Effects of Nafta Signing on Mexico’s Industries

Vehicles

The implementation of NAFTA agreement became a millstone for slowly expanding Mexico’s automotive industry. Biggest manufacturers such as Honda, Peugeot, Porche and Mercedes – Benz settled in Mexico to benefit from cheap labor, and free trade. Later General Motors, Nissan, Ford Motor, Volkswagen and Fiat-Chrysler also took this opportunity. They saw even more advantages: Mexico has good infrastructure, lacks domestic producers and is close to USA. It has become the 4th biggest vehicles exporter globally. The profit of the exported cars has increased more than 9 times. The industry is growing rapidly till this day. It is considered the main contributor to Mexico’s economy. For Mexico, NAFTA was the first remarkable agreement for internalization of the market and starting global trade. Now Mexico has free trade with 47% of the global vehicle market.

Before the establishment of NAFTA, Mexico’s economy was mostly based on protectionism as the market was highly protected with high import tariffs, quotas, import licensing and restrictions on foreign investment. The few remaining manufacturers used outdated machinery, were not able to import needed engines and other vehicle parts for the lower price, therefore the produced vehicles were expensive because of the high production costs and were low quality. Mexico had no advantage in international automotive trade, but that was not a concern until late 80’s. Relying on the big resources of oil and favorable geographic location, in 1977 state signed new Automotive Decree with current automobile companies. The main goals were the increasement in vehicles export and internalization of the industry. The new Decree didn’t remove restrictions on import as the state still tried to protect domestic auto parts manufacturers. However, new regulations helped to create a trade surplus in Mexico, but 5 years later, in 1982 Mexico’s economy collapsed and the goal was not fully achieved.

In 1989 the new administration signed “Decree for the Modernization and Promotion of the Auto Industry”, which the first time after roughly 60 years opened the Mexico market for import of new vehicles and its parts for as long as automotive companies have positive trade balance. Favorable trade conditions and low tariffs were negotiated with USA. It was a lead-in for successful trilateral agreement later. In the year of NAFTA signing, Mexico was already a significant automobile producer in Latin America and OECD. NAFTA establishment eliminated the rest of the trade barriers and outright changed the regulations. However, the full implementation took approximately 10 years as all the tariffs and restrictions were cut gradually until they fade out. In 2004, numerous foreign automotive companies expressed their wish to assemble vehicles in Mexico. With the integration to economic space of North America, Mexico manufacturers were able to adopt the newest technologies and make the manufacturing equally advanced.

Maquiladora

Maquiladora is called Mexico’s trademark as one of the most significant industries which had a successful history even before NAFTA. Term “Maquiladora” stands for factory that imports raw materials and manufactures goods for both export and domestic use on behalf of foreign corporations (world atlas). Now maquiladora makes up to 65% of all Mexico’s exports and employs more than 1 million people. Clothing is the top Maquiladora product followed by electronics, furniture and plastics. Maquiladoras started in Mexico in 60’s, mainly along US border. In 1964 state started IMMEX (Maquiladora, Manufacturing and Export Services Industry) simply known as Maquiladora program. It allowed maquiladoras to be 100% foreign own and offered tax incentives for foreign manufacturers. The main goals were to decrease unemployment in Mexico, attract foreign investment, fasten industrialization along the border and improve the economy. The program was dedicated to help companies lower production costs and maintain control of their offshore production.

The project was beneficial for both Mexico and US, one could diminish unemployment, other’s companies could take advantage of cheap labor. From 70’s till 2018 more than 70% of Mexico export goes to US (world atlas) Worth to mention that Mexico had competitive advantage against Asian states, because it was next to US, therefore US companies could save huge amounts of money on transportation and warehousing costs, beside the cheap labor. Additionally, close relationship between Mexico and US lowers the risks of trade disruption. However, Maquiladora industry never reached its full potential until the signing of NAFTA. NAFTA caused a rapid growth of factories, that can be seen from number of people employed in the plants over the years.

However, in 2000 the industry reached its peak and then started to decline because of the increasing competition with China and cyclical downturn of US economy, In early 2002, the production diminished by 30% (GAO report). Some economists are arguing that NAFTA was detrimental for maquiladora industry and Mexico should have continued to develop IMMEX program. With NAFTA Mexico has lost some tariffs benefits, agreement established stricter regulations for production quality and required more licences and patents for producers.From the social perspective NAFTA didn’t do much good for the maquiladora employees. Even though the profits increased significantly, the wages have decreased. Huge demands for production fostered labor force exploitation, human rights abuses and modern slavery. Just one year after the establishment of NAFTA cases of young 14 old girls working in maquiladoras for $0.4/hour were reported. “Once a corporation structure is set up as a free trade zone and secures a manufacturing contract with a large multinational company, the owner of the facility maximizes profits by informally sanctioning a number of abuses, including offering low wages, tolerating dismal safety standards, refusing to provide health benefits and insisting upon unpaid overtime.”

There are plenty of reports about broken or poorly maintained maquiladora equipment causing injuries, dismemberment or death for the workers. In spite of that, NAFTA included some regulations for workers protection, but nothing was implemented in reality. The main Mexico’s competitive advantage was cheap labor, any improvement in labor conditions or wages would have resulted in the increasement of production costs, therefore a loss of both government and corporations’ revenue. By the same token it would have discouraged other foreign companies from settling in Mexico or even cause the current ones to move away. Therefore, the exploitation of the workers was not the state’s concern at all. There is still no single opinion whether the problem was caused by NAFTA or the government’s greed and unwillingness to address the issue.

Agriculture

NAFTA signing and tariffs-free food imports from US have ruined Mexico’s agriculture. Worth to mention, that 20%1 of the whole Mexican population is involved in agriculture, compared to 1.9%1 in the U.S. and 2.1% in Canada (globalfarmernetwork.org). Mexico began agriculture restructuring in1980’s with the guidelines imposed by IMF and World Bank. “Mexico cut its public investment in agriculture and dismantled key programs such as credit, subsidized farm inputs, price supports, food reserves, state marketing boards, and extension services.” NAFTA advocates promised that it would help to increase employment and exports to US, decrease Mexican emigration to United States. In the time of NAFTA signing, nearly 3 million local Mexican farmers were growing corn. NAFTA caused the loss of job for nearly all of them. Farmers were not able to compete with the cheaper corn production imported from US. They had no other option but to move to border regions and work in maquiladora sweatshops. Meanwhile US corn exports to Mexico increased 20 times (prospectjournal.org) However, NAFTA signing helped coffee beans producers, but only in short run. Worth to mention that this topic is still debatable, Some experts argue, that the growth of coffee beans export was caused just by favorable conditions in international market and not the impact of NAFTA. Recession was felt in others agriculture sectors too. Mexico’s agriculture never came to its previous state.

Energy sector

Mexico is in the top 10 world‘s largest oil producers (world atlas). Mexico nationalized the industry and created PEMEX (state own petroleum company) in 1938. NAFTA inception enabled Canada US and Mexico become one unique global energy center establishing free trade and integration between 3 of them. Tariffs for crude oil, natural gas, petrochemicals and other oil or gas based products were eliminated. “The partnership is built on three market pillars: Mexican crude oil to the U.S., U.S. gasoline to Mexico, and U.S. natural gas to Mexico.” Furthermore, NAFTA made energy more affordable in Mexico. (American Petroleum Institute). As can be seen in graph 5, the agreement also helped to increase Mexico liquids production and exploration as a result of increasing export.

Oil Crisis and NAFTA

NAFTA has been widely blamed by economic protectionism supporters for the oil crisis. In 2009 the quantity of production fell to 3 million bbl/d and became lower than the one before signing NAFTA. It continued to fall and reached the point of 2.5 million bbl/d in 2014 (US Energy Information Administration). The fall was a direct result of declining oil prices due to the Great Recession. It was a shock for the whole economy as oil production accounts 40% of total Mexico’s revenues. Furthermore, the drop of oil prices was not the only trouble, oil reserves were declining and Mexico failed to adopt new technologies to extract oil from deeper layers of the Earth and refine it (Mexico has first ship the oil to US to be refined and then import those products back into the country), in addition, the state annually loses aproximetly 1 billion dollars due to fuel theft - over 2000 illegal taps in PEMEX pipelines. The International Energy Outlook had even predicted that by 2030 the production would fall to 0.3 million bbl/d. The issue was hard to fix as Mexico oil industry was a state monopoly closed to foreign investment.

In 2013 Mexico decided to start a reform and end a monopoly of energy sector. It was opened for the foreign investment, government began selling rights to drill in parts of the Gulf of Mexico. Luckily new companies with modern equipment discovered billions of barrels of oil but Mexico is unlikely ever again reach the peak of 2004. All things considered, the reasons of the crisis were poor governance and the Great Reccesion rather than NAFTA.

Future implications and USMC

NAFTA effects on Mexico’s industries and economy might change soon. In 2018 Donald Trump expressed a wish to withdraw from NAFTA. He believes that “the United States was hurt very badly by NAFTA for many years”. Worth to mention, that 70% of all Mexico export goes to US. Some experts are afraid that United States withdrawal from NAFTA could be the beginning of the end for this trade union. The rise of the tariffs would inevitably ruin Mexico’s maquiladora, automotive and energy industries also result in low investment. Luckily in October, 2018 US, Canada and Mexico reached preliminary United States-Mexico-Canada Trade Agreement (USMC) that would replace NAFTA in the future. It will change free vehicles trade conditions. 75% of the vehicle parts must be made in NAFTA zone to qualify for free trade, it could help to increase auto parts production in all 3 states. Second change requires 40-45% of a car be made by the workers earning at least 16 dollars/hour, US demands it to be implemented to stop corporations shifting from The United States to Mexico to benefit from cheap labor. It would strongly effect automotive industry, there is a possibility that corporations will not pay such high wages and just shift elsewhere, for example to China. Taking into account that over 839 thousands Mexicans work in this industry, in that scenario, tens or even hundreds of thousands of citizens would become jobless. As a result of that, illegal Mexicans migration to US would increase. In the other scenario, if companies wouldn’t move away from Mexico, higher wages could make production more expensive as a result of increased costs, but also increase the wealth of the Mexicans.

Conclusion

NAFTA had different effects for Mexico’s industries. Free trade, favorable geographical position and cheap labor initiated a rapid growth of automotive industry. It created thousands of workplaces and let to adopt the newest manufacturing technologies from US and Canada. The similar effect was seen in maquiladora industry. Although this might be true, NAFTA provoked human rights abuses, child labor and the exploitation of labor force in maquiladoras. The agreement also ruined Mexico’s agriculture and displaced millions of small farmers encouraging them illegally migrate to US. In contrast, it had a positive effect on Mexico’s energy industry, even if Mexico was not able to maximize the profit due to bad governance and the Great Recession. The rejection of the NAFTA and trying to negotiate a new agreement brings a lot of uncertainty to all 3 economies. As much as it is known now, USMC could have a severe impact on Mexico automotive industry, while effect on other industries remains vague.