When Mexico’s President Vicente Fox paid a visit to the White House and the U.S. Congress last September, he spoke to a group of Washington insiders about the institution that has become the symbolic embodiment of the “new relationship” between Mexico and the United States: the North American Free Trade Agreement (NAFTA).
It has become almost obligatory to begin any discussion of the Mexican economy with a discussion of NAFTA, the agreement that went into effect on New Years Day 1994—a day that also witnessed the Zapatista uprising in the impoverished state of Chiapas—and commits the United States, Mexico and Canada to lower trade and investment barriers within the three-country region. Among mainstream economists—and mainstream financial institutions—NAFTA is responsible for pulling Mexico into the twenty-first century. “Far-reaching stabilization and structural reform efforts since the late 1980s are rapidly transforming the Mexican economy,” says the World Bank on its website. “Trade liberalization and in particular the North American Free Trade Agreement (NAFTA) clearly contributed to this.”
Fox’s comments were a bit more nuanced than those of the World Bank. The agreement will succeed, he told his audience at the Institute for International Economics, only if Mexico is taken seriously as a full partner. “NAFTA is working,” he argued, “and it is working to better the situation in our three countries...but I don’t think we have come to an understanding yet of what it means to be partners, or to an understanding that partnership is the key to the success of NAFTA. We should be concerned about one another. We should combine our resources and talents; we should work together to be competitive; we should see the future with the same vision. This is what it means to be partners.”
And therein lies a problem for President Fox. As a wealthy free marketeer, he is all in favor of an agreement that opens up investment opportunities, but as a Mexican, he has an uneasy feeling that his country is getting the short end of things. NAFTA is an agreement that has inequality at its heart, not only between its signatory countries, but within those countries as well. This is particularly the case within Mexico, home to the poorest of the region’s poor.
To understand more precisely the economic changes of the past decade, and especially to understand the effects of NAFTA within Mexico, we must remember that the free trade treaty, since it went into effect in 1994, has accelerated certain processes that were already well underway, processes that had been growing since the late 1970s. Despite its symbolic prominence, therefore, it is difficult to attribute the recent changes in the Mexican economy exclusively to NAFTA.
The processes that have transformed Mexico over the past two decades are familiar throughout Latin America under the rubric of “neoliberalism”: less intervention in the economy by a weaker state, changes in economic regulation favorable to the entrepreneurial sector, a greater link to the international economy and openings to world trade. In addition, Mexico’s neoliberal transformation has included the gradual abandonment of the domestic market as a source of growth and the turn toward exports, particularly to the United States. This has given a boost to the activities of the maquila industry—the small factories that assemble duty-free imports into duty-free exported final products, with minimal connection to the real Mexican economy. All this has brought about a closer link with the U.S. economy, a link that was consolidated, but not created by NAFTA. This link, in turn, has been accompanied by the government’s closer relationship with U.S. foreign policy.
The most important implication of this close connection is that the Mexican economy is now more vulnerable to the ups and downs of the U.S. economy. For 2001, for example, in the wake of the U.S. recession, the most recent estimates are that Mexico’s growth will be close to zero, a sharp contrast with the initial predictions of President Fox, who had optimistically predicted 7% growth. There is also evidence showing that the economy’s overall profit rate has remained stagnant, still far from the levels of the boom years of the 1970s. The cycle of continuous growth, promised by the defenders of NAFTA has yet to arrive.
Not surprisingly, the official data shows an impressive rise in exports. In part, however, this is the result of an accounting trick: the adding up of the total value of goods transformed in the maquila process as though they were real exports—international trade resulting in income for the country. In reality, this is not the case. In maquila production, the vast majority of the inputs, the denim cloth to be worked into a pair of jeans, for example, comes from outside the country, frequently from another branch of the company that owns the maquila. In the case of trade between branches of the same firm (the cloth producers and the jeans assemblers, in this example), not only are the inputs brought into the country duty-free but, typically, the maquila firm pays nothing for them to its corporate headquarters. When shipped out of the country, now in the form of jeans, the final product has a certain value added in Mexico. But this addition doesn’t mean that the company is receiving the full value of the jeans from its corporate headquarters; all those internal transactions are only on paper. The only money that remains in Mexico is the value added, corresponding to wages, benefits and small additions to the productive infrastructure.
Maquila exports account for about half the country’s official manufacturing exports. Of the other half, the non-maquila exports are found in a small number of industries. For example, 31% of non-maquila manufacturing exports come from the automobile industry. In these non-maquila industries also, a large proportion of exports take the form of intra-firm trade. When we consider the value of the imports necessary to produce these products, the balance of payments falls into a deficit. International trade has been concentrated in a segment of firms who rely on outside suppliers—whose links with the national economy are therefore very small.
As for employment, according to the data for manufacturing, it appears that between 1993 and 1998, approximately 967,000 jobs were created in fixed establishments. Among the economic activities that most supported manufacturing job growth in this period, three stand out: In absolute terms, the largest contribution is in the field of textiles and clothing, contributing about 380,000 new jobs; second is machinery and equipment (including the auto industry); and third is the food industry. Together, these three sectors account for 80% of the non-maquila manufacturing jobs created in this period.
According to the information provided by surveys of maquiladoras, about half a million maquila jobs were created during this same period. That is to say, over half of the new employment created in manufacturing has been created in the maquiladora industry. The northern border has long been the established center of the industry, though over the past five years or so, we can see a growing movement to the south of the country. The clothing industry, in fact, has now established itself in a few areas of the south-central states of Puebla and Oaxaca. The small Puebla city of Tehuacán, for example, has over the past five years tripled the number of its maquila factories, which are owned by Mexicans as well as foreigners. So the principal Mexican manufacturing growth after the passage of NAFTA has taken place within an activity that had existed for some 30 years before the treaty went into effect—the maquiladoras.
