Mexico and the Politics of Free Trade

Mexico and the Politics of Free Trade

Mini Teaser: When it is negotiated and if it is approved by Congress, the North American Free Trade Agreement between the United States, Mexico, and Canada may prove to be the most important foreign economic policy achievement of President Bush's first term in of

by Author(s): Morton Kondracke

When it is negotiated and if it is approved by Congress, the North American Free Trade Agreement between the United States, Mexico, and Canada may prove to be the most important foreign economic policy achievement of President Bush's first term in office.  This is especially true if there is a failure in the Uruguay Round negotiations to repair the world trading system under the General Agreement on Tariffs and Trade.  The North American agreement, known as NAFTA, will create a free-trade zone nearly equal in population to the European Community and nearly double that of Japan's emerging ``yen bloc'' in East Asia--and larger than either in economic terms.  Administration officials hope that NAFTA will form the basis of a free-trade community of market democracies encompassing the entire Western Hemisphere, and will help promote capitalism, democracy, and free trade globally.  That would make it a veritable pillar of Bush's New World Order.

Ironically, though, Bush was not the driving force behind NAFTA.  It was, instead, President Carlos Salinas de Gortari of Mexico, who in February 1990 was scheduled to be the star of the World Economic Forum in Davos, Switzerland, a glittering annual gathering of international bankers, businessmen, and politicians who spend part of their time at economic policy seminars and the rest socializing and skiing.

The previous year, thanks partly to a speech by Senator Bill Bradley, Davos had been abuzz with conversation about Salinas' courageous economic reforms--his sell-off of nationalized industries, his opening to foreign investment, his reduction of government spending, and his crackdowns against corrupt labor union officials, businessmen, and drug dealers.  In 1990, the Davos program called for Mexico to be the centerpiece of discussion.  Salinas delivered a major address.  Mexican food was served at banquets and Mexican music was played at receptions.

Accompanied by key members of his government, many of them fellow American-educated free marketeers, Salinas went to Europe hoping that investors would be impressed with his reform policies.  Mexico needed large-scale capital inflows to provide jobs to a population that had been suffering five years of austerity-induced reductions in its standard of living.  But, instead of willing investors, Salinas found Europeans preoccupied with the fall of the Berlin Wall and the liberation of Eastern Europe.  As happened the previous year in Japan, he received lavish praise but no commitments of cash.  Europeans, and especially West Germans, told him that whatever risk capital they had they would have to reserve for Eastern Europe.

Shortly after Davos--by some accounts, on the ride home--Salinas decided to reverse his previous position that negotiating a free-trade agreement with the United States was premature.  In October 1989, on a visit to Washington to sign a partial tariff-reduction pact with President Bush, he had told the press flatly that the disparities in size and wealth between Mexico's economy and that of the United States precluded an agreement of the kind that the United States and Canada had put into effect that January.  The reason for that statement, associates say, was more political than economic: Despite disparities--Mexico's GNP is $200 billion, compared with $5.5 trillion for the United States, and its per capita GNP is $2,000, a tenth of that in the United States--Salinas wanted Mexican industry to face world-class competition in order to improve its efficiency.  But he feared that the press, leftist political foes, and a public subjected to decades of anti-U.S. rhetoric would accuse him of opening up the Mexican economy to a buy-out by ``the gringos.''

At a meeting of his economic cabinet a few days after his return from Davos, associates say, Salinas reported that while inflation was down, a debt-reduction agreement with the United States was working, and economic growth was resuming, progress was not occurring fast enough to impress investors.  He declared that dramatic action was necessary, and announced to the cabinet that he intended to privatize Mexico's banks, state-owned since 1982, and seek a full free-trade agreement with the United States.

Within days, he placed a phone call to President Bush to discuss the possibility.  Bush asked him to send aides to Washington, and on March 8 and 9, 1990, Salinas' chief of staff, Jose Cordoba, and his minister of commerce, Jaime Serra Puche, met with the top economic and foreign policy officials of the Bush administration--Secretary of State James Baker, Treasury Secretary Nicholas Brady, Commerce Secretary Robert Mosbacher, National Security Adviser Brent Scowcroft,  Special Trade Representative Carla Hills, and Michael Boskin, chairman of the Council of Economic Advisers.

