NAFTA: Birth Of A Free Trade World
Tuesday, September 4, 2012
Negotiations for The North American Free Trade Agreement concluded 20 years ago last month.
Special Feature NAFTA Series
A look at the impact of NAFTA after 20 years.
When Luis de la Calle first traveled with Mexico’s then-president, Carlos Salinas de Gortari, to Washington D.C. to propose a free trade agreement between the two nations, Mexico’s economy was still relatively tiny — just 4 percent the size of the U.S. economy.
Like all pacts of free trade, the North American Free Trade Agreement (NAFTA) would eliminate essentially all tariffs and special protections each country provided its farmers and workers, even though agriculture and manufacturing in the U.S. were significantly more industrialized and, thus more efficient, than those same sectors were in Mexico.
Yet de la Calle and Mexico’s other top trade negotiators were sure free trade was in their country’s best interest.
It was 1990. Mexico was just emerging from what is now known as the country's “Década Perdida” or “Lost Decade” of deep financial crisis.
“Not very dissimilar to the crisis Greece or Spain are going through right now,” de la Calle said.
After a petroleum boom in the 1970s, the market settled and Mexico struggled to find economic stability. The ensuing ten years were marked by a plummeting peso, record-high inflation, and immense national debt. These are the conditions in which NAFTA started to gain traction.
“In a way,” de la Calle said, “NAFTA is the child of the 1980s crisis.”
Mexico owed money — a lot of it — to the World Bank, to private banks, and to other countries. Officials decided the only way out was to completely restructure Mexico’s economy.
“In order to address the debt crisis and pay back the debt, Mexico needed to export,” said Kathleen Schwartzman, an economic sociologist at the University of Arizona. “As a condition of that, it had to begin liberalizing the economy.”
Under the direction of President Miguel de la Madrid, and later Salinas de Gortari, Mexico lowered its tariffs, joined The General Agreement on Tariffs and Trade (GATT), the precursor to the World Trade Organization, and rewrote its laws to allow foreigners to own businesses and invest more freely in the country.
This was a dramatic shift for Mexico. Since the administration of President Lázaro Cárdenas in the 1930s, the country had been focused on protecting its own farmers and its own industries. Consumers mostly bought Mexican products, and people in the countryside grew their own corn for making tortillas.
But the 1980s debt crisis left Mexico in a financial wreck and exposed its vulnerabilities in the global economy. Its leaders decided to change course. They started looking for countries that might want to invest in Mexico.
Originally, the U.S. wasn't Mexico's first choice to become its top trading partner. To explain this, de la Calle quotes an oft-repeated line attributed to former Mexican dictator Porfirio Díaz: “Poor Mexico, so far from God and so close to the United States.”
“Which is another way of saying ‘So close to the U.S. and so far away from Europe,'” de la Calle said.
But unfortunately for Mexico, Europe was busy. The Berlin Wall had recently fallen, opening up a huge adjacent market for Western European products and investment.
That left the U.S. as the next best option.
“Mexico was, in a way, very lucky because a bunch of Texans were running the U.S. government,” de la Calle said.
The Secretary of Commerce (Robert Mosbacher), the Secretary of State (James Baker), President George Bush Sr. — all Texans who have a long history of doing business with Mexico.
Plus, free trade was becoming an increasingly popular concept. More than 120 countries were in the process of forming the World Trade Organization.
And the U.S. — starting first with Canada, and then with Mexico — wanted to sell its goods to everyone in the western hemisphere.
U.S. officials promised NAFTA would stem the tide of Mexicans coming across the border to look for work. It would also ensure that the U.S. remained a superpower in a globalizing world.
"It was the most far reaching agreement that anyone on the face of the globe had negotiated up to that time,” said Carla Hills, the U.S. Trade Representative under the first President Bush.
Of course, some groups opposed NAFTA vigorously. American labor was worried U.S. manufacturers would move their operations, and jobs, south of the border, where employees were cheaper and environmental standards lower. Environmentalists worried about the same thing.
In a 1992 debate with President George Bush Sr. and presidential candidate Bill Clinton, independent candidate Ross Perot famously suggested NAFTA would create "a giant sucking sound" as jobs moved south of the border.
Mexican manufacturers feared they wouldn’t be able to compete. And subsistence farmers in southern Mexico prepared for an uprising to defend their corn and bean fields from American agribusiness.
Critics on both sides of the border predicted fallout over one point in particular: NAFTA would allow money and goods to flow freely across the border, but not labor.
"It would not have permitted the trade agreement to be negotiated had we had an immigration chapter," Hills said.
Politicians from the U.S., Mexico and Canada signed off on NAFTA in late 1992, creating the template for a free trade world.
To view PDF documents, Download Acrobat Reader.