Mixed feelings on NAFTA in Mexico

By Andrea Jaramillo / Cronkite Borderlands Project

Thursday, Oct. 12, 2017

QUERETARO -- Mexico is facing what it never thought would happen: the possibility that NAFTA, the trade agreement that shaped the country’s economic policies over the last two decades, would be under threat of disappearing.

But just as some Mexican officials try to convince U.S. President Donald Trump that the North American Free Trade Agreement has been beneficial for both countries, Mexican critics of the treaty think their government should take a hard look at its shortcomings.

“NAFTA has generated employment, has provided a lot of goods, trade and investment, that’s fine,” said Mexican economist Gerardo Esquivel. “But in terms of the final purpose of NAFTA, I think it has been very short to what it was supposed to be the goal of NAFTA, which was to promote convergence in the North American region.”

Moreover, Esquivel thinks NAFTA hasn’t been successful in fulfilling one of its key purposes, which was to reduce the wage gap between Mexico and the United States.

When NAFTA passed in 1994, per capita income in the U.S. was 2.85 times larger than Mexico’s. Since the agreement was implemented the gap has actually gotten worse; the World Bank reported that in 2015 that per capita income in the U.S. increased to 3.19 times that of Mexico. Over half of the country’s 127 million residents still live in poverty.

But NAFTA supporters in Mexico point to clear benefits for the country in the form of booming foreign investment and trade. Foreign investment grew from $4.4 billion in 1993 to $32.9 billion in 2015, according to the World Bank. Trade between Mexico and the U.S. increased six-fold, from $81 billion in 1993 to $525 billion in 2016, according to the U.S. Census data.

A key issue spurring Mexico’s internal debate over the effectiveness of NAFTA is that relatively few regions and business sectors have benefited from that growth.

As NAFTA developed, states that were closer and more historically connected to the U.S. market took advantage of the trade agreement, especially the manufacturing industry, which received nearly half of the foreign investment from 1999 to 2016, according to data from the Mexico’s Secretariat of Economy.

“All the benefits of NAFTA have been concentrated along the border, certain central states, and somehow Mexico City,” said Esquivel.

Foreign investment grew at record rates in central states deemed safe and accessible like Queretaro, which received more than $13 billion dollars in foreign investment from 1999 to 2016, according to data from the Secretariat of Economy.

Through NAFTA, these states attracted foreign investment not only from companies in the U.S. and Canada, but from many other countries in Europe and Asia that wanted to produce goods in Mexico and then export them to the U.S. with no tariffs.

“Big international companies arrived not only from North America but also from other parts of the world who see Mexico…as the ideal way to export to the United States,” said Jose Luis de la Cruz, director of the Institute for Industrial Development and Economic Growth in Mexico City.

In Queretaro, 40 percent of the foreign investment flows from 1999 to 2016 came from the U.S., while 37 percent came from Spain, Canada and the Netherlands and 22 percent came from 17 other countries, according to the Secretariat of Economy.

A similar trend can be seen in Queretaro’s largest industrial cluster, Industrial Park Queretaro, which was created in 1997, three years after the passage of NAFTA.

When the industrial park started, it consisted of just one company; now the expansive industrial zone counts 150 companies, employing nearly 36,000 workers.

Eighty percent of the companies are foreign-owned, half of that total American. They include large multi-national companies and American automotive suppliers like Beach Mold & Tool and Batesville Tool & Die.

The park is located on the city’s limits on Federal Highway 57, also known as the NAFTA corridor, which is connected to Interstate 35 in Laredo, Texas, and gives the manufacturers a direct route to the U.S. market.

“The founders of the park at that time saw several benefits in the NAFTA project and evidently also in the location (of Queretaro),” said Ricardo Gaitan, the deputy general manager of the Industrial Park Queretaro.

The industrial park is spread out over nearly 1,600 acres and looks like a small city. It has its own fire station, ambulance service and water treatment plants. Buses that take workers to their jobs display small signs that read “Hitachi” or “Samsung” to show their routes.

“The location of the park is strategic, it was built in a place where it was perfectly well connected especially to the north of the country to facilitate the mobility of both suppliers and producers that export to the United States,” Gaitan said.

Queretaro has attracted two predominant manufacturing industries: automotive supplies and a burgeoning aeronautics industry, led by Canada’s Bombardier, Inc.

“In the state we have no car manufacturers, there is no General Motors, there is no Ford, no Toyota, but the state owes its growth to two major items,” said Carlos Herrerias, secretary of Sustainable Development for Corregidora, Queretaro’s richest municipality. “The first of them is the supply of automotive manufacturers on the one hand, and on the other hand is aeronautics.”

Corregidora has two manufacturing clusters: El Pueblito Industrial Park, which has 47 companies, and the Balvanera Industrial Park which has 69 companies. The municipality is expecting to construct a new park exclusive to the automotive industry, despite the uncertain political and economic climate between Mexico and the United States.

But according to economist Esquivel, the manufacturing work that companies do in Mexico is very simple and is not adding real value to the products that are exported to the U.S.

“Most of what we do is just ‘maquila’ work, and that means getting the inputs, doing a minimal processing work in some cases, and just sending them back to the U.S. This can be imported from the U.S. or from other markets,” he said.

