Online Extra: Salinas: "Now Is the Time for Action"

The Mexican President who negotiated NAFTA reflects on how the pact has worked and not worked -- and what needs to happen next

After the fall of the Berlin Wall, then-President Carlos Salinas of Mexico visited Europe and noted that leaders were completely focused on integrating the former Socialist Eastern European countries into their own bloc. U.S. President George H.W. Bush had suggested a free trade agreement back in 1988, but Salinas turned him down. Now, he realized that if Mexico wanted to get the foreign investment that was vital for its future, he needed to link his economy to that of the U.S. In March, 1990, Salinas called Bush, and they agreed to start negotiations immediately. On January 1, 1994, the North American Free Trade Agreement took effect.

Salinas, who lived for many years in self-imposed exile in Ireland to avoid public ire over a peso devaluation and crippling financial crisis that occurred just weeks after he left office in December, 1994, spoke about NAFTA with BusinessWeek Mexico Bureau Manager Geri Smith. The discussion took place at his Mexico City home, in his sprawling office decorated with dozens of photographs of Salinas with world leaders. Following are edited excerpts from their conversation:

Q: Why was it important for Mexico to negotiate NAFTA, and how well has it performed?

A:

NAFTA was a proposal made in the face of a new international reality. You have to remember that it was after the Berlin Wall fell, the Cold War ended, and you had the perspective of all of the Eastern European nations joining the European Union. [With] the resulting explosion of market integration and globalization. And globalization's "Big Bang" was the Berlin Wall's fall and the end of the Cold War. NAFTA came to us just in time.

It was very important in allowing us to relate to the U.S. on economic, financial, and commercial grounds with clear, nondiscretionary rules. NAFTA took effect in 1994, when the North American economy began the longest economic expansion of its [recent] history. It arrived just in time [for Mexico] to be a part of that expansion.

The 1995 Mexican economic crisis, although it did keep us from taking full advantage of the opportunities that NAFTA presented, also demonstrated that NAFTA was the main key to our recovery after the crisis. NAFTA did fulfill Mexico's expectations, although not in the way that had been expected, because of the 1995 crisis.

Q: There's a feeling in Mexico that NAFTA is losing steam.

A:

First, we are in a new international reality. Since September 11, geopolitical conditions have changed drastically. Second, NAFTA has not finished taking effect, because there were several time frames [during which different protections for Mexican products such as corn and beans would have their tariffs lifted], and one of them was for 15 years. That hasn't happened yet. So, we don't yet have the complete NAFTA effect in place to be able to say that this worked well, that didn't work well.

Also, Mexico has fallen short on implementing additional reforms that were needed when NAFTA took effect. The lack of these reforms is blocking or slowing down the [positive] effects of NAFTA on Mexico.

Q: Some say that Mexico picked the easy-to-reach fruits of NAFTA and left the difficult second wave of reforms for later generations.

A:

I'd say there is never easy-to-pick fruit. Those who didn't participate in the initial effort say, "It was easy for you," and they forget how difficult it was to start those reforms.

When we proposed the negotiation of NAFTA, a poll showed that 75% [of Mexicans] were opposed to it. Five years later, when we concluded the negotiation and NAFTA began, another poll showed that 80% [of Mexicans] were in favor of it. We took five years to build a domestic consensus in favor of NAFTA and of the indispensable reforms.

Q: What did you most want from NAFTA -- jobs and investment, or a policy straitjacket that would force your successors to continue economic reforms and open markets?

A:

The two most important things were certainly investment funds [to create] jobs in Mexico and a new type of relationship with the U.S. I believe the two were achieved.

[But] 10 years later, we're seeing that the advantages that Mexico won weren't permanent. [Today's leaders] have to make decisions and promote needed reforms in order to maintain this advantage for Mexico.

Today I'm very worried to see that U.S. imports are growing 6% to 8%, but Mexico's exports to the U.S. aren't growing at all. The problem isn't that the American market isn't growing. Instead, the problem is that in Mexico we've lost competitiveness. Why? Because we have a serious problem in the areas of energy, labor, fiscal policy, and education.

Q: What additional benefits would you like to have gotten in the NAFTA negotiations?

A:

I believe it would have been good to obtain more funds to compensate for the [economic] differences between the countries. But we didn't accept a European Union-type negotiation, moving toward total integration. In the European Union there are no more [individual] currencies or central banks or barriers to the movement of people [in the region].

In North America, it's impossible to think about a common currency. Would we be willing to see the Mexican peso, the U.S. dollar, and the Canadian dollar disappear to establish something like the "Azteca"? I don't think so. If it were the U.S. dollar, then there would not be a common currency but just a dominant currency.