A development that can be attributed to NAFTA is the purchase by foreigners of already-existing productive facilities—not necessarily the construction of new plants. This is particularly the case in the textile industry as well as the non-maquila production of food. In production that is destined for the domestic market there is also a greater presence of foreign capital than in 1993, mainly due to the purchase of operating establishments, not the creation of new ones.
The growth of export activities has brought with it the growth of Mexico’s financial sector, particularly financial services linked to the production and commercialization of exports. This sector is probably the major overall beneficiary of the free-trade agreement from the points of view both of Mexican entrepreneurs and foreign investors in Mexico.
Another growth sector consists of microbusinesses of fewer than five employees, including one-person activities. These microbusinesses—for the most part low-income, unstable activities—now account for about 50% of the non-agricultural jobs in the country. Basically they are activities of self-employment; wage work in these activities is not the norm. In general they represent a form of survival, a scheme that has been adopted in an increasing manner by an ever-widening group of the population in a setting of systematically falling wages. The overall average wage decrease between 1994 and 2000 is on the order of 21% despite the fact that real wages grew between 1999 and 2000 by just over one percent.
Work is the most important source of income in Mexico. Sixty percent of all reported money income is income from work; 38% is from a combination of work and property ownership and only 2% is property or financial income. Of the households reporting work as their principal source of monetary income, 72% receive that income in the form of wages or salaries. So the scarce creation of new jobs and the continued absence of well-paid jobs has meant that the concentration of income in Mexico hasn’t changed since the implementation of NAFTA. In fact, the behavior of income distribution over the past decade contrasts sharply with its behavior before the implementation of the neoliberal project. Until 1984, annual measures of income distribution showed a movement toward greater equality, a result of the government’s redistributive policies. Since 1984, this movement has stagnated. The project that underlies NAFTA has translated into a creeping impoverishment of the population, not only workers, though they have been the hardest hit, but of the population in general.
The neoliberal project, which has its expression in, among other things, the free-trade agreement, has inevitably created a greater polarization in terms of employment, creating large numbers of low-quality jobs, characterized by instability and low pay, with few or no benefits, at the same time that it has created a smaller nucleus of workers who have access to Social Security, to job stability or to wages adequate to support a family.
It has also produced a geographical polarization in the distribution of income. If we look at the distribution of jobs and the distribution of productive facilities within Mexico, what becomes clear is that up to now, the north-central and northern areas of the country have disproportionately benefited. The principal beneficiaries of the growth of agricultural wage work, for example, have been the north-central and northern areas of the country. In terms of manufacturing employment we see exactly the same distribution of new jobs. This implies the loss of relative importance of Mexico’s traditional centers of employment like the metropolitan areas of Mexico City and Guadalajara. At the same time the divide has sharpened between the traditionally poor southern states like Chiapas, Oaxaca and Guerrero, closely tied to subsistence agriculture and small-scale service and commercial activities, and their counterparts in the north.
Based on the results of the 2000 national Census of the population, the National Institute of Statistics, Geography and Information (INEGI) has undertaken an evaluation of the relative levels of marginalization.6 The results show that this polarization and the concentration of poverty in poor states has grown and that the number of states with high levels of marginalization has also grown. That is to say, we find ourselves facing an economic project, and facing an important episode within that project, NAFTA, characterized by a growing geographical and sectoral polarization of income and employment, from which we have to judge the effects of free trade and review the possible benefits that might bring with them a substantial renegotiation of the treaty.
It is worth mentioning that, in fact, there are no studies on the medium-term effects of free trade on the productive and employment structures of agriculture. This is despite the fact that within the next few years, mid-size producers are going to face bankruptcy. It is worth remembering that these are the principal sources of agrarian employment in many parts of the country. Campesinos are traditionally dependent on medium-size producers to obtain a monetary income beyond the meager sales of their own crops.
But we are witnessing massive imports of inexpensive corn from the United States. Today, the price of corn in Mexico is equal to the international price, this despite the removal of all subsidies to growers—of the sort enjoyed by U.S. farmers, for example—and the absence of the technological ability to grow corn at that low price. This has implications for further massive migration to the cities and to the United States.
Which brings us back to Vicente Fox’s admonition to the assembled economists and policymakers in Washington this past September. NAFTA’s staying power, the right-wing populist may have been saying, will be limited if it is widely perceived as widening rather than narrowing economic differences within the region. This is especially true in Mexico, a country historically cautious about relations with its powerful northern neighbor. And whether or not Fox—the old friend of George W. Bush—worries about it, behind the logic of greater subordination to the economic interests of the United States also lies a dangerous political subordination. As NAFTA—and the Zapatistas—turn eight years old in 2002, both stability and sovereignty are at stake.
ABOUT THE AUTHOR
Carlos Salas, a labor economist, is visiting researcher in the sociology department, Autonomous Metropolitan University, Iztapalapa, Mexico. Translated from the Spanish by NACLA.
1. See the website, “World Bank Group/Mexico,”
2. Presidente Vicente Fox, speech to the Institute for International Economics, Washington D.C., September 7, 2001.
3. This article restricts itself to the Mexican case; the interested reader can consult the text “NAFTA After Seven” on the website of the Economic Policy Institute, www.epinet.org/, for a discussion of the treaty in all three countries.
4. U.S. maquila producers use a U.S. tariff code provision (HTS 9802) whereby U.S. firms are allowed to send U.S.-made inputs abroad for assembly and then return those semi-finished or finished products to the United States, paying a tariff only on the value added abroad.
5. National Institute of Statistics, Geography and Information (INEGI), National Survey of Household Income and Expenditures, various years.
6. INEGI, “Niveles de bienestar en México,” 2001.