Mexico, Trade, and the U.S. Election - Winners and Losers

Mexico’s political and economic leaders are clearly terrified about the prospects of a Trump election victory. However, they should probably not be too sanguine about a Clinton victory either—although Presidential candidate Hillary Clinton has rejected the idea of a wall along the Mexican/U.S. border, she has gone on record as supporting “a barrier to prevent illegal immigrants from coming in”. She, like Republican presidential candidate Donald Trump, also supports the renegotiation of the North American Free Trade Agreement (NAFTA). To many observers it appears that Mexico has much to lose should the US abandon its enthusiasm for free trade agreements. It has, but the agreement has already been very costly for Mexico.

The Mexican public has responded with humour to all of machinations going on north of the border. Sales of the Trump piñata, ready to hit and burst, have been brisk. The country’s political leaders, both past and present, on the other hand, have reacted with substantial vitriol. A Mexican senator has proposed legislation to protect the country from growing U.S. isolationism. He has proposed a bill that would block Mexican payment for a wall and require a review of all 75 bilateral agreements with the U.S. should there be an attempt to cancel NAFTA. In addition, the bill proposes the imposition of equivalent taxation on the estimated one million U.S. citizens living in Mexico in the event of a U.S. attempt to block remittance payments sent by Mexican’s working in the U.S. to their families.

NAFTA: the Positive and the Negative for Mexico

Media reports have enthused about the benefits of NAFTA and free trade for Mexico, citing, in particular, the recent rapid growth of the auto industry in the states of Guanajuato and Coahuila, this latter now regarded as the “Detroit” of Mexico. Indeed, the year 2015 marked a record output for the Mexican auto industry; with the industry generating 19 percent of the country’s GNP and 20 percent of the its exported products. Attracted by low wage rates and quality production, foreign auto producers have swarmed to Mexico. The automobile industry, which accounts for 17.6% of Mexico’s manufacturing sector, has driven Mexico’s economic growth over the past 3 year. Although the industry, which supplies approximately 675,000 jobs, pays Mexican workers in a day what a U.S. worker makes in an hour, that pay is considerably better than what most Mexicans make.

However, the picture is not nearly so rosy if one looks beyond this sector to what has happened since the implementation of NAFTA. Mexican economic growth since the agreement has been sluggish, poverty remains substantial, wages have not risen significantly, and the failure to generate sufficient employment has meant the continued outflow of migrants to the United States and the attraction into the drug trade of legions of young men who lack any other economic opportunity. A high proportion of the economically active population—between 30 and 50 percent depending upon the source--works in what is known as the informal sector where there are no benefits, employment is precarious, and poverty rates are an estimated two times that in the formal economy.

Mexican policymakers assumed that dismantling the country’s highly interventionist state, measures to stimulate direct foreign investment in export processing zones (EPZs), increased export activity on the part of the country’s biggest conglomerates, along with the foreign investment encouraged by NAFTA, would generate high levels of economic growth and employment expansion. This has not happened. While jobs have been created in the auto industry, many more were lost in the economic restructuring occasioned by trade liberalization. In its enthusiasm for free trade, the Mexican government abandoned the few sectoral industrial development programs (in the auto-parts and pharmaceutical industries) and instead made foreign investment in export processing zones (maquilas), and incorporation into global (that is U.S. dominated) value chains, the core of its export, employment, and growth strategy.

The Impact of NAFTA on Mexican Employment

With the signing of NAFTA, both foreign investment and the country’s export of manufactured goods shot up. But as the Mexican economy became increasingly integrated with the American one, its manufacturing became involved in only a single stage of any given production process—the labor intensive, low technology, low paid, final assembly phase. By 2007, this type of assembly manufacturing process accounted for an estimated 70 percent of Mexico’s manufactured exports. The combination of increased foreign investment and trade liberalization resulted in a decline in Mexican industrial integration as foreign investors dropped domestic producers as suppliers and imported their needed inputs. In this process, many small and medium domestic firms, including ones that had produced for the big export firms, could not compete with imports and went bankrupt. Their demise meant an appreciable decline in employment opportunities. According to one estimate, the trade liberalization process destroyed at least 40 productive chains involving small and medium enterprises. This form of economic growth has also meant that Mexican prosperity is concentrated in the north while south and central Mexico languishes.

Furthermore, the maquila sector itself has not been a stable employment generator. While employment in the sector rose 123 percent between 1994 and 2000, and was the single largest source of job creation, after 2001 job creation fell due to the shift of many maquila firms to lower wage areas in Central America and China. Between 2000 and 2003, the sector lost 240,000 jobs. As a consequence, employment in manufacturing in Mexico declined from 35.4 percent of formal employment in 2000 to 25.7 percent by 2008. Mexican autoworkers are beginning to demand increased wages and improved working conditions. We have to ask whether this boom in employment generation in the auto industry is therefore transitory. Moreover, while the auto industry provides above average wages, many Mexican firms in export processing zones have been associated with low pay, lack of benefits, and unhealthy and harsh working conditions for young women.

The most devastating impact of NAFTA, however, has been on rural employment and rural welfare, particularly for grain and bean farmers. Although NAFTA provided for a 15-year phase-in period for the removal of tariffs and import quotas for these products, under U.S. pressure the Mexican government accelerated the liberalization process. The consequence was a rapid rise in much cheaper imports with devastating consequence for southern farmers. Farm employment dropped dramatically as millions of rural jobs were lost and day laborers faced deterioration in pay and worsening working conditions.

Winners and Losers

The winners in the process of economic restructuring, trade agreements, and increased foreign investment in Mexico have not been Mexican farmers or, on balance, Mexican workers. On the other hand, NAFTA gave big U.S. agricultural producers unprecedented access to the Mexican market. While Mexico’s exports to the U.S. are mostly manufactured products, these products are produced by foreign (American) investors. These exports are, are for the most part, intra-firm exports, part of global value chains involving the export of both products and profits back to the United States. Now the American public is demanding a reversal of the economic integration with Mexico that has developed over more than twenty years. The original integration produced far more misery and dislocation in Mexico than it did in the U.S. Although the benefits of free trade for Mexico have been ephemeral if not illusory, ordinary Mexicans will, once again, bear an inordinate share of the burden if there is an attempt to substantially revise the Mexican-U.S. economic relationship.