Monday, March 4, 2024

Opinion: The legacy of the North American Free Trade Agreement

At its 30th anniversary, the North American Free Trade Agreement (and its second iteration in the form of the USMCA) has been the most successful instrument of economic transformation that Mexico has ever had in its life as an independent nation.

It sounds easy, but in recent decades it has been possible to provide stability to the economy and the exchange rate, two factors that for centuries seemed unattainable. Although there are many complaints and criticisms regarding this agreement, the best way to assess it would be to imagine what would have happened to Mexico in the absence of this instrument.

Three objectives motivated the negotiation of what ended up being NAFTA.

The first two were economic in nature and the third was political. The aim was to promote active engagement in international trade with the aim of modernizing the Mexican economy and generating a source of foreign currency that would allow paying for imports carried out on a regular basis.

Secondly, it sought to promote foreign investment in order to raise the growth rate of the economy, as a means of creating new sources of wealth and employment and, in this way, reducing poverty.

The numbers show that the success in both areas has been dramatic: Mexico has become a manufacturing export power, and these exports finance the growth of the economy as a whole. That is, exports are the main engine of growth of the Mexican economy and constitute a reliable source of foreign currency, which is an important part of the explanation why the peso-dollar exchange rate has remained stable in recent years (the other factor is remittances).

For its part, foreign investment has grown year after year, even in an environment as hostile to it as the one promoted by the current administration. A more favorable environment, particularly in the context of so-called “nearshoring” could raise these rates in an extraordinary way (and, with it, the sources of employment and wealth creation).

The third objective was political in nature: it sought to depoliticize government decision-making related to private investment. The NAFTA constituted a straitjacket for the government, since it committed it to a series of disciplines and limited its capacity for arbitrary decisions as well as those motivated by sheer tantrums.

By signing the agreement, the Mexican government committed to preserving a regulatory framework favorable to investment and foreign trade, protecting private investment and preserving a benign environment for economic development. These purposes arose after the expropriation of the banks in 1982, a situation that had created an environment of extreme distrust among both national and foreign investors, without whose activity the country would have no possibility of fostering economic growth, employment, as well as addressing poverty in a systematic way.

In this context, the NAFTA made it possible to depoliticize decisions regarding private investment, an objective that continues to work even with an administration that would clearly prefer that the NAFTA not exist, but from which it has benefited immensely. In fact, the NAFTA was designed precisely for a government like the current one.

For 24 years, with very different governments, each with its own, contrasting, priorities, the NAFTA was preserved, and its fundamental principles were respected. From this perspective, NAFTA fully achieved its goal, as even many of its staunchest critics at the beginning recognize today.

Criticism of the treaty originates from elements that have nothing to do with the agreement, essentially that it did not achieve the comprehensive development of the country. The inevitable answer is more than obvious: NAFTA is nothing more than an instrument for the achievement of specific objectives, all of which were achieved.

What was not achieved has to do with everything that was not done so that the country could effectively develop, poverty would disappear, and inequality would decrease, and that — all of it — has to do with the absence of a development policy that would have implied the consolidation of the rule of law, the creation of a modern public security system and the concomitant strategies in education, health and the like.

NAFTA was a central instrument for the country’s development, as is the USMCA today. It has allowed business decisions to be depoliticized, contributing to the development of highly competitive and world-class companies and industries. Although still far from benefiting all Mexicans, its success is so overwhelming that its limitations end up being inconsequential in relative terms.

But a free trade agreement is not, nor can it be, an objective in itself. The country requires a development strategy that assumes it as one of its pillars, but that goes further: to governance, to education, to infrastructure, to security, to the comprehensive competitiveness of the economy and the population. In short, to increase the general productivity of the economy, because only in this way will development be achieved.

In the absence of a strategy of this nature Mexico will end up being a country perpetually dependent on low wages. A sad corollary for an institution as visionary and successful as NAFTA has proven to be.

Luis Rubio is the president of México Evalúa-CIDAC and former president of the Mexican Council on International Affairs (COMEXI). He is a prolific columnist on international relations and on politics and the economy, writing weekly for Reforma newspaper, and regularly for The Washington Post, The Wall Street Journal and The Financial Times.

Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the views of Mexico News Daily, its owner or its employees.

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