PROFMEX-Consorcio Mundial para la Investigación sobre México

In the five years since NAFTA's implementation, Mexico has undergone enormous social, economic, and political change. The northern part of the country, which had historically been an unpopulated semi-arid region is now a booming economic magnet to inhabitants from all over the country in search of jobs and opportunity. As the nation has increasingly become a "land bridge" to the North American market, Mexico continues to face political and economic reforms. The July 2000 Presidential election promises to be the most open in Mexican history. The PRI, Mexico's ruling faces new challenges as opposition parties promise increased participation.

NAFTA went into effect during the midst of Mexico's last Presidential election in 1994. It immediatly prompted insurgent rebllion amongst the indigenous Mayas of southern Mexico. The Zapatista National Liberation Army (ELZN) launched their uprising to coincide with the date of its implementation on January 1, 1994 because they considered it a "death sentence" to their indigenous traditions. In their opinion, NAFTA threatened corn production and forced them to change their way of life.

That year, NAFTA was also on the campaign agenda of the leading Presidential candidate, PRI nomineee Donaldo Luis Colosio Murieta. Following his murder near the U.S.-Mexico border, his successor Ernesto Zedillo was faced with implementing NAFTA during the 1994-2000 presidential term.³⁹ The ensuing economic crisis forced Zedillo to devalue the Mexican peso in December 1994. The financial convulsion that followed shocked Mexico and global markets. In the chaos, the United States and international financial institutions scrambled to lend Mexico US$50 billion to contain volatility in the international markets.⁴⁰

Has Mexico benefited from NAFTA? Trade experts believe that it has because on the macro-economic level, the Mexican economy has expanded and diversified. Latin Trade magazine notes that , “Mexico’s overall exports have doubled since 1994, from US$60 billion annual to an expected US$120 billion for 1998. Exports to the U.S. have grown to nearly US$100 billion, making Mexico the third largest supplier of goods and services to the U.S. market after Canada and Japan.”⁴¹ Figures from the Americas Council concur estimating that “since 1993, U.S. merchandise trade is up 93 percent with Mexico. … In 1997, U.S. trade with Mexico totaled US$180 billion.”⁴²

Figure 2 provides official U.S. government trade statistics between 1991 and 1998 from the International Trade Agency at the U.S. Department of Commerce. These figures begin in 1991, a year before NAFTA was signed. U.S. exports to Mexico increased from nearly US$33.3 million in 1991 to approximately US$78.8 million in 1998. Similarly, during the same time period U.S. imports from Mexico jumped from nearly US$31.1 million in 1991 to US$94.6 million in 1998. Interestingly, the chart demonstrates that U.S. imports from Mexico did not begin to exceed exports until after the implementation of NAFTA in 1994. Additionally, the chart reflects a slight drop in U.S. exports in 1995 resulting from the peso devaluation.⁴³

Trade experts have concluded that of the three NAFTA members, Mexico has been the greatest beneficiary. Carol Wise, a Johns Hopkins University political science professor has pointed out in The Post-NAFTA Political Economy that Mexico now enjoys “new unprecedented levels of access to the U.S. and Canadian markets.”⁴⁴ NAFTA encouraged an increase in foreign investment in Mexico. Foreign businesses built new maquiladora factories along the U.S.-Mexico border to take advantage of lower Mexican wages. This in turn incentivized U.S. and other foreign policymakers to increase cooperation with Mexican officials. As Isaac Cohen, former director of the Washington office of the United Nations Economic Commission for Latin America and the Caribbean notes, "investment and trade links intensified, reaching levels of interdependence that were inconceivable without the pact.”⁴⁵

As foreign investments increased in Mexico, large Mexican corporations became the biggest beneficiaries. In 1997, foreign investment totaled US$12 billion, more than any Latin American country except Brazil. A large portion of this foreign investment was in labor-intensive manufacturing, especially in automotive, electronic and textile sectors. Mexican corporations were forced to restructure and compete in the global market. Companies such as Grupo Alfa, Grupo Desc, San Luis Corporación, Grupo Industrial Bimbo, and Isaac Saba met this challenge and in doing so, increased their access to the U.S. market. Some even made their own acquisitions across the border to diversify their assets and solidify their presence in the United States. As Stephen Bank and Jerry Haar articulate in Making NAFTA Work, this trade agreement was a major impetus for increased trade and globalization. It forced changes in business and trade patterns that resulted in “inter-linked forces of global competition, regulatory liberalization and technology.”⁴⁷