In fact, 75 percent of the inputs the manufacturing companies use are imported and only 25 percent are produced in Mexico, according to the Manufacturing Industry, Maquiladora and Export Services Program of the national statistical agency, INEGI.

That low added value is also reflected in the relatively low wages manufacturing workers receive.

For workers like María Vargas, the wage she received when she worked at the Industrial Park Queretaro was not as good as advertised.

Vargas lives in the neighborhood that is right next to the Industrial Park Queretaro called La Estacada, which, though it’s in the city of Queretaro, just recently got its roads paved. The neighborhood is so close that the park has a back entrance for workers who walk to their jobs.

Vargas worked for a Canadian automotive company for five years as a technician. She said she was told her salary would increase after a training period, but it stayed the same for two years: approximately 128 pesos a day, or roughly $7 a day.

“They always had an excuse,” Vargas said, who now helps her father run a convenience store while she takes care of her of her 10-month-old son.

But significantly better wages and added value in manufacturing processes are not the only things NAFTA failed to produce for Mexico.

NAFTA didn’t do much to reduce poverty either. Poverty rates in the country now are almost the same as they were before NAFTA. In 1992, 53.1 percent of Mexicans lived poverty, while in 2014 the rate was 53.2 percent, according to the National Council for Evaluation of Social Development Policy.

“The government here hasn’t done nearly enough and it hasn’t even begun to focus on the issue of how to get the majority of Mexicans who are poor integrated into the economy and formal jobs, and beyond that, integrated into the global economy,” said Mark Aspinwall, director of the Division of International Studies at the Center for Economic Research and Teaching in Mexico City.

While Queretaro is among Mexico’s greatest beneficiaries of NAFTA-inspired foreign investment, large parts of the state have not been positively impacted. More than half of the state’s municipalities have poverty rates above 60 percent, according to 2010 reports from the National Council for Evaluation of Social Development Policy.

Opportunities remain slim in indigenous villages in Queretaro state, where the best options include working in construction or manufacturing in the large city, being a housekeeper or migrating to the U.S. or Canada.

For Miguel Segovia, 21, none of those are options he wants to consider.

“Those jobs pay very bad,” he said. “Some friends from my high school are working on manufacturing companies that exploit them.”

Segovia is a 21-year-old student at the Ñoñho Intercultural Institute in San Ildefonso, Amealco, approximately 62 miles from Queretaro city. The school only teaches one career, Solidarity Economy, which seeks to increase a community’s quality life, largely through non-profit ventures. Here the goal is to teach indigenous students tools to create their own businesses focusing on their local culture.

His family is Otomi, the most prevalent indigenous group in the state. He is the first one in his family to go to college; his father and his brother work in construction and his mother travels to Canada as a guest farm worker for six months a year.

Segovia contemplated training for a manufacturing job after a high school trip to the Polytechnic University, but he decided against joining and has no regrets since his cousins haven’t found good jobs.

“We are a low-wage labor force,” said Ivonne Santiago, another student at the Intercultural Institute Ñoñho.

“I used to think I wanted to finish school and get a job at a manufacturing company, to work for someone,” Segovia said. “But since I entered here, my mentality changed, not everything has to be about money, (we must think about) our well-being, our community’s well-being, and all the things our ancestors have left us, that’s what’s really important.”

But for businessmen like Gaitan of the Industrial Park Queretaro, those jobs are still a secure income.

“It is well known that the hourly cost in Canada or the U.S. is higher than the one we have in the country. Queretaro is no exception,” he said. “However, I think that the fact that people have a better income, a safe income and an expectation of being able to grow in the company where they work, I am certainly excited because I also think it is good for them.”

Segovia says having job offers is good for people who don’t have any other options, but he is concerned about the negative impact these companies have on the natural resources like water and communal farmlands known as ejidos, which companies purchase in order to build their enterprise or new highways. Mark Aspinwall agrees.

“Indigenous communities have not benefited at all (from NAFTA) and perhaps have suffered,” Aspinwall said. “They’ve definitely suffered in certain areas where infrastructure projects have been put in,” Aspinwall thinks the Mexican government needs to do a combination of things to make sure the trade agreement positively benefit more people in the country.

“It has to do better with its education, it needs better social welfare and social services, it needs better infrastructure, it needs better public services, less corruption,” said Aspinwall.

But as the U.S. pushes to renegotiate NAFTA, deciding which alterations would be acceptable to Mexico will be a tough balancing act for the Mexican economy, which is deeply integrated with the U.S. economy.

According to preliminary estimates by Mexico City economist Jose Luis de la Cruz and his team, eliminating Mexico’s trade surplus with U.S., which has been one of Trump’s main goals, would result in a drop of three to four percentage points of GDP growth in Mexico. That could be catastrophic.

“For certain states, that scenario would be very delicate because during the last two decades they have bet everything on export manufacturing,” said de la Cruz.

For economist Esquivel, Mexico has only one option regardless of what happens with NAFTA.

“In any case, I think what we need to do is to do what we haven’t done for the past few decades, which is to look at our internal problems, to invest more in what we haven’t invested in the past few decades, like education and infrastructure,” he said.