Rebuilding NAFTA

February 18, 2014

Guest Post from Juan Carlos Lombardo

Economic attaché of the Mexican Embassy in London

All three sovereign countries benefit when each of the countries makes progress, and all suffer when one fails…

-Robert Pastor

In the last couple of months, two topics related to Mexico have been recurrent in the financial media: the Mexican “moment” and the twentieth anniversary of NAFTA. The first of them refers to the positive expectations generated by the set of constitutional reforms promoted by the federal government and approved by the Mexican congress during 2013. The second is a déjà vu of the evaluations –for and against- made by different trade experts, former officials, policy makers, and academics in 2004 (for the agreements 10th anniversary).

Global Recognition

The Banker recently recognized Dr. Luis Videgaray as 2014´s as global finance minister. The accolade responds to his successful leadership of Mexico´s finance ministry, but above all, to the important role he played in enabling urgent constitutional reforms (labour, education, telecommunications, finance, tax, antitrust, anticorruption and energy).

But despite the international excitement a dose of skepticism prevails among Mexican middle and lower classes. A clear and realistic landscape of the challenges of the Mexican  “moment” is well sketched by Duncan Wood, who explains that “Mexico’s moment has  never really materialised, since the set of approved reforms, is only one stage of the process, and that the hard work should come in 2014”.

In early January, during the Mexican ambassador´s annual summit, foreign minister, José Antonio Meade asked the diplomatic corps to be a mirror of the internal changes that Mexico was living, “in order to project the country as global actor moving forward”. This implies, besides a precise instruction to take advantage of the opportunities that such reformist mood generates abroad, the obligation to seek with corresponding devotion a responsible role in the global arena, including fairer conditions for the regional integration process of North America. Minister Meade particularly underlined the objective of “working jointly towards a more dynamic and competitive North America”.

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Mexico’s new president, Enrique Peña Nieto, has made a big impression on the international stage

In addition to the current reformist eagerness, Mexico´s credentials include fifteen years of healthy macroeconomics and a commendable performance in the international arena. As a proactive participant in forums such as the G20, COP/UNFCCC, the Pacific Alliance, the MIKTA dialogue, or as guest country in G8, Mexico confirms its commitment on issues such as free trade, financial stability, resilient growth, climate change, and even on nuclear disarmament and peaceful settlement of conflicts. Hence, Mexico has put together sufficient arguments to support a more exigent foreign policy towards region to which it belongs. Throughout its recent history, although it may have irritated certain local stakeholders, Mexico has benefited from such proactive performance, which has resulted in the revision and adjustment of many domestic policies. By deploying a consistent foreign policy with today´s domestic objectives, Mexico reaffirms its “moral obligation” with the international community to adequately implement the referred reforms. Therefore, linking Mexico´s moment to a revision of the integration course in North America would surely benefit both processes.

NAFTA’s 20th Birthday Party

With an article published last October, former Mexican Foreign Minister, Jorge Castañeda, was among those who triggered NAFTA’s 20th anniversary debate in Mexico. He raised a series of benchmark questions to evaluate the agreement from the Mexican perspective: should a geographical (contrasting to other similar countries or trading blocs) or temporal (previous to its subscription or after 10 years) approach be privileged? Or should it be a hypothetical scenario -such as those proposed by visionaries like Robert Pastor? In a recent interview, one of Mexico’s NAFTA negotiators, Jaime Serra, stated that any evaluation of the agreement should be based on its original purpose. From his perspective, “it has been a complete success, since the goals of boosting export capacity and attracting foreign capital were reached”: today Mexico exports more than a billion USD daily (of which 80% are manufactures), compared to 100 million dollars before NAFTA.

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Trade between Canada, the US and Mexico has grown strongly thanks to NAFTA

Trade between Mexico and the US increased more than 500% in the last twenty years. During the 1993-2013 period, trade among NAFTA nations more than tripled, from $297 billion to $1 trillion. Furthermore, according to The Economist, the region’s supply chains were integrated: 40% of the content of imports from Mexico into the US, and 25% of the content of imports from Canada, originated in the US. From this perspective, the American, Canadian and Mexican economies have all benefited from NAFTA.