Bush and his team needed little convincing about the fundamental desirability of a U.S.-Mexico agreement.  Bush supported the idea during his 1988 presidential campaign, and he also wanted to support Salinas, whom he had come to respect personally as a modernist reformer beset by an old guard hostile to the U.S.  In August 1990, Bush's support for Salinas grew even stronger when the Mexican president increased oil production to support the U.S. embargo of Iraq (while the leader of Mexico's leftist opposition, Cauhetemoc Cardenas, called for an oil embargo against the United States).  Two other influential Texans in the administration shared Bush's special interest in Mexico--Mosbacher, who had recommended a U.S.-Mexican free trade agreement in 1989, and Baker, who favored the agreement for both geopolitical and domestic policy reasons: a prosperous Mexico would insure stability on this country's southern border and would reduce the flow of drugs and illegal immigrants across the border.  The only hesitation in the Cabinet came from Carla Hills on the grounds that negotiating the Mexican agreement, which would be the responsibility of her office, might interfere with achieving the administration's top trade priority--the conclusion of the Uruguay Round of GATT, designed to lower tariffs and non-tariff barriers among all countries in the world.

The Big Picture

By the end of March, the administration had decided to pursue the Mexican pact.  This was leaked to the Wall Street Journal on March 27 and caused an immediate stir among opponents of free trade in both Washington and Mexico City.  On June 10, Presidents Salinas and Bush met in Washington.  Their communique declared that the two ``are convinced that free trade between Mexico and the United States can be a powerful engine for economic development, creating new jobs and opening new markets.''

Almost uniformly, President Bush's statements about NAFTA emphasize its economic benefits, but key officials at the State Department see it in much larger terms.  One is Robert Zoellick, who is both counsellor of the State Department and undersecretary for economic affairs and is one of the few genuine strategic thinkers in the Bush administration.  Zoellick sees NAFTA as an important building block in the entire post-Cold War global strategy of the United States.  Bernard Aronson, assistant secretary for Latin America, similarly sees the Western Hemisphere as ``a model for the new world order.''

As U.S. leaders are fond of pointing out, Latin America has undergone a dramatic transformation over the past decade.  Formerly filled with military dictatorships and beset by violent Marxist insurgencies, the region now brims with popularly elected civilian governments striving to establish permanent democracy.  Simultaneously, Latin countries have moved from statist economic models toward experimentation with free markets, and the attitudes of elites toward the United States have shifted from fear and hostility to some measure of cooperation.  Aronson says that if democratic, market-oriented, and pro-U.S. regimes in Latin America succeed in solving their endemic problems--notably poverty, debt, and authoritarianism--other regions of the world can as well.  The Bush administration is endeavoring to help, he says, through debt relief proposals and the 1990 Enterprise for the Americas Initiative (designed to reduce trade barriers and spur economic reform), as well as efforts to salvage environmentally important areas like the Amazon rainforest, to block the spread of nuclear weapons and missile delivery systems, and to control narcotics.  For both ideological and practical reasons, the Republican administration favors trade expansion over foreign aid as a means of assisting developing nations.  Trade benefits a country's private sector rather than its government, and there is neither money in the tight U.S. budget nor support in the public for foreign aid.

The administration's hope, according to Zoellick and others, is that the Western Hemisphere will ultimately form one huge free-trade zone.  This could happen either as a result of other hemispheric nations gradually joining the U.S.-Canada-Mexico Free Trade Agreement, or by a gradual melding of bilateral and regional agreements.  If NAFTA contains an accession clause, Chile will probably join reasonably soon.  Other groups of nations are already discussing regional common markets, including Argentina, Brazil, Uruguay, and Paraguay; and five Andean, six Central American, and thirteen Caribbean countries.

The United States, Canada, and Mexico represent a combined population of 360 million (85 million for Mexico, 26 million for Canada), compared with 365 million for the twelve members of the EC and 200 million for Japan and the East Asian ``tigers'' (South Korea, Taiwan, Hong Kong, and Singapore).  North America's combined GNP is nearly $6 trillion, compared with $5 trillion for the EC and $3.5 trillion for Japan and the tigers.  A free-trade zone encompassing all or most nations in the Western Hemisphere would total more than 650 million people and be richer than even the EC plus Eastern Europe (at 400 million people), or Japan plus the tigers and the ASEAN nations.

Essay Types: Essay