W230 NAFTA and Mexico a Sectoral Analysis by Archivo Vertical

NAFTA and Mexico: a Sectoral Analysis

José Luis Valdés-Ugalde

World History is a house that has more staircases than rooms Bรถrne1

Did the United States succeed in nation-building and in forcible nation-restoration because it was virtuous, or because it had Canadians and Mexicans as its neighbours rather than Russians and Germans? C.S. Gray2

What is Past is Prologue. William Shakespeare3

Quoted by Robin Blackburn (ed) (1991) C.S. Gray (1988:39). 3 Shakespeare, W, (1611), The Tempest, act 2, sc. 1, l. [296]. Also written at the entrance of the National Archives Building, Washington, DC. 2

Mexico and the Case of NAFTA: a Sectoral Analysis4 José Luis Valdés-Ugalde5 Introduction The so-called global village nowadays is circumscribed to an intense dynamic process in which commercial activity is one of the central features in the process of integration starting with neo-globalization. Neo-globalization, trade opening processes, and economic reform are components of a movement affecting foreign policies that occurred for the first time in 1989, year of the Soviet Bloc disintegration, the Cold War end, and a new definition of world arrangements. As soon as those elements were given, States started visualizing themselves and relating to the world around them from a new perspective, determined by the variety of paradigmatic challenges they encountered. A clarification about the so-called end of the Cold War is required if we want to make a proper insight of its implications on the strategic redefinition of the economic and political blocs. This is a whole that has to be decomposed in its parts, taking into account Paul Veyne’s affirmation that “recognition of the existence of other nations as subjects of international law is not self-evident.”6 This is relevant because sovereignty is an issue discussed intensely in the process of trade integrations, and sometimes still without possible agreement. It is important to mention that the end of bipolarity gives way, due to a simultaneity of flows, to the generation of the necessary conditions for a new economic world order that, even in the present, still needs to define some of its routes. The most important of these is the distribution of financial and material resources that lead the way to national and world progress and modernity. Ricardo Pozas Horcasitas suggests that “the current international 4

The present work was derived from the book, José Luis Valdés-Ugalde (2000), Análisis de los Efectos del Tratado de Libre Comercio de América del Norte en la economía mexicana: Una visión sectorial a cinco años de distancia, 2 vols. Miguel Ángel Porrúa y Senado, (2000), and it was adapted by the author to be published in the co-edited book by the University of Alberta and the Institute of US-Mexican Studies of the University of California at San Diego; it stands for both an introductory methodological approach, and the conclusions of the book mentioned before, in which I explore both the advantages and disadvantages faced by the main sectors of the Mexican economy. I would like to express my thanks to Jimena Otero, Fernanda Paredes and Rosalva Miguel, my research assistants, for their valuable help in the preparation of this paper. 5 Sociologist. He completed an MA in Political Sociology and a Ph. D. in International Relations from the London School of Economics and Political Science. He is a professor and researcher at the Centro de Investigaciones sobre América del Norte (CISAN), UNAM. 6 Paul Veyne, (1982), “The inventory of differences,” Economy and Society, vol. 11, no. 2, (May 1982) (trans. E. Kingdom; text of Veyne’s inaugural lecture at the Collège de France, published by Editions du Seuil, Paris, 1976 under the title ‘L’inventaire des différences’), p. 177.

phenomena which are the contents of the global scenery spring from the wearing out of the status edified during the second post-war”7 In Pozas Horcasitas’ analysis: Nowadays, the global era edifies the new terms of international integration (and this happens) as there is a new distribution of the world in regions, in blocs, and in communities, forms of organization signifying constant and mandatory referents to edify political behaviors and actors’ actions in societies as in national States”8

Pozas Horcasitas argues that regulative policy, a central component of neo-globalization that has not always worked as expected, specially when talking about less developed economies, Has made the economy autonomous, producing a new phenomenon in which globalization appears as an economy without society and, as a reaction to it, a political power without economy that expresses itself in the impossibility to design rational and predictable public policies originating from the national states ... The globalization process has also created a new massive phenomenon of exclusion with regard to economy and citizenship9.

Neo-globalization, or globalization, as other theoreticians of this field call it, is not, then, an abstraction, but rather a cultural, economic, and political space that gives the geopolitical scene a new character10. Within the neo-globalizing realm, the world is understood and categorized from ontological universes and among original political realities. Nevertheless, there still “does not exist a consistent definition of what to be globalized means”11, or at least we do not yet dispose of the hard elements that will allow the most complete approach possible to this irrefutable reality. In this respect, N. García Canclini calls our attention in the following terms: It is curious that this all-out dispute in which factories are bankrupt, jobs are obliterated, massive migrations and inter-ethnic and regional clashes increase, is called globalization. It is to be noted that entrepreneurs and politicians interpret globalization as a convergence of humanity to a solidary future, while many critics of this process read this torn passage as the process by which we will all end up homogenized.12

See J.L. Valdés-Ugalde, op. cit., p. 697. Ibid. 9 Ibid.. 10 About globalization, the following works may be consulted: James Mittelman (ed) (1996), Globalization. Critical Reflections. Boulder, London: Lynne Rienner; Christos C. Paraskevopoulos (ed) (1998), Global Trading Arrangements in Transition. Cheltenham, UK, Northampton, MA: Edward Elgar; Octavio Ianni (1999), La era del Globalismo. México: Siglo XXI; Nestor García Canclini (2000), La Globalización imaginada. México: Paidós; Eleonore Kofman y Gillian Youngs (1996), Globalization: Theory and Practice. London: Pinter. About the cultural dimension of world changes, Vayne’s assertion stands out as he says that “culture is truly and really dead when it is defended instead of invented.” P. Vayne, Ibid., p. 175. 11 N. García Canclini (1999), op. cit. p. 45. 12 N. García Canclini, op. cit., p. 10. 8

If neo-globalization makes uniform or not to the interaction process of national and international actors is a question that requires consideration. Even more, it is about an enigma to be solved as history –irony in progress–, gradually shows the reality of each country in the integration process vis-à-vis its own objective socioeconomic conditions. It is even more important, if we explain the sense that an objective observation of world reality through the prism of free trade has, to highlight the diversifying vitality that the cultural arena holds. About this, Veyne, once again, abounds on the importance of diversity of ideas in the search of historical clues to understand reality: “As the well known saying goes, the more ideas we have, the more we find that people are original.”13 Likewise, Geoffrey Barraclough suggests that “what we should consider meaningful are the differences and not the similarities, the elements of discontinuity and not those of continuity”14 For this reason, among other important influences, we should assess the influence that the new unipolarity has had on the nature or the new world order, in which Washington has held the position of sole power since the second post-war15. Likewise, the weight that the global frame has at national scale is yet to be explored, as well as the preoccupation expressed by academic and political circles about the influence that “Americanization” has over Mexico.16 García Canclini explains this as follows: “... we have gone from a global concern of ideological nature about the Americanization that was already taking place in Mexico and that intensified since NAFTA, to a more diversified understanding of the various ties Mexico has with the US ... and with Europe and Latin America”17 Apart from its belonging to a transitional period and from the possible answers we get to the many questions it poses, economic integration today is a fact. One the one hand, it is complex and heterogeneous; on the other, undeniable, and to a certain point, irreversible: “the articulation between globalization, regional integration processes, and diverse cultures is becoming a key issue both in study agendas and in negotiations.”18 That is why integration is now a reality that, being world pervasive, affects each national unity in 13

