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After Initial Boom, Mexico's Economy Goes Bust

Supporters say the free-trade zone has been a success, but critics point to the loss of jobs, factories and investment.

January 02, 2004|Chris Kraul | Times Staff Writer


The heady early years of the North American Free Trade Agreement brought Oscar Garcia opportunities he had scarcely dreamed of.

An electrical engineer raised in Mexicali, he became manager of the biggest factory the city had ever seen -- a Mitsubishi plant the size of three football fields where workers assembled computer monitors. Garcia bought a new sport utility vehicle. He paid cash for a new home.

Then, it all came crashing down. Unable to compete with more sophisticated flat-screen monitors made in the Far East, Mitsubishi in August shut the $250-million plant it had opened in 1998, putting Garcia and 1,200 others out of work and leaving most of its machinery to rust in a junkyard. A cluster of high-tech companies that had come up around the factory also closed.

"I thought I would retire with Mitsubishi. It was such a good place to work," Garcia, 36, said. "But I don't see much chance of a new industry coming along to replace it."

Garcia's story mirrors the course of the Mexican economy since NAFTA opened up cross-border commerce and investment 10 years ago.

Rising exports to the United States fueled Mexico's growth in the first years of NAFTA. Foreign companies spent billions of dollars on factories that made everything from cars to vacuum cleaners. Engineers and skilled managers were in such demand that companies engaged in bidding wars for their services.

Then, in 2000, the U.S. economy slowed down, dragging Mexico's down with it. The U.S. has begun to recover -- but Mexico remains moribund, hobbled by serious problems that NAFTA had briefly masked.

Despite a history of U.S. domination, Mexicans viewed NAFTA as a steppingstone to the developed world's standards in wages, health and education, holding the promise that they would no longer have to migrate to the United States to find jobs. The treaty also was welcomed as a wedge that could open Mexico's protected economy to foreign competition, along with new consumer goods and ideas.

Government officials and many economists insist NAFTA has been a success, a catalyst for an era of economic reform and political change. In 2000, the Institutional Revolutionary Party's 71 years of continuous rule came to an end.

However, they now recognize that Mexico's 1990s boom was merely hiding profound flaws: a weak educational system that produces too few engineers and technocrats, high energy costs, low spending on research and development, and systemic corruption.

Citing these shortcomings, the Switzerland-based World Economic Forum recently ranked Mexico 47th in global competitiveness, behind such countries as Botswana, Tunisia and Chile.

Carlos Salinas de Gortari, who as president of Mexico in the early 1990s fought hard for NAFTA, says the country squandered many of the opportunities the treaty provided.

"Unfortunately, from 1995 on, reforms to make sure Mexico took advantage of NAFTA were left behind," Salinas said.

The advantages conferred by NAFTA have eroded. Mexico's proximity to the U.S., the world's largest consumer market, means less in a world of ever-faster air and ocean transportation. And trade barriers have fallen around the world, devaluing Mexico's special trade status.

Mexico has lost nearly half a million manufacturing jobs in the past three years to countries as far away as China and as near as Honduras. Last year, foreign investment -- an engine of job growth since NAFTA -- declined to its lowest level in 10 years.

Over the summer, China displaced Mexico as the No. 2 exporter to the U.S. (Canada is first.)

"NAFTA is stuck," said Federico Sada Gonzalez, chief executive of Vitro, a glass manufacturer in Monterrey whose post-NAFTA exports to the United States grew 62% before leveling off three years ago.

Others say the reality is more complicated.

"The issue is not whether Mexico is competitive. It is that other countries have become more competitive," said Alfredo Thorne, an economist at J.P. Morgan Chase & Co. in Mexico City. Competing in the world economy is like going up a down escalator, he said: "If you stop making progress, you lose ground."

Mexico, the U.S. and Canada signed the trade accord in November 1993 and it took effect Jan. 1, 1994. Its main objectives were to boost foreign investment and phase out nearly all tariffs on goods traded among the three countries.

NAFTA opened the door to $125 billion in foreign investment in hundreds of Mexican factories and offices. At the peak of its impact, economists estimate, NAFTA generated at least 2 million jobs in Mexico, as manufacturers sought to take advantage of low-cost Mexican labor and proximity to the U.S. market.

Arrivals included not just U.S. and Canadian firms, but companies from around the world that agreed to adhere to "local content" rules, meaning products had to be made mainly from components or raw materials originating within the free-trade zone.

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