Mexico and the North American Free Trade Agreement: Hits and Misses Essay

Mexico and the North American Free Trade Agreement: Hits and Misses

            Mexico is home to Montezuma, exotic food, serious liquor, beautiful beaches and warm people. It is just a few hundred feet away from the United States of America but stepping into this wonderful country one could not be mistaken that this place is a separate and distinct from the nations belonging to the upper regions of North America. It is therefore interesting to know that Mexico had embraced its two neighbors: Canada and the United States of America in a landmark deal among free trade agreements.

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            This paper will look into the positive and negative impacts of the North American Free Trade Agreement (“NAFTA”) on the country of Mexico. First, the nature of free trade agreements will be discussed and this is followed by a more detailed look on NAFTA as a tool to maximize efforts, time management, talents, and other resource as pertaining to the U.S. – Canada – Mexico troika.

Free Trade Agreements

            Before proceeding much further it is imperative to first take a handle at what is free trade agreements in general and NAFTA in particular. A free trade agreement is basically the removal of tariffs. An early model of this kind of economic partnership was started between Canada and the United States, almost 20 years ago (Randall, 1995, p. 1). And such is the nature of free trade agreements that this free trade deal almost got derailed because of the perceived disadvantage of Canada as compared to the United States. Many thought that this partnership is one way street where Canada is the only making the U.S. richer. Now, the same thing is being said with regards to the new member Mexico – that they will be victimized by the rampaging U.S. economy.

NAFTA

            Concerning NAFTA a more technical definition is taken from the Dictionary of International Trade which states that it is a free trade agreement that comprises Canada, the U.S. and Mexico and having the following objectives,”…eliminate barriers to trade, promote conditions of fair competition, increase investment opportunities and establish procedures for the resolution of disputes” (Hinkelman, 2005, p. 128). If all the agreed upon terms in this agreement will be honored by all the parties involved then there is much profit for Mexico considering that their economy before NAFTA leaves more to be desired.

            To fully understand the impact of the said trade liberation NAFTA it must be understood that FTA’s does not only about the removal of tariffs but also concerns other trade barriers not related to import taxes. In this regard Loren Yager asserts that when America negotiated with Mexico its main aim was to achieve greater access to the Mexican market by eliminating tariffs on commodities, “…and to do away with non-tariff trade barriers, most notably its system of import licensing requirements” (2005, p. 5). More of this topic will be discussed later, in the following pages.

Drivers of Progress outside NAFTA

            An objective assessment of the effects of NAFTA must consider that there are other drivers for progress. And aside from policies and trade agreements there are other factors contributing to the success of a particular region in terms of economic growth. A few of these drivers for progress is listed below just so that it would be clear that NAFTA alone could not be the major catalyst for change in a nation that stayed pretty much the same for many centuries, and Abbot enumerated them as follows:

·         Transportation – Not only is the cost of transporting goods reduced significantly through the decades but also the possibilities of moving products is virtually endless. In the past there were untradable goods such as live lobsters and fresh flower. Moreover the drops in price have “…turned luxury items into everyday goods” (2002).

·         Communication – This one require no more further explanation. One only has to think about the internet and cellular phones and the impact of such technologies upon business dealings. The drops in price with regards to phone calls are a great catalyst for progress.

·         Democratization of information – there is less and less hindrance to acquiring knowledge. Economic growth starts with information and the current trend of allowing access to a large portion of the population is key to progress.

·         Integration of capital markets – Due to intense competition, nations are willing to adopt more standard and transparent practices since unsound policies can push investors away or could lead to capital withdrawals.

It is now clear that there are other forces working in conjunction with the strategic wisdom of NAFTA, good governance, and hard work from all those involved.

Playing with the Big Boys

            Equality is a major issue when it comes to inking a deal with other parties. The importance of this issue is seen from the inferior position of Mexico as opposed to the clout and power of her more dominant neighbor up north. This led Kose, Meredith, and Towe to say that, “Perhaps the most significant aspect of the agreement, however was the fact that it was struck between a developing country and highly developed economies” (2004, p. 4). The concern is legitimate for in any trade relationship one has to look at what one can one party offer the other and vice versa. It seems at first glance that Mexico has nothing substantial to offer the United States or even Canada when the deal was signed ten years ago.

            At the onset the critics were not few in discouraging Mexico from sealing a pact with the U.S. and Canada. This kind of view is understandable considering the following roadblocks between Mexico and the other two nations:

Mexico is an underdeveloped country […] with a gross domestic product (GDP) of less than 4 percent of that of the United States. At the same time, Mexico does not share the political and legal systems and structures of either of its two northern neighbors, and of course it is divided even further by its language, culture, and religion (Sen, 2003, p.138).