Under NAFTA Mexico became a “land bridge” to the U.S. market. Luis Rubio, Director of Mexico’s Center for Development believes that it has been "an exceptional tool for the development of the Mexican economy and generating secure access to the U.S. market.”⁴⁶ Taking advantage of its new position, Mexico implemented a series of new bilateral and regional trade agreeements aimed at strengthening its position as the gateway to the North American marketplace. These include regional membership in the Grupo de Tres with Venezuela and Colombia (1994) and a multilateral treaty with APEC (1993). Given this new network of trade agreements, Mexico has little incentive to see FTAA implemented.

Economic reform measures related to NAFTA continue to change Mexico. Most urgent is banking reform, which promises to correct a faulty economic structure created in the wake of the 1994 peso devaluation. This devaluation forced Zedillo’s Finance Minister, Guillermo Ortiz to formulate an emergency program in early 1995. Based on a $50 billion loan from the United States and the International Monetary Fund, this program propped up Mexico's failing banks. ⁴⁸ At the time these measures were hailed by policymakers in Washington, D.C. and New York for stabilizing a very volitale sturcture.⁴⁹ This loan was used to guarantee that Mexican banks would not default due to overextension and bad loans. It allowed them to provide refief measures to overwhelmed debtors. In exchange for this fianncial assistance, Mexican banks were required to increase their secured deposits and assets. When interest rates soared following the peso devaluation, many Mexican bank shareholders suddenly found that they could not retain control over their banks.⁵⁰ As a result, since 1996 foreign acquisition of Mexican banks has increased significantly.

Mexico’s banking system has been vulnerable to collapse since 1995. Mexican Congressional studies conducted in 1998-1999 estimate that it will cost $65 billion to reform the banking system. Angered by this staggering sum, opposition legislators have accused Guillermo Ortiz of violating the Constitution when he incurred billions of dollars of government debt to shore up the banks without consulting the Congress. Part of the solution to the impending crisis has been the creation of the Bank Savings Protection Institute. Since its establishment in 1998, this organization has already been responsible for two huge bailouts including Bancrecer S.A. and Grupo Financiero Serfin SA, Mexico's third-largest bank.⁵¹ Economic analysts are concerned that the July 2000 Presidential elections has the potential of further destabilizing Mexico's vulnerable banking system.

Every Mexican Presidential election since 1976 has been followed by an economic crisis.⁵² To an economic disruptionin 2000 that has the potential of damaging foreign investments and NAFTA trade, the United States and various international financial agencies approved an emergency financial package in June 1999. In total, Mexico is scheduled to receive $23.7 billion in international credits and refinancing. This includes a $6.8 billion credit line from the United States and Canada, $4.2 billion in stand-by credit from the IMF, $3.5 billion from the Inter-American Development Bank, $5.2 billion from the World Bank, and $4 billion from the U.S. Export-Import Bank.⁵³ Mexican Treasury official José Angel Gurria is satisfied that the emergency package will divert any economic vulnerability. Bolstered by this support, the Mexican government is confidently predicting five percent growth in 2000 and has pledged to reduce inflation to ten percent.⁵⁴

One of the issues that the next Mexican President will have to address is the controversial proposition of dollarization. A poll by El Economista newspaper in May 1999 estimated that 86% of Mexicans would like to open up bank accounts in dollars and see dollars move freely in the economy.⁵⁵ Exchanging pesos for dollars would effectively give the United States Federal Reserve political and economic power over Mexico. Total dollarization would create a monetary union with the United States and eliminate violent changes in currency value. Interestingly, this same El Economista poll indicated that Mexicans want access to dollars but they are not in favor of entirely giving up the peso, a symbol of sovereignty and national identity.⁵⁶

