By Alan M. Field

In 1992, independent U.S. presidential candidate Ross Perot made opposition to the North American Free Trade Agreement (NAFTA) the cornerstone of his national campaign, warning American voters that because of huge wage differentials between the U.S. and Mexico, “There will be a giant sucking sound going south.” Twenty years after NAFTA was ultimately enacted in 1994, the trade agreement’s impact has been significant, although quite unlike what Perot anticipated. The outcome for Mexico has been especially full of surprises.

Although Mexico’s lower wage scales did lure many U.S. firms to invest in Mexico, the People’s Republic of China was to become the far greater challenge for the United States. When Perot issued his famous warning, China wasn’t even on the radar screen of multinational U.S. and Canadian firms, and China didn’t join the World Trade Organization until December 2001, nine years later.

As it turned out, NAFTA didn’t just eliminate tariffs between the U.S. and its partners in the trade pact. For Mexican manufacturers, transportation firms, and providers of logistics services, especially in the automotive sector, NAFTA turned out to have a much more comprehensive impact than anyone could have imagined, often working to the detriment of Mexico’s competitors from China, which evolved rapidly into the world’s second largest economy during the interim.

Just as surprising, NAFTA wasn’t the only free-trade agreement that helped strengthen Mexico’s industrial competitiveness – and raise its export volumes. Over the past twenty years, Mexico has signed free-trade agreements with forty-six countries; perhaps the greatest number of any country on earth. Mexico’s long list of FTAs has not only opened Mexican markets to imports from these various trading partners, but encouraged non-Mexican manufacturers to use Mexico as an investment platform for manufacturing goods that are shipped to non-members of NAFTA. Thus, Mexico has signed bilateral FTAs with Bolivia (1994), Costa Rica (1994), Colombia (1994), Nicaragua (1997), Chile (1998), the European Union (1999), and the European Free Trade Association (2000) – which comprises Iceland, Liechtenstein, Norway and Switzerland. More recently, trade pacts have followed with Israel (2000); Guatemala, El Salvador and Honduras (2000); with Uruguay (2003); Japan (2005), Peru (2011), and the remaining nations of Central America (2011). And, as if that weren’t enough, Mexico is currently discussing trade pacts with Panama, Singapore, South Korea, New Zealand, Brazil and the Dominican Republic.

An explosion of automotive exports

Mexico’s biggest successes have occurred in the automotive sector, including cars, light trucks and automotive parts, where the country has captured U.S. market share from Canada. Before NAFTA, Mexican administrations had pursued a policy known as “import substitution,” which was antithetical to free trade. Protected by high import duties, import licenses and quotas, Mexican plants were notorious for producing shoddy goods unpopular even in their domestic market. Only Mexicans bought Mexican cars, and only then because they had no other choice.

Thanks to NAFTA, automotive companies in the U.S., Canada and Mexico “can use an engine from Mexico and a transmission from Canada, and then build the car in the U.S.” and still enjoy NAFTA preferential treatment, so long as 62.5 per cent of the value of that vehicle comes from within those three countries, noted Michael Robinet, Managing Director of IHS Automotive, a consultancy in Michigan. Nowadays, the “vast majority” of vehicles built in NAFTA nations have at least 75 per cent (combined) value-added from those three countries, while some have well over 90 per cent of North American value-added. The rare exceptions are some low-volume luxury vehicles for which it makes sense to source a (high-value) engine from outside the NAFTA countries.

During the first half of 2014, Mexico’s automotive sector generated 34,382 new jobs, which represented 20 per cent of all new jobs in its manufacturing sector; more new jobs than any other sector in the country. By the end of June 2014, there were 674,908 workers in Mexico’s automotive sector, or 8.9 per cent more than a year earlier. Overall, 8.5 per cent of all new jobs in Mexico were in the automotive sector. Eduardo Solis, President of AMIA, the Mexican automotive industry association, said that over the past year some 10 billion dollars have been invested in new plants and expansions. In 2014, he added, “we could generate 350,000 additional jobs.” The largest employer in the sector, the automotive parts industry, had 593,303 workers at the end of June 2014, or 8.7 per cent more than a year earlier.