P. Veyne, op. cit., p. 178. Quoted by Octavio Ianni (1999), op. cit., p. 11. 15 Juan Castaingts explains that the integration, and particularly NAFTA, is the result of a triadic world. 16 See J.L. Valdés-Ugalde, op. cit., p. 625. 17 Ibid. 18 Ibid. 14

a specific manner and is far from supplying us with uniform answers to our multiple questions. Facing the possible death of this old triadic order and starting from these new world dynamics, national States began a new journey to define and solve their economic, political, and social pursues. Moreover, most countries which conform the new regional and world arrangements within their own local instances, became individual actors with a need to find a new sense to their regional and world alliances. The great majority of them, constituting today the different world trade blocks, redefined their economic priorities and became part of trade regional alliances in order to make compatible the domestic economic reforms with the prominent aspects of the economic reality of the world. The study of this phenomenon cannot be divorced from the study of its more specific manifestations. Our analysis should make categories from Sociology, Political Philosophy, and Economics concur and establish a dialogue among them, as this dialogue is undeferrable now. All this would be directed towards finding some of the changing key thoughts on the economic scienceâ&#x20AC;&#x2122;s new directions and of its active role in recent modernity, so that we can search deeper, and not unintentionally, into what O. Ianni calls the â&#x20AC;&#x153;epistemological implicationsâ&#x20AC;?19 which explain the new global society. It is important to understand that the ontological dimension of neo-globalization is not complete (as no form of knowledge is) from the mere analysis of the factors that explain more immediately the redesigning of the world economic and political order. If we are to give this problem its proper dimension, we should briefly heed the opinion of the specialists who have exposed their hypotheses about the meaning of global reality. Mostly, the problem of modernity precedes any discussion of modern economic progress. Within the context of this modernity, a systemic complexity is outlined, and it originates, in terms of the distinguished Canadian political analyst Robert W. Cox, in a conflict defined by hegemony. Cox tells us that international relations go with fundamental social relations and suggests that the race for modernization in the current era has been subjected to the: The hegemonic concept of world order [which] is founded not only upon the regulation of inter-state conflict but also upon a globally-conceived civil society, i.e., a mode of production of global extent which brings about links among social classes of the countries encompassed by it ... [Thus] to become hegemonic, a state would have to found and protect a world order which was universal in conception... A world hegemony is thus in its 19

Octavio Ianni (1999), op. cit., p. 25.

beginnings an outward expansion of the internal (national) hegemony established by a dominant social class ... [and it] is describable as a social structure, an economic structure, and a political structure; and it cannot be simply one of these things but must be all three.20

The emergence of bipolarity (in great measure a result of competition for hegemony) meant in itself a crisis, both for the foreign policy processes and for theoretical thought. It also prompted a moment of reflection about the failure to reach a peaceful agreement in face of the conflict in which the international system found itself. At the same time, the political actors’ perspective was reduced, and this reduced the theoretical analyses’ perspective as well, mostly that of the US foreign policy, historically a dominant actor in the world system throughout this century. This produced some severe limitations and gave way to a vicious circle that became dominant: some of the foreign policy problems were regularly perceived by an analytic scheme that confined them to the notion of “threat” (to national security). Therefore, such crisis also meant an obvious ontological limit that representatives of the school of critical thought, such as Cox, have expounded. The apparent solution to this pitfall was the emergence of a global reordering. In this sense, it would not be possible to give an account of the specific manifestations of the mentioned integration without referring to some of the immediate and mediate challenges that come about with this process. One of them, undoubtedly, is the issue of progress and modernization and their convergence with that of US interests. Within the context of a hegemonic sphere, modernity and progress, referred to by the Mexican thinker Octavio Paz as “evasive ghosts”, are destined, in theory, to be carried out according to the essential interests of the US and not in (apparent or real) opposition to them. Alluding to this kind of behavior, Cox says that local leaderships, by virtue of their legitimate quest for external and internal conditions of economic development, will collaborate to transfer modernizing elements to the periphery, but only as long as these elements are consistent with the interests of the established local powers.21 Even if we do not totally agree with it, the previous theoretical postulate leads us to one last consideration. It is about evaluating the position Mexico and its multiple economic, social, and political actors hold in an unprecedented sociopolitical context which, as such, 20

Robert W. Cox (1983) "Gramsci, Hegemony and International Relations: An Essay in Method,” Millenium vol.12, no.2 (Summer 1983), pp.171-172. 21 Ibid., p.173.

is potentially modernizing. Our interest focuses not only in Mexicoâ&#x20AC;&#x2122;s position as another actor within the global concert, but more importantly, on the nature of its insertion in the regional sphere, in which the US is a predominant actor. This insertion crystallized in 1994, with the formalization through NAFTA of the most meaningful commercial integration of our history. Only thus will it be feasible to ponder the true possibilities Mexico has in the future, in a milieu where regionalism and globalism share a reality that is as extraordinary as it is contradictory and unresolved. In the following sectoral analysis, we considered necessary to carry out an estimation based on an analysis sector by sector, through which we could break down the logic of each economic entity and, from this logic, elaborate the pertinent diagnoses. In this sense, it is convenient to note that the analysis of each sector involved an integral definition of topics â&#x20AC;&#x201C;that included introspection about their strategic and systemic antecedentsâ&#x20AC;&#x201C;, by virtue of which it was possible to produce a comprehensive study that served the purposes of such a significant evaluation. Thus, the sectoral analysis of the impact NAFTA had depended on its development from its very formulation. Even when the analysis comprised 15 sectors of the economy22, in this brief study, only the most representative sectors included in NAFTA (since it went into effect on January 1st) have been considered. In this sense, the estimations offered in our conclusions have a strategic character as well as a particular importance in themselves.

A Methodological Approach From the beginning of the 80s, a new concept that impacted the decisions of the policy makers arose in Latin American nations: liberalization. The export-oriented industrialization policy (EOI), as well as deregulation and market liberalization, were identified as the new imperatives of developing countries in order to restructure their productive system and in this way be able to get on the band wagon of globalization. In this process, the experience of the so-called Asian Tigers set an example to follow, due to their notable success in micro-electric industry, their commercial success, and their growth at

The studied sectors were: automotive, textile and clothing industry, fishing, chemistry, petrochemistry and energy, telecommunications, transportation, iron and steel industry, metallurgy and mining, agriculture and livestock, cement and construction industry, financial services, foreign direct investment, intellectual property and competition rules, labor affairs and migration, environmental issues, and the media.

world level. Among Latin-American countries, the theoretical and political axes of economic readjustments has been a strategy of liberalization, and Mexico has not been an exception to this.23 In this context, the process of reduction of State participation in our economy started since the past decade with the sale of semi-public companies, a radical turn in the policy of governmental subsidies, foreign trade liberalization, and less market regulation in general. An instant consequence to this was an outward-oriented production, that is, oriented towards the foreign market. On the other hand, in 1985, as a result of the wearing out of the Import Substitution Strategy (IS), a policy that introduced a bias against exportable goods, the economic opening process became an unavoidable pre-requisite in the integration process of Mexican economy.24 We would nevertheless have to mention that the economic opening process did not always have a favorable impact on the modernization evolvement that had set out.

