Trade Warms Mexico’s Economy

The North American Free Trade Agreement is 3 1/2 years old, yet much of the public discussion is still centered on its impact on U.S. jobs.

The issue of whether U.S. business can compete in the international marketplace has already been answered in the positive many times over: The U.S. is the world’s top exporter. The largest recipient of foreign direct investment, its exports have dominated trade even in traditionally protectionist markets where the odds against U.S. products were high. At the same time, the mobility of the U.S. job market has allowed it to weather technological and trade pattern changes successfully, as is evident from today’s low rate of unemployment. A more meaningful debate about the value of agreements such as NAFTA should be on the ability of Mexico, the developing country, to participate profitably in international trade.

The main question is whether developing countries can beneficially open their borders to competition from First World countries whose competitiveness is a proven fact. The future of trade liberalization hinges more on the success of integrating developing countries into world markets than on its impact on the already successful developed economies. In a way, the fulfillment of NAFTA’s potential lies more with Mexico than with the United States or Canada. The growth in bilateral merchandise trade from (U.S.) $80 billion in 1993 to an expected $160 billion in 1997 underlines the wisdom of Mexico’s decision to open its markets.

Some people ask if NAFTA is going to develop Mexico. We can confidently answer that by itself it will not. The key question in my mind is whether NAFTA makes a contribution to Mexico’s economic development. It does, in four ways:

* Mexico will increase its worldwide exports to a record $110 billion in 1997. The export boom took place precisely when we needed it the most. In 1995, without export growth, Mexican GDP growth would have been minus-12%; in 1996, export growth contributed 90% of total GDP growth of 5.1%. Since the 1995 peso crisis, 1.5 million jobs have been created, most of them in the export sector, which pays an average of 34% more than other manufacturing jobs.

* Mexico is now a more attractive place for foreign direct investment, which totaled $31.5 billion in 1994-96, an amount second only to China among developing countries. These flows are better, economically and from the standpoint of sovereignty, than the alternative of relying purely on foreign debt to complement domestic savings.

* We are getting a better quality of investment for two reasons: In an open North American market, second-rate investment is simply not competitive, and no large investment in the region takes place without Mexico being considered, whether for location, sourcing or distribution. That is true whether the investor is from Europe, Japan or North America. Mexican workers have proved adroit at adapting to new technologies. This has made our workers our best asset, and within our limited resources we have allocated a major part of our budget to education and social services.

* We are expanding our export capacity, geographically and by sector. In the past, exports originated from the border region and the largest cities, while today, most export-oriented plants are opening outside the border and throughout Mexico. And, while in 1982 our main export was oil, today that represents only 11% of a diversified export base. In 1993, we had 21,000 exporters; by the end of 1996, we had 31,800. Some 96% of these new exporters are small and medium-size firms, with overseas sales of less than $10 million. But this is just the beginning. In the NAFTA marketplace, smaller companies have access to advanced technology and production processes. The NAFTA marketplace also increases opportunities for strategic alliances in production, distribution and technology. As a consequence, firms grow more confident and participate in non-NAFTA markets.

What does this mean for the region? Last April, Mexico surpassed Japan to become the second-largest market for U.S. exports. (Canada ranks first.) Mexico-Canada-U.S. trade is remarkably balanced in the sense that in sectors in which we import a lot from each other, we also export a lot. This pattern of trade is unique among U. S. international trade relationships.

While some of the benefits of NAFTA could have been obtained through traditional routes, in negotiating a comprehensive agreement, the three countries acquired rights that inoculated each against unilateral protectionist decisions. This is a central issue for Canada and Mexico, countries whose trade is mainly with the U.S. and whose economies are a fraction of the size of the U.S.

Another piece of evidence showing the benefits of free trade for Mexico is the record growth of Mexican trade with other countries in the hemisphere.

Oftentimes, the perception of whether trade works is associated with the issue of whether NAFTA works. In this way, understanding the workings of NAFTA affects the prospects of trade expansion in general. The U.S. is already successful. It is Mexico’s success that holds the key.