Mexico and the North American Free Trade Agreement

What do Nissan, Mazda, Chrysler, Volkswagen and Honda all have in common? That’s right, they’re all cars manufactured in Mexico. The country’s auto industry has boomed over the last 20 years and now manufactures more than 2.5 million vehicles a year, making it the fourth-largest exporter of new light vehicles worldwide in 2012. Free trade agreements have brought down barriers to trade in Mexican-made automobiles and created a market for quality products at competitive prices. As a result of liberalization and economic integration, large auto conglomerates are investing in Mexico for production of the next trendy vehicle on the market.1

Rush Hour in Mexico City, picture taken by discopalace.

In 1994, the North American Free Trade Agreement (NAFTA) was created to make clear rules, coordinate markets, and boost investment between Canada, the United States, and Mexico by breaking down prohibitive trade barriers and encouraging increased coordination. Today, the signatory countries exchange 2.6 billion dollars each single day – triple the amount of 1994. An additional 40 million employees have also been hired in industries that have grown since implementation of NAFTA. The Mexican auto industry is just one of the many sectors that have benefited from NAFTA policies.

The situation, however, is not entirely rosy. Overall good economic performance is one thing, but how it truly affects the people is quite a different story. A well-respected Mexican economics professor said in one of my classes, “Free Trade generates winners and losers. The benefits brought to the winners in aggregate outnumber the negative effects on the losers. This makes an economy grow at the cost of generating the worst sin of all: jealousy… the jealous losers form groups and continuously complain about the earnings of the winners, thus blocking neoliberal economic policies and slowing down the country’s path to development.”

The first time I heard this reasoning I was outraged, how selfish this guy is…but indeed he was halfway right. To force growth via free markets requires poor “losers” to suffer in exchange for a strong and diversified economy. Naturally, Mexican trade dramatically rose with the creation of NAFTA, with around 80% of its exports going directly to the USA. Nevertheless, it also deeply affected certain vulnerable groups such as Mexican farmers.

At least 25 million Mexicans (or nearly one quarter of the country’s entire population) inhabit rural areas and live mostly from harvesting their small plots. The entrance of the United States’ agriculture industry into Mexico’s food products through NAFTA has severely affected them. American-grown corn, which is highly subsidized by America’s far better infrastructure and government, has elbowed small Mexican farmers out of the game for competitively-priced grain. This is one unexpected outcome of NAFTA, as in theory non-developed countries should have a competitive advantage due to the abundance of labor and cheap wages they have.

The social and economic outcomes of the treaty have been thoroughly analyzed by academics, economists, and policymakers. The negative effects have shown both that integration, though gradual, is still a tough challenge and that free trade is effective only when complemented with a firm internal strategy. Considering the need for structural reforms and the enormous asymmetries between the signatories – Mexican GDP equals only one quarter of that of the USA – NAFTA is still far from achieving its possible optimal results.

In May 2013 Barack Obama visited Mexico to negotiate various matters including possible future NAFTA negotiations. Picture taken by Alejandro Navarro.

Even so, stopping efforts to institutionalize and perfect the organizations that first make free trade and integration possible is not the right answer to the unequal levels of wealth brought by the liberal system of winners and losers. Nearly twenty years after the signing the agreement, the world has dramatically changed and so must our perceptions. There is no turning back.

In a context in which globalization has been reinforced by new technologies, social media and means of transport, Mexico’s economy continues to grow steadily at more than 3% a year while international trade has generated more interdependence between it and other countries. It is necessary for governments to continue cooperating and negotiating in order to adapt to these changes and prevent possible negative effects such as a widening inequality gap.

Instead of forever lamenting the millions of free trade “losers”, it’s high time to keep our eyes on the road to avoid more furture damage, to fight against inequality and continue to grow. Only by working as a region to lower production costs, optimize processes, implement coordinated policies and generate mutual development will it be possible to continue opening the market in a way that is beneficial for majorities rather than a burden for the most vulnerable. Hopefully one day our farmers will be the drivers of a new Volkswagen or Honda!

1 For more information about the automotive industry in Mexico watch this great PROMEXICO Infographic.