Economic Opening Process and Liberalization

Both the economic opening process and trade liberalization in Mexico started in 1986 when the General Agreement on Tariffs and Trade (GATT) went into effect, and this fact formalized the tendency integrating Mexican economy to the new international economic trend. Market globalization is the main feature of this novel international economic 23

We could mention, as liberalization theoreticians, the representatives of the new version of the neo-classical industrial and trade theory. They are based on the Heckscher-Ohlin-Samuelson (HOS) model, and they point out the need for a strong private sector together with an export-oriented industrialization, and a minimum State. This last would be limited to guarantee that macroeconomic conditions are not unfavorable to the development of various industries. According to this outlook, production oriented towards the external market can maximize efficient assignation of productive factors and spur countries to specialize in their respective comparative advantages, and thus, incentivize growth. Balassa, Bela J. Williamson. “1990 Adjusting to Success: Balance of Payments Policyin the East Asian NICS”, Policy Analysis in International Economics; Bhagwati, J. 1991/a. “Is free trade passé after all?” in Ad Koekkoek y L. B.M. Mennes (eds.). International Trade and Global Development Routledge, London. Thomas, Vinod y John Nash. 1992. “Trade Policy Reform: Recent Evidence from Theory and Practice” in R. Adhikari (et. al). Industrial and Trade Policy Reform in Developing Countries. Manchester University Press, Manchester; Srinivasan, T.N. 1985. “Trade Policy and Development” in J. Bhagwati. Dependence and Interdependence. The MIT Press, Cambridge. 24

IS began in Latin America because these countries saw the need to develop their own industry and infrastructure. Besides, they were now isolated from the great powers involved in the Second World War. This economic policy was based on the idea that the State had a very important role in what concerns protection of the incipient industry and promotion of those sectors that could guarantee a vast growth potential.

dynamics, in which context individual State actors have no place separately from each other25. This began a tariff reduction unilateral process. Economy operated from an average tariff of more than 100 percent and a long control list in 1982, to a common tariff of a maximum 20 percent at the beginning of 1988. The first result of this period was the acquisition of a relatively homogeneous tariff structure and the elimination of direct controls, except for a few sectors such as automotive industry. The process of change from 1988 to the outset of NAFTA, was also a process of protectionism reduction. At the moment of the NAFTA negotiations on 1989, Mexican economy was almost completely open. The only exceptions were automotive industry, telecommunications, and a few others where direct control still prevailed. However, the purpose of economic integration through NAFTA meant the most ambitious decision for the development of Mexican economy: it was thought that the entrance to the world’s greatest market would significantly spur investment and trade. Therefore, NAFTA is one of the efforts to achieve regional integration to the international flows of goods and services, and it is one of the most innovative and ambitious trade agreements in the sense that it comprehends trade, investment, and other relevant aspects of economic life. The fundaments of NAFTA gave form to great changes to the norms that used to regulate trade in North America, and in some cases they surpassed those from other prior agreements, such as the Free Trade Agreement (FTA) between the US and Canada, and GATT, and later on, the World Trade Organization (WTO). Then, a variety of agreements followed as a result of NAFTA26.

The Importance of Productive Sectors

It is of the utmost importance to identify the effects of NAFTA on each sector in particular. This will allow us to distinguish the tendencies that can be ascribed to the treaty 25

See J.L. Valdés-Ugalde (1994), “Reto Democrático y Globalismo Modernizador: Estados Unidos y América Latina o de la inutilidad del espejo”, Problemas del Desarrollo. Revista Latinoamericana de Economía, Instituto de Investigaciones Económicas, no. 96, UNAM, México, Jan-March , 1994. 26 Such is the case of the North-American Agreement for Environmental Cooperation (NAAEC) and the North-American Agreement on Labor Cooperation (NAALC), instituted by various organizations. Nevertheless, it must be pointed out that NAFTA does not make reference to the macroeconomic policies each country should implement. If NAFTA negotiators had included such matters at their discussion table, as

from changes originated otherwise. This way, we will not wrongly attribute to it all the characteristics of later economic development. In this sense, we should remember that frequently the economic aspect of some sectors is determined almost completely by diverse variables such as national or international economic dynamics, the former guidelines of economic activity, economic growth in general, the different macroeconomic policies and other trade factors not included in the Treaty and that generally surpass its dispositions27. The aforesaid is relevant if we note that NAFTA does not respond only to a legal framework, but also to a dynamic economic activity which started to influence Mexicoâ&#x20AC;&#x2122;s economic life from the 90s. This has a lot to do with the expectations that determine the behavior of economic agents, that is, the attitude that influences present decisions.28 Our aim is to analyze to what degree this trilateral agreement serves the original purposes it was designed for. Due to the fact that economic sectors are heterogeneous, the impacts of NAFTA on them have been multiple, so that the best way to evaluate the Treaty at a macroeconomic level, using quantitative models, but rather by a microeconomic exam of each industry, as well as the physical infrastructure it is served of and the legislation that determines its behavior29.

Evaluating NAFTA in the light of the Industrial Organization Theory

In order to be able to evaluate how any kind of policy affects any specific sector of economic activity, it is imperative to identify its development, its main features, the governmental policy that regulates by law its behavior, as well as how does an industry relate to its environment. A commercial treaty will affect dissimilarly the diverse components of production, due to their prevailing heterogeneity. By applying the tools of the Industrial Organization Theory, we can determine the market structure of any particular happened in the European Union â&#x20AC;&#x201C;which consequently reached a greater integrationâ&#x20AC;&#x201C;, the treaty would have hardly been viable. 27 These are factors determined by traditions, the weather, sociopolitical and geopolitical conditions, among others that could hardly be overcome without a profound, long-run negotiation policy that would confer a systemic rationality to the nature of the Treaty. 28 Merchandise consumption and production depend on time as prices and sold amounts are determined not only by existing preferences, but also by expected future prices. In economic theory, we distinguish adaptative expectations from rational expectations. While the former consist on using the information from the immediately precedent period as a basis to formulate the subsequent behavior decisions, the latter gather all available information on the moment in order to project it to the future.

industry. Once we have understood its logic, it will be easier to identify the impact NAFTA has had in its development. Market structure of any industry comprehends basically four essential elements: (1) concentration, (2) entrance barriers, (3) product differentiation, and (4) market demand.

1)Concentration

Concentration is probably the most prominent feature of market structure, and we should bear in mind the number of firms that make up a specific industry, and the market distribution existing in it. We may use several indexes in order to measure concentration (Herfindahl Index, Absolute Concentration Index, Entropy Index, and antilogarithm). All of them are structural indicators of presence or absence of market power.30

2) Entrance Barriers

The comparative advantages that already established firms hold over those wanting to get into a particular industry are what is first taken into account in order to go into it, and this is because they determine the market power an industry has. There are four elements of market structure that should be taken into account: 1st, economies of scale: this is a technological characteristic if we are dealing with real economies of scale, and these can be pecuniary, in case firms are capable of negotiating lesser costs for their input with suppliers or if, insofar as they increase their production by other means (e.g. publicity) they are more sales-effective; 2nd, required capital: this refers to access to credit and to

aggressive

behavior from established firms related with patents or dumping practices; 3rd, absolute advantages of entrance costs: established firms may have advantages they acquired based 29

For more precise information on each particular analysis, see J. L. Valdés-Ugalde (2000), op. cit., v. 1. Herfindhal index is calculated by the following formula: H = Σ ni=1 (si)2, where si=qi/Q, qi is the enterprise i sales level, Q are the industry’s total sales, and n the number of enterprises in the market. Elevating each term times square, we ponder large firms over small firms. If we had perfect competition, H would be equal to 1/n, so that this index is found between 1 and 1/n depending if we deal with monopoly or with perfect competition. Absolute concentration index is calculated by the sum of the market shares of the m largest firms. Thus, this index’s limits are found between 1 and m/n for monopoly and competition respectively. Depending on the competition degree, different zones that give reason of market conditions are established. Entropy index is defined as E = Σ Si log (1/si), with the same interpretation as physics with regard to the existing disorder degree. 30

on their experience. This can be achieved either by the learning by doing process, or by means of Investigation and Development (I&D) they have generated.31 Likewise, established firms may have exclusivity contracts with their suppliers. The 4th element of market structure to be considered is legislation: each industry operates within a legal framework that may vary from country to country or throughout time, and this framework is determined by negotiations between the sector concerned and legislative authorities, during the temporal link they establish. For instance, there are constitutional restrictions in Mexico in the energy sector and, in the textile sector, there is a Multi-Fiber Agreement settled in the Uruguay Round and GATT. Different norms may deflect the course of any industrial development, either for good or for bad.

