private investment has run aground on nationalist sentiment and union opposition, even as manufacturers complain that Mexico's gas and electricity costs are as much as 40% higher than in China.

Such dithering is proving costly for companies. Grupo México, the world's third-largest copper producer, is considering moving its refining operations across the border to Amarillo, Tex., where it pays just 4 cents per kilowatt-hour of electricity, compared with 8.5 cents in Sonora. "Politicians are completely ignoring the impact that high energy prices are having on the country's productive companies," says Juan Rebolledo, Grupo México's vice-president for international affairs.

Energy is just one of many critical reforms that have stalled. "There's a shortage of engineers, middle management, and executives," says William Spurr, president of the North American transport division of Bombardier. The Canadian company has a locomotive and subway-railcar manufacturing operation in the central Mexican state of Hidalgo and is expanding its workforce there by two-thirds, to 2,000. "There's a very good talent pool, but if I opened a plant in India, I'd have all the engineers and technicians I need." If Mexico wants to hold on to its value-added jobs, it must "develop education and enlarge its pool of knowledge-based workers."

To be fair, the government struggles under a huge handicap: Its finances have been sapped by a $100 billion bailout of the banking sector after the peso crisis. Even under those circumstances, officials have managed to boost the number of high school graduates from 20% of students before NAFTA to 28%. Plus, the number of science and engineering college grads has nearly doubled over the past decade, to 73,300 last year. Yet that number still pales next to India, which graduated 314,000 students in those subjects, while China handed out diplomas to 363,000. Congress has so far foiled Fox's efforts to raise taxes to pay for improved education. As it is, Mexico has one of Latin America's lowest tax collection rates.


To get a glimpse of what the right training can do, consider the case of Tecnomec Agrícola, a maker of farm and earth-moving equipment based in Aguascalientes, in central Mexico. "We never had a tradition of exporting. NAFTA definitely changed that," says founder José Leoncio Valdés. It was hard going at first. "We couldn't get in to see people in the U.S. because we were from Mexico and they figured we were unreliable" recalls the 55-year-old engineer.

Then in 2000, Valdés dispatched his son José to Cambridge, Mass., to earn a joint master's degree in engineering and business administration at Massachusetts Institute of Technology. On his first spring break, he returned home and conducted a weeklong training session with two dozen Tecnomec managers. To teach them about lean manufacturing, Valdés had the group build a replica of his father's factory out of Lego blocks. Using the model, they figured out how to better track inventory, boost quality, and control waste. Tecnomec soon doubled production capacity and boosted productivity by 21%. Nowadays, exports total $1.4 million a year, nearly a quarter of the company's annual sales, up from just $500,000 in 1995.

Mexico could use more Tecnomecs to generate new jobs. With few exceptions, only the biggest Mexican companies have the management and financial depth to reach world class levels. Just 50 companies account for half of all of Mexico's exports -- and the top tier is dominated by foreign multinationals. Meanwhile, thousands of Mexican businesses have gone under in the face of competition from U.S., Chinese, and other imports. "We are at a watershed," says Jaime Serra Puche, Mexico's chief negotiator in the NAFTA talks. "Either we take the steps to become a true North American country or we slide backward and just become a big Central American country."

Serra Puche is one of many policymakers and businesspeople now trying to figure out how to improve NAFTA. "If we were going to do it all over again today, I would insist on introducing a lot of considerations," says President Fox, who believes that NAFTA should be modeled more on the European Union, with provisions for free movement of labor and cross-border grants to compensate poorer countries for the dislocations caused by free trade. Proposals for a single currency, a North American energy cooperation plan, and a common agricultural policy have also surfaced in recent years. But don't expect any breakthroughs soon -- not while the U.S. is headed into a Presidential election and trade has emerged once again as a contentious issue among American voters.

So for now the burden will remain on Mexico. Salvador Kalifa, an independent economist based in Monterrey, recalls that when Spanish conqueror Hernán Cortés reached Mexican shores, he burned his boats to prevent anxious crew members from stealing away. "With NAFTA, we burned our boats and threw ourselves into globalization," says Kalifa. "There is no turning back."

By Geri Smith and Cristina Lindblad

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