First of two parts

The electoral cycles of Mexico and the United States — (presidential terms of six and four years, respectively) are such that every twelve years there is the double coincidence of an almost simultaneous change of administrations. That was the case in 1988 when Carlos Salinas was elected in Mexico and George Bush Sr. in the US. As soon as the Bush victory was announced in November, the two presidents-elect met to set up the bilateral agenda of their countries for the immediate future.

Mexico was mired in economic troubles since the default on its external debt in 1982, coupled with very unfavorable external conditions. Its problems were underscored by a collapsed price for oil, the country’s virtually only export at the time, which led to a grave debt overhang and no growth. The US, for its part, was also experiencing an economic downturn, and was particularly interested in restoring the growth of its southern neighbor, its third largest trading partner, in order to rekindle its exports and stem illegal immigration.

George-Carlos love fest

The meeting was an enormous success, the two new presidents and their teams got along well and they started working on concrete programs and methods to enhance the bilateral relationship, particularly in economic issues. A new and more ambitious re-negotiation of Mexico’s debt with its bankers was set-up as the top priority, with the full support of the US Treasury and its representatives in the relevant multilateral financial agencies, such as IMF and the World Bank.

Mexican President Carlos Salinas de Gortari, U.S. President George H.W. Bush and Canadian Prime Minister Brian Mulroney exchange handshakes following Salinas’ address before the NAFTA initialing ceremony in November 1992 in San Antonio.

Interestingly, trade was not discussed in any detail in those first meetings, although Mexico had started liberalizing its protectionist trade policies unilaterally in 1984. Following a long historical tradition of his country, Salinas was trying to balance the influence of its powerful neighbor to the North by prioritizing investment trade with Asia (Japan in particular) and Europe. When the debt negotiations succeeded in 1990, the debt overhang was dispelled and Mexico could return to the international financial markets, Salinas launched trade initiatives that surprisingly went nowhere.

Europe was mesmerized by the events in the crumbling Soviet Bloc, epitomized with the fall of the Berlin Wall, while Japan was still smarting from Mexico’s financial default a decade earlier that cost its banks dearly, which at the time were among the largest in the orb. Given these circumstances, Salinas turned to the US to propose a bilateral free trade agreement that president Bush Sr. enthusiastically accepted. As soon as this news was leaked to the press, Canada mobilized its considerable influence in the US Congress to make sure they were included in the negotiations since they wanted to protect their own bilateral trade agreement finalized in 1987.

Thus, the NAFTA talks were launched. They represented the second radical departure from the US’ post-World War II embrace of a strictly multilateral trade policy. The talks proceeded with alacrity, in view of a scheduled US presidential election in 1992. Bush lost that race, in good part, thanks to the folksy populist from Texas Ross Perot whose key platform was to oppose NAFTA. This threw the election to Bill Clinton, the Democratic candidate. As soon as he was in office, Clinton gave NAFTA his full support. But he also asked to negotiate two side agreements on the environment and labor — two issues that preoccupied his core constituents. The deal was approved by the US Congress in November 1993 and came into effect in January of the next year.

Enter China, 9/11

The flow of trade in North America exploded, growing at an annual average of almost 20% between 1994 and 2001, and the zone became extremely competitive, exceeding the European Union and the Asian regions in wealth and productivity. The economies were increasingly connected by investments, businessmen, pipelines, tourists and immigrants. North America’s share of world GDP soared from 30% to 36% between 1993 and 2001 as the leaders of the three countries got together in early 2001 to propose the creation of a North American economic community that would have entailed, a much closer integration than that mandated by NAFTA, including a customs union and common regulations and standards in all sectors of their economies. Everything seemed to be going well for the region, until 9/11 and China’s joining the World Trade Organization (WTO) radically changed these upbeat trends.

Table 1                        Regional Share of World GDP

                            Year     2001    2014
North America      36%      27%
European Union[1]      25%      33%
Asia[2]      22%      25%
Rest of the world      17%      15%

Source: IMF Data Mapper 2015

Already, the exponential growth in trade between the NAFTA partners had created enormous pressures on the terribly outdated infrastructure of the region, especially between Mexico and the US. As someone said at the time, “we have 21st century trade with a 20th century legal framework and 19th century infrastructure.” Government officials of the three nations kept meeting frequently, but very ineffectively in terms of providing solutions to the region’s growing problems. In the altar of national security, the terrorist attacks on the World Trade Towers in New York created a new layer of obstacles at the US borders, pushing up transportation costs, as commerce between the US and China, which was now a full partner of the world trade community, started growing much faster than trade within North America.

In 2001, Shi Guangsheng, then China’s foreign trade minister, signed documents admitting China into the WTO in Qatar.

China, Mexico go toe-to-toe

Other factors contributing to the relative fall of North America: the slump of the US economy 2001-02 and the Great Recession of 2008-09. The US’ lack of fulfillment of its NAFTA mandate on trucking barred Mexican trucks from enjoying unimpeded access into that country until 2014. The proliferation of free trade agreements of all three countries made compliance with the “rules of origin” provisions so cumbersome that many firms simply used the standard most-favored-nation tariff that NAFTA was intended to eliminate. But undoubtedly the leading cause was Chinese competition vis-à-vis Mexico for the North American market and the failure of the region to have a strategic response. In contrast to China’s bold development approach, Mexico was unable to support its own competitiveness within NAFTA with crucial structural reforms in energy, education, competition and taxation to help it become more productive. This situation finally changed in a major way after 2012.

In my follow-up column, I will detail how the bleak situation for North America, particularly with respect to Mexico in its cutthroat competition with China for the US and Canadian markets, has begun to change dramatically as the result of differing economic strategies by both countries. Mexico is gaining competitiveness following reforms it began adopting three years ago, and the relative weakening of its currency. Meanwhile, China has been moving in the opposite direction due to wages rising much faster than labor productivity and a strong yuan. This reflects China’s struggle to transit from an export economy, fed by investment as its main engine of growth, to an economy where the internal market is increasingly important. This kind of economy also relies on private saving, not government development banks, to provide healthy investment funding. Such a transition, moreover, depends critically on China avoiding major blow-ups in its alleged real estate and stock market bubbles — which would fuel social tensions to a breaking point.

[1] Most of EU’s share growth was due to its enlargement with new countries.

[2] The explosive growth of China was compensated by a reduction in the GDP share of other countries in the region, most notable Japan.

Manuel Suarez-Mier is a Washington, DC-based independent consultant on economic and financial issues. He has taught economics and international finance at various universities in the US and Mexico and was Director of the Center for North American Studies at American University 2014-2015. His numerous posts include chief of staff of the Governor of the Bank of Mexico. He also was Mexico’s top economic diplomat in Washington at the time of the negotiations of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico.

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