3) Product differentiation

Product differentiation is one of the strategies firms employ to create “institutional” monopolies.32 This consists on making a good or a service different from others physically similar to them, by means of publicity, or by a distinctive presentation, or any other means. Market fragmentation makes them imperfect, as firms gain by it more market power. It is unlikely that a single producer will reach a great degree of monopoly, unless the consumer’s choice freedom is limited, if a single brand dominates the market, or if there are agreements between producers in order to restrain competition between them. 4) Market demand

There are products that, due to their own nature, face a determined demand curve (which may take any elasticity coefficient). Sometimes this curve is not predictable in the short or the long run, so it is necessary to extrapolate in order to estimate it. Obviously, there will be a fair amount of eventual shocks we will not be able to predict; in this aspect, we will find

Investigation and development refers to the capital destined by firms to get the necessary innovations and technology to increase their productivity. Many of them, especially those located abroad, keep several specialized centers dedicated to research and try to make both the productive process more efficient, and their product better. 32 We understand institutional monopolies as those that result from the firms’efforts to distinguish their goods with a commercial brand protected by law, by which they ensure a particular position in the market.

diverse vectors having an influence, which may vary drastically from one industry to another. Within the framework of this sectoral analysis, it was necessary to emphasize the problems resulting from the 1994 crisis, which had to do with exchange rates and cash policies. Even when they were not integral components of NAFTA, they affected it deeply. From the end of 1994, the Mexican peso had depreciated more than 50 percent, while tariffs decreased an average of only 12 percent. Therefore, during the first year, such a dramatic depreciation had a greater impact on trade than on tariff cuts.33 It must also be noted that the existence of a trade integration will not correct the flaws in macroeconomic and structural policy of any of the three signatory countries of the Treaty.34 Both an industrial and a technological policy, until now precarious in Mexico, are required to constitute an endogenous growth that will, one the one hand, make possible to solve the structural problems our country has been dragging year after year, and, on the other, to generate the necessary conditions for a sustainable development. In this sense, NAFTA will have a greater sustainability insofar as, parallel to a trade integration policy, a strategy to solve the shortcomings resulting from technological dependence is generated. Shortcomings in this sense affect prominently the manufacturing sector. After the import substitution policy was implemented, development patterns in this sector were highly heterogeneous. With the change in the foreign trade policy, participation in manufacturing production increased in Mexico’s northern states, a trend NAFTA subsequently intensified. This constitutes a logical consequence of trade opening process, due to the fact that our major partner is the US. Finally, we should focus on the in-bond (maquila) sector. Although traditionally located in the north of Mexico, after the enactment of the Treaty this activity branched out, insofar as foreign direct investment searched for new productive spaces in other areas of the country, such as the states of Puebla and Oaxaca. We should observe to what degree the adjustment process of Mexican economy in strategic areas is congruent with the domestic market’s type and size, as well as the nature of its needs vis-à-vis the US and Canadian markets. Thus, from the variables that result 33

See Colleen Morton, “Efectos del TLC en el Comercio y la Inversión” en Elaboración del Marco de Trabajo para Evaluar Efectos Ambientales del TLC, CCA, California, USA, 1996. 34 Macroeconomic policies comprehend the monetary, fiscal, industrial, financial, and trade policies.

from this analysis, we will be able to ponder the favorable or unfavorable impacts the trade opening process has had on each sector of Mexican economy. This is especially significant if we consider that regulatory measures were excluded from NAFTA in such areas as foreign investment, intellectual property, textile industry, and telecommunications. Likewise, the absence of supranational mechanisms beyond parallel agreements that saw to legal and economic regulations due to contingencies related to subsidies, environmental issues, labor force, or consumer protection, questions the degree to which the virtuous circle that trade liberalization promises is being accomplished. Furthermore, if we heed Adam Smith’s economic liberalism classical principles, we should realize that some of them are still absent from Mexican reality, namely: a) the principle of converting a selfish society into one capable of fulfilling general interest, without recurring to authoritative aspects other than those “the market” sometimes imposes; b) the perfect competition criterion, in which economic actors (this includes foreign actors) would have symmetrical relations, and, in the case these were broken in any way, those responsible would be properly sanctioned; c) access of all economic actors to all the information existing in the market; d) as a result, rational decisions would be made, included those related to priorities and preferences. In addition, it would be pertinent to ask ourselves about the workings of these characteristics in today’s Mexican liberalized economy, in the context of NAFTA.35 Additionally, it should be assessed if NAFTA has worked as a regulating agency between private and collective objectives, that is, as a State surrogate, or if it has been superseded by other entities. These could be either government or any other political institutions, and/or even by a small group of investors, exclusively engaged on maximizing advantages without any other rationale than profiting at any rate. Personal interests would rule over national interests as the main variables of economic development. Hence, we should consider economy as an ideally open space to consolidate the conditions to accomplish progress and development, and not as a surrogate space for political dynamics

See J.L. Valdés-Ugalde (1998), “NAFTA and Mexico: the Future of Democracy and Economic Development”, in Christos C. Paraskevopoulos (ed.) (1998), Global Trading Arrangements in Transition, Cheltenham, UK: Edward Elgar Publishing Limited, pp. 160-172.

that replace the State as a medium to acquire the balance that should be reached by market dictated dynamics36.

Conclusions

The relevance of productive sectors in Mexico’s integration process arose during the course of my study mentioned above; the conclusions presented here are based upon that work. Consequently, from the sectoral analysis made on the impacts of NAFTA on Mexican economy, several scenarios could be suggested. Such scenarios give either a favorable or an unfavorable picture the most representative topics and sectors, so they are left to the audience’s consideration and thus suggest several potential directions for further discussion and scrutiny in later studies. It is not so much about exposing exhaustively debate issues or study-topics, but rather about a query of historic keys (pondered and proposed at this moment) as strategic guidelines for further research.

