A decade ago the North American Free Trade Agreement was a political football in the U.S. presidential election, with independent candidate H. Ross Perot famously predicting "a giant sucking sound" as U.S. manufacturing jobs flew south to Mexico.
Ten years later some things haven't changed, and although India is the primary destination for a wave of outsourced white-collar jobs from the U.S., NAFTA is once again a hot campaign topic. And many in Mexico say the agreement never brought about the massive improvements in the country's economy and living standards that some imagined it would.
But in a presentation on "Lessons of NAFTA After Ten Years" on April 3 as part of the 10th HBS Latin American Business Conference, 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 percent less than it has, there would have been 40 percent less foreign investment in Mexico, and that NAFTA has cut in half the length of time it takes Mexican factories to adopt new technologies.
"When you look at NAFTA in terms of what NAFTA was made for, which were trade flows, investment flows and in general, technological transfer and so on," he said, "you can say that NAFTA has been a successful enterprise."
NAFTA not the solution
NAFTA has been criticized, however, even by presumed presidential candidate John Kerry, who had voted for it, as well as by some members of the AFL-CIO and some NGOs who suggested that NAFTA has been "a complete failure because there's still poverty in Mexico," said Serra.
According to Serra, NAFTA could never have been the solution to all Mexico's economic problems, and that he, for one, made it clear that such expectations were misplaced. Twelve years ago, when he had to explain NAFTA to the Mexican Senate, "I said that NAFTA should not be understood as a panacea and that NAFTA should not be an excuse to abandon all of our other efforts as a country to become more competitive." Unfortunately, he said, NAFTA was viewed exactly in that light, and other efforts to make Mexico more competitive were left behind.
"NAFTA should have been perceived as the beginning of the process," instead of the end, he said.
Serra cautioned that negotiators behind today's Latin American trade agreement efforts should try to keep expectations realistic. "It's very important you don't build up huge expectations, that you're able to tell people this is just a trade and investment instrument."
In evaluating NAFTA for what it did promise to do, Serra first looked at the openness of the Mexican economy, expressing it as a ratio of exports plus imports divided by GDP. When Mexico was a closed economy before joining the General Agreement on Tariffs and Trade in 1985, Serra said only 22 percent of its GDP came from trade. Trade increased to 30 percent after Mexico signed GATT, and since NAFTA it has risen to 52.8 percent of GDP.
There is a clear correlation between the NAFTA years and much higher foreign direct investment. |
Perhaps the most dramatic change is in the country's export mix. In 1980, Mexico had $18 billion in exports, with 60 percent of that in oil and only $5 billion, or 31 percent, in manufactured goods. Last year, Mexican exports were $165.6 billion, 11 percent of which was oil and 86 percent of which was manufactured items.
"If you think about all the implications of this change, you would immediately react and say, 'This economy to the left is different from the economy to the right,'" he said, comparing two graphs. "We're talking about a different economy all together."
Serra said one criticism of NAFTA has been that it concentrated too much of Mexico's trade with one country: the U.S. But according to him, the balance of trade between Mexico and the U.S. and other countries has not swung dramatically since NAFTA.
"Our trade was already concentrated with the U.S., and I think that's very important to recognize," he said.
NAFTA has also cemented Mexico's trade relationship to the U.S. as compared to other Latin American countries. In 1992, Mexico's exports to the U.S. were $35 billion while the rest of Latin America's exports to the U.S. were about $34 billion. Last year, the rest of Latin America's exports to the U.S. were $79 billion compared to Mexico's $138 billion; Mexico is not the region's largest economy.
China steps in
The major threat to Mexico's U.S. export market appears to be China. The annual rate of growth of Mexican exports to the U.S. grew at a consistent double-digit rate since NAFTA was signed, with the exception of 1998. After the terrorist attacks of September 11, 2001, exports shrank and then recovered somewhat. But last year, for the first time since NAFTA, the rate of growth in exports from the rest of the world to the U.S. was greater than that of Mexico or Canada, and Serra believes that growth from elsewhere is driven mainly by China.
In 2003, for the first time China exported more to the U.S. than did Mexico: $152 billion compared to $138 billion. Trade liberalization has been effective in increasing foreign direct investment in Mexico, Serra added. But competition for U.S. investment dollars is also heating up between Mexico and China. Before Mexico signed the General Agreement on Tariffs and Trade (GATT) in 1980, it received only $1.3 billion in foreign investment annually. After GATT, that increased to about $3.5 billion. But after NAFTA, it increased to $14 billion.
"There is a clear correlation between the NAFTA years and much higher foreign direct investment," he said. Last year, however, Serra saw more evidence of what he called "the China effect," as foreign investment in Mexico fell to $10 billion.
"I think we're going to see this trend increasing, unfortunately," Serra said.
He said there has been little doubt that NAFTA has brought trade and investment benefits to Mexico. Asked about its impact on the U.S. labor marketalways a thorny issue in this countrySerra said he believes NAFTA has made relatively little difference.
"The 'sucking sound' is now coming from China, and there's no NAFTA with China," Serra said. "This country is not and will not be very competitive in labor-intensive sectors."