A Perspective from Mexico
As over 80% of Mexico’s trade and investment is with the United States, NAFTA provided an institutional setting of credibility for long-term investment
By Roberto Salinas León
A curious feature of the pre-NAFTA political debates is that the proposal for a trilateral framework in North America witnessed much stronger opposition in the US (and Canada) than in Mexico. The latter was barely emerging from a “lost decade” of runaway inflation, debt default and currency devaluation—and was seen as more associated with an agenda of import-substitution and protectionism, than with open trade.
In fact, the main concern in Mexico, prior to 1994, was not about labor or the environment, it was about the formidable economic “asymmetries” between Mexico and its northern counterparts, and how this would cause significant dislocation in local companies and businesses, not accustomed to competing in the global arena. Ross Perot’s infamous fears of a “great sucking sound” of jobs fleeing south was seen as strange, especially considering that the size of Mexico’s economy was barely that of, say, Florida’s.
Now, a quarter of a century later, there is virtually no debate in Mexico about whether open trade in North America should continue; if anything, debates tend to focus on the steps towards further integration, including freer flow of capital and labor. The new administration of Andrés Manuel López Obrador (AMLO) has even moved to secure legislative approval of the revised USMCA agreement, and criticizes the Trump administration for not moving fast enough in lobbying for the approval of the restated and amended trade deal.
This is truly a story for Ripley: a populist demagogue with outdated hard left-wing views, chiding the US President, a hard-core Republican, and self-proclaimed master of the art of the deal—for not committing to free trade as fast as he should! Oh, in the meantime, another (not so trivial) trivia for Ripley: so far, in 2019, despite AMLO and despite global economic slowdown, Mexico has surpassed China and Canada, to become the United States’ number one trading partner.
More importantly, it is high time to appreciate the tremendous transformational effect that NAFTA has had across Mexico’s society—one that goes beyond the exponential growth in three-way trade. The institutional logic of NAFTA, for Mexico, was to safeguard trade liberalization via a “lock in” effect. In theory, no treaties or accords are needed for unilateral liberalization. But the key for Mexico was to find a way to rule out the possibility of future unilateral de-liberalization. As over 80% of Mexico’s trade and investment is with the United States, NAFTA provided an institutional setting of credibility for long-term investment, virtually immune to the caprices of changing political tides.
This, indeed, is the source of success in capturing far greater productive investment flows, and in the massive expansion of trade, across all sectors—including agriculture, which has seen a huge diversification and boost in growth. Not surprisingly, growth rates in states that became part and parcel of NAFTA benefits (especially the northern regions) have tended to witness higher growth rates, akin to those seen in successful market-oriented emerging markets.
To this extent, the transformation effect has been deep. On the one hand, NAFTA did not issue in a magic wand of instant competitiveness; however, it has functioned as a straitjacket against bad policies, such as wholesale expropriations or confiscation of deposits, or some such. It remains to be seen how AMLO’s populist proposals will fare under this framework. Still, 25 years later, the continent has witnessed the development of tightly integrated supply chains that extend all the way from Anchorage to Tulum.
To this extent, trade realities today reflects a paradigm shift to a culture of competition. Mexico exports the equivalent of more than one billion dollars in manufacturing goods, per day. Open trade (on all borders) has enabled Mexico to radically diversify its external sector. Oil and oil derivatives were almost 80% of total exports in the past; now, they are 5%. Two-way trade will surpass well over 600 billion dollars this year, which represents a six-fold increase since NAFTA began.
Moreover, the US-Mexico border has become the largest manufacturing corridor in the world, with highly flexible mobility of goods, services, capital and even labor. A border point such as Nogales (Arizona) and Nogales (Sonora) have become extremely active trading centers, where consumers on both sides trade the likes of gasoline, gas, watermelons, auto parts, televisions, computer chips, cereals, blueberries, flowers, and much more. The Texas-Mexico region, now referred to as “Texico”, has become the sixth largest trade region in the world, with over 200 billion dollars in total trade. Moreover, proximity to the US market, lower transportation costs and affordable logistics have enabled Mexico to become a preferred destination for industrial production.
These facts explain why Trump’s hostility towards NAFTA were met with stunned disbelief. In fact, the Trump onslaught against NAFTA undermined the “untouchable” institutional feature of abandoning the agreement, one that was supposed to act as a straitjacket for Mexico, preventing a return to protectionism and statist policies.
The great trade economist and historian Doug Irwin says that the key to enhancing trade among North American partners is reciprocity of market access. The impetus of greater trade in North American and integrated supply chains suggests that a new round of negotiations would have had us looking into factors like border labor flexibility, larger private investment, a regional policy of open skies, or greater capital market integration. Instead, despite the massive empirical evidence suggesting a quarter century of success in three-way trade, debates are now focused on tariffs, trade deficits, restrictions, and even a border wall.
Perhaps the key lesson of NAFTA at 25 that proponents of open trade need to work in improved narratives that can help explain why free and volutary trade is beneficial for all citizens of all three countries in North America.
Dr. Roberto Salinas-León is President of the Mexico Business Forum in Mexico City and Director of Atlas Network Center for Latin America