NAFTA turns 20: Mexico is pact's biggest winner

Ross Perot may have had it right after all about who would win under NAFTA.

The North American Free Trade Agreement was an important step for all three members, but the evidence points to Mexico — at the time the weak sister in the group that included two G7 economies, the United States and Canada — as by far the biggest winner.

On the 20th anniversary of the pact, Mexico — in 1994, an insular, economic basket case — has in two decades emerged as a forward-looking country with expanding global reach, a handful of world-class corporations and a ballooning middle class.

Perot, who twice ran for U.S. president in the 1990s and made his name as an anti-NAFTA crusader, generally saw that coming although he focused his barbs on what the U.S. would lose in what he termed "the giant sucking sound of jobs going south."

Perot's fear was that U.S. firms would flock to where labour costs were cheapest. To an extent that has happened, and it can be argued that Canada too lost critical manufacturing jobs to Mexico.

While there are some in Mexico who would dispute the characterization of their country as the big winner, the numbers make a strong case.

Mexico under NAFTA had a rough start, because of a coincidental pesos crash just as the deal was getting under way. But the country has grown into the one of the more robust emerging economies with exports of about $1 billion a day, more than 10 times what they were in 1994.

Mexico is now estimated to be the world's 13th-largest economy with total output similar to Canada's, although on a per capita basis it still lags.

"I think NAFTA has been excellent for Mexico," says economist Jaime Serra Puche, the Mexican trade minister at the time, adding it would have worked even better if Mexico had not waited almost 20 years to bring in internal reforms to the economy.

"Now with the reforms that are finally taking place I think we are going to gain competitiveness and the platform that has been constructed mostly for exports and manufacturing is going to become stronger."

'Manufacturing catastrophe'

Some of that has come at the expense of Canada, or so believes Jim Stanford, an economist with the Unifor union. Under the deal, Mexico has gone from a bit player in the North American auto sector to the second-largest participant with almost 20 per cent of total production, compared with Canada's 16 per cent.

"Heavy truck shipments in Canada collapsed by 75 per cent between 2006 and 2011. It's an incredible example of a manufacturing catastrophe and NAFTA was absolutely a key part of it," he says.

Serra and others who have studied post-NAFTA impacts agree that Mexico's manufacturing sector, and particularly the auto industry, has been a big beneficiary.

But they don't give all the credit to the deal.

Even before 1994, Mexico had started on the road to trade liberalization and economic stability, by giving its central bank independence, for instance. NAFTA may have been the last and most important piece of the puzzle, but not the only one, they say.

Overall, trade deals are often oversold by both proponents and critics, says Angeles Villarreal, a trade specialist with the U.S. Congressional Research Service who co-authored a paper on the deal earlier this year.

"It didn't benefit as much as the optimists predicted, but also the negative effects weren't as severe. There weren't huge job losses," she says.

Mexico transforming

On the plus side for Mexico, the auto industry has taken off, skills have improved and manufacturing has increased — and not just low-skilled factory jobs, she says.

On the negative side, there were losers as well, particularly firms propped up by high tariff walls and small subsistence farmers, although even here the evidence is unclear. Villarreal says it's difficult to separate the NAFTA effect on farming from that of land reform that came at about the same time.

Christopher Wilson of the Mexico Institute at the Woodrow Wilson International Center in Washington says while there were losers, NAFTA has to be considered an overall success for the country.

"Mexico at the time was the smallest, now the Mexican and Canadian economies are similar in size," he points out.

"One of the big stories in Mexico has been the slow but steady emergence of a middle class that's now about half of the country.

"It's not the same as the middle class as the U.S. or Canada, but it does mean they are not in poverty, they now own a car, they go to the movies, they take a vacation. It's transforming the country," he says.