Slanting the NAFTA Story

December 18, 2009 4:00 PM

Mexico's experience with the North American Free Trade Agreement (NAFTA) has been a disappointment, according to three scholars writing in a paper issued this month by the Carnegie Endowment for International Peace. In the paper, Rethinking Trade Policy for Development: Lessons from Mexico under NAFTA, Eduardo Zepeda, Timothy Wise, and Kevin Gallagher call for revisions in trade agreements with Mexico and other developing countries. Following is a rebuttal to their study.

The Zepeda, Wise, and Gallagher policy outlook on NAFTA issued by the Carnegie Endowment for International Peace misrepresents the causes of Mexico's economic problems and the impact of NAFTA on Mexico's economic and political reforms over the past 15 years.

Mexican growth did underperform over the period 1992–2007 compared to what we (and the Organization for Economic Cooperation and Development [OECD]) thought feasible because of inadequate investment and deferred economic reforms. Simply put, Mexico didn't take advantage of the opportunities created by NAFTA. Without NAFTA, growth in Mexico would have been much worse, in part because the US response to the 1994–95 peso crisis and provision of financial aid to Mexico would likely have been more muted. We analyze these issues in great detail in chapter 1 of our comprehensive analysis of the trade pact, NAFTA Revisited: Achievements and Challenges, published by the Institute for International Economics in 2005.

Nothing in NAFTA prevents Mexico from levying sufficient taxes to build out much-needed infrastructure for water, roads, sewer, gas, and electricity in urban areas or from building ports and highways to accommodate increased North American traffic. Nor does NAFTA chain Mexico to outmoded limits on Pemex operations that are rapidly turning the country into a net energy importer. Health and education programs are not in any way limited by NAFTA. Deficiencies in these areas badly erode Mexico's growth record.

Additional erosion comes from the drug wars that bedevil Mexico with corruption and violence. The United States is partly to blame, as we create the market for drugs and the supply of weapons. But again, the drug wars have nothing to do with NAFTA.

Without being explicit, the authors hunger for a regime of state ownership, barriers on inward foreign investment, and high protection of domestically made goods and services—in other words, the good old days of Mexico in the 1960s and 1970s. No country can be cited where this recipe has yielded high growth in the 1990s and 2000s. But many countries can be cited where this formula has fostered corruption, political patronage, and one-party rule.

Bottom line: NAFTA's contributions to Mexico are simple yet profound—vast increases in trade and foreign investment and far better integration with the global economy. Mexico can move forward by building on these foundations, by making essential internal reforms, and—with US help—by defeating the drug lords, not by returning to discarded economic models of yesteryear.