Advantages of NAFTA

NAFTA has allowed Mexican exports to increase considerably and to enter mainly the US without political obstacles. Similarly, NAFTA has allowed the continuation of the liberalization strategy developed in Mexico since 1988, which has been based on the exporting sector of economy. The trade opening index has increased significantly from the beginning of 1990 (see Chart 1). Mexican exports have augmented in a considerable way and have become the main motor of Mexican economic growth. Exports have come to represent 11.5 percent of the GNP in 1988, and 28.7% in 1998 (see Chart 2). However, analysts such as Pablo Ruiz Nápoles sustain that these came to represent from 18.7 percent to 31.1 percent of the GNP.37 Mexican exports to the US increased from

See F. Valdés-Ugalde, “The Changing Relationship between the State and the Economy in Mexico”, Challenge. May-June 1995, pp. 32-36. 37 Pablo Ruiz Nápoles, Liberalización, crecimiento económico y divisas: un análisis preliminar del TLCAN (lecture presented for the NAFTA evaluation), Senado de la República (20 de octubre de 1999), p. 1. Even when their figures differ, both show an upward trend. For comparative purposes, see also Enrique Dussel

66.96 percent of the total of our world exports in 1990, to 80.83 percent in 1998, placing Mexico as the third exporting country to the US market since 1990. This quota will surely surpass that of Japan in the medium term, if the trends observed from 1990 to 1998 continue.38 Automotive Industry provides an illustrating example in this sense, due to the buffer role NAFTA played in reducing the effects of the domestic market fall, after the devaluatory crisis at the end of 1994. By establishing clear rules that guarantee access to the market of North America, NAFTA ensured continuity in the intense investment flow that consolidated the automotive sector’s modernization, and it made possible for the large Mexican exports to enter the US without political pressures. In this sense, M. I. Studer mentions: We must underline the fundamental role NAFTA has played in guaranteeing access to the US and Canadian markets, being that in 1995, without the Treaty, the risk that the US government –pushed by unions or auto part producers– would take measures to avoid trade deficit caused by substantial increase of Mexican car exports, was real. In fact, there are several historical antecedents that prove the natural tendency in that country to protect industries that register considerable disequilibrium in their balance of trade.39

In that respect, lets consider the following exposition from Eduardo Loría: By 1989... Argentina, Brazil, Chile and Mexico’s total exports were of 8396, 25693, 3823 and 21664 M.d., respectively. Therefore, Mexico’s total exports was 4 times superior to that 40 of Argentina, twice as that of Brazil, and 6 times that of Chile

This impressive performance, adds Loría, is even more so if we take into account three additional factors:

Peters, Foros de Evaluación del TLCAN, May 27, 1999, p. 3. See, J.L. Valdés-Ugalde, op. cit., vol. 2, Chapter 15 and 2 respectively. 38 In this sense, tariff cuts are important. Dussel proposes that “ the U.S. tariff cuts granted to Mexico from 1990 to 1998, and particularly since 1994, have also been relevant in this respect: in 1998 Mexcio paid the U.S. for its exports a tariff of 22.58 percent with regard to the total imports of the U.S. E. Dussel (1999), "Los impactos causados por el TLCAN al sector electrónico y de computación", (lecture presented for the NAFTA evaluation), Senado de la República, Foro Textiles e Industrias de la Confección, Aparatos Eléctricos y Electrónicos, Industria Maquiladora, (May 27, 1999), p. 1. We should note that the fact that Mexico exports 80.83 percent to the U.S. reinforces the idea that our trade is little diversified. In this case, NAFTA has not collaborated to diversify trade. 39 See María Isabel Studer Noguez, “Los efectos del Tratado de Libre Comercio en la Industria Automotriz”, , (lecture presented for the NAFTA evaluation), Senado de la República, May 20, l999, p. 7. See also J.L. Valdés-Ugalde, op. cit. vol. 2, chapter 1. 40 See Eduardo Loría, Efectos de la apertura comercial en la manufactura mexicana 1980-1998, XIII Congreso Nacional de Economistas, México, D.F., February 8-10, 2000, (CD rom) pp. 3-4.

1) the notable growth observed in Chilean economy and, although lesser, that of Argentina; 2) Brazil’s entrance, since the 1960’s, in a vigorous phase of high and medium level manufacture exportations, and 3) Multiplication of the manufacture exportation capacity of Mexican economy, in an unfavorable domestic context, given that domestic demand grew notably between 1989 and 1994, and the real exchange rate was systematically overvalued. These facts made possible for other factors of international competitiveness to evolve even more spectacularly and to surpass the mentioned effects ... this paradox would support –in principle– the economic dualism hypothesis, which postulates coexistence of an extremely dynamic modern sector... with a traditional [lagging] sector...41

NAFTA has allowed Mexico to be considered abroad as a relatively safe and reliable country for foreign investment. It can be observed that, from 1994, foreign direct investment was of 42 375 million dollars, and during the period from 1994 to 1998 the accumulated balance was practically the same: 41 233 million dollars. That is, it doubled in a few years. With regard to the evolution of investment from the US, there was a similar outcome: in the past five years, Mexico’s input was of 24 thousand 700 million dollars, while up to 1993 the accumulated balance had summed 26 thousand million dollars.42 On the other hand, legislative changes on foreign investment, property rights, trade legislation, and privatization, among others, have significantly contributed to consolidate this process, strengthened abroad by the Treaty. Thus, the guarantee of market access for NAFTA signatory countries has relatively minimized political factor impacts that could become trade barriers. In this sense, we must add that foreign investors do not only look forward to legislative changes, but they also expect some guarantee that these changes will be respected. We must say, however, that the results obtained from our field work showed that, in Mexico, that has not always been the case.43 And yet, NAFTA acted as a buffer during the December, 1994 peso crisis, by ensuring Mexico’s access to the Canadian markets (mostly commodity markets), and more importantly, to those of the US, and thus preventing a severer recession. The aid package Mexico received from the US helped to maintain our credibility abroad as well. For instance, within the financial sector, the entrance of foreign capital played a significant role in reducing the banking system vulnerability, as it allowed a recapitalization of domestic 41

Ibid. See José Luis Valdés-Ugalde (2000) op. cit., vol. 2, p. 590, (stenographic version of Foro de Evaluación del TLCAN, Asuntos Laborales y Migración), (See Chart 8). 43 Ibid., p. 495. Even when they /belong to a domestic process, we should bear in mind that legislative changes responded to external pressure as well, particularly from the U.S., and they originated from the imminent signature of NAFTA. 42

banks. This helped to reduce the fiscal cost of the banking rescue, and to palliate the deep crisis this sector went through. Unemployment and production did not fall as much as could have been expected, as the foreign market remained open to Mexico. NAFTA contributed to modernize the legal framework of several sectors, such as property rights and financial sectors, thus achieving their adaptation to international standards which had proved to be functional. With the trade opening process –not specifically due to NAFTA but also due to outward-oriented industrialization, there has been a structural change that, in 15 years, has had repercussions on the export composition; oil stopped being the main income source from exports. In this sense, Loria points out that: While during the period going from 1981 to 1983, crude oil and natural gas provided the 72 percent of exports and manufacture provided 19 percent, in 1998, the latter contributed with the 90.2 percent, and oil only with 6.1 percent. The remaining 3.7 percent belonged to agriculture and livestock as well as extractive exports44... [thus] even when during 1998 we underwent the worst global financial crisis since the 30s, and that, consequently, trade, product, and world finance dynamics were deeply affected, the value of Mexican non-oil exports increased 11.3 percent, one of the highest rates in the world.45

Before we refer to NAFTA’s setbacks, we would care to clarify something. When analyzing the economy performance from 1994, we find several deficiencies that, except those referring to dumping practices, cannot be directly or exclusively attributed to the signing of NAFTA. Most of the setbacks found are derived from outward-oriented industrialization – whose origins, as has been already mentioned in this work, can be traced to 1986, year of the signature of GATT – and not precisely to the enactment of NAFTA. In this sense, Ruiz Napoles asserts that it is important to recall that “Mexico’s accession to NAFTA isn’t but the corollary of the trade liberalization policy started years before”46 The consequences of Mexico’s 1994 economic crisis had to be carefully examined in order not to confuse the impact NAFTA had on Mexican economy with other influences. Indeed, this event prevents us from getting a clear economic overview of the past years. In this sense, NAFTA should be understood as one of the elements of the economic integration and the opening process model. For instance, F. Zapata argues that a central issue in the study of NAFTA is to understand, 44

