Tale of two Mexicos? Amid NAFTA rethink, some urge more inclusive growth

Many credit the agreement with jump-starting Mexico's economic transformation. But those wins are not distributed evenly across the country's northern and southern states. Some analysts see negotiation as an opportunity for reform. 

Jose Luis Gonzalez/Reuters
An employee works on an LED TV assembly line at a factory in Ciudad Juárez, Mexico, that ships to the United States.

Omar Chavira grew up near the rolling foothills of this state capital, coming of age when the US, Mexico, and Canada first signed the North American Free Trade Agreement. Mr. Chavira had already dropped out of high school and soon married his wife, Soledad, who halted her education before junior high.

“Back then, there weren’t many incentives to stay in school,” Chavira says, remembering high school fees and few formal job opportunities.

But today, the clerk at a local pharmacy chain is singing a different tune.

“My kids know that not graduating isn’t an option,” he says.

What changed? “Opportunity,” says Chavira.

As the US, Canada, and Mexico renegotiate the North American Free Trade Agreement this year, critics have questioned how much good it did in the first place. Certain industries were hurt by US imports, and many of the formal jobs introduced in Mexico are low-skill and relatively low pay. But most analysts here credit the agreement with jump-starting the country’s economic transformation, making it the 11th-largest economy in the world: opening Mexico to foreign investment, modernizing its export model, and holding the government accountable on business regulations.

For workers like Chavira, those results are visible today. Formal employment has grown 40 percent, on average. In the 10 states with the most foreign investment over the past 13 years, including Chihuahua, that jumps to 55 percent. With more employment comes improved financial security, like health insurance and access to credit.

But Mexico’s “wins” via NAFTA are not evenly distributed. Poverty, informal employment, and poor education standards are still nagging communities across the nation, and pre-existing divides have grown. In part, it comes down to how NAFTA was implemented within Mexico: with a focus on the northern border states and the central Bajío region.

“The Mexican government focused its efforts on the modern economy and not on the traditional economy, and that’s why we’re seeing a growing split between poor and rich regions of Mexico, and growing inequality in society as well,” says Duncan Wood, the director of the Mexico Institute at the Wilson Center.

Now, as negotiators from Canada, Mexico, and the US meet in an effort to rewrite NAFTA, some see an opportunity for Mexico to reevaluate its strategy for inclusive growth and development.

“The modernization of NAFTA can be positive, not just in terms of bringing the agreement up to date…. But, hopefully focusing on not making the same mistakes,” says Armand Peschard-Sverdrup, director of the Mexico Project at the Center for Strategic and International Studies.

“There needs to be an effort to help different segments of society capitalize on the agreement. And do a better job of communicating why this modernization is ultimately in the best interest of people on main street, not just Wall Street,” he says.

“There can be a broader benefit.” 

North and south

The lush, mountainous jungles and secluded valleys of southern Mexico can feel worlds away from the arid states bordering the US. It’s not just in terms of climate and terrain, but infrastructure and cultural practices.

Border states are geographically convenient, and when NAFTA was signed, already had much of the needed infrastructure for trade. But for US industries, the appeal goes further than that.

In the northern state of Chihuahua, a human resource manager at American Industries, which helps international manufacturers set up shop in Mexico, says one of the selling points for US clients to establishing their business here is the “shared culture.” That includes hobbies, like following US football and baseball, or the relatively strong grasp of English. “When we talk about things in common [with clients], maybe a Texas A&M game you saw on TV, it creates a sense of understanding and connection,” says Jose Nuñez.

Rebecca Blackwell/AP
Farmers donning Mexican straw hats take part in a march protesting the North American Free Trade Agreement, in Mexico City on July 26, 2017. More than 1,000 farmers from multiple Mexican states marched to protest against the treaty that has allowed in lower-priced imported grains from the US, which farmers say have harmed their ability to make a living.

And although Chiapas and Chihuahua are part of the same country, for many, the cultural divide is far more immense than between the US and northern Mexico.