The same would be true in the case of the countries' central banks. It would be difficult to imagine the Bank of Mexico, the Bank of Canada, and the U.S. Federal Reserve system disappearing to create a large North American Central bank. If the Fed were to remain [in place], that would not be unificiation -- it would be submission. You have the complication of the great weight that the U.S. has in our region. That's why we proposed something more "modest," which at the time was spectacular -- an area of free trade.

Q: What do you think of President Vicente Fox's efforts to win migration concessions from the U.S.?

A:

The big pending issue on the [bilateral] agenda is without a doubt the migratory issue. I believe President Fox's proposal to move toward a migration treaty is right on track. I believe that [migration reform] is almost inevitable. The ideal is free labor movement, and without a doubt the sooner the better.

[But] one has to consider U.S. domestic circumstances. The worst time to negotiate a migratory treaty is during an economic recession and during a Presidential election [year], because that's when all of the protectionist tendencies emerge. I believe there could be a window of opportunity at the end of next year to relaunch the migration issue.

Q: NAFTA has really been a tough blow for agriculture.

A:

For 70 years, Mexican campesinos were told that we were going to protect them. [So] we established a 15-year period [of protection] for the farmers to become competitive. Direct payments would be made to those who could not compete and to generate other [employment] options for them. But [the government] didn't live up to its promise to producers, and it stopped giving them money. And the government didn't wait 15 years to open the border [to corn imports]. That's why there are complaints from the countryside now. Many farmers blame NAFTA for something that NAFTA isn't to blame for but that is due to mistaken government policies.

Q: What about the complaints of unfair competition from China?

A:

When we were negotiating NAFTA, in the U.S. they said that Mexico had very low salaries and that it was going to be very unfair competition. Ten years later Mexico says China has low salaries, and that it's unfair competition. We can't repeat the argument that we rejected 10 years ago.

If China is paying low salaries, the World Trade Organization is there. That's why it was so important to get China into the WTO, so we could demand similar rules for them. I haven't seen a complaint in the WTO about that, so that means that the problem isn't China's low salaries but Mexico's low productivity.

Q: With many computer factories moving to China, some components suppliers in Mexico are competing desperately for low-end jobs.

A:

The challenge in Mexico is to understand these warning signs and to be willing to carry out the indispensable reforms to recover the leadership we had. NAFTA opened a big opportunity for Mexico, but over these 10 years we haven't given the proper care [to that opportunity]. [Leaders] didn't realize that NAFTA wasn't an end unto itself, but a means to something. And that something was precisely the need to go further in the reform process, which is required to remain competitive.

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.

Q: The U.S. signed NAFTA in order to boost its own competitiveness vis-à-vis Asia. Is that still working?

A:

I believe the advantage [the U.S.] had of co-producing with Mexico has functioned very well for them, but once again, nothing is forever. I believe we Mexicans face an enormous challenge of maintaining that advantage. We could lose it. I believe this 10th anniversary of NAFTA should be marked by reflection and action, more than by celebration. Now is the time for action.

Q: Is it really in Mexico's best interest to support the idea of a hemisphere-wide Free Trade Area of the Americas (FTAA)? It will hurt Mexico to lose its exclusive access to the U.S. market.

A:

We always said that NAFTA was a building block for multilateralism, so we have to be in agreement with the FTAA. The problem for Mexico is not the FTAA -- it's the lack of domestic reforms to recoup our competitiveness in the context of NAFTA. Our problem is not external, but internal.

Q: What did you think of the breakdown of talks at the recent WTO meeting in Cancun?

A:

The failure of Cancun is the failure of multilateralism, the failure of developing countries. I was surprised to see that the ones who were celebrating the failure of Cancun were the losers -- I had never seen a party of losers before.

I believe there's such great confusion today in the national and international sphere. It's like a fog that distorts the light, so they believe that the light shining on them is something to celebrate, but in truth, it's [the headlights] of a train that's coming at them form the opposite direction and is going to run them over.

The dynamic of NAFTA helped reach a positive conclusion to the Uruguay Round and the creation of the WTO. Today, unfortunately, it's the opposite situation: The failure of Cancun is reinforcing [the concept of] bilateral agreements in substitution of multilateral agreements. And if we don't recognize the difference, we run the risk of losing perspective on this globalization -- because in bilateral agreements, the weaker ones always win less because they don't have the negotiating strength.

In a world like today's, in which unilateral policies dominate, we need multilateralism to dominate in the economic [sphere].

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