Data taken from A. Salomón 1996:882 and Bank of Mexico, 1999:52, quoted in Loria, op. cit., p. 3. See E. Loría, op. cit., p. 3. 46 Pablo Ruiz Nápoles, op. cit., p. 1. 45

That the evaluation of NAFTA’s effects cannot be derived from the period going from 1994 to 1999... this analysis necessarily has to be inserted into a much broader temporal frame... trade opening process, free-trade agreement negotiation, privatization of semi-public companies, and labor market re-structuring started a while before NAFTA was enacted, and we can still trace that to the beginning of the 80s...47

Salas’ view is that “NAFTA should be seen as one of the elements in Mexican economic integration... NAFTA is a natural consequence of a policy implemented in Mexico since 1982, and whose aim is to go from a model centered on the domestic market to one centered on the foreign market”48 On the other hand, according to H. Juarez’s view, in the automotive industry, the position of Mexican production, and even of the US production [he refers to the production of the three NAFTA signatory countries], was already defined before the 80s ended... the Mexican productive quota within that of North America, and the North American quota within world production, in fact have not varied [since then]. That is, we do not find that 1994, the year of the enactment of NAFTA, is a turning point.49

J. Mattar, analyst of the Economic Commission for Latin America and the Caribbean (ECLAC) in petrochemical industry affairs, asks about the importance of factor diversity as a key to explain the described economic behavior. Mattar stresses, that one of those elements [that have a bearing on economy] is precisely NAFTA, but I want you to keep in mind that in a world such as we have lived in for the past few years, it is practically impossible to isolate the different determinants that influence industry performance; it seems important to me... because we cannot ascribe to NAFTA neither all the benefits, nor all the drawbacks in this industry...50

Once we have made this precision, we will give account of the setbacks our domestic economy has encountered, that in general terms can be identified with the economic opening process imposed by NAFTA. Let us insist on the fact that, such a process has only reinforced tendencies which have been present since the mid 80s. In the course of this work

See José Luis Valdés-Ugalde (2000), op. cit., vol. 2, p. 580, (stenographic version of Foro de Evaluación del TLCAN, Asuntos Laborales y Migración). 48 Ibid., p. 584. 49 See José Luis Valdés-Ugalde (2000), op. cit., vol. 2, p. 27, (stenographic version of Foro de Evaluación del TLCAN, Sector Automotriz). The same idea was sustained by Jordi Micheli at the same forum. 50 Op.cit., vol. 2, p. 160, (stenographic version of Foro de Evaluación del TLCAN, Química, Petroquímica y Energía). We consider important, in the course of this annotation, to emphasize Mauricio Jalife’s outlinings with regard to industrial property in Mexico. Jalife affirms that Industrial Property Law does not strictly correspond, neither in its conception nor in its making, to a legislation that followed from the enactment of NAFTA. The Mexican Law of Industrial Property, promulgated in June, 1991, responds rather to the standards of what GATT had been in its moment”. See José Luis Valdés-Ugalde (2000), op. cit., vol. 2, p. 537, (stenographic version of Foro de Evaluación del TLCAN, Propiedad Intelectual, Reglas de Competencia y Monopoly.

we have given account of the specific conditions each sector faced before the trade opening process, and we have analyzed the impact NAFTA had on each particular case. Once again, our findings show –in most cases– that other factors’ influence was more decisive than that of the opening process.51 For instance, it was found that deterioration in the financial sector had its main cause in the privatization process that took place during the administration of President Carlos Salinas de Gortari. With the 1994 crisis, it became evident that privatization directed towards income maximization instead of the establishment of a stable long-run project brought huge gaps. The enactment of NAFTA and the graduality defined in its own regulatory framework found the obstacle, from the beginning, of a banking system in crisis, characterized by bad management, due to bankers’ lack of experience. Later on, they faced the creation of emergency programs, such as FOBAPROA (Bank Fund for the Protection of Savings). Furthermore, the trade opening process played a positive role in its reestablishment later on. In the mining sector, on the other hand, we found that metal prices have continued to fall, a trend that cannot be exclusively attributed to NAFTA, but to an international supply-and-demand process, due to its being a commodity. The same happens with regard to the downward trend observed in grain prices, which would have continued to fall even without NAFTA’s influence.

NAFTA’s drawbacks

The export increment stimulated by NAFTA has been characterized by its growing concentration: from 1993 to 1997, around 300 firms supplied an average of 54.64 percent of the total exports, while in-bond industry participated with 40.46 percent. By contrast, the rest of the Mexican economy, that is to say, more than 2.1 million firms, only exported about the remaining 4.9 percent, with a downward trend during the same period. Firms, branches, and sectors oriented to the domestic market and smaller firms have not integrated to this growth process since 1988.52

See José Luis Valdés-Ugalde (2000), op. cit., vol. 1. See José Luis Valdés-Ugalde (2000), op. cit., vol. 2, p. 61-101, (stenographic version of Foro de Evaluación del TLCAN, Textiles e Industrias de la Confección, Electrodomésticos y Electrónicos e Industria Maquiladora; interventions by G. Mendiola and E. Dussel).

Therefore, from 1988 to 1998 we notice that participation of micro, small, and medium scale industries in manufacture total employment has dropped from 49.79 percent to 42.81 percent. Even if NAFTA is not this trend’s main cause, it has allowed these structures and polarized industrial organization to deepen in Mexican economy, as it has not been capable of solving these structural problems.53 The industrial apparatus has not been able to compete successfully in various productive branches. This has resulted on a systematic increase of imported contents in both production and exports (see Chart 2 and Table A), which means that we are in presence of an in-bonding or de-industrialization process, that supposes a de-manufacturing process as well. All this affects the interests of small and medium-scale industry, given that the operating mode of such a program has extended insofar as tariffs have decreased. NAFTA set favorable conditions to the affluence of in-bond industries into our country, although, in Mendiola’s view, this circumstance “did not necessarily impact local input chain notably”54 Mendiola also asserts that “practically 85 percent of industrial in-bond industrial establishments were created from [the 80s] reform period, and if we examine the NAFTA period, a third of the in-bond establishments were created from 1994.”55 In other words, favorable results are not to be found if the referred conditions are analyzed within the structural links of the domestic apparatus. At the same time, zones with a highly important productive tradition have been wasted.56 Currently, in-bond industry represents around 50 percent of Mexican exports, and it is the big multinational companies that define their workings – trade flows, investments, and employment – which show a strong concentration. A recent study revealed that the national integration percentage in the in-bond sector was just of 2.5 percent.57 Numerous domestic firms that before operated under the traditional manufacturing scheme, have now gone to the in-bond program, that is, importing most of the input. From 53

Ibid. Lets emphasize that the aforesaid in this section is, in great measure, due to the fact that Mexican authorities have not developed a State Industrial Policy. 54 Ibid. 55 Ibid. p. 65. 56 According to Mendiola, Oaxaca and Puebla, for instance, are places “where wooden furniture has been produced for years, and there is an in-bond furniture section that is not related to it in any way; much of the experience and the input capacity these states have could be used. Ibid., p. 66. 57 Ibid. p. 64, and Gerardo Mendiola (1998), Mexico, Empresas maquiladoras de exportación en los noventa. (Mimeo, ECLAC). By contrast, data provided by SECOFI (Minister of Trade) report a national input usage