“If we go back in history, what’s different about southern states, especially Chiapas and Oaxaca, is that they are cultures that were able to resist the Hispanization of Mexico very successfully,” says Roberto Newell García, founder of the Mexican Institute for Competitiveness (IMCO). Many communities don’t speak Spanish; some maintain traditional government structures, with Mexico City’s approval; and the spirit of resistance is still strong. The day NAFTA went into effect – Jan. 1, 1994 – the left-wing Zapatista National Liberation Army launched a rebellion against the Mexican government. For 12 days, they protested globalization and southern states’ marginalization, particularly that of indigenous communities.

For decades, the central government – hundreds of miles away in Mexico City – prioritized developing the north, wary of any potential US usurping of Mexican territory, or domestic revolution. That meant investments in telecommunications and infrastructure to keep the north integrated with and connected to Mexico City. And the region’s proximity to the US meant that it was already developing a common business culture long before NAFTA. Once the Mexican economy opened up in the 1990s, this region was already well primed for economic expansion.

Stubborn divides

That has concrete repercussions for poverty and upward mobility today. In Mexico, the average formal worker makes 63 percent more than an informal worker, not including the benefits offered through formal contracts. And that varies greatly by state. In Chiapas, for example, formal workers make nearly 170 percent more than informal workers, on average. These discrepancies can lead to important shifts, like migrating to other parts of the country – or beyond Mexican borders – in search of decently paid work.

But, it’s not that no one has tried to bring the south into the fold. Former President Vicente Fox, for example, in 2001 unveiled Plan Puebla-Panama. It was intended to draw investment and create incentives for businesses to open up in Mexico’s south. However it never transitioned from paper to reality. Current President Enrique Peña Nieto has tried to introduce a similar initiative.

Last year, border state Nuevo Leon saw its GDP grow by more than 5 percent, while the southern state of Oaxaca barely grew half a percent.

Such stubborn divides present risks, says Mr. Newell from IMCO. 

Debate about those gaps “becomes politicized, and we start discussing [NAFTA] in terms of ‘Is it fair?’ ” he says. “Is it due to the nature of the development process under way that these areas are left behind?”

Social policies and economic packages have tried to bridge the gap. But the debate itself “ends up creating fertile ground for populist and demagogue” ideas, he says, referring to a leading presidential candidate from the south: Andrés Manuel López Obrador, who many fear would try to do away with NAFTA and other free trade agreements.

A treaty for ‘many Mexicos’

But Mexico’s economic and social divisions aren’t just between the north and the south. Informal taco stands set up outside luxury car plants in Puebla, or snack-sellers boarding brightly painted former school buses carrying factory workers back to Chihuahua’s city center, underscore the uneven reach of economic investment here. 

“It’s not just two Mexicos; there are many Mexicos,” says Luis Rubio, president of The Mexican Council on Foreign Relations. “The average growth we have seen over the past two-and-a-half decades is just that – average. It overshadows the fact that the more one city or state grows, the further away it gets from the rest of Mexico.” 

The renegotiations, which kicked off in August, won’t directly resolve these shortcomings. But the modernization of the pact, and potential, though unlikely, changes to items like the minimum wage, will offer Mexico an opportunity to reevaluate how it tries to bridge its growing economic, educational, and income divides.

“NAFTA was a huge opportunity for Mexico,” says Leticia Hernández Bielma, an economics professor at the College of the Northern Border (COLEF) in Tijuana, Mexico. “But Mexico missed the mark. It had no long term economic strategy.”

Officials can use this moment to develop more forward-looking plans that don’t rely solely on investment from the US and Canada to benefit from NAFTA, Dr. Hernández says. She suggests Mexico can put more emphasis on developing national industry at home, so that more of the items manufactured and exported bring profits to Mexican-owned companies, as opposed to US- or Canada-owned businesses.

The negotiations have faced a handful of political wrinkles: President Trump tweeted threats to pull out of the pact, while Mexican politicians are eager to finalize any changes before Jan. 1, in the lead-up to 2018 presidential elections. But Mr. Rubio says there’s business energy behind the current renegotiations, which will likely touch on topics including dispute resolution and intellectual property. A third round of trade talks will take place in Ottawa in late September.

“It’s the idea of, ‘Let’s do this well once and for all,’ ” Rubio says. “Let’s use the negotiations to transform the country seriously and to eliminate barriers” left over from the 1990s.

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