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Monday, July 21, 2008
Perspectives

NAFTA, Mexico and the US

Terminating NAFTA today would put Mexico into a tailspin, where everybody, Americans as well as Mexicans, end up as losers.
NAFTA BENEFITS: Mexico - here represented by Mexico City - would be very different without NAFTA, the author points out.  (Photo: WIlhelm Heinz/IDB)

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BY LUIS RUBIO

The North American region faces a stark choice: build a true integrated economy composed of Mexico, Canada and the United States, with all the structures capable of combining each country’s strengths to the benefit of all, or fall into a disorderly, conflict-ridden integration process that intensifies the region’s weaknesses at a cost to everyone. It is that simple: nobody can stop integration. The real question is whether it will be orderly or disorderly. But the consequences of each alternative are dramatically different.

As the United States embarks on a soul-searching process associated with the presidential election this year, it would be worth seeing what impact a change in the North American Free Trade Agreement (NAFTA) might have on Mexico and, thus, on the United States.

Mexico proposed the negotiations for a free trade agreement with the United States for reasons that transcend trade. Those reasons are as alive today as they were when the negotiations began.

At its core, the objective was to borrow the institutional strength of the United States in order to create an environment where both citizens and business people could develop a long-term horizon in their savings and investment decisions. Mexico had just emerged from an era of failed, inward-looking, development strategies. The government was attempting to shift gears: it liberalized exports, privatized a few major companies and tried to attract investment. Soon, however, the government realized that it lacked the credibility necessary to convince the population and potential foreign investors of the worthiness of its new, market-based policies.

NAFTA was the result of a new economic strategy. Above all, however, it represented a major political shift. Instead of looking at the United States as the source of conflict and irritation, as it had historically been portrayed, the new Salinas de Gortari administration (1988-1994) sought out its northern neighbor as a source of stability, support and institutional strength. The objective was to borrow a rules-based system that Mexico lacked.

The trade and investment agreement embodied in NAFTA is only part of the story. Now, almost fifteen years since it went into effect, NAFTA has delivered on some of its promises, while it has been less successful in others. If one looks at the numbers, total trade has grown dramatically. At the same time, other factors, some related to the agreement, but not all, have become emblematic of the political debate that surrounds NAFTA today. If one looks at the demographic pyramids of both Mexico and the United States, it is quite clear that migration would have grown to its huge size with or without NAFTA. It is not NAFTA that caused migration, but Mexico’s population growth over the previous decades.

Equally true, the Mexican government failed to introduce the kind of reforms that would have been indispensable for NAFTA to be successful for all Mexicans. One example says it all: lack of appropriate infrastructure in southern Mexico, combined with its presence in northern Mexico, has meant that NAFTA has had a huge impact on Mexico’s north, while the south has been largely neglected. It is not NAFTA that has failed here, but the Mexican governments of the past fifteen years.

The fact of the matter is that NAFTA was seen as the end, rather than the beginning of a political process. The immediate objective was to ensure that the advances made over the previous years would be preserved. However, rather than launching a major initiative to transform the regulatory framework and to build the infrastructure needed to implement it after NAFTA’s approval, passivity became the norm. It was as if Mexicans assumed development would just magically happen.

There is no question that NAFTA has not fulfilled every expectation that it created. It is also true that Mexico has yet to tackle many of the most important development issues confronting it. Yet, one cannot dismiss what NAFTA has achieved in Mexico and by extension on the Mexico-U.S. border and in the bilateral relationship.

Mexico would be very different without NAFTA. In the fifteen years since the trade deal was approved, Mexico has gone through a series of economic and political upheavals that have changed almost every point of reference in the country and, yet, it has not abandoned the intent embodied in NAFTA. This has been no small accomplishment.

In 1994, on the day NAFTA took effect, the country found itself engaged in an indigenous uprising. Later, the candidate for the Institutional Revolutionary Party (PRI) was assassinated. At the end of that year, a major economic crisis ensued, the worst crisis in the country’s modern history. The banking system collapsed and the economy went into its worst recession in decades. The emerging middle class was hit the hardest and thousands of families lost their homes and automobiles. The ripples of that crisis were at the heart of the bitter fight for the presidency in 2006 and the ongoing saga of the unfinished business of that election.

Despite all that, the core of the country’s economic policy, particularly its trading and investment regimes, have remained essentially untouched. In the absence of NAFTA, it is not impossible that the open trading regime would have been abandoned in 1995. In that scenario, economic crises would have been common rather than exceptional and migration flows probably would have been even larger. Despite its imperfections, without NAFTA there would hardly have been any advance towards democracy. Even if the country’s economic performance has not been exceptional, the fact that Mexico has avoided severe economic crises and has strengthened its democratic institutions is all due to the environment of certainty that NAFTA engenders.

NAFTA has fulfilled its foremost objective, namely to create a credible framework for economic policy. It does so by establishing a punitive cost to any government that attempts to break away from the straight-jacket that NAFTA embodies. And that is what matters.

It is not that NAFTA is a perfect instrument for development; in fact, it is only a trade and investment arrangement. But its political importance is paramount, which is why so many other nations have sought to reach similar deals.

The political guarantees implicit in NAFTA have made it possible for Mexico to stay the course, despite the pressures against it. But the other side of the coin is equally true: were the guarantor to pull the plug on NAFTA, the consequences would be dire. Terminating NAFTA today would put Mexico into a tailspin. In the absence of the certainty it brings, there is no telling what kind of Pandora’s Box would be opened. Stated differently, this is precisely the kind of scenario that Lopez Obrador would like to see from the United States. It would be a dream come true: he would not have to break out from the straight-jacket; the United States would do it for him.

One wonders if there may be a better way.

Many Americans are suffering the consequences of globalization and, particularly, of rapid technological change. Terminating NAFTA would not alter these processes. It would not diminish the pace of integration across North America, either. But it could create a most disorderly integration process where everybody, Americans as well as Mexicans, end up as losers.

As Jaime Serra, former secretary of commerce and industry of Mexico and NAFTA negotiator, has repeatedly argued, NAFTA includes instruments that could accelerate and deepen the process of integration in an orderly way, as well as maximize the benefits to both societies. In other words, rather than arguing about the current problems that many see associated with NAFTA, we should be looking for a higher ground, for the opportunity to transform the region, increase value-added production, and take advantage of the strengths of each society in the region in order to minimize their respective weaknesses. Any objective assessment of the region shows that the opportunities that each nation offers to complement one another are vast and hold great potential. This includes demographics, food production, manufacturing, and services.

The real question about NAFTA is not whether Americans have gotten the short end of the stick, but how NAFTA might transform the region. Short-term responses will lead nowhere. Instead, NAFTA should be embraced to build a new and better reality for future generations.

Luis Rubio is the chairman of Centro de Investigación para el Desarrollo, A.C., an independent research institution devoted to the study of economic and political issues, in Mexico City. He was a 2006 Visiting Fellow at the Center for Hemispheric Policy at the University of Miami.

This opinion piece was published by the Center for Hemispheric Policy for its “Perspectives on the Americas” series.  Republished with permission of the center.

 

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