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One market for all?

WITH THE CREATION OF THE NORTH AMERICAN FREE TRADE AGREEMENT, MEXICO, CANADA AND THE UNITED STATES NOW FACE THE CHALLENGE OF BALANCING THEIR DISPARATE ECONOMIES AND DEVELOPMENT PERSPECTIVES

WHEN CHARLES I, King of Spain, asked Hernando Cortes what sort of country he had found, the Conquistador responded by throwing a crumpled piece of paper on the table. This portrayal of a land of peaks and valleys proved to be an accurate description of Mexico, whose topography is one of mountains and canyons, and whose politics and economics have been a series of peaks and troughs.

Throughout its existence Mexico has been plagued by revolutions and revolutionaries who have toppled governments, destabilizing the country and relegating it to a place among the poorest countries in the Western Hemisphere. From 1810 to 1812, popular uprisings threatened Spanish rule. In 1821, General Agustin Iturbide freed the country and became its first Emperor, only to be overthrown shortly after. In 1836, settlers in Texas declared independence from Mexico, and in a war with the United States that lasted from 1846 to 1848 California, Texas, Arizona and New Mexico seceded. War with the United States was by no means the nation's final conflict--in 1864 Maximillian, Archduke of Austria, was installed by the French as Emperor, and from 1910 to 1920 the Mexican Revolution brought further turmoil.

The founding of the ruling Institutional Revolutionary Party or PRI in 1929 marked the beginning of a period of relative stability and growth, and put Mexico on a steady upward, though economically erratic, course. The PRI embraced a set of social and economic reforms based principally on educating the masses. This commitment was underscored by the earmarking of almost 20 percent of the annual budget for education. Mexico has a long tradition in higher education. The National University in Mexico City was chartered in 1551, nearly a hundred years before Harvard University was founded, and over the years fine universities and technical institutions were established at Monterrey, Saltillo, Oaxaca, Guadalajara, Morelia, Hermosillo, and in other cities.

In 1934, the government created a new agency, Nacional Financiera, to invest private and government capital in infant industries, but by 1965 only $25 million had been expended for copper, cement, steel, textiles, paper, fertilizers, and other factories. Following the lead of other Latin American countries, the Mexican government tightened its grip on the country's vital resources by systematically nationalizing key industries--from banking and airlines, to food and petrochemicals. The most important of these was the petroleum industry, which was nationalized in 1938 and remains firmly under government control today.

Until World War II, Mexico relied mainly on agriculture for its basic food supply and exports. Corn was the staple crop, but it was cultivated primarily for local consumption. Wheat production was second, followed by cotton, coffee, beans, and cane sugar. Natural resources included petroleum, silver, gold, lead, zinc, and timber. With the exception of crude oil, none of these industries was sufficiently developed to satisfy even local consumption. In fact, Mexico imported virtually half of the steel it needed until the early 1980s.

Shortly after the end of World War II, with the economy still in a state of malaise, the central government instituted a national program of rapid industrialization through import substitution. This program was designed to spur economic development, grow local industries, and gradually replace foreign manufactured goods with Mexican-made products. In addition to boosting local employment, the new industrial policy was expected to reduce the country's reliance upon foreign goods and the treasury's need for scarce hard currencies.

Mexico sought to improve the standard of living of the masses through increased imports, exports and local employment opportunities with a series of ever-increasing government budgets. However, it soon became apparent that the industrialization program was in jeopardy. In the struggle to become self-reliant, hundreds of new products appeared on the market bearing the stamp "Made in Mexico." To protect the new industries and fledgling businesses, the Mexican legislature enacted a variety of protectionist measures ranging from stiff tariffs (some, as much as 100 percent) on imported goods, to import quotas, licensing for foreign goods, and restrictions on foreign direct investments. In some cases, the government encouraged or mandated that foreign companies set up local manufacturing plants in order to do business in Mexico. Ford Motor Company and Volkswagen of Germany both established manufacturing facilities in or near Mexico City in compliance with government edicts. Sensing the official attitude towards foreigners and foreign interests--which most North American business people described as "hostile"--local labor unions grew in numbers and influence.

The same type of import substitution program was being pursued in other Latin American and Caribbean countries with varying degrees of success. While the program seemed to work in Mexico, it did not reduce the budget deficit or eliminate the unfavorable balance of trade. In the intervening years, Mexico had become a country of even greater contrasts, with widening rifts between its rich and poor. Opulent homes, condominiums, and luxurious hotels sprawled alongside shacks, rundown factories and other signs of abject poverty.