1994 to this date, fixed gross investment grew 3.6 percent at domestic level, while growth in the in-bond sector was of 30.4 percent. This means that there has been a new industrialization process along the border, that has meant the emergence of a new industry as well as a million jobs. On the other hand, manufacture has being facing a process of deindustrialization, bankruptcy, and enterprise disappearance.58 Ruiz Nápoles explains this as follows: As a recent entrepreneurship magazine affirms: our destiny is to become an in-bond country... if we subtract in-bond operations from manufacturing exports and imports, the resulting trade deficit in the current decade is found between 20 and 30 billion dollars, except during 1995 and 1996... [years of the peso crisis]... as a policy to incorporate in-bond industry to domestic industry, by a process of integration, did not exist... it is not in-bond industry that becomes full industry, but rather export industry that tends to become inbond.59

Similar considerations are found in the work by Loría that we have already cited.60 From his perspective, since 1950, there have been two structural problems present in Mexico: first, the endemic character of trade deficit, which became increasing since 1986; and second, that the core explanation of this problem is found in manufacturing industry (see Chart AA).61 Likewise, it stands out that employment elasticity is decreasing with regard to income: from 1991 to 1994 it reached negative levels, thus confirming the insufficiencies of the manufacturing productivity sector, manifested in huge import requirements by product unity. In Table BB we can observe how, total imports are composed, mostly, of

over 20 percent. Reports from the US Department of Trade (DT) inform of a high percentage of national input, close to 44 percent. Nevertheless, it is not certain how this data were calculated. 58 Ibid. 59 Pablo Ruiz Nápoles, op. cit., pp. 7-9. 60 E. Loría, op. cit., p. 4. 61 E. Loría proposed a model where a coefficient (T) is calculated; this captures the impact of a percentual point of the product (Y) over trade balance (TB). Thus he found that, from 1991 to 1994, this coefficient reached a –1.48 value, and that from 1995 to 1998 it was only of a –0.6. This means that, for the former period: “ the sector’s growth increased progressively its import demand, so that it is plausible to consider that manufacture raised its capital-work relationship. The elevation of total factorial productivity is explained thus (even at the expense of occupation), reported by several works, even while using very different methodologies and theoretical focuses”. Coefficient reduction during the last period could indicate structural changes, although it is too soon to make such an assertion. “In the whole of this development we find that there has been an important change in employment constitution... given that, even if between 1985 and 1995 the manufacturing sector’s total occupation did not grow, the in-bond sub-sector tripled it, while the non-maquila subsector decreased it in almost 40 percent.”Ibid. pp., 8-9.

intermediate and capital goods. Together, both kinds of imports have represented little more than 90 percent since 199562 (see Table BB). The same idea is sustained by Ruiz Nápoles in the following terms: liberalization produced... a substantial reduction in the integration degree of domestic economy... This seems to imply that the integration degree lost in internal productive branches is gained by the import sector ... the manufacturing sector shows clearly a strong trend to replace national input by imported input, since the trade opening process began.63

All this can be seen in the technological spillover derived from the trade opening process, showing little insertion in the domestic sector. That is, the technological gap between US and Mexican firms is too large, so that innovative processes have to be imported. This can be seen in the patent flow process within our country. In this respect, J. Aboites argues: There is a clear predominance of patent applications from residents and non-residents, both before and after the trade opening process began... changes in the intellectual property legal framework produced a deep breach between these two flows (see Chart 4)... For the OECD countries, two groups can be discerned... [first,] that where there is no correlation between the flows of foreign firm applications and those of national firms [Mexico, for instance]... and [second, a group] where arriving technology and technology created domestically are correlative [South Korea would be one of these]64 (See Charts 5 and 6).

The nature of each country’s technological system is reflected in all this. Thus, we may conclude that, in Mexico, the opportunities provided by NAFTA for access to foreign technology have not been exploited: technology has neither been disseminated, nor spread, nor assimilated by Mexican firms. Within this framework Mexico is, until now, what has been called a technology follower. This case is antithetical to that of a nation where “ a strong relationship between foreign technology and domestic technology” is found, “[meaning] that it is about a country with solid technological capacity, learning mechanisms, and well developed relationships and nets for the diffusion of technological information.” Aboites reaches the conclusion that the opposite happens in countries like Mexico, “whose framework of technological capabilities is in a formation process, therefore fragile, and where patent flows do not impact domestic activity”. On the contrary, since ten years ago, other countries that faced circumstances similar to those of Mexico

Ibid. P. Ruiz Nápoles, op. cit., p. 4. 64 José Luis Valdés-Ugalde (2000), op. cit., vol. 2, p. 547, (stenographic version of Foro de Evaluación del TLCAN, Propiedad intelectual, reglas de competencia y monopolio). 63

(such as South Korea), have profited from the advantages that foreign technology offers.65 The problem is how to conceive an industrial, scientific-technological policy that will allow technological information from abroad to reach domestic technological capabilities.”66 (See chart 7) Mexican economy depends heavily on the performance of US economy.67 Exports were not very sensitive to exchange rates (increasing only a 2.9 percent, in face of a depreciation of 10 percent). However, they had a significant response to the US total available income (an increment of 10 percent of the US GNP resulted in an 18 percent increase in the Mexican non-oil export demand). As to imports, although their relationship with exchange rates is positive, it is not significant. This reinforces the systematic increment of the production’s imported contents: 80 percent of imports are intermediate goods, and they are necessary to domestic production. Consequently, even when there is a depreciation in the exchange rate, economy depends on imports to produce and export (See Charts 2 and 3, and Table A). To this phenomenon, Dussel refers in the following terms: On the one hand, manufacture in general has been extremely successful in growth and productivity terms, and particularly in the export field. NAFTA, from this perspective, has allowed a deep integration between Mexico and US’s intrafirm trade and in-bond industry. On the other, these firms generate a minimum of employment, and surprisingly, their salaries have shown a downward trend if compared to the rest of manufacture’s salaries from 1998. The most relevant characteristic, however, is the industrial organization it has generated and that, in order to grow in GNP terms, requires more and more imports.68

In-bond exports (maquila) are not affected by exchange rate fluctuations, due to the fact that activity in this sector responds to production strategies of main offices located abroad. Imported consumer goods have shown to be extremely sensitive to exchange rate 65

Aboites adds that, “South Korea was chosen as a reference point as there are certain symmetries between its economy and Mexican economy. Besides, South Korea has been a paradigm in the design of Mexico’s economic policy, and the working of its manufacturing exports are greatly parallel and symmetrical to those of Mexico”. Ibid., p. 546. 66 Ibid., 547. In Chart 7 we can see other countries’ behavior; some show to be dependent, and some others to generate their own technology. 67 In this sense that E. Dussel points out, as has already been commented, that: “there is a small group of [300 firms that, together with] in-bond enterprises, that participate of 95 percent of the [total] exports and generates only 5 percent of employment... what happens if this starts to revert?” José Luis Valdés-Ugalde (2000), op. cit., vol. 2, p. 95, (stenographic version of Foro de Evaluación del TLCAN, Industria textil y de la confección, aparatos eléctricos y electrónicos e industria maquiladora). 68 See E. Dussel, “Los impactos causados por el TLCAN al sector electrónico y de computación”, op. cit., p. 7.