On the other hand, NAFTA´s critics sustain that the neoliberal changes that prioritized deregulation in international trade and investment over development and social policies, resulted in slow growth and exacerbation of income gaps by devastating industrial and agricultural sectors in US and Mexico. They also sustain that change in circumstances –such as China´s entry to the WTO- should lead to a redefinition of the agreement´s objectives. This side of the debate points out that while trade, investment and productivity in Mexico increased above the world´s average between 1993 and 2012, growth levels, poverty and export concentration indicators have not presented significant changes. The fact that macroeconomic success of NAFTA has not reflected notable variations in social and redistributive conditions was asserted ten years ago by Pastor: NAFTA has successfully increased trade and investment; it has failed to confront some of the major challenges of integration. This failure has not only harmed the three countries, it has also seriously undermined support for the agreement, thus preventing North America from seizing opportunities for further progress.

Towards NAFTA 2.0: a responsible revision

A very worrying fact was revealed by Oxfam recently: the richest 85 people in the world have the same income as the poorest 3.5 billion (50% of the entire population). According to Oxfam’s report, in the past quarter of a century, wealth has concentrated more than ever.

North America has not escaped this unfortunate worldwide tendency. In the US, for instance, the share of national income allocated in the top decile is the highest since World War I. Meanwhile, Mexico is among the top eight countries that will create the most HNWIs (high net worth individuals) in 2014, according to Forbes magazine. Pastor noted this a decade ago: “Mexico´s income disparity did worsen, but only because those regions that do not trade with the United States grew much more slowly than those that do; the problem was not NAFTA, but its absence”. The situation was being pointed out by many other specialists such as Consuelo Davila who warned that the border could not be opened only to certain goods without expecting inertias in other type of flows across North America’s borders.

Other experts, as economy Nobel Prize winner, Joseph Stiglitz, would say that avoiding the discussion of issues such as the effect on wealth distribution, the adjustment costs of opening the market, and the order in which policies should be implemented, was irresponsible. Today, it is too late to discuss which would have been the adequate timings for North Americas market liberalisation: sterile discussions should be avoided so that the debate can be focused in the social and structural components of the integration. Not only for moral matters should NAFTA be revised, distribution and inclusive growth have also very important economic implications such as opportunity allocation – addressed by foreign policy- and the consolidation of middle classes. Higher purchasing power in Mexico would imply, among other things, higher demand for American and Canadian products.

A worthy revision of the status quo must include the requirements to properly integrate the three economies. The involved countries have unique strengths that perfectly complement each other; in many areas cooperation should be changed for competition. Canada has abundant natural resources and energy supplies. Mexico has a significant, comparatively young, low-cost labour force in close proximity to the United States. The U.S. has one of the world’s top higher-education systems and is the global leader in technology and innovation.

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Mexican car exports to the US are rising fast

Interdependence is a concept that should be present on the dialogues: the capacity to identify other´s strengths and one’s weaknesses is essential. The term also refers to the transversal qualities within the different topics in the agenda such as, security, energy and environment. Eluding the connection between the different aspects of the relationship has already led to numerous blunders such as the enlargement of income gaps.

On an optimist note, the current Undersecretary for North America, and the Mexican Ambassador in Washington, among other high level officials have declared that there is political will to revise and update the agreement to the region´s current challenges. There are plenty of issues already identified by specialists, including: labor movement, the new energetic scenario in US and Mexico (shale gas in the US and Pemex reform in Mexico), etrade, integrating SMEs to productive chains, border infrastructure,

Time for a pre-mortem?

The ultimate tragedy of capitalism in our time is that it has achieved its dominance without regard to a social compact, without being connected to any other metric for human progress…

 David Simon

It is now time to take the appropriate steps. A disclaimer today will not be valid ten years ahead. Trade is not an end in itself, it is imperative to attend the human variables and the asymmetries between NAFTA members. Mexico enacted very important reforms in 2013. Engaging their implementation with international commitments, such as the revision of NAFTA, would certainly contribute to
convert them into the solid foundations of long term economic growth. NAFTA´s pre-mortem revision.

In his psychology masterpiece Thinking, fast and slow, Daniel Kahneman proposes a very interesting procedure in order to counteract our optimistic bias. The pre-mortem is an exercise that consists of foreseeing and describing hypothetical failing scenarios –no

matter how crazy they might appear- for which a specific goal was not reached. The result is a practical anticipation of the many plausible unforeseen obstacles one could face. Tomorrow the three regional Leaders of North America will meet in Mexico. A pre-mortem session about the future of the region could have quite revealing outcomes…