The United States remained by far the largest market for Mexican car exports, with a 70.9 per cent share of the market from January through September 2014, or 1.384 million vehicles. That figure rose by 15.4 per cent, year over year, from January through September. Mexican vehicle exports to Canada ranked in second spot, with 194,000 units, up 35.8 per cent from the same period last year, as Mexican-made vehicles are acquiring a larger share of Canada’s automotive market. Other strong markets for Mexican auto exports are Brazil, with 81,000 vehicles; Germany, with 68,000; China, with 55,830 and Colombia with 44,441 vehicles over that nine month period.

Thanks to NAFTA, the U.S. share of North American automotive jobs (automobile assembly and parts manufacturing) dropped from 64.5 per cent in 2000 to just 53.4 per cent in 2012. By 2012, 39.1 per cent of all North American automotive jobs were in Mexico, up from 27.1 per cent in 2000. The Canadian share of such jobs had declined to 7.5 per cent of such jobs in NAFTA member states by 2012. By 2020, almost 25 per cent of all North American vehicle production will take place in Mexico, compared with only 10 per cent in Canada and 65 per cent in the United States that year. Robinet said, “This is a flip flop of the positions of Mexico and Canada,” which once produced a lot more vehicles than Mexico.

Mexico’s automotive sector is now on track to set new production records because of massive new foreign investments by Asian and German brands. Three new plant openings, by Nissan Motor Co., Honda Motor Co. and Mazda Motor Corp., will supply the final push for Mexico’s leap past Japan, which as recently as 2008 shipped almost twice as many vehicles to U.S. consumers as did Mexico. The plants will include Mazda’s new facility with an estimated annual production of 185,000 vehicles, and Audi’s plant set to open in 2016, with annual capacity for 150,000 vehicles. A new jointly owned Daimler-Nissan plant will produce 300,000 cars a year when it reaches full capacity in 2021. The first Nissan Infiniti model will roll off its assembly lines in 2017, followed by a Mercedes-Benz model a year later. By 2018, Mexican production is projected to surpass 4 million units, up from last year’s 2.93 million, according to LMC Automotive.

A mixed picture of Mexican growth

Nevertheless, Mexico’s rate of economic growth in the NAFTA era has been disappointing, noted Gary Hufbauer, Senior Fellow at Peterson Institute for International Economics, in a recent report. “In the wake of substantial economic reforms, Mexico should have delivered a performance as good as Chile’s. It did not… Between 1993 and 2013, Mexican real GDP per capita expanded 31 per cent, which works out to 1.3 per cent annually (compounded), whereas Chile expanded 90 per cent, or 3.1 per cent annually. The ASEAN-4 (Indonesia, Malaysia, the Philippines, and Thailand) expanded 75 per cent, or 2.7 per cent annually.”

Between 2000 and 2009, Mexico’s automotive workforce actually dropped from 554,000 (2000) to 397,000, before recovering to 579,000 in 2012. Moreover, after China joined the WTO, foreign investment in Mexico suffered from a widespread view among U.S. firms that China’s even lower-cost structure made that country a more attractive location than Mexico from which to outsource components and assembled products.

Significantly, the report argued that Mexico’s overall economic underperformance was not the result of NAFTA or of lagging Mexican exports. Between 1993 and 2013, Mexican exports actually expanded by 640 per cent, while Chilean exports rose by 730 per cent, and ASEAN-4 exports by 420 per cent. The real problem was that Mexico suffered from three handicaps that those other countries did not suffer from. “Foremost was organized mayhem stemming from drug wars.Drug cartels have not only killed 70,000 people just since 2006, spreading fear across Mexico; they have also knocked GDP growth down by around 1 per cent annually.” According to INEGI, Mexico’s national statistics institute, at least one household member in 10.7 million households in Mexico (33.9 per cent of total Mexican households) was the victim of a crime in 2013, a rate of 28,224 victims per 100,000 residents. 

