An Inside México special report on NAFTA
Buying Stuff in Mexico

While Jonathan Heath was studying economics at the University of Pennsylvania during the 1970s, he bought himself a state-of-the-art stereo system. When he returned to Mexico upon completing his degree, he brought the stereo home and sold it for five times what it cost him.

That was what it was like in Mexico in the days before the North American Free Trade Agreement (NAFTA) went into effect in 1994. Lots of international consumer products, from washing machines to toothpaste, were available only for several times the American price, if they were to be had at all.

“When someone went to the States in the 70s and 80s they brought a list of things their friends and relatives wanted them to bring back, even things like toothpaste and soap,” says Heath. “If you had a cordless telephone it meant you’d been to the States. Nobody could buy one here.”

With the advent of NAFTA, Mexico’s exports skyrocketed, and Mexican imports of foreign goods shot upward too, once prohibitive tariffs were eliminated.

Heath believes one of the main reasons for the burgeoning number of American baby boomers coming to live in Mexico is the simple fact that they can find the things they want in stores here as easily as they can in the US.

“They come here, they live here, and they can still buy the same things,” he says. “All they have to do is go to Wal-Mart.”

Heath, now HSBC’s Chief Economist for Latin America, isn’t quite an expat, though in many ways he thinks like one. Both his parents are Canadian and currently live in Canada, but Jonathan was born in Mexico and has lived here all his life.

Expat John Gardner, who has lived in Mexico since 1994 and runs an insurance agency in Mexico City as well as a social group called Mexpat, agrees: “You can even get real Canadian maple syrup here!”

“As a Canadian, I remember finding it hard to find maple syrup and any type of beer other than Mexican,” he says. “The arrival of Wal-Mart and other large retail chains like Costco took care of that. This was a good thing too, considering the post-9/11 [airline] cabin restrictions on liquids. You don’t want to put maple syrup in your carry-on luggage!”

People who argue the pluses and minuses of NAFTA -- not just in Mexico but also in Canada and the US -- talk about jobs, exports, investment, and the distribution of the wealth created by increased trade. While focusing on production, many forget the sector that arguably benefited the most, the one that we’re all part of -- consumers.

Eric Rojo, who was born in Mexico, says, “I think the effect [of NAFTA on the migration south] was indirect, but happened through the greater availability of consumer goods in Mexico.” Rojo, Executive Vice-President and Chief Operations Officer of the Washington-based United States-Mexico Chamber of Commerce, adds: “Now, the kind of life that’s available in Mexico is the same as it is in the US. For those [expats] that want to integrate, they can enjoy all that Mexico has to offer. For those that don’t … well, it can be as if they never left.”

In other words, Mexico’s consumer sector provides that final added attraction for retirees and other expats, along with the things that have been here all along, like reasonably priced beachfront houses, great climate and scenery, and, for Americans and Canadians, the ease of bringing your car.

An October 2005 study of Mexico’s retirement housing market, produced for CEMEX by consultants Active Living International, estimates that there are about one million baby boomer expats living, or at least wintering, in Mexico. This figure, confirmed by a recent BBVA Bancomer study of the expat market, has certainly increased in the last two years.

This trend is only the beginning: the Bancomer study quotes US Census Bureau figures stating that the number of baby boomers reaching retirement age -- potential customers for Mexican retirement services -- will continue to grow until at least 2025. Walter Russell Mead, a Senior Fellow at the Washington, D.C.-based Council on Foreign Relations, estimates in his book Power, Terror, Peace and War that the average baby boomer household contributes, on average, about $55,000 USD to its local economy.

If he’s right, this arithmetic suggests that expats pump as much as $55 billion USD into Mexico’s economy each year: with another twenty years of population growth, the economic impact should increase exponentially. Compare that to the $43 billion USD per year brought in by petroleum exports, currently ranked as Mexico’s top revenue source.

Even if a sizable chunk of this expat spending goes to imported consumer goods or franchise products, the money spent on all-Mexican items like houses, furniture, maid services, restaurant food, and golf still create income for entrepreneurs and service providers, paid for in Mexico with US or Canadian dollars.

A Tale of Two Crises

How did so many goods suddenly become available so quickly in the 1990s, right in the middle of one of the worst of Mexico’s many 20th-century economic crises?

Heath explains this by describing the difference between the economic crisis of 1982 and the one in 1994-95.

In both cases the nation faced a balance-of-payments problem: Mexico didn’t have the money to pay the short-term debts that were coming due, and was in serious danger of defaulting on them.

In 1982, it tackled the crisis by using the only method available to a closed economy: it placed severe restrictions on money leaving the country through the purchase of foreign imports. However, without sizeable revenue from exports to repay the debts, the recession was prolonged and severe. It took seventy-six months—more than six years—for Gross Domestic Product (GDP) to recover to its pre-crisis level.

