NAFTA Is Getting a Bad Rap : Trade: U.S. politicians are scapegoating the pact with phony claims. Mexico’s efforts merit optimism.

John Sweeney is a Latin American affairs analyst at the Heritage Foundation, a Washington-based public policy research institute

GOP presidential hopeful Patrick J. Buchanan and wannabe presidential kingmaker H. Ross Perot are throwing a national “I-told-you-so” party, reminding America that they warned us what would happen if the North American Free Trade Agreement became law.

The U.S.-Canada-Mexico trade pact, they say, has proved a disaster, resulting in the collapse of the Mexican peso, record U.S. trade deficits, the loss of American jobs, falling U.S. wages, increased immigration from Mexico, even the spread of drug trafficking.

But the truth is that Mexico’s problems have nothing to do with the trade pact. If anything, the NAFTA framework, having forced Mexico to keep its economic liberalization program on track, helped prevent an even worse crisis.

Mexico’s financial crisis was precipitated by the 40% devaluation of the peso last December. This was unrelated to the trade pact, which went into effect 12 months earlier. The peso’s collapse was caused by mismanagement of Mexico’s monetary and exchange policies by the government of former President Carlos Salinas de Gortari.


Everyone realized when NAFTA was approved that Mexico’s economy was not yet free. Despite the extensive economic reforms carried out by the Salinas government since 1988, Mexico’s railroads, ports, electricity generation and petroleum and petrochemical industries remained under government ownership. Rigid labor laws discouraged investment and job growth. The economy was a regulatory jungle. Had Salinas pushed reforms more vigorously during his six-year term, private investors would have had more confidence in the stability of the country and might not have fled the Mexican market when the necessary belt-tightening began.

Despite Mexico’s economic woes, President Ernesto Zedillo has pushed free-market reforms in recent months. Foreign investors now can own 100% of any financial institution. The government has put up Pemex’s petrochemical plants for auction and is pushing plans to privatize the railroads and power utilities. A proposed law regulating the natural gas industry is expected to allow private investment in extraction and distribution. Zedillo also has announced a reform package designed to reduce burdensome regulation and to increase domestic savings and investment. Much more still needs to be done, but Mexico is moving in the right direction.

It might not be moving at all without NAFTA. One of Mexico’s foremost political analysts, Luis Rubio, director of the Center for Development Research Studies in Mexico City, says NAFTA “is one of the few strong anchors that Mexico still has. NAFTA is keeping Mexico from losing all sense of direction.”

When the Mexican economy starts growing again, as it inevitably will, the current U.S. trade deficit--caused by the peso’s devaluation, not NAFTA--will turn into a surplus. NAFTA’s potential was clearly demonstrated in 1994, when trade between the United States and Mexico jumped more than 22% to nearly $100 billion. During the five years before NAFTA went into effect, bilateral trade had grown an average of only 12.5% annually.

The claim that more than 1 million U.S. jobs have been lost is way out of line. Economists use the widely accepted formula that every $1 billion in exports produces 20,000 jobs. If this formula is applied to the $8.5-billion trade deficit reported by the U.S. Commerce Department for the first six months of 1995, 170,000 Americans may have lost their jobs this year as a result of the Mexican crisis. While that’s nothing to be happy about, we should remember that 350,000 American workers file new unemployment claims every week. When the Mexican economy recovers, exports to Mexico will increase again, creating U.S. jobs.

Finally, the argument that NAFTA has caused Mexican immigrants to flood across the U.S. border is preposterous. Mexicans have been migrating to the United States for many generations, and as Mexico’s population increases over the next 15 years, from 91 million today to about 130 million, the number of Mexicans who enter the United States--both legally and illegally--will grow as well. As NAFTA creates greater economic opportunity in Mexico, those numbers will drop, not rise.

The NAFTA-bashers are wrong on all counts. NAFTA is the most important instrument America possesses for helping the achievement of an economically prosperous, politically stable Mexico. To do away with it now would be a terrible mistake.