According to the same report, other causes of lagging Mexican performance included weak primary and secondary education; poor infrastructure (water, sewer, gas, electricity, roads) in major urban areas, discouraging the migration from farm to city. The absence of infrastructure has been particularly damaging in many rural areas. Ysmael Lopez Garcia, President of CICEG, the footwear industry trade association of the Mexican state of Guanajuato, said, “NAFTA was signed as an opportunity to take advantage of the comparative advantages of the three countries, in the most important project for the development of Mexico. And yet because we lacked appropriate public policies and an industrial strategy, we were unable to take full advantages of the benefits that we negotiated.”

A recent McKinsey Global Institute report (2014) finds that those sectors of the Mexican economy that are oriented towards NAFTA, primarily large firms employing 500 persons or more, enjoyed annual productivity growth of 5.8 per cent between 1999 and 2009. “However, Mexican industry has a productivity problem, concentrated in traditional, small firms that employ ten or fewer people, and have little connection with NAFTA. Those firms account for 42 per cent of the Mexican labour force, but their productivity actually declined between 1999 and 2009, dragging down the overall growth of the Mexican economy. The McKinsey report warns that this trend is unhealthy for Mexico’s long-term competitiveness. “What makes this dichotomy important now is that the two Mexicos are pulling in opposite directions. As the modern economy celebrates the NAFTA anniversary and triumphs such as the opening of yet another world-class auto plant, the traditional sector is moving backward.”

In Mexico, the productivity of small establishments (ten or fewer employees) declined from 28 per cent of the level of large companies (more than 500 employees) in 1999 to just 8 per cent [of that level] in 2009. “Yet these traditional unproductive firms are creating jobs at a faster rate than modern firms, the opposite of what typically happens as economies develop.” This is hardly the long-term economic payoff that supporters of NAFTA were dreaming about decades ago.

Consider the impact of NAFTA, for example, on the poultry industry, which plays an important role in Mexico’s food supply. According to Jaime Crivelli Espinoza, the former President of Mexico’s National Union of Poultry Farmers (UNA), more than 100 poultry companies have disappeared over the past two decades as a result of NAFTA and other Mexican free trade pacts, yielding a monopoly of large Mexican poultry companies. Crivelli Espinoza told the local press that small-scale poultry farmers have had had to lower their prices in order to compete with fierce competition from transnational corporations. Twenty years ago, there were 80 poultry producers in the state of Veracruz, producing a total of six million chickens; currently, more than 30 million chickens are produced in that state, but there are only seven producers. Only, the large producers have survived.

Divided opinions of NAFTA

Among Mexicans, NAFTA has drawn a great deal of criticism from those who argue that the gap between the country’s rich few and its masses of poor has deepened as a result of the trade agreement. According the Economic Commission for Latin America, the overall poverty rate in Latin America fell from 48.4 per cent in 1990 to 27.9 per cent in 2013. In Mexico, the poverty rate dropped from 52.4 per cent in 1994, to as low as 42.7 per cent in 2006. However, by 2012, it had risen again to 51.3 per cent.

No wonder, public opinion about NAFTA is ambivalent: A recent Universal newspaper/Buendia-Laredo poll showed that while about half of all Mexicans would approve the NAFTA trade pact if it were proposed again today, about 34 per cent would reject it. The rest had no opinion. The margin of error was 3.5 per cent. Among those who have profited from NAFTA, especially, skilled workers and well-educated professionals, the treaty is often considered beneficial. But among lower income groups, especially in rural areas, NAFTA is, at best, highly controversial. Like Canada, Mexico is extremely sensitive to the ups and downs in the U.S. economy, which purchases nearly three quarters of Mexico’s exports.