fluctuations and national income. Unlike the rest of imports, imported consumer goods have a negative relationship with exchange rates (see Table A). Disloyal practices have been present during the years NAFTA has been in effect. Particularly in the cement industry, there have been cases where antidumping dispositions imposed by the US to Mexican cement exporters have gone against the liberalization precepts NAFTA defends.69 Carlos Villareal, Chief Planner of Villacero Financial Group in Michoacan, pointed out the US as the responsible actor for imposing a variety of protectionist barriers. It is his view that this happens even when this country has a wire and rod deficit. However, in some U.S states such as Kansas and Missouri, entrance restrictions are applied to the same Mexican products. Villareal considers this situation not only absurd, but also harmful and adverse to the basic Treaty principles.70 Similar problems occur within the agriculture and livestock (ganadería) sectors. In the case of sugar, for instance, Mexican sugar producers argue that NAFTA has contributed to worsen their situation. Disloyal competition in the market of fructose-rich corn syrup has increased, as this product has entered Mexico in dumping situations.71 With regard to livestock, in 1994, when the National Cattle Group (GNP) filed a suit for dumping practices, around 12 000 t of beef were imported each month, from which 4000 t (35 percent) entered at dumping prices. In 1997, this state of affairs became more serious, because from a 28 000 t of beef that entered the country, an estimated 18 000 did so in dumping circumstances (77 percent). That is to say, not only did the imported volume increase, but also did the dumping or price discrimination margin. Even when a suit was filed, and a voluntary arrangement with the US party was reached, price discrimination practices persist.72 Representatives of the Mexican Cattle-Feeders Association assert that the main topic with regard to domestic beef production and its place in the market, has been the prolonged effort directed to stop the growing import of US beef. Even though action was 69

See José Luis Valdés-Ugalde (2000), op. cit., vol. 2, pp. 419-455. Ibid, pp. 285-319, (stenographic version of Foro de Evaluación del TLCAN, Metalurgia, siderurgia y minería). 71 After this sector’s request, the situation was investigated and confirmed by the SECOFI International Trade Practices Unit. José Luis Valdés-Ugalde (2000), op. cit., vol. 2, pp. 319-371 (stenographic version of Foro de Evaluación del TLCAN, Sector agropecuario). 72 Beatriz Cavalloti, Hermilio Suárez Domínguez, Victor H. Palacio Muñoz, El impacto del TLCAN en la ganadería de bovinos de carne (1994-1998), Departamento de Zootecnia, Universidad de Chapingo, Mexico. 70

taken to impose special tariffs, it was applied only partially, thus leaving the major introducers of US beef an open market for their products. National projects oriented to improve competitiveness in the domestic market have not been proposed. Some cattlefeeders have implemented projects that take into account domestic production and foreign trade and which, according to their judgement, represent potential benefit to Mexican livestock. The first one is oriented towards establishing a grain buying system, being grains our main input, supported through ASERCA (Aids and Services for Agriculture and Livestock Commercialization). Nevertheless, there is not any economic-financial support for middle and small users, such as beef, eggs, and milk producers among others, that would allow them to acquire grain directly from the producer. Thus, they are vulnerable to multinational companies, which buy directly from the producer and obtain the benefit of ASERCA support. Later sale of the grain with wide utility margins limits competitiveness opportunities. A second project consists on a scheme to prevent traditionally exported raw materials (such as yearling calves and bull calves) from leaving Mexico. That is because such a system not only interrupts the take off of domestic productive chains, which would start by stockyard intensive feeding, but also increases the need to import finished products (boxed beef). Within this framework, it is noticeable that technical outlines to ensure production efficiency exist; that economically viable schemes are projected; that these schemes are subject to healthy financing and to commercialization through firms like those composing this association. Finally, the third project is the creation of a center for technological development, that focuses on viable and instant application research work, through a technical-financial program that enhances profits for livestock firms.73 As to the labor sector, much has been said about the roughly 1.5 million jobs that exports, foreign investment, and the establishment of maquila industry generated. However, this fact must be given its proper dimension, as the analysis made of migration and labor sectors have revealed great deficiencies. In the first place, although there is an increment in Mexican workersâ&#x20AC;&#x2122; productivity compared to US and Canada workers (Chart 9), salaries show a downward trend (Table B). On the other hand, data provided by INEGI show the percentages evolution of the unemployment time series. From 1987 to 1993, unemployment

averaged a 3.12 percent, while from 1994 to 199974, the percentage obtained was higher than an annual 4.1 percent. Even if we do not take into account the year of 1995 due to the fact that it is considered an anomalous stage, we would obtain a 3.7 percentage. All this leads us to conclude that, even considering the peso crisis in December, 1994, employment generation before NAFTA was superior to that of the period starting in 1994 (see Chart 10). It is to be noted that, in contrast the European Union (which is monetary union), labor liberalization is not a precept in NAFTA’s agenda. On the contrary, the US have tried to legislate and stop, at all costs, free circulation of Mexican workers; and Mexican authorities have remained passive in this respect. All this forces Mexico to reformulate its role as the main labor force exporter from the three NAFTA partners, and to give a proper dimension to its policy, in face of the growing phenomenon of massive migration. About the agricultural sector, we can say that, every year except for 1997, neither import quotas nor corresponding tariff payments have been fulfilled. According to data provided by the US government,75 since NAFTA’s first year, US corn exports to Mexico (3,054,00 t) surpassed the 2.5 million t corn import quota. Additionally, the agreed tariff was not paid. Therefore, it can be said that there has been an utter exposure of Mexican corn from year one and not from year 15, as established in the Agreement76 (see Table C and Chart 11). In the case of livestock, US participation in Mexico’s imports is concentrated above 98 percent. The US exports such amounts to Mexico by means of a domestic price control policy, by surplus management, and by penetration and market displacement strategies (see Chart 12). Recapitulating, we can conclude that there are several meaningful guidelines to evaluate NAFTA: first, it is undeniable that Mexican exports, showing an unprecedented growth since the trade opening process began, have become an important motor of economy growth. The trade opening index (exports plus imports as GNP percentage) has incremented from 19.73 percent in 1983, to 58.49 percent in 1997. The main destination market has been the US, going from 66.96 percent from the total in 1990, to 80.83 percent 73

This information is based on the following document: “Rancho el 17 –rancho17@prodigy.net.mx, July 13, 1999 (e-mail). Also see jbarrio@compac.net.mx. 74 That is until June, 1999. 75 USDA/FAS: Grain: world markets and trade; NAFTA: year two and beyond. (US: USDA, Feb. 1997) (hiper-link).

in 1998; second, it must be pointed out that NAFTA has consistently allowed to continue the liberalization strategy starting formally in Mexico from 1986, with the signature of GATT, an agreement based on export-oriented industrialization. Therefore, as field investigation shows, in the majority of the evaluated sectors, NAFTA hasn’t necessarily meant a turning point, given that the productive quota of many industries was already clearly established before 1994; and third, by virtue of the Treaty, Mexico is projected as a relatively reliable country for new investors, as they find the conditions to ensure short and middle term investment. Opposite to all this, stands the fact that this investment’s stability is relative, given that the legal framework is precarious, so that it is not yet sufficient to impulse a long-run economic industrial development. Tariff reductions granted to Mexico by the US during the period from 1990 to 1998 (and particularly since 1994) have been a concomitant response to the liberalization logic inserted in NAFTA. We can notice that export growth is characterized by a strong concentration: from 1993 to 1997, around 300 firms exported an average of 54.64 percent of total exports, while in-bond participation reached a 40.46 percent for this same period. Beyond this macroeconomic fact – although complementarily to it – it can be generally ascertained that the rest of the economy has had a fairly irregular performance. Besides, if exports have increased substantially, also imports have, and not due to greater domestic consumption but rather to the tiny domestic export added value. This reflects that economic penetration of exporting industries is far from what we could wish for. We must say, however, that NAFTA is not the central cause of these trends, even if it has relatively contributed to deepen asymmetrical industrial structures and organization in economy.

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Fuentes primarias

â&#x20AC;&#x201C;rancho17@prodigy.net.mx,

jbarrio@compaq.net.mx