The "Made in Mexico" movement fuelled strong nationalistic sentiments and a hatred of foreigners. On the positive side, it gave rise to a strong entrepreneurial class and led to the creation of thousands of small businesses and cottage industries vital to Mexicans. In the long run, though, the measures isolated Mexico from the rest of the industrial world, frustrated foreign investors and, ultimately, local small business owners as well.

From the end of World War II until 1990, except for two brief periods of high economic prosperity engendered by oil shocks, the Mexican economy floundered. Foreign direct investment was a mere $25 billion, and local capital began to take flight north of the border. The oil shocks of 1979-80 and 1983-84, which sent the price of petroleum products skyrocketing, brought billions of dollars into the national treasury, and the transient prosperity whetted the national appetite for goods and services. When oil prices again settled down in the mid-1980s, the Mexican treasury was broke, the national debt had skyrocketed to more than $40 billion, and runaway inflation doubled the price of such staples as food, clothing and shelter every few months. Compounding the problem was a fast-growing population increasing at a rate of 2.2 percent annually, from 69.6 million in 1980 to an estimated 94 million in 1993. In addition, the growing trend toward urbanization had compressed more than 71 percent of all Mexicans into half a dozen other urban centers.

In 1985, President Miguel de la Madrid Hurtado began the long and painful process of restoring fiscal discipline to his nation. De la Madrid recognized that success rested on the shoulders of the social infrastructure, which would be the foundation upon which future economic systems could be built. He improved schooling at the elementary level, increased the number of technical institutions, and initiated training and retraining programs. This reformist movement was countered by one of the most devastating natural disasters in the country's history. On September 19, 1985, an earthquake ravaged Mexico City, leaving thousands dead or homeless and billions of dollars of damage and destruction.

But the de la Madrid reforms got a major boost at the end of 1988 when Carlos Salinas de Gortari was elected President by one of the slimmest election margins in Mexican politics. Salinas, a forty-year-old Harvard-educated economist, pursued his job with a vision seldom seen among the world's political leaders. Almost immediately, he set about dismantling the very roots of Mexico's economic malaise. In a sweeping program of social, economic and political reforms, he sought to lead Mexico away from economic isolation back into the world community of nations, to shed all vestiges of protectionism, to open the economy and, above all, to win the respect of Mexico's neighbors and trading partners.

Salinas did not attempt his reforms singlehandedly. He assembled an exceptional team of advisors to tackle the thorny issues of economic and political reform and an ambitious social agenda. Piece by piece, he tore down the fabric of protectionism and opened up Mexico to foreign capital and modern business practices. His government slashed tariffs by two-thirds (to an average of 10 percent), eliminated nearly all import licensing requirements, and gradually relaxed the draconian economic measures that had been instituted during the period of triple-digit inflation.

Four years into the reforms the government has relaxed protectionist policies on the manufacture of automobiles, computers, pharmaceuticals, and communications equipment. Land tenure is currently undergoing reform, with the consolidation of smaller plots and farmers being granted title to the communal plots they cultivate. Nearly eighty percent of the nation's 1,150 state-owned industries were sold, closed, or merged in debt-for-equity swaps, and once sacred state-owned companies such as Telmex (the telephone company), the national airlines (Mexicana and Aero Mexico), and 18 commercial banks were privatized. The national debt has been substantially reduced, and inflation is below 10 percent.

Privatization provided hundreds of millions of dollars in hard currencies for the national treasury, but above all, it gave the outside world a clear signal that Mexico was serious about attracting long-term foreign capital. At first, neither the Americans, Europeans or Japanese rushed in with money or know-how, but instead they formed important joint ventures and entered into strategic relationships with promising Mexican companies in a cautious attempt to establish a foothold in Mexico. One of the first areas to develop and offer new opportunities for employment was the Maquiladora corridor along Mexico's border with the United States where more than 220,000 are currently employed. Maquiladora plants operate in an atmosphere of relative freedom and export most of their production.

One of the more important intangible benefits has been the influx of new capital, management and technologies into the Maquiladora region. This growing cooperation between Government and industry also brought about a reduction in the influence of Mexico's powerful but corrupt labor unions. One Japanese company executive operating along the border commented, "We now feel we have the power to pay fair wages and make changes as conditions demand, without undue union influence."

