Lifeline to Mexico
Mexico still struggles with many problems, but one observer argues that, on the whole, NAFTA has had positive effects.
“Scoring Free Trade: A Critique of the Critics” by Sidney Weintraub, in Current History (Feb. 2004), 4225 Main St., Philadelphia, Pa. 19127.
In the decade since the North American Free Trade Agreement (NAFTA) took effect, Mexico has endured serious economic woes: weak economic growth, insufficient new jobs, and continuing widespread poverty. Things would have been a lot worse without NAFTA, argues Weintraub, director of the Americas program at the Washington-based Center for Strategic and International Studies.
The trade agreement with the United States and Canada had hardly gone into effect when the peso collapsed in December 1994. Having depleted its foreign reserves to protect an overvalued peso, Mexico could not pay its dollar-indexed foreign debt. Its economy went into a tailspin. But NAFTA eased the impact and helped with the recovery. As their domestic market shrank, Mexican producers were able to expand exports to the United States by 28 percent in 1995. Economic growth returned the following year.
“In its own terms—the expansion of trade and the attraction of more foreign investment—NAFTA has succeeded beyond anyone’s expectations,” says Weintraub. Between 1993 and 2002, Mexico’s exports to the United States increased by 14 percent annually, while exports to the rest of the world increased at an eight percent rate. Oil once dominated Mexico’s exports; today, as NAFTA’s architects intended, manufactured goods make up almost 90 percent of the total. Foreign investment has flowed into Mexico at a rate of $13 billion annually, more than two and a half times the rate in the 13 years before NAFTA.
But foreign trade can do only so much. Mexico’s economy has grown by an average of only three percent annually since 1994. One cause of the mediocre performance is a low level of tax collection—only 11 percent of gross domestic product, compared with Brazil’s 37 percent, for instance—that leaves the government starved for resources: Up to half of Mexico’s population remains in poverty.
There is one Mexican problem, though, that NAFTA has aggravated: regional inequalities in wealth. The trade pact has fostered stronger growth in the country’s central valley and in the north, while other regions have languished. NAFTA should have followed the European Union’s example by providing for subsidies to these poorer areas, Weintraub believes. But Mexico’s fundamental economic problems do not lie with NAFTA. On the contrary, NAFTA is “the one policy initiative that has worked.”