Chiapas Ten Years Later

Wednesday, December 15, 2004

Business Week on NAFTA and Mexico

Title: MEXICO Was NAFTA Worth It?
Authors: Smith, Geri

Lindblad, Cristina
Source: Business Week; 12/22/2003 Issue 3863, p66, 7p, 5 graphs, 6c
Document Type: Article
Subject Terms: EDUCATION & state

FREE trade

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url,uid&db=f5h&an=11676474">MEXICO Was NAFTA Worth It?

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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.
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 significantly 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 and China's
casting off Marxism for capitalism. It encompasses 421 million people
and melds two first-world economies -- the U.S. and Canada -- with a
struggling third-world country, Mexico. The bloc was seen as a bold
attempt to demonstrate once and for all 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 worked in spades 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, the pact spurred profound political change. Mexicans
who backed open markets also wanted an open political system. Would the
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 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
Latinobarometro, 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 switch: It was
NAFTA, after all, that kicked the 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 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
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. 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. With the U.S. in a slump for the past three years,
Mexicans are experiencing the downside of their close commercial ties
with the colossus. Mexico's economy will grow by 1.5% this year, a poor
showing for a developing country.

In a larger sense, Mexicans feel shortchanged by globalization. They
thought they would be America's biggest workshop. That honor now belongs
to China, which this year surpassed Mexico as the U.S.'s No. 2 supplier.
Mexican policymakers signed trade agreements with a total of 32
countries, and as a result consumers got cheaper and better goods. Yet
local manufacturers of everything from toys to shoes, as well as farmers
of rice and corn, struggle to survive the onslaught of cheap imports.
Mexicans hoped NAFTA would generate enough jobs to keep them at home.
Instead, the jobless flock in ever-greater numbers across the border.
Reforms that pressed on Mexico before NAFTA -- modernizing the
electricity sector, overhauling the tax code, shoring up the crumbling
schools -- are an even more difficult sell now that 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 part
because the Mexican government has failed to capitalize on the
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 doesn't allocate 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 momentum is of vital interest
not just to Latin America but also to the U.S. The Bush Administration
has made trade a key part of its hemispheric agenda. Besides, the U.S.
needs a stable, prosperous Mexico on its border 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 China. ``Mexico cannot compete sewing brassieres and
tennis shoes,'' says Roger Noriega, U.S. Under Secretary of State for
the Wes-tern 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 the country a coveted
investment-grade rating on its debt. And the current recession is mild
by historic standards. Most analysts see growth quickening to 3.5% next

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. An assembly worker in Mexico
earns $1.47 an hour; his counterpart in China makes 59¢ an hour,
according to a new report by McKinsey & Co. Top Delphi executives have
warned for months that some work may be shifted to China because of the
many advantages it offers. ``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
maquiladoras, which assemble goods for export using imported parts and
components, have been around since the mid-1960s. Under NAFTA, the
number of plants rose 67%, to 3,655 in seven years. Yet more than 850
have shut down since 2000, with many shifting to cheaper locales.
Employment is down more than 20% from its peak of 1.3 million workers.
Romero and a group of maquiladora managers traveled to China last year,
and came away dispirited. ``They have aggressive tax incentives, low
salaries, very aggressive worker training, and a supply chain that
allows them immediate access to the latest technology,'' says Romero.

The agriculture sector is suffering even more than the maquiladoras, as
subsidized U.S. food imports flood the country. 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,'' says Julián Aguilera, a pig farmer
from Sonora. He and his peers have staged big demonstrations to protest
a 726% increase in U.S. pork imports since the pact took effect.
``Mexico was never prepared for this.''

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 after September 11, hundreds of thousands
continue to cross the border. The money sent back to their families will
hit $14 billion this year, more than the $10 billion Mexico expects in
foreign direct investment.

The exodus has turned rural hamlets into ghost towns. Panindícuaro in
Michoacán, one of Mexico's poorest states, has one of the highest
incidences of migration, with one out of every seven people leaving.
Panindícuaro's priest, Melesio Farías, recently said mass for a young
father 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?''

Salinas' band of technocrats and their successors didn't do enough to
prepare vulnerable sectors for NAFTA's onslaught. Long-promised programs
to help 20 million campesinos switch to export crops never materialized.
Nor has the government offered inducements to channel investment into
areas where it is most needed. The six border states, along with the
capital, nabbed 85% of foreign outlays last year. Little has been done
to foster local suppliers for the import-dependent maquiladoras. Less
than 3% of the industry's parts are sourced in Mexico. ``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 government has done
absolutely nothing to help.''

This laissez-faire attitude is in stark contrast to China. There,
state-owned banks have bankrolled investments in industrial parks, power
plants, highways, and other infrastructure to provide low-cost
facilities for foreign manufacturers. These multinationals had to source
as many components as possible from domestic suppliers, and the
government wasn't bashful about demanding transfers of technology to
Chinese partners. Also, Beijing sealed off weak sectors like financial
services or retailing. As a condition for entry into the WTO in 2001,
China is phasing out these policies, but domestic companies now have a

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 painful reforms that paved the way for
NAFTA. Now under a multiparty system, the politicians struggle to make
difficult choices. Mexico will need to spend $50 billion to upgrade its
power grid. But legislation to open the constitutionally protected
sector to private investment has run into nationalist sentiment and
union opposition, even while electricity rates are as much as 40% higher
than in China. Grupo Mexico, the world's third-largest copper producer,
is considering moving refining operations to Amarillo, Tex., where
electricity costs 4¢ per kilowatt-hour, vs. 8.5¢ in Sonora.

Education is another critical area where reform has stalled. William
Spurr, head of the North American transport division of Canada's
Bombardier, which builds railcars in Hidalgo, sees a need for more
skilled workers. ``There's a very good talent pool, but there aren't
enough of them,'' he says. ``If I opened a plant in India, I'd have all
the engineers and technicians I need.'' To be fair, the government's
finances have been sapped by a $100 billion bank bailout after the peso
crisis. Even under those circumstances, the number of science and
engineering college grads has nearly doubled over the past decade, to
73,300. 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
improve education.

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 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 earn a degree in engineering and business
administration at Massachusetts Institute of Technology. On his first
spring break, young José conducted a weeklong session with Tecnomec
managers. He used Lego blocks to build a replica of the factory and
figure out how to better track inventory, boost quality, and control
waste. Tecnomec soon boosted productivity by 21%. Now its exports total
$1.4 million a year, nearly a quarter of annual sales.

Mexico could use more Tecnomecs. Just 50 companies account for half of
all exports -- and the top tier is dominated by multinationals.
Thousands of other Mexican businesses have gone under in the face of
foreign competition. ``We are at a watershed,'' says Jaime Serra Puche,
Mexico's chief NAFTA negotiator. ``Either we take the steps to become a
true North American country or we just become a big Central American

Serra Puche is one of many prominent Mexicans 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 dislocations. Proposals for a
single currency and a North American energy cooperation plan have also
surfaced. But don't expect any breakthroughs soon -- not while the U.S.
heads into elections and trade has reemerged as a contentious issue.

So for now the burden will remain on Mexico. Salvador Kalifa, an
independent economist based in Monterrey, recalls that when the
conquistador Hernán Cortés reached Mexico, he burned his boats to
prevent crew members from fleeing. ``With NAFTA, we burned our boats and
threw ourselves into globalization,'' says Kalifa. ``There is no turning


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