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Mexico Hopes to Strengthen NAFTA, but Faces Two Tests: Trump and Time

Paul Imison - World Politics Review

01 de Junio del 2017

Artículo publicado en World Politics Review

Mexico Hopes to Strengthen NAFTA, but Faces Two Tests: Trump and Time

The lengthy and tumultuous prelude to talks between the United States, Mexico and Canada over the North American Free Trade Agreement has in many ways epitomized the chaos and contradictions of Donald Trump’s presidency. Trump has demonized the 23-year-old pact as the “worst trade deal, maybe ever,” but officials from his administration have hailed its potential to create a “regional powerhouse” through further economic integration. The confusion notwithstanding, Trump has forced policymakers to reflect on an agreement that is vital to the interests of all three NAFTA members. But he has also forced them to consider the intricacies of the global marketplace as a whole.

On May 18, the White House triggered a 90-day period of consultation with Congress ahead of formal trilateral talks set to begin in August. Mexico, which has received the brunt of Trump’s criticisms of NAFTA, expressed surprising confidence that the deal could not only be saved but strengthened. In many ways, the Trump administration’s delay in triggering negotiations has only given the Mexican government and the country’s business leaders time to build a stronger case in favor of an agreement that, however controversial, may not have yet realized its full potential.

“Instead of reversing decades of economic integration, the way forward is to deepen [the relationship] in areas that are still to be exploited and through which we could obtain an even more profound integration,” the governor of Mexico’s Central Bank, Agustin Carstens, said in an impassioned defense of NAFTA last month. 

When NAFTA went into effect in 1994, reducing or eliminating tariffs on exports between the U.S., Mexico and Canada, it represented more than an emerging post-Cold War consensus on trade liberalization. The agreement turned North America into the largest trading bloc in the world with some $1 trillion per year in trilateral commerce—$500 billion between the U.S. and Mexico alone. 

Of course, the deal had its critics. Labor and environmental activists protested a raft of deregulatory measures. In 1992, U.S. presidential candidate Ross Perot famously decried the “giant sucking sound” of jobs heading south. In Mexico, opposition to the agreement was most famously associated with the Zapatista uprising, an armed insurgency by indigenous rebels in the state of Chiapas that became a cause célèbre for the nascent alter-globalization movement. 

The irony to the current saga is that if any country appeared likely to succumb to the populist temptation to abandon NAFTA, it was Mexico. While the quantity of trade among NAFTA’s members more than quadrupled over 20 years and saw real per capita GDP growth in the U.S. and Canada increase by around 40 percent between 1993 and 2015, south of the border the results were decidedly poorer. Mexico’s real per capita GDP grew by just 24 percent in that time, and NAFTA only deepened the country’s inequality gap

“There were those who thought that free trade would solve all Mexico’s problems, yet evidently that hasn’t been the case,” says Valeria Moy, an economics professor at the Autonomous Technological Institute of Mexico. 

The inability of Mexico to reap greater benefits from NAFTA has been at least partly due to a range of structural weaknesses domestically, such as low tax revenues, the prevalence of monopolies in key economic sectors, and a dysfunctional public education system. Mexico has also gained a reputation as a “screwdriver economy,” a low-value assembly hub in the global supply chain with the high-value work done in the U.S., Europe and Asia. Wages in the country’s manufacturing sector have remained low, while the geography of investment has exposed an increasing north-south divide in which factories are overwhelmingly located within easy access of the U.S. border. 

“The Mexican states that have grown and developed in the past 25 years have been precisely those that are connected to NAFTA trade,” says Moy. “But there are states that haven’t integrated into the chain because they lack the infrastructure, and these have fallen behind economically.”

Nevertheless, experts insist that the positive benefits of NAFTA for Mexico are frequently overlooked. The agreement took an inward-looking economy that was still recovering from a devastating 1982 debt crisis and turned it into the 12th-largest export economy in the world. Mexico’s workforce is more highly skilled than ever. Meanwhile, as Luis de la Calle, a former trade minister at the Mexican Embassy in Washington, has pointed out, NAFTA has fundamentally strengthened property rights and the rule of law within a Mexican private sector long accustomed to political intervention and opaque business practices.

Yet perhaps most importantly, the reassessment of NAFTA that has taken place in recent months has revealed two key issues that the Trump administration would be foolish to ignore. First, it is widely estimated that NAFTA has played only a minimal role in the loss of manufacturing jobs in the United States. Second, Mexican trade and investment have made an immense contribution to the U.S. economy, with roughly 5 million American jobs supported by the agreement.

“Texas’ exports to Mexico have more than quadrupled since NAFTA went into effect,” says Rep. Henry Cuellar, a Democrat from Laredo and an advocate of strengthening the deal, in an email. “Last year, trade activity through Texas’ 29 ports of entry supported more than one-and-a-half million jobs in the state.”

“However, NAFTA is 23 years old; it’s ready for an update,” he adds. “When the original deal was struck, cell phones and internet commerce were in their infancy. Supply chains have gotten more complicated, too, so rules of origin need to be re-examined. Higher labor standards could increase wages in Mexico, improving our neighbor’s economic and social situation.” 

Analysts on both sides of the border suggest that reforms to rules governing the energy sector in Mexico could be part of any NAFTA renegotiation. When the pact was established, Mexico’s oil, gas and electricity industries were all nationalized, but they have since been opened to foreign investment under President Enrique Pena Nieto. Agriculture, digital commerce, labor and rules of origin—the quantity of locally produced inputs necessary to qualify exports for NAFTA benefits—could also be renegotiated to the benefit of Mexico, but also the U.S. and Canada. 

“There are various issues that seemed far less important when NAFTA was negotiated in 1992, and in these areas, there are possibilities for all three sides to win and generate further trade,” says Macario Schettino, an economist at the Technological Institute of Monterrey in Mexico City. 

The U.S., Mexico and Canada have all expressed hope that talks can begin promptly and be completed within six months, at which point any reforms to NAFTA must be approved by all three countries’ legislatures. Yet along with the unpredictability of the Trump administration, timing will be another major concern. The U.S. holds midterm elections in November 2018. Perhaps more crucially, Mexico will host presidential elections in July 2018. Pena Nieto has made it clear that he will withdraw Mexico from the deal should the outcome of talks be detrimental to the Mexican economy.

“If the U.S. insists in putting up tariffs, I think Mexico would be best to reject the negotiations,” says Schettino. “If that signals the end of NAFTA, so be it. Ideally, things will move quickly and be wrapped up by December. If not, it may not be worth it, as neither Congress is going to approve the deal.” 

Paul Imison is a British journalist based in Mexico City. You can follow him on Twitter @paulimison.

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