Mexico Since NAFTA: Elite Delusions and the Reality of Decline

The community of La Alianza, in the desert outside of Monterrey. Most residents work in the maquiladoras.

Photo by David Bacon

In late 1993, the governments of Canada, Mexico, and the United States completed the North American Free Trade Agreement (NAFTA) to build an investment and production bloc that would rival those of Asian and European Union countries. The Mexican government made it clear that the enhancement of foreign direct investment (FDI) and portfolio investment—not trade—was its prime motivation for entering into the agreement. ¹ Mexico’s need to recover from its devastating 1980s economic slowdown neatly coincided with an emerging U.S. strategy of relocating production plants to low-cost sites to confront surging competition from Japan and U.S. organized labor. After Mexico passed a new foreign investment law in December 1993, 91 percent of its economy became open to foreign ownership. The U.S. automobile sector was particularly heavily impacted—in 2010, one out of every four automobiles imported into the U.S. had been assembled in Mexico.

A profound crisis followed in late 1994 through 1995. Recovery came in 1996, as the Mexican economy enjoyed a jump in foreign investment and manufacturing exports to the U.S. soared for several years. NAFTA’s advocates felt vindicated, ignoring the fact that the export boom was driven by unique “new economy” conditions in the U.S. which caused a massive overexpansion of communications and information technologies. By 2000, this “investment-led” expansion in the U.S. came to an end.

At this point, Mexico was hit from both sides. China’s manufacturing exports quickly expanded when it joined the World Trade Organization (WTO) in 2001, knocking out textile, apparel, and other labor-intensive Mexican export plants. Meanwhile, U.S. demand slowed through the recession that followed the 2000 dot-com implosion and into the jobless recovery period that lasted through 2004. Five years of strong GDP growth—averaging 5.4 percent a year from 1996 to 2000—were followed by seven years (2001–2007) of a 2.3 percent annual GDP expansion rate (which slightly exceeded population growth). Then, Mexico was more severely impacted by the 2008 U.S. financial crisis than any nation in Latin America.

Far from helping to overcome Mexico’s economic backwardness, NAFTA has permanently tied Mexico to a low-wage export strategy. In spite of the export boom, real manufacturing wages in 2002 were 12 percent below the 1994 level, while maquiladora wages only rose by 3 percent.² In the same period, manufacturing sector employment growth dropped by forty-four thousand jobs while maquiladora employment growth rose by 493,000 jobs—roughly equal to one year’s worth of migration in the first half-decade of the twenty-first century. NAFTA increased exports and foreign investment but it failed to generate significant employment growth because of policy-based wage repression that constrained the domestic market. Labor productivity failed to improve and from 1994 through 2009 employment growth in the formal economy averaged 387,000 jobs per year—absorbing only 38 percent of Mexican youth leaving school for the labor market.³

Furthermore, Mexico deindustrialized under NAFTA because transnational firms began to import more of their inputs and suppliers, almost exclusively relying on a combination of imported components and cheap Mexican labor to process and assemble products for re-export. Approximately 80 percent of Mexico’s exports were for the U.S. market, with foreign-owned firms accounting for 80 percent of total exports. Although Mexico had a $93 billion trade surplus with the U.S. in 2010, overall it suffered a trade deficit.⁴ It fell from the twelfth largest exporter in 2000 to the fifteenth largest exporter in 2010, with its share of global exports dropping from 2.61 percent to 1.96 percent.⁵ Cheaper imported consumer and intermediate goods (inputs) also undermined the domestic industrial base. Stagnation, falling wages, a growing “jobs deficit,” and surging migration from 2001 through 2008 demonstrated the failure of NAFTA’s export-led strategy.

During...