The influential Mexican Businessmen's Council and the Mexican Bankers’ Association presented President Zedillo with a dollarization proposal in March 1999.⁵⁷ Eugenio Clariond, President of the Mexican Business Council, suggested that dollarization would be the first step towards establishing a common currency amongst NAFTA partners. He rationalized that, "sustaining a currency like Mexico's has an enormous cost. Living with its fluctuations is a luxury we can no longer afford.'' Overall, the proposal concluded that dollarization would “spur growth, reduce inflation, and lower interest rates on government expenses.” It would also legitimize a common Mexican corporate de facto practice of calculating and financing their growth in dollars. Politicians such as Senator Arturo Nava of the pro-business National Action Party (PAN) supported the proposal reasoning that, “the Mexican economy has already been dollarized due to the frequent use of the U.S. currency in business transactions.”⁵⁸

President Zedillo has staunchly opposed dollarization in favor of a free-floating exchange rate system, which allows market forces of supply and demand to determine the peso's value. According to Zedillo, “the free-floating exchange regime has allowed us to buffer the effects of international financial volatility even in the most critical moments, and has allowed us to protect our international reserves.” Zedillo has worked to strengthen this system by issuing a weekly report on the level of international reserves and money supply, which is scrutinized carefully by investors trading peso futures at the Chicago Mercantile Exchange. Mexican financial mogul and chairman of Teléfonos de México, Carlos Slim Helú is one of the better known private Mexican investors who has joined Zedillo in opposition to dollarization. He believes that the Mexican government should concentrate on fiscal discipline rather than exchange pesos for dollars. According to Slim, “the way you have to stop inflation is by cleaning up your financial house. Besides, the idea that the Federal Reserve would want to take responsibility for our financial system is absurd.”⁵⁹

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Chile's Reaction to the Lack of NAFTA Expansion and FTAA

Notes

³⁹Donaldo Colosio’s assassination has been linked to former Mexican police commander Fernando de la Sota Rodalleguez and alleged drug lord Rafael Aguilar Gujardo.

⁴⁰As a guarantee against the loans, Mexico was required to use a large portion of its oil revenues as collateral. These funds have been deposited at the New York Federal Reserve Bank until the loan is paid back. David Sanger, “Gamble For U.S. In Bailout of Brazil,” New York Times, 14 November 1998.

⁴²Testimony of William T. Price, Vice President, Washington Operations, Council of the Americas Before the Subcommittee On Trade House Committee On Ways And Means, 4 March 1999.

⁴⁴Sergio R. Bustos, “Trading Places,” Latin Trade, January 1999, 40-42.

⁴⁷Sergio R. Bustos, “Trading Places,” Latin Trade, January 1999, 40-42.

⁴⁹Julia Preston, "Mexico's Wanted Poster Exchanges Black Hat For White Collar," New York Times, 28 Oct. 1998.

⁵⁰Citigroup Inc. and Spanish banks Santander and BBV have been among the largest acquirers.

⁵¹Mexican officials estimate that it will take approximately $9 billion to make Grupo Financiero Serfin sound in preparation for selling it. Mark Stevenson, "Mexico to Subsidize Banks," AP, 9 June 1999..

⁵²"Mexican Businessmen, President At Odds Over Dollarization," CNN, 13 March 1999.

⁵⁴Monica Gutschi, "Mexico Gets $23.7B Economic Package," AP, 15 June 1999.

⁵⁵Workers’ wages are paid in pesos but many families supplement their incomes with funds from relatives working in the United States. Julia Preston, "Mexico Measures Identity in Pesos vs. Dollars," New York Times, 16 May 1999.

⁵⁶"Mexican Businessmen, President At Odds Over Dollarization," CNN, 13 March 1999 and Julia Preston, "Mexico Measures Identity in Pesos vs. Dollars," New York Times, 16 May 1999.

⁵⁷The Businessmen's Council includes two dozen of Mexico's top companies. Alfonso Romo Garza, Chairman of Pulsar International hosted the meeting. Its purpose was to build support for dollarization in both the U.S. and Mexico. Ibid.

⁵⁸"Mexican Businessmen, President At Odds Over Dollarization," CNN, 13 March 1999 and Julia Preston, "Mexico Measures Identity in Pesos vs. Dollars," New York Times, 16 May 1999.