- The Washington Times - Monday, May 14, 2012

CHIHUAHUA CITY, Mexico — The North American Free Trade Agreement, which went into effect in 1994, has been the key driver of Mexico’s economic and social transformation of the past 20 years, analysts say.

NAFTA at first brought an explosion of low-skill-labor factories to the Mexican side of the U.S. border. By the mid-2000s, the trade pact had triggered an increasingly sophisticated manufacturing base that now reaches across Mexico’s 31 states.

“What we’re seeing now is a growth of industry in Mexico that requires more engineers,” said Christopher Wilson, an associate with the Mexico Institute at the Washington-based Woodrow Wilson International Center for Scholars.

“To put a name on it, specifically, we’re talking about automobiles and aerospace,” Mr. Wilson said. “Mexico is now graduating more engineers than Germany every year.”

A 40 percent jump in Mexico’s per capita gross domestic product since the inception of NAFTA has brought with it an increasingly robust middle class.

“What that means is Mexicans are becoming more educated, and there is more investment in children, which is why you are able to see the development of an aerospace sector,” Mr. Wilson said.

Poverty rate nearly halved

About 47 percent of Mexico’s 115 million people live in poverty, down dramatically from the 80 percent rate half a century ago. Today, 98 percent of homes have electricity, and more than 4 million people study at the university level each year.

Through early 2012, the nation of 112 million had an unemployment rate of roughly 5 percent.

The per capita salary of about $15,000 ranks the country 81 out of 195 nations.

North of the border, however, NAFTA’s reputation remains a topic of heated debate. From the onset, when 1992 U.S. presidential candidate Ross Perot, an independent, described the “giant sucking sound” that would be heard if the agreement were implemented, critics have long decried the flight of U.S. manufacturing jobs to Mexico.

U.S. unemployment is running above 8 percent.

Some NAFTA critics point to less publicized impacts wrought by the trade agreement.

“During the first few yeas, there was a massive overhaul of Mexico’s agricultural trade rules through NAFTA,” said Todd Tucker, who heads Global Trade Watch at the Washington-based nonprofit advocacy organization Public Citizen.

“This meant small-scale Mexican farmers were massively displaced by subsidized imports from companies in the United States,” Mr. Tucker said. “That led to overcrowding in cities, as well as new immigration into the United States.”

To address the displacement, the Mexican government attempted to create jobs programs in rural areas. But NAFTA had granted large U.S. companies new powers to challenge such programs on grounds they interfere with potential profits.

One such challenge in 2009 saw a NAFTA tribunal order the Mexican government to pay $77.3 million in damages to the U.S.-based agribusiness giant Cargill, a maker and marketer of high-fructose-corn-syrup products.

“So now you have Mexican taxpayers paying big U.S. companies,” Mr. Tucker said.

“So the net impact of a trade agreement like NAFTA is that, on the one hand, it creates displacement, and then on the other, Mexico is put in a bind in terms of how its government can try to navigate social and economic problems created by the agreement.”

Apart from such concerns, others assert the increasingly globalized nature of Mexico’s manufacturing economy has laid the groundwork for decades of future growth.

U.S. investment soared

Before NAFTA, U.S. foreign direct investment in Mexico was roughly $15 billion. Today it’s more than $90 billion.

A growing number of European, Japanese and Chinese firms also are investing in Mexican manufacturing.

Aside from tapping a labor market where unions are largely irrelevant and worker pay averages $6 per hour, foreign companies are attracted by Mexico’s proximity to massive auto sales markets in the United States and Canada.

Twenty-five vehicle-assembly factories owned by foreign automakers - Ford, General Motors, Volkswagen, Honda and Nissan - produced more than 2 million new cars and trucks from Mexico during 2011.

“We’re not talking about people putting brake pads on a car in a free-trade zone on the border,” said Christopher Sabatini, senior director of policy at the Americas Society and Council of the Americas in New York.

“The downside [to the United States], and I say this as a dedicated free-trader, is that Mexico is now on the verge of cutting into the higher-skilled manufacturing, design and engineering jobs,” he added.

“That raises the implication that the U.S. needs to invest in infrastructure, so that … the U.S. higher-skilled manufacturing and design jobs don’t head south.”