Moderator: Richard N. Haass, president, Council on Foreign Relations (Morning Session)
Moderator: Elizabeth Becker, Washington correspondent, The New York Times (Afternoon Session)
Panel One (Morning Session)
Speaker: Carla A. Hills, former U.S. trade representative; chairman and chief executive officer, Hills & Company
Speaker: Roy MacLaren, former Canadian trade minister; director, Standard Life
Speaker: Jaime Serra Puche, former Mexican trade minister; founding partner, SIA Consulting
Panel Two (Afternoon Session)
Speaker: Jagdish N. Bhagwati, senior fellow, international economics, Council on Foreign Relations
Speaker: Thomas J. Donohue, president and chief executive officer, U.S. Chamber of Commerce
Speaker: Thea Lee, assistant director of public policy, AFL-CIO
Speaker: John R. MacArthur, president and publisher, Harpers Magazine
Council on Foreign Relations
New York, New York
Tuesday, February 10, 2004
RICHARD HAASS: Okay. Why don't we then begin, and we may need a slight technical time out later.
Welcome to the Council on Foreign Relations. I'm Richard Haass, fortunate enough to be the president here, and the subject of today's session is "NAFTA [North American Free Trade Agreement]--Ten Years On." Actually, that's a little bit imprecise; it's really NAFTA— Ten years, one month, and nine days on, but you get the idea. A decade has passed, and what we thought we would do is take a step back and look at it. And since it's— NAFTA is, in many ways, a process as well as simply an agreement, what we thought we'd do is look backwards but also look forwards and look at the future, to some extent, of North American integration and where we might build on the first 10 years, in what ways.
What we have with us in the first part of this morning is an extraordinary panel; and for those of you who like oral history, well, you have shown up at the right place. What we have are essentially three of the architects— not just the architects. These are also in some ways the stone masons, the plumbers, the electricians. These are the people who, as much as anyone else, made NAFTA possible and put it together. You've got their bios here. What we're going to do is ask each of them to give a presentation, and then I may have one or two questions I will pose to the group, and then we will open it up to you all.
We're fortunate enough to begin with Carla Hills, who was the U.S. trade representative, but, more important, is the vice chairman of the Council on Foreign Relations and someone who contributes to this organization in more ways than I can recount, but we are fortunate enough to have her. Carla now also in Washington runs her own company, which dispenses advice to all those who are fortunate enough to get it.
After Carla speaks, we're going to have Roy MacLaren. He is the one with the Canadian accent— you will be able to discern it quite clearly, I'm sure— who was Canada's trade minister and now spends his life doing various directing things, above all at Standard Life.
And then, thirdly, we're going to have Jaime Serra [Puche], and Jaime was Mexico's man in the match, as Margaret Thatcher [prime minister of the United Kingdom, 1979-90] might have put it. And assuming we can get the technology going, he's going to give us not simply a talk, but actually a little bit of PowerPoint. It's the first time, I should admit, I will have ever seen PowerPoint outside the confines of the Pentagon— [laughter]--so I am curious to see how it translates to a civilian setting.
In any event, that is this morning's session. This will go on for approximately two hours, and again we will try to reserve at least half the time for you all to raise points and all that because NAFTA— one of the things that makes it so interesting to me is that when people look back at the history, people see very different things. Normally in life, in my experience, people look at things and then they might disagree over what the consequences, might disagree over the policy remedies that flow from it, but NAFTA strikes me as one of those issues where people really disagree on many of the basics, on just what it accomplished. So one of the things that I hope our three panelists [address] and expect they'll flock to, is the question of NAFTA's legacy, of its accomplishments. But again, as I said, the purpose of this is to be forward-looking as well as looking back at the past. Indeed it's part of a larger enterprise we're starting up here at the Council to look at some of the issues of where we go from here with North American integration, what might be, if you will, a beyond, or post-NAFTA policy.
Then we'll take a few minutes break. We're going to sit— move into, I assume, another room? Maybe this part of the room, so I'd be over here; and Elizabeth Becker is going to lead a conversation really building on this morning's conversation. So some of it will talk about NAFTA, but some of it will talk about the trade process more generally and will raise questions about bilateral trade agreements; FTAs [free trade agreements] for some, preferential trade agreements for others; regional trade agreements, including Free Trade Area of the Americas; the Doha Round [of the World Trade Organization talks]. We will basically raise some of the larger questions that are informing the U.S. trade debate, which as you all know is approaching white-hot temperatures given not simply the state of the economy but the electoral calendar, so our timing here is extremely good.
Why don't I stop there? Again, you didn't come here this morning to hear me but instead the three people that we're fortunate enough to have. And let me first turn to Carla Hills, who will speak, and then we'll talk to Roy MacLaren and Jaime Serra. So again, thank you for giving your time, and— [refers to Carla Hills]--thank you.
CARLA HILLS: Thank you, Richard. Well, good morning, and let me tell you first off what a pleasure it is to be on a panel with Jaime Serra and Roy MacLaren. You will find in their presentations that they're really top flight.
I have to confess that I resisted making this presentation strongly. I wanted to have the joy of a conversation and use all the time to give and take. But Richard is very persuasive, and when I said to him, How can I begin to tell them what I know about NAFTA in 15 minutes? he said, "Well, speak slowly." [Laughter.] But the topic today is "NAFTA— Ten Years Out," and what was accomplished, as Richard said, and what have we learned and where do we go from here.
What have we accomplished? The economic data documents that the NAFTA has served very, very well the national interests of all three of the participants. Its comprehensive approach in opening markets is today still the benchmark for trade agreements because it, unlike so many that have followed, eliminated— not just reduced, eliminated— all tariffs on industrial products. It guaranteed free trade in agriculture between the United States and Mexico, something that has not yet been achieved; it provides the highest standards of intellectual property protection. It opens a broad range of services, and it creates a framework that encourages adherence to rule of law. And as a direct result, the trade of all three participants exploded and moved much more rapidly. The trade with each other moved much more rapidly than trade with the rest of the world.
It has also sponsored efficiencies. Removing the trade barriers and the restrictive regulations enabled industries like automotive, chemical, electronic, textile, and apparel to integrate their production across a wide region that substantially strengthened their competitive position and its legal framework. It increased transparency and predictability, making the region much more attractive to foreign investors from all around the world, further stimulating economic growth in all three countries.
A recent World Bank study concludes that without the NAFTA, Mexico's exports would have been 25 percent lower and foreign direct investment would have been roughly 40 percent less. But the gains went beyond the commercial, for as Mexico liberalized its trade it liberalized its political regime. I personally believe that the increased public spotlight on Mexico as a result of NAFTA contributed to its willingness to permit external observers to watch the 2000 presidential election, and to invite [United Nations] and OAS [Organization of American States] human rights missions to review Mexico's progress in that area. And I also believe that it contributed to its relatively gentle treatment of the Zapatistas' uprising [indigenous Mexican rebels armed takeover of towns in Chiapas on January 1, 1994].
Also the NAFTA's position with respect to positions in trade, with respect to the reverberations outside the region had a very positive effect within the region, and let me explain why. It demonstrated to the rest of the world that countries of very different backgrounds, of different languages, differing development levels could sit down and negotiate the means to enlarge opportunities that benefit all three participants, rich and poor. And as a result, it encouraged the nations of the Asia-Pacific region to agree in 1994, shortly after NAFTA was passed by our Congress, to open up their economies. It persuaded the 34 democratically-elected leaders in this hemisphere to agree to negotiate a free-trade agreement for the Americas by the year 2005. And I can attest personally that it breathed new life into the ongoing Uruguay Round [of