Mexican suspicions of the TPP

Mexican critics of free trade pacts are also suspicious about the impact of TPP and other agreements that would include chapters that set environmental protection standards. “The free trade agreements signed by the Mexican government are the fundamental cause of the deterioration of the quality of our life, whether economic, environmental, political, cultural or institution since twenty years ago,” said Octavio Rosas Landa, an activist with ANAA, the National Assembly of Environmentally Affected Peoples. “Mexico is living through the worst humanitarian crisis in its history as a nation. This crisis is related to the structural violence that stems as much from the government as from criminal organizations that have left behind a trail of death, destruction, sickness and injustice.” Rosas Landa added, “Mexico decided, more than twenty years ago, to surrender the riches of the country, its economy and its domestic market to the interests of the big multinational companies from the United States and other countries. This has led to territorial plunder, serious environmental destruction, the loss of all sorts of labour rights, the fall of salaries and, of course, the social consequences of the destruction of the social fabric of the entire Mexican society.”

According to Pierre Beaucage, a professor of anthropology at the University of Montreal, “until a few years ago, many people in Mexico believed that the participation of Canada in NAFTA could be advantageous for their country because it would counterbalance, up to a certain point, the excessive weight of the United States in that alliance.” But Canada has not played a constructive role in the implementation of NAFTA, Beaucage argued. He cited a 2012 study by economists Alain Denault, and William Sacher, which showed how lax Canadian legislation and the complicity of the Toronto Stock Exchange stimulated the spectacular growth of mining companies in Canada, for the greater benefit of speculators, after NAFTA was enacted.

Not only is Canada now a fiscal paradise for mining companies, wrote the authors of that study (Denault and Sacher), but its government concealed the operations of those Canadian companies in foreign countries so that it was almost impossible to indict them for their misdeeds in other parts of the world. Beaucage wrote, “Thanks in part to NAFTA, Mexico has become one of the favorite locations for Canadian firms. One of the victories of the Mexican Revolution was that most Mexicans have traditionally believed that the subsoil of their country belonged to the (Mexican) nation. Yet, out of the 833 new mining projects registered in Mexico in August 2012 by 301 different companies, a (surprisingly high) 202 of those projects were Canadian, while barely 12 projects belonged to Mexicans.” Whether or not such charges are true, they clearly reflect a further lack of confidence in the impact of NAFTA.

Looking to the future

In coming months, Mexico’s industrial capability will be expanded even further by the ambitious deregulation of its energy sector, opening up to Canadian, U.S. and other foreign investors for the first time. Jeffrey Eppink, President and founder of Enegis LLC, a Fairfax, Virginia-based energy consultancy, noted that Mexico has significant untapped oil and gas reserves. Only six of the country’s twelve oil basins have significant production, so the development of those other basins will involve the importation of huge volumes of industrial equipment, likely from Canada and elsewhere. Over the last 100 years, 96 billion barrels of oil equivalent have been extracted in Mexico, but a whopping 160 billion barrels of oil equivalent are still left to be produced, according to estimates by state oil company Petróleos Mexicanos (Pemex). “The energy reform brings the opportunity to tap these reserves with the help of private capital,” said Eppink.

Despite the investment guarantees provided by NAFTA, not everything is expected to be smooth sailing for those foreign firms that participate in Mexico’s energy expansion. Marcelo Mereles, a partner at EnergeA, a Mexico City-based consultancy, said, “The biggest threats to Mexico’s energy reform are its weak and rigid regulatory institutions, and the lack of human capital within the regulatory bodies and Pemex,” the notoriously corrupt state oil company. “Concerns about security and the rule of law could also deter investments.”

Will Canada’s enthusiasm for the next stage of Mexico’s economic development, the leap forward in energy, be greeted by NAFTA-inspired suspicions? Or might Canada take advantage of NAFTA guarantees, and/or those in the upcoming TPP, to stake out a highly profitable position in a sector where Canadian firms have a great deal of expertise to contribute? How much new business might such projects provide to Canadian transportation and logistics firms? The next, and perhaps most profitable stage in Mexico’s painful economic transformation might just be getting underway…