Two Sides of the Coin

            As of every issue and every event there are always two sides to it. Concerning the discussion on the effects of NAFTA two perspectives are available the first one comes from how the Mexican government and its people view the changes whether good or bad as a consequence of their nation’s acquiescing to the terms of the said agreement.

            The second one comes from the outside looking in, this time the view is from the partners – both the U.S. and Canada – in their assessment of how things have changed after embracing each other in an concord aimed to strengthen their status as established global economies.   But the focus of this paper is on Mexico and if data regarding the economic status of the U.S. and Canada will be mentioned afterwards its intention is to merely provide context to aid in better understanding the effects of NAFTA on Mexico.

Pre-NAFTA Period

            As mentioned earlier there were legitimate concerns as to the kind of leverage Mexico is bringing to the negotiating table prior to the signing of NAFTA. Mexico as the world knows is nothing compared to U.S. and Canada in terms of industrialization, finance, technology, etc. How then can there be a fair and mutual trade relationship between the three nations?

            But examining the facts of the case in detail the International Monetary Fund released their findings, pointing out that Mexico has nothing to lose. By going to the negotiating table so to speak, Mexico was turning weakness into strength. According to Kose, Meredith, and Towe (2004, p. 10), the following statements apply to Mexico’s economic profile during the same time when NAFTA was being considered:

1.      In the early 1990’s Mexico experienced great difficulty in sustaining economic reforms after decades of poor performance.

2.      Their monetary exchange the Peso was overvalued.

3.      External competitiveness declined overall.

4.      The sins of the past like imprudent fiscal policies are catching up to them.

5.      The heavy burden of external borrowing contributed to financial fragilities.

6.      By early 1994 Mexico was facing serious macroeconomic imbalances, including widening current account deficit.

7.      Authorities were being forced to shift to risky financing instruments as other credit channels dried up.

8.      Finally, the currency depreciated sharply, output plunged and inflation rose significantly.

Jaime Suchlicki, writing about the same turbulent period remarked that Mexico was about to take-off when the problems began to come out from nowhere, “Suddenly dramatic shocks began to crack the façade of Mexico’s growth, modernity, and stability […] These built to a crescendo of doubt and fear about Mexico’s future, both within and outside the country (2004, p. 4).

The economic outlook was grim but when someone is in a desperate situation it is also the time when he is open to changes and is willing to work harder in order to make things right. The irony of being weakened to be able to gain an advantage was explained by Kose, Meredith, and Towe by showing the flipside of Mexico’s economic woes and they wrote, “In some respects, this unstable macroeconomic environment was an unpromising setting for Mexico to reap the benefits of North American trade integration. Significant exchange rate and inflation uncertainty […] had severely damaged investor confidence. In some respects, however, the crisis left Mexico better positioned to take advantage of trade liberalization” (2004, p.10). This is the first good news after a long time of depressing prospects. Now the nation at least has strong bargaining position because they have nothing to lose – the economy is going down the drain.

Positive Impacts

            In a study sponsored by the United Nations it was found out that all three members of NAFTA agreed that everyone benefited from the deal. Julius Sen pointed out that as a whole, “Intraregional trade has grown faster than global trends, and Canada and Mexico have become the largest trading partners of the United States, and vice versa […] Mexico in particular has benefited, demonstrating that a trading relationship has to be supported politically, particularly in an unequal situation (2003, p. 142).

Gross Domestic Product

            Even after less than six years from the implementation date, Mexico has shown signs of recovery. In the June 24, 2000 issue of The Economist, Enrique Krauze provided the following positive results:

In the past four years, GDP has grown by an average of 5.01% a year and manufacturing employment by 3%. Inflation, which was running at 52% in 1995, could fall to single digits this year. This admirable record is partly due to good government and partly to the North American Free Trade Agreement […] since then both trade and foreign direct investment has more than doubled (as qtd. in Abbot, 2002, p.1).

Investments and Exports

            Adding to the list of positive indicators for success, Sen (2003, p. 144) gave the following data concerning both export and investment performance:

·         Export performance: Mexico’s exports to its partners increased by 225 percent between 1993 and 2001, whereas its international exports increased by 93 percent.

·         Investment performance – Mexico’s increase in inward investment in the same 11 period (1993-2001) was three times the average of the previous seven years, and in 2000 stood at US$11.7 billion.

Labor Sector

            Complex numerical data as evidence of economic growth will not mean a thing to a desperate family man in search for a job. It does not take a rocket scientist to figure out that the abovementioned increase in exports, investments, and GDP also means a reciprocal increase in employment opportunities.

            The positive effect on the labor sector is very much welcomed by the Mexican workers whose ranks have been swelling in recent years. According to Abbot, “Mexico’s population is growing more than twice as fast as that of the United States […] The Mexican labor force is growing by more than one million persons annually, substantially more than even the dynamic Mexican economy can absorb” (2002, p. 28). So theoretically removing NAFTA out of the picture could mean even fewer jobs and wages will be much lower due to limited employment opportunities.

Negative Impacts

            The world is not perfect and even if NAFTA can be considered as a well analyzed and brilliantly executed idea, problem areas still exist and there is much to be desired in the evolving economic profile of Mexico.

Agriculture

            The first obvious casualty in the trade agreement by simply looking at the surplus products each country has will lead one to conclude that Mexico is at a disadvantage in some areas of agricultural production. A head to head comparison with the U.S. for instance will reveal that both countries plant maize but the U.S. more technologically advanced, with more farm land devoted to planting maize, with easy access to capital and with structures already in place to compete globally Mexico’s subsistence farmers does not stand a chance. Related to the problem of maize production is the expected cutting back demand for labor in medium sized farms (see Yager, 2005).

Environment

            In general, Mexico greatly benefited from NAFTA but in other aspects of development the nation may have experienced some setbacks especially in the area related to the environment and society. The problem regarding pollution and the decrease in the quality of life is particularly evident near the border between Mexico and the U.S.

            Randal asserts that Mexican border cities discharge significant amounts of untreated sewage that of course goes straight to the river systems and he adds, “The impressive growth and development of the borderlands over the past decades have produced significant negative impacts on the native flora and fauna […] Expansion of urban areas, destruction of native habitats through grazing activities or agriculture, lowering the water table through pumping of water deposits, and impacts of recreation on fragile ecosystems have all had important consequences on the border region” (1995, p. 168).

The same concern was raised by Ojeda et al., in the July 5, 1997 issue of The Economist where the authors warned that Mexico will be, “…at the mercy of rapacious capitalists pouring filth into Mexico’s air and rivers” (as qtd. in Abbot, 2002, p. 1). On the other hand a significant number of researches would attest that the environmental impact is negligible.

Trade Imbalance

            Finally, the most significant problem area in terms of the trade relations between the Mexico and the U.S. is the growing concern regarding trade imbalance. This is especially true when it comes to the kind of importation Mexico is making. Lucinda Vargas an economist from the Federal Reserve Bank of Dallas was able to put it succinctly when she said, “In some respects, each country is sending the other essentially the same product but at a different stage of production” (as qtd. in Abbot, 2002, p. 27).

            Vargas’ insight makes sense when one looks at the disparity between Mexico and the United States in terms of productivity and technology. In many instances it is the U.S. who will be sending the finished product to Mexico and not the other way around. Mexico just like other developing nations are going excited to possess high end products that have the mark Made in the USA.

Conclusion

            In the year 1994 the global economy was tremendously affected by a landmark deal that was agreed upon by three nations: 1) Canada; 2) Mexico; and 3) the United States of America. What makes this deal so significant is the composition of the economic players involve. One is the U.S. which is the only remaining true superpower in the world, with a great amount of clout and of course money and resources that can make a great impact in any nation or economy it will train its sights into.

The second member is Canada although much less powerful and considerably less wealthy than the United States is part of the economic elites in the world and its products and services portfolio is something that no nation can sneer at. And finally the third member is Mexico, a nation that could not boast of anything except its proximity to the two trade and industry behemoths. Thus, many had discounted Mexico’s chances to compete and thrive together with the big boys. Yet, after more than a decade Mexico was able to prove her detractors wrong. From an economic laughingstock in the North American region, Mexico was able to rise from the mire economic doldrums and able to capitalize on the opportunities that presented itself when it became part of the regional free trade agreement.

The more evident examples of success can be seen from the increase in foreign investments, the upgrading of infrastructure, creation of more jobs etc. This has inspired the Mexican government to even work harder to provide more services for the Mexican people.

On the other hand there are setbacks as well. The trade deficit is one example that could not easily be corrected because a developing nation could not challenge an economic giant like the U.S.

Works Cited

Abbot, Jeffrey. Uniting North American Business: NAFTA Best Practices. Burlington, MA:

Elservier Science, 2002.

Hinkelman, Edward. Dictionary of International Trade: Handbook of the Global Trade

Community. Novato, CA: World Trade Press, 2005.

Kose, Ayhan, Meredith, Guy and Towe, Christopher. How Has Nafta Affected the Mexican E

conomy: Review and Evidence. Accessed 07 May 2007 from http://www.imf.org/external

/pubs/ft/wp/2004/wp0459.

Randall, Stephen. NAFTA in Transition. Canada: DWFriesen, 1995.

Sen, Julius. “North American Free Trade”. In Regionalism, Multilateralism, and Economic

Integration: The Recent Experience. Edited by Gary Sampson & Gary Woolcock (Eds.).

New York: United Nations University Press, 2003.

Suchlicki, Jaime. Mexico: From Montezuma to NAFTA and Beyond. New Jersey: Transaction

Publishers, 2000.

Yager, Loren. International Trade. Washingtong, D.C.: Diane Publishing, 2005.

 

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