Mexico: NAFTA & Its Disappointing Economic Performance

December 13, 2010

The North American Free Trade Agreement, better known by its acronym, NAFTA, came into force over almost 17 years ago to create a free trading bloc composed of Canada, Mexico and the US. It’s therefore an apt time to look at Mexico’s economic performance and its outlook.

Last Wednesday, December 8, the University of Miami’s Center for Hemispheric Policy held  a conference on Mexico with a number of distinguished speakers and key points included the following:

  • Mexico has seen the lowest growth rate in Latin America since 2000, with recessions in 2001-2003 and 2008-2009.
  • Mexico has in fact seen an average of one economic recession in each of the past 6 presidential terms, or one every 6 years.
  • Although Mexico has recovered in 2010 it has still not regained its economic level to that before the crisis, and the outlook for 2011-2018 is quite muted for an emerging economy with GDP growth of around 3% per annum, a very mediocre performance. Pamela Starr of the University of Southern California said that Mexico would “muddle through,” neither joining the BRICs nor becoming a failed state.
  • The growth engine at present is non-oil exports, but the question is why low productivity and the domestic economy are not growing faster – Lack of credit penetration is a key issue at only 14% of GDP (compared to around 45-50% in Brazil and 94% in Panama) and a significant amount of this credit is channeled to the export sector and therefore the domestic economy is deprived of credit. Credit has not recovered since the Tequila Crisis in 1994-95.
  • On the positive side, external debt is very low (around 12% of GDP) and there is a solid financial situation, but the size of the US deficit and lack of consensus on how to resolve it moving forward will impact on Mexico.
  • Important and significant reform in Mexico appears to have ended with NAFTA, but much work is still needed particularly with public sector, labor, education, energy, etc.
  • Monopolistic concentration in several sectors decreases competition and productivity and domestic investment.
  • NAFTA has without doubt integrated Mexico significantly into the US economy. Chip Brown, Chief Economist for Latin America with Banco Santander, said that Mexico was a polygraph of the US, using the analogy of Jefferson’s antique copying device, but that it lags behind; US country risk is therefore impacting on Mexico.
  • A significant amount of trade between the US and Mexico involved the automobile industry, which has been particularly hard hit in the crisis, and an important element is the export of manufactured automobile parts from the US to Mexico, and their subsequent reexport to the US as parts of completed vehicles from assembly plants along the border.
  • Mexico together with Chile has more free trade agreements (FTAs) than any other global markets, but in Mexico’s case over 80% of exports are to one single market, the US (although this is down from >90% in 2000). Over 80% of Mexico’s exports are manufactured, so it has not seen any of the benefits of the commodity boom that many other Latin American markets have experienced (in comparison only 40% of Brazil’s exports are manufactured), and also competes against China.
  • Luis Rubio, Chairman of the Center of Research for Development (CIDAC) asked if NAFTA would pass today, which is a pertinent question given the impact that China has had on trade with the US since NAFTA came into effect, and commented that there is some talk in Mexico about reexamining NAFTA.
  • The effect of organized labor in the US is still important: the Teamsters have effectively prevented Mexican truck drivers from delivering to final destinations in the US, thereby raising freight rates and preventing free movement of trade as seen in say the European Union.
  • Labor is an interesting topic in Mexico: in the US with total unemployment of 9.8% the figure for those with a high school diploma education and above is only 5.1%, but in Mexico the inverse is true and there is a higher unemployment rate for those with higher education qualifications. The issue in Mexico is the quality of employment rather than unemployment (and underemployment is an issue that afflicts all of Latin America).
  • Job creation in Mexico is around 400k jobs per annum, and previously another 400k jobs have been created in the US, but the latter have been badly affected by the crisis (and the construction industry in particular) and of course on the whole have been for undocumented (or illegal) workers.
  • Oil in Mexico is running out, and it represents 5% of GDP and around a third of government revenue. There are more reserves, but the state oil company Pemex, which controls the oil production, does not have the ability to tap them. Pemex is state owned by regulation, and is generally considered overstaffed and inefficient.
  • No discussion on Mexico could take place without mentioning security and the drugs war. No one believed that Mexico would become a failed state, or that Hillary Clinton’s comments about the ‘Colombianization’ of Mexico was a fair comparison,  but nevertheless the current situation is one of concern. There have been over 30,000 deaths to date, and of these >90% of these were cartel/gang members; this is not inconsistent with an insurgency (as seen in Colombia previously) but rather a high crime turf war. The cartels want a compliant government and are not targeting the capital, the state airline, running for office, etc.
  • We have not discussed Wikileaks yet on this site, but it is possible that the recent revelations may damage bilateral relations between Mexico and the US. One contentious issue raised at the forum is that both countries lack leverage against the other because of their addictions: the US because of its addictions to drugs, the NRA (and the associated arms exports to Mexico) and cheap immigrant labor, and Mexico because of its addictions to NAFTA and the Merida Initiative against the drug cartels.

Without doubt there are opportunities for trade with Mexico, especially as it looks to diversify from its dependence on the US, and it is important not to label Mexico as part of a homogenous unit with say Latin America (and Brazil in particular). One interesting point raised has been to encourage the already significant sector of US retirees to live in Mexico, producing a “win-win” situation for both nations by creating opportunities for development of services in Mexico and lowering care costs for the US.