In 1994, faced with the same problem, Mexico bounced back much more quickly. This time, it generated revenues for debt repayment by increasing exports -- something it was able to do thanks to the newly-signed NAFTA accord. Even though the plunge in GDP was deeper than in 1982, the economy recovered its pre-crisis level in just twenty-two months without imposing any import restrictions.

A $20 billion USD loan guarantee package engineered by then US Treasury Secretary Robert Rubin and backed by President Bill Clinton -- which would have been politically difficult, if not impossible, to engineer without NAFTA --was a critical factor in helping Mexico avoid default.

Ever since, a disciplined monetary policy imposed by the central bank has controlled inflation, giving investors the confidence that Mexico’s economy is stable, and that it’s safe to invest in Mexico and buy its bonds. Whatever one thinks about the long-term effects of NAFTA on Mexico, in its early days it provided a tool for economic crisis management that hadn’t been available in the past.

From Mexico’s perspective, NAFTA has helped to achieve the main goals its architects had in mind --dramatically higher exports ($272 billion USD in 2007, up from $43 billion USD in 1993) and a boom in foreign direct investment ($223 billion USD since NAFTA was signed).

In an HSBC research report titled “Fifteen Years of NAFTA: Net Benefits?”, Heath and co-author Juan-Pedro Treviño, HSBC Chief Economist for Mexico, write: “When the negotiating process took place … there were two main goals: first, to increase the export capacity of the country; and second, to increase the capacity for attracting foreign investment.”

Though not articulated as a goal, a major benefit for Mexican residents, both locals and expats, was the availability of more and better consumer goods at lower prices.

Great NAFTA Expectations

If that’s the case, why do so many people express disappointment in Mexico’s post-NAFTA performance? Some base their criticism on reasoned analysis, but others seem to think NAFTA should have solved problems it was never intended to.

Some of the problems, like lingering poverty, agriculture in disarray, and companies hard-pressed to compete with newcomers, may have been caused by failures of government policy or corporate failure to prepare for competition, not by NAFTA. A trade agreement can bring new riches, but it can’t be held accountable for the way that wealth is distributed.

Heath and Treviño state: “The possibility that an economy is flexible and takes maximum advantage of the potential benefits of free trade does not depend on free trade by itself. It depends on the institutions within the country and on other economic measures that are undertaken.”

Other challenges, such as fierce competition from China and difficulties arising from technological change and globalization, are what economists call “externalities”—they would have occurred even without NAFTA. Treviño takes that concept further. “NAFTA is a consequence of technological change and globalization, rather than the cause.”

Yahir Garcia, author of the textbook Economic Geography of Mexico and advisor for International Business and Geography at UNAM, is especially hard on Mexico’s politicians and policymakers.

“The purpose in 1994 was to pursue the macro-economic [policy] numbers, then transfer them into the micro-economy to make a better way of life for the people,” he says. “The macro numbers have not been translated into micro numbers. The result is continuing unemployment and ongoing agriculture problems. The problem is the people in government.”

As maquiladora factories mushroomed in the 1990s, Mexican workers rushed to the northern border states for jobs, because foreign companies paid higher wages than local competitors -- and paid their workers regularly.

Although the concentration of maquiladoras in the north made sense because of their proximity to the gigantic American marketplace, Mexico’s government could have offered more inducements, such as tax breaks and infrastructure, to encourage factories to relocate to poorer southern states such as Oaxaca, Guerrero, and Chiapas, which currently have the highest rates of unemployment and migration to the US.

Agriculture is another sore point. Successive governments have failed to address the needs of Mexico’s small farmers. On January 1st of this year, the day the last tariffs on agricultural products like corn and beans were lifted, social pressure mounted to renegotiate the agreement. On January 30, farmers took to the streets of Mexico City to protest against the American produce which is starting to enter the market.

Despite these concerns, and government neglect of the agriculture sector, corn production today is 20% higher than it was in 1994. Mexican producers provide all of the country’s white corn used for human consumption. Imported corn is used to feed a growing livestock population, needed because Mexicans are raising and eating more meat, a sign of growing prosperity.

Not a No-Brainer

In the 1820s, British economist David Ricardo developed the theory of comparative advantage in international trade, one that free-traders still espouse today. Stripped to its fundamentals, the theory says that so long as each country specializes in producing what it is best suited for, international trade will benefit all players. For those who believe that Mexico, the US, and Canada are each optimizing their economies according to Ricardo’s theory, NAFTA seems like a no-brainer.

However, despite the measurable benefits that have come with NAFTA, giving the agreement an unequivocal thumbs-up is not a no-brainer. Other evidence, both statistical and practical, shows that NAFTA has its losers, too.

For starters, despite its name, NAFTA is not really about “free trade”, but rather “freer trade”, and the agreement contains thousands of pages of conditions, exceptions, exemptions, caveats, and disclaimers negotiated by the three governments and countless business and social lobbies.

For example, NAFTA exempts Petroleos Mexicanos (PEMEX) from the general rules about foreign investment. Also, NAFTA’s strict protection of intellectual property primarily benefits large American and multinational corporations.

If NAFTA succeeded in setting the stage for the easier movement of capital and consumer goods, one of its biggest failures was the lack of a policy for the mobility of that other essential component of every economy: labor.

In Mexico, where millions of people still depend on subsistence farming, labor and agriculture are deeply intertwined. Farmers who are forced off the land look for work in the cities. When there is neither factory work nor training, many migrate -- legally or otherwise -- to places where there is work: in Mexico’s case, to the United States. Many Mexican politicians, notably former President Vicente Fox, advocated for a guest worker program similar to that adopted by the European Community, which has proved successful.

One could say that by failing to provide greater protection for small-scale agriculture, both the Mexican government and the NAFTA negotiators set the stage for a mass migration. They could have helped avoid this bleak situation by providing training and jobs for untrained and unemployed marginal farm workers.

One of the more thoughtful NAFTA skeptics is Laura Carlsen, Director of the Americas Policy Program at the Center for International Policy, a California-based research group. She has lived in Mexico City for twenty years.

About NAFTA and its impact on agriculture, labor, and migration, she says: “That whole plan of moving people around like chess pieces on a board … didn’t work, both because the macroeconomics didn’t work, and also because it didn’t take into account the impact on people’s lives.”

There’s growing resentment in the United States about NAFTA -- witness its prominence in the rhetoric of this year’s Democratic primary campaigns -- but few make the connection between NAFTA and immigration. “There’s so much anti-immigration rhetoric in the US, and almost no one is looking at the role NAFTA played in it, in the form of the trade policies,” says Carlsen. “Those cycles of people coming down here, and people going up there, are not a negative thing in themselves. You don’t want to eliminate immigration; you want to eliminate forced immigration.”

Many expats like John Gardner, while quick to point out the personal benefits NAFTA has brought, are also aware that things haven’t gone so well for many Mexicans.

“Without a doubt, NAFTA has increased trade flows, opened up Mexico to foreign investment, and improved consumer choice,” he says. “However, it would not appear that overall quality of life or purchasing power for Mexicans has been favored by NAFTA.”

Roy Dudley came to Mexico from Kansas in 1972 to study Spanish for a year. He met and married a Mexican woman, Lourdes, in Jalapa, Veracruz, and has lived there for the past 30 years, running a photography business.

Dudley used to buy merchandise that was unavailable here on his trips back to the States and sell it when he got back. Now, he says it’s nice to buy more things locally. As Americans are starting to “discover” Jalapa, he’s found a new source of income, helping new expats find a place to live and get settled there. Still, he says, “I don’t think NAFTA has brought any change for the benefit of the Mexican people.”

Moving Forward

Even the most basic arguments about NAFTA can never be resolved: how much growth in exports and foreign investment would have taken place without it? Which problems and distortions in the Mexican economy are due to NAFTA, and which ones should be blamed on poor policymaking? How many baby boomers would be moving to Mexico even without the amenities brought by NAFTA?

That question can be turned on its head: how would Mexico have coped with the 1994-1995 crisis, and how much worse would the social and economic problems be if NAFTA had never been signed? We can only speculate.

An editorial that appeared in El Universal at the time of the January agriculture protests puts it this way: “We cannot return to the era of closed markets with high protectionism, in which industry sectors return to being inefficient and lacking international competitiveness. Few of us like globalization, but that’s where we are and we can’t avoid it … We must evaluate the good and the bad that NAFTA has brought us and act accordingly … We must avoid conflicts and offer differentiated solutions, sector by sector, to the challenges of an open market, which has been neither the end of the world, nor a panacea for our problems.”

Meanwhile, NAFTA is here, and the world of consumer goods and services that has arrived in Mexico can be expected to draw growing numbers of expats for a long time to come. Those expats themselves form a new and indirect form of Mexican “export.”

John Gardner looks back to his arrival in Mexico in January 1994, just days after NAFTA came into effect. “I remember my first visual image of roads and highways in Mexico City as a sea of Volkswagen Beetles. The broad array of different makes and styles of cars [available now] with every price tag represents a major change.”

Yahir Garcia sees the baby boomer influx as a “very, very important way of transforming Mexico. The reality of the migration [into Mexico], with all the money spent and invested is, I think, an opportunity for us.”

Eric Rojo sums it up it this way: “I think [NAFTA] benefits Mexico as a whole. It gives Mexico access to a population of high income consumers. It’s a different form of remittances. What we need to remember is that North American integration is not politically driven, it’s people driven.”