Mexico and the North American

Mexico and the North American Free Trade Agreement

The North American Free Trade Agreement, known usually as NAFTA, is a comprehensive trade agreement linking Canada, the United States (U.S.), and Mexico in a free trade sphere. NAFTA went into effect on January 1, 1994, and called for immediately eliminating duties on half of all U.S. goods shipped to Mexico and gradually phasing out other tariffs over a period of about 14 years. Restrictions were to be removed from many categories, including motor vehicles and automotive parts, computers, textiles, and agriculture. The treaty also protected intellectual property rights (patents, copyrights, and trademarks) and outlined the removal of restrictions on investment among the three countries. Provisions regarding worker and environmental protection were added later as a result of supplemental agreements.

This Agreement was an expansion of the earlier Canada-U.S. Free Trade Agreement of 1989. Unlike the European Union, NAFTA does not create a set of supranational governmental bodies, nor does it create a body of law which is superior to national law. NAFTA, as an international agreement, is very similar to a treaty (indeed, in Spanish, it is styled a tratado). Under U.S. law it is classed as a congressional-executive agreement. There was considerable opposition on both sides of the border to the Agreement. Some opposition persists to the present day. In Canada, labor unions have subsequently removed their objections to the Agreement from their platforms.

In today's borderless economy, Mexico faces enormous challenges. A decade after the enactment of NAFTA, Mexico has benefited from free trade but problems remain if it is to compete effectively with the rest of the world. On the way to establishing itself as a middle-income country, it currently has the highest per capita income in Latin America, and a literacy rate of over 90%. Access to clean water is available to over 85% of the population and life expectancy at birth has risen to almost 74 years. With abundant natural resources, including oil, Mexico's export position is favorable. Manufacturing jobs are growing and foreign investment has increased. All of this bodes well for the future of Mexico. "Jaime Serra Puche, former Mexican trade minister and chief NAFTA negotiator for Mexico, said that if judged by the metrics of what it was designed to do, the agreement has succeeded on most fronts. Serra cited a World Bank study that showed that without NAFTA, Mexico would have exported 25% less than it has, there would have been 40% less foreign investment in Mexico, and that NAFTA has cut in half the length of time it takes Mexican factories to adopt new technologies."

Mexico has come a long way from the catastrophic financial crisis of 1994-1995, when millions of Mexicans were thrust into poverty and life savings were wiped out. Two million jobs were eliminated. The early days of NAFTA had failed to benefit Mexico as expected, and most of the manufacturing exports still came from the maquiladora sector along the northern border with the U.S. A corrupt and unstable political environment limited foreign investment. In January 1995, President Clinton was motivated to provide a $47 billion bailout of the Mexican economy.

Today, foreign investment is on the rise. The maquiladora sector no longer accounts for the bulk of exports. Manufacturing facilities, while still concentrated in northern Mexico, are spreading out to other parts of the country. The low average wage, of less then two dollars per hour, is a strong inducement to establishment of foreign facilities, particularly outside of the northern area, where the unemployment rate is close to zero. Not only is foreign investment coming from the U.S. And Canada, but also from Europe and Asia, as we see a shift from investment in Asia. The political climate has improved and Mexico is now perceived as a more stable platform for investment.

In spite of these vast improvements in the last ten years, Mexico still has some serious challenges ahead. Poverty rates are still high, with more than half the population classified as poor (living on less than two dollars per day) and almost a quarter classified as extremely poor (living on less than one dollar per day). Although unemployment is low in northern Mexico, other parts of the country are suffering from a shortage of jobs, with many workers surviving on part-time work. The Mexican economy needs to create one million new jobs each year in order to absorb the young workers entering the market. "John Cavanagh and Sarah Anderson of the Institute for Policy Studies, writing in the same issue of Foreign Policy, contended that NAFTA promised a broad range of social and environmental advances, not just industrial growth, which has not benefited the citizens of Mexico. 'Workers, communities, and the environment in all three countries have suffered from the agreement's flaws,' they wrote, pointing to reports showing that Mexican manufacturing wages were no higher in 2000 than in 1994, NAFTA's first year. In fact wages in 2000 were calculated to be lower than in 1981." There is also concern that loopholes allow U.S. industries and goods to be protected at the expense of both U.S. consumers and Mexican producers. "Exports for one of Mexico's main crops, sugar, are severely restricted by U.S. quotas that limit imports from Mexico to only 7,258 metric tons of raw sugar. Thus, while American consumers pay four times the world price for their sugar, Mexican sugar farmers, like West African cotton growers, face penury and hunger."

The educational infrastructure is currently not sufficient to meet the needs of the labor pool. Although manufacturing jobs are being created in Mexico, many of these are lower paying jobs. The workforce does not possess the skills necessary to move into higher paying positions. This has the affect of increasing discontent in lower class Mexicans who aspire to a higher lifestyle, but are trapped in lower paying jobs because of a lack of skills.

As mentioned above, Mexico has the highest per capita income in Latin America. How is this consistent with the extreme poverty conditions we see there? The answer is that while the average standard of living is increasing in Mexico, the gap between the upper classes and lower classes is increasing. The richest ten percent of the population earns almost forty percent of total income, while the poorest ten percent earns only about one percent of total income. This inequitable situation is compounded by ethnic and regional differences and by differences in access to basic services. Mexico's goal of reducing poverty and hunger by half, under five-year-old infant mortality by two-thirds, and maternal mortality by three-quarters by the year 2015 appears to be in jeopardy.

Much of the benefit of NAFTA has been reaped by larger companies, with access to cheaper foreign financing. Smaller companies in Mexico have trouble upgrading technology because of higher borrowing costs. "You're clearly concentrating power in the top producers that have financial power,' says Raul Hinojosa, a professor of public policy at the University of California at Los Angeles." A study he led for NAFTA discovered that the top fifty companies accounted for one-half of exports and most of the export growth. Foreign investment has been extremely important to the progress Mexico has made over the past decade, but it cannot be counted upon to sustain growth over the long-term. Access to domestic financial markets must be improved, particularly for the small businessman, and property ownership opportunities must be expanded.