Reforms have been important to Mexico, not only for what they have accomplished internally, but also for what they have done for Mexico's reputation in the international community. By joining the Organization for Economic Cooperation and Development (OECD), Mexico opened its institutions to international scrutiny and regulation. By joining the General Agreement on Tariffs and Trade (GATT) in 1986, it agreed to protect intellectual rights, including patents and copyrights, and to abide by the rules of international law with respect to these properties. More recently, in May of 1993, the government moved to make the central bank, Banco de Mexico (Banxico), an autonomous entity like its counterparts in the U.S. and Britain, pushing the country further towards a free-market psychology and providing the framework for the independent administration of the financial system without political interference. These new reforms exposed Mexican businesses to the rigors of international competition, with measurable gains in productivity, export growth and general economic recovery. With the new foreign capital these reforms attracted, Mexico was able to finance its current account deficit and fuel a four year period of economic growth. In 1992, the government operated with a small surplus, breaking a 20-year cycle of budget deficits. In 1993, a surplus of about 1.7 percent is anticipated.

Mexico, as a partner in the North American Free Trade Agreement (NAFTA), would have been impossible ten years ago. Even five years ago, it was unthinkable. However, in a little less than two years, the Salinas regime had gained such stature that it was able to open trade talks with the Bush and Mulroney administrations as early as 1990. More importantly, the privatization of economic decision making so institutionalizes this activity that it deprives the Salinas administration and future governments of the ability to manipulate the system to benefit supporters or punish the opposition. Increasingly, the PRI is being called upon to share power with other political parties such as the Democratic Revolutionary Party and the National Action Party. In the long run, an institutionalized system of economics, banking, and industry will facilitate power sharing, leaving lawmaking to the legislature and the operation of government to civil servants.

To sustain economic growth, Mexico will need secure access to the huge United States market, which only a treaty like NAFTA can ensure. To help counter the influence in the world financial markets of the European Community, Japan, and the Four Tigers of the Far East (Hong Kong, Singapore, Taiwan and South Korea), U.S. and Canadian businesses will need Mexico and its relatively untapped market of 94 million consumers.

NAFTA will follow many of the rules and conventions established under the United States-Canada Free Trade Agreement, and will open Mexico's economy to investments from the United States and Canada, guaranteeing U.S. and Canadian firms "no less favorable treatment" than their Mexican counterparts. Above all, NAFTA will bind Mexico to essentially the same legal standards used in the U.S., Canada and the European Community.

NAFTA will phase out over ninety-eight percent of all tariffs over the first ten years, and will abolish the remaining tariffs on politically sensitive products (i.e., those considered to need special protection) over fifteen years. Nearly all import quotas and licensing requirements will be eliminated, and in exchange the United States and Canada will grant Mexico equal treatment when establishing orders for agricultural and other products produced by the latter. NAFTA will establish standards for products from the three countries, and will provide binding dispute resolution to ensure "the fair and equal" application of trade laws.

NAFTA offers advantages for all concerned. The United States and Canada stand to profit from trade with Mexico by supplying a broad spectrum of consumer goods, machinery, electrical goods, computers, communications equipment, environmental systems, and automobiles, and by participating in Mexico's modernization plans. Already, Mexico is the U.S.'s third largest trading partner, with bilateral trade between the two nations approaching US$70 billion. In addition, U.S. and Canadian firms will find a new market for services including the Mexican government, and with Mexico's rapid population growth, a lucrative market for decades to come. On the other hand, Mexico will gain from modern machinery and management methods, the infusion of capital and new technologies, and a vast new market for its agricultural products and fruit.

Ultimately, the success or failure of NAFTA in gaining legislative approval in the United States, Canada and Mexico will rest not upon tariffs or wage rates, or even upon Mexico's long entrenched corporatist policies, but more than likely upon a plethora of other issues ranging from immigration and drugs to clean air, cultural differences, and simply trust. In the long run, the great disparity in wages will disappear, Mexico's pollutive factories will modernize and become environmentally efficient, and other quirks will be worked out. Whether or not the other members will ever consider Mexico equal partners in trade remains to be seen. One thing is certain: if the U.S. and Canada don't seize this opportunity for North American economic unity, with all its attendant benefits, the Japanese and Europeans will. And if successful, NAFTA may well deserve to bear the stamp: "Made in Mexico."

D.H. Forde, an international business consultant, is a native of Barbados. Currently, Mr. Forde is president of the Corporation for International Reporting, a research and publications firm, and vice-president of World Business Reports, Inc., producers of private information reports on global trade and industry.
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Title Annotation:Mexico's expected entry in the North American Free Trade Agreement
Author:Forde, D.H.
Publication:Americas (English Edition)
Date:Sep 1, 1993
Words:2590
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