NAFTA: Two Mexicos, Two Outcomes

The trade treaty that has increased Mexico's exports and expanded its middle class has left small farmers without a share of the prosperity

by Geri Smith

Anyone who doubts the transformative power of free trade need only look at Mexico. Since Jan. 1, 1994, when the country teamed up with the U.S. and Canada to create the North American Free Trade Agreement (NAFTA), Mexico has shed its stereotypical image of an emerging market wracked by trade deficits and recurring financial crises. Today, Mexico is better known for its industrious workers toiling in state-of-the-art factories and its engineers fine-tuning jet turbine designs.

There's no question that the country has benefited greatly from NAFTA: Mexico has become the world's 15th-largest exporter, sending abroad $272 billion of merchandise in 2007 ($43 billion of which was oil). It transformed a $3 billion trade deficit with the U.S. in 1993 into a $75 billion surplus in 2007. Mexico went on to sign free-trade agreements with 41 other countries, attracting some $223 billion of foreign investment in 15 years.

Farmers Protest in Mexico City

So, why did tens of thousands of angry Mexican farmers take to the streets in late January, demanding that NAFTA be renegotiated? Because after a decade and a half of free trade, Mexico's economic transformation is incomplete, and many Mexicans are blaming NAFTA for a plethora of problems that have more to do with bad government policies than with free trade.

Jaime Serra Puche, a Yale-trained economist who, as Mexico's Commerce Secretary, negotiated NAFTA in the early 1990s, says the agreement has done what it was intended to do. "NAFTA was meant to help us increase our export capacity and to attract foreign investment, and on those two fundamental objectives, it has been a huge success," he argues. "It's crazy to think that NAFTA could resolve each and every one of our economic problems."

On Jan. 31, 50,000 farmers from around the country converged on Mexico City and marched to the historic downtown plaza, where Mexicans traditionally have aired their grievances against the government. They grazed cattle in a grassy median in front of the Mexican Stock Exchange, burned an old farm tractor, and then motored four dozen other tractors down the city's main avenue. Carrying placards saying "We've had enough! Time to renegotiate NAFTA!" they walked past sleek skyscrapers housing key foreign investors, including HSBC (HBC), Ford Motor (F), American Express (AXP), and a luxury Ritz-Carlton hotel under construction.

The farmers were angry because the government had lifted the final, remaining import tariffs on the most sensitive farm products they produce: corn, beans, sugar, and milk. When NAFTA was negotiated, special 15-year protection was given to those products, so that millions of peasant farmers would have extra time to prepare for competition from heavily subsidized U.S. farmers. But Mexico isn't being flooded by cheap corn: The country consumes more than it produces, and has long imported U.S. corn to make up the difference. What angers farmers, really, is that they're just as poor as they were before NAFTA; the government has done little since then to help them move beyond subsistence farming.

The contrast between the weathered faces and worn clothes of the protesting farmers and the prosperous, suited businessmen who closed their offices early to escape the commotion illustrated the sharp divide between two Mexicos: one that has thrived under NAFTA and another that is still struggling to cope with an open economy.

Rural Poverty Persists

The liberalization of trade that has helped boost Mexican business and expand the middle class has left small farmers behind. Imported consumer goods are beyond their reach. Inflation has dropped to U.S. levels, but the rural poor are unable to join millions of urban Mexicans taking advantage of low interest rates to become first-time home buyers. Not all have benefited from government cash transfers that have reduced rural poverty from 47.5% of the rural population to 32.7%.