REVIEW & OUTLOOK - Wall Street Journal
The Triumph of Nafta
Ten years later, a stronger continent-wide economy.
Monday, January 12, 2004 12:01 a.m.
When President Bush and Mexican President Vicente Fox sit down together today at the Summit of the Americas in Monterrey, Mexico, they might begin with a toast to the North American Free Trade Agreement. The treaty turns 10 this month and, despite protectionist bellyaching, a decade of closer commercial ties across our shared 2,000-mile border has been a boon to both nations.
Nafta includes Canada, of course. But the treaty was historic in 1994 because no advanced country since Britain in the 1800s had dared to institutionalize open trade with such an underdeveloped neighbor. The U.S. already had a free-trade deal with Canada. Bringing Mexico into the mix was the revolutionary gamble.
Nafta visionaries in the U.S. went out on that limb for good reason. Mexico's authoritarian political system, repressed economy and resulting poverty were creating problems that could not be contained at the border in perpetuity. Mexican instability would eventually spill over the Rio Grande. The choice was easy: Either help Mexico develop as part of an integrated North America, or watch the economic gap widen and the risks for the U.S. balloon.
By this measure alone Nafta has been a success. In less than a decade the openness of free trade helped promote monumental changes in Mexican politics, and in its economy and financial system. Greater transparency in almost all facets of governance means that Mexico is far more stable today than it was 10 years ago. It has also made for exponentially better U.S.-Mexico relations, and for a more promising North American future.
Mexican liberalization had begun before Nafta, under the presidency of Carlos Salinas. But by making markets open to American and Canadian goods by law, in the year Mr. Salinas left office, Nafta ensured that the trend toward liberalization would continue under a new administration. Without Nafta, Mexico's destructive 1994 devaluation might well have pulled the country back into another decade of isolationist nationalism, of the sort we have seen in Argentina. As it turned out, Nafta helped the Mexican economy stabilize more quickly amid the post-devaluation chaos.
The economic shock of trade competition has in turn helped open Mexican politics. In July 2000, what Peruvian novelist Mario Vargas Llosa had famously called the "perfect dictatorship" finally came to an end. Mexicans elected their first president from outside the Institutional Revolutionary Party (PRI) in 70 years. Mexican elections at the national and state level are now considered free, fair and highly competitive.
Political accountability provoked yet another advance. When Mr. Fox took office in December 2000, there was no mega-devaluation of the peso as there had been in the presidential years 1976, 1982, 1988 and 1994. The drivers of this historic non-event were unmistakably related to Nafta. That is, pressure to attract foreign investment had forced Mexico to open its books, and at Mr. Fox's inauguration there were no monetary or fiscal surprises.
Under Nafta, Mexican businesses--notably the Monterrey elite--had new incentives as well. They became importers of components and machinery for production as well as exporters. Their transactions were now in dollars. Open markets changed the dynamics of a currency play that once had Mexican producers lobbying the government for a weaker peso.
Free trade efficiencies have also boosted North American economic growth. According to Dan Griswold at the Cato Institute's Center for Trade Policy Studies, "since 1993, the value of two-way U.S. trade with Mexico has almost tripled from $81 billion to $232 billion, growing as fast as U.S. trade with the rest of the world."
The point of free trade isn't to create jobs per se but to allow resources to find their most efficient use and redeploy workers to better-paying jobs. Manufacturing networks incorporating the comparative advantages of all three Nafta members have made North America an attractive investment for global capital.
"The small outflow of direct manufacturing investment to Mexico has been overwhelmed by the net inflow of such investment from the rest of the world," writes Mr. Griswold. From 1994 to 2001, U.S. manufacturing companies invested an average of $2.2 billion a year in Mexican factories, in addition to the $200 billion invested annually in the U.S.
The U.S.-Mexico relationship still faces challenges--from water rights to crime and immigration. But the future is infinitely more promising now that we share a greater number of economic interests and political values. On those counts alone, Nafta has been a spectacular success.
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