News Column

A Decade of NAFTA

July/August 2004, HISPANIC BUSINESS Magazine

Debra Beachy

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As the landmark North American Free Trade Agreement marks its 10th anniversary, debate continues over the economic impact of the trilateral pact. While the accord boosted trade and investment, and counts ardent supporters among businesses that have benefited, it has opponents who maintain that promised benefits have failed to emerge, that thousands of jobs have been lost, and that gains have been uneven.

"NAFTA is a mixed story," says Mike Acosta, associate director of the Institute for Policy and Economic Development at the University of Texas at El Paso.

On the success side, most tariffs except those on some agricultural goods have been eliminated. At the same time, U.S. export growth to accord partners has outpaced exports to the rest of the world, according to a report by the U.S. Department of Commerce's International Trade Administration. U.S. exports to Canada rose 62 percent from 1993 to 2003; to Mexico, exports rose 106 percent during that period. Meanwhile, exports to the rest of the world rose 36 percent, according to the report, "NAFTA 10 Years Later." Firms exported a total of $651.4 billion in 2003, including $83.1 billion to Mexico, and $148.7 billion to Canada.

Canada is the top U.S. trading partner, with Mexico following at No. 3, behind China, according to the U.S. Census Bureau. Still, U.S. imports from Mexico to the U.S. rose to $165 billion last year. Meanwhile, maquiladora (U.S.- or Canadian-owned assembly plants inside Mexico's borders) exports rose from 15 percent of Mexico's total exports in 1980 to 50 percent in 2001, according to an International Monetary Fund report.

Many Hispanic-owned businesses that trade with member countries are enthusiastic supporters of the accord. Carlos de Cespedes of Miami-based Pharmed Group (No. 2 on the Top 50 Exporters directory in this issue) says the treaty helped his company gain a Mexican manufacturing partner. Robert Garcia credits NAFTA with opening Canada's market to the tortilla chips made by his San Jose, California-based R.W. Garcia Co. Inc. (No. 37 on the directory list). And Jorge de la Riva, owner of RHO Industries (No. 16 on the list) says NAFTA is giving his Houston-based company's packaging film an edge over products of European and Asian competitors, who still pay stiff tariffs in Mexico.

Yet most experts agree that along the U.S.-Mexico border, where NAFTA was sold as a development-boosting elixir, the anticipated economic boom hasn't materialized. A growing number of companies that operate maquiladoras have moved to China to take advantage of even lower labor costs. And there is disappointment that while the increased trade under NAFTA has created more traffic along the border, it hasn't created more jobs, says Mr. Acosta of the Institute for Policy and Economic Development.



Carlos Decespedes

Carlos Decespedes

"The border has not really seen the positive impact of NAFTA," he says. Indeed, in this year's Hispanic Business Top 50 Exporters directory, only two of the top exporters are near the Mexican border.

"NAFTA definitely further plugged Mexico into the most dynamic economy in the world, but the country's development across the 1990s, including the NAFTA period, was unequal," says Guillermo Perry, the World Bank's chief economist for Latin America and the Caribbean. "The most developed and competitive regions and sectors [in Mexico] have clearly benefited from the trade liberalization, while those lagging behind have not."

"NAFTA clearly did not cause a boom in the Mexican economy, which many had hoped for," adds Chris Woodruff, director of the Center for U.S.-Mexico Studies at the University of California at San Diego. "But NAFTA led to some very large changes. First, foreign direct investment increased markedly, especially in northern Mexico. [And] wage rates increased, especially in the north."

According to a February 2004 study by the Congressional Research Service, U.S. direct investment in Mexico from 1994 to 2002 rose nearly 260 percent, from $16.1 billion to $58.1 billion; Mexican direct investment in the United States rose 244 percent, from $2.3 billion to $7.9 billion. The study, which analyzed studies by the Congressional Budget Office, the World Bank, the Carnegie Endowment for International Peace, and the U.S. International Trade Commission, also found changes in wages. While real wages in Mexico are lower than before the accord, the study notes that Mexico experienced a 25-percent drop in real wages after its 1994 peso crisis. It also found that "trade in general has contributed no more than 10 to 20 percent" of the rising U.S. wage gap between more-skilled and less-skilled workers.

NAFTA's impact on jobs is another hotly-contested issue. Opponents in the United States cite thousands of jobs lost as U.S. companies in some sectors, such as manufacturing, have moved operations to Mexico; opponents in Mexico cite the loss of small subsistence farms, and job gains expected under NAFTA that never materialized. The Congressional Research Service report notes that while there have been changes in aggregate U.S. and Mexican employment levels, none of the studies it analyzed attributed the changes to NAFTA, suggesting "both the U.S. trade deficit with Mexico and U.S. employment levels over the past decade were responding to economic growth, not each other."

Tensions and disputes remain in other areas as well. While some sectors, such as Mexican manufacturing, have increased business under NAFTA, others such as traditional agriculture have lost out to lower-priced U.S. products. Lingering disputes revolve around agricultural subsidies with all three countries. And although the World Bank concluded in a recent report that the accord has benefited agricultural exporters, others believe Mexico's small farmers are at a disadvantage because they lack capital and access to credit.

For U.S. Hispanic entrepreneurs and companies that have enough capital and access to export markets, NAFTA, as well as their cultural connections, have helped. But they also emphasize the importance of local ties.

"It's terribly important to establish alliances local to the market where you want to work," says Mr. de la Riva of RHO Industries who followed his own advice and partnered with a Mexico City company. "Even if you are Hispanic, it doesn't mean you know how to do business in that country."



Source: HISPANIC BUSINESS Magazine


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