Asia’s economic ties with Latin America: NAFTA and China
First of two parts
The electoral cycles of Mexico and the United States — (presidential
terms of six and four years, respectively) are such that every twelve
years there is the double coincidence of an almost simultaneous change
of administrations. That was the case in 1988 when Carlos Salinas was
elected in Mexico and George Bush Sr. in the US. As soon as the Bush
victory was announced in November, the two presidents-elect met to set
up the bilateral agenda of their countries for the immediate future.
Mexico was mired in economic troubles since the default on its
external debt in 1982, coupled with very unfavorable external
conditions. Its problems were underscored by a collapsed price for oil,
the country’s virtually only export at the time, which led to a grave
debt overhang and no growth. The US, for its part, was also experiencing
an economic downturn, and was particularly interested in restoring the
growth of its southern neighbor, its third largest trading partner, in
order to rekindle its exports and stem illegal immigration.
George-Carlos love fest
The meeting was an enormous success, the two new presidents and their
teams got along well and they started working on concrete programs and
methods to enhance the bilateral relationship, particularly in economic
issues. A new and more ambitious re-negotiation of Mexico’s debt with
its bankers was set-up as the top priority, with the full support of the
US Treasury and its representatives in the relevant multilateral
financial agencies, such as IMF and the World Bank.
Mexican
President Carlos Salinas de Gortari, U.S. President George H.W. Bush
and Canadian Prime
Minister Brian Mulroney exchange handshakes following
Salinas’ address before the NAFTA initialing ceremony
in November 1992
in San Antonio.
Interestingly, trade was not discussed in any detail in those first
meetings, although Mexico had started liberalizing its protectionist
trade policies unilaterally in 1984. Following a long historical
tradition of his country, Salinas was trying to balance the influence of
its powerful neighbor to the North by prioritizing investment trade
with Asia (Japan in particular) and Europe. When the debt negotiations
succeeded in 1990, the debt overhang was dispelled and Mexico could
return to the international financial markets, Salinas launched trade
initiatives that surprisingly went nowhere.
Europe was mesmerized by the events in the crumbling Soviet Bloc,
epitomized with the fall of the Berlin Wall, while Japan was still
smarting from Mexico’s financial default a decade earlier that cost its
banks dearly, which at the time were among the largest in the orb. Given
these circumstances, Salinas turned to the US to propose a bilateral
free trade agreement that president Bush Sr. enthusiastically accepted.
As soon as this news was leaked to the press, Canada mobilized its
considerable influence in the US Congress to make sure they were
included in the negotiations since they wanted to protect their own
bilateral trade agreement finalized in 1987.
Thus, the NAFTA talks were launched. They represented the second
radical departure from the US’ post-World War II embrace of a strictly
multilateral trade policy. The talks proceeded with alacrity, in view of
a scheduled US presidential election in 1992. Bush lost that race, in
good part, thanks to the folksy populist from Texas Ross Perot whose key
platform was to oppose NAFTA. This threw the election to Bill Clinton,
the Democratic candidate. As soon as he was in office, Clinton gave
NAFTA his full support. But he also asked to negotiate two side
agreements on the environment and labor — two issues that preoccupied
his core constituents. The deal was approved by the US Congress in
November 1993 and came into effect in January of the next year.
Enter China, 9/11
The flow of trade in North America exploded, growing at an annual
average of almost 20% between 1994 and 2001, and the zone became
extremely competitive, exceeding the European Union and the Asian
regions in wealth and productivity. The economies were increasingly
connected by investments, businessmen, pipelines, tourists and
immigrants. North America’s share of world GDP soared from 30% to 36%
between 1993 and 2001 as the leaders of the three countries got together
in early 2001 to propose the creation of a North American economic
community that would have entailed, a much closer integration than that
mandated by NAFTA, including a customs union and common regulations and
standards in all sectors of their economies. Everything seemed to be
going well for the region, until 9/11 and China’s joining the World
Trade Organization (WTO) radically changed these upbeat trends.
Table 1 Regional Share of World GDP
| Year | 2001 | 2014 |
| North America | 36% | 27% |
| European Union[1] | 25% | 33% |
| Asia[2] | 22% | 25% |
| Rest of the world | 17% | 15% |
Source: IMF Data Mapper 2015
Already, the exponential growth in trade between the NAFTA partners
had created enormous pressures on the terribly outdated infrastructure
of the region, especially between Mexico and the US. As someone said at
the time, “we have 21st century trade with a 20th century legal framework and 19th
century infrastructure.” Government officials of the three nations kept
meeting frequently, but very ineffectively in terms of providing
solutions to the region’s growing problems. In the altar of national
security, the terrorist attacks on the World Trade Towers in New York
created a new layer of obstacles at the US borders, pushing up
transportation costs, as commerce between the US and China, which was
now a full partner of the world trade community, started growing much
faster than trade within North America.
In 2001, Shi Guangsheng, then China’s foreign trade minister, signed documents admitting China into the WTO in Qatar.
China, Mexico go toe-to-toe
Other factors contributing to the relative fall of North America: the
slump of the US economy 2001-02 and the Great Recession of 2008-09. The
US’ lack of fulfillment of its NAFTA mandate on trucking barred Mexican
trucks from enjoying unimpeded access into that country until 2014. The
proliferation of free trade agreements of all three countries made
compliance with the “rules of origin” provisions so cumbersome that many
firms simply used the standard most-favored-nation tariff that NAFTA
was intended to eliminate. But undoubtedly the leading cause was Chinese
competition vis-à-vis Mexico for the North American market and
the failure of the region to have a strategic response. In contrast to
China’s bold development approach, Mexico was unable to support its own
competitiveness within NAFTA with crucial structural reforms in energy,
education, competition and taxation to help it become more productive.
This situation finally changed in a major way after 2012.
In
my follow-up column, I will detail how the bleak situation for North
America, particularly with respect to Mexico in its cutthroat
competition with China for the US and Canadian markets, has begun to
change dramatically as the result of differing economic strategies by
both countries. Mexico is gaining competitiveness following reforms it
began adopting three years ago, and the relative weakening of its
currency. Meanwhile, China has been moving in the opposite direction due
to wages rising much faster than labor productivity and a strong yuan.
This reflects China’s struggle to transit from an export economy, fed by
investment as its main engine of growth, to an economy where the
internal market is increasingly important. This kind of economy also
relies on private saving, not government development banks, to provide
healthy investment funding. Such a transition, moreover, depends
critically on China avoiding major blow-ups in its alleged real estate
and stock market bubbles — which would fuel social tensions to a
breaking point.
[1] Most of EU’s share growth was due to its enlargement with new countries.
[2]
The explosive growth of China was compensated by a reduction in the GDP
share of other countries in the region, most notable Japan.
_____________________
Manuel Suarez-Mier is a Washington, DC-based
independent consultant on economic and financial issues. He has taught
economics and international finance at various universities in the US
and Mexico and was Director of the Center for North American Studies at
American University 2014-2015. His numerous posts include chief of staff
of the Governor of the Bank of Mexico. He also was Mexico’s top
economic diplomat in Washington at the time of the negotiations of the
North American Free Trade Agreement (NAFTA) between the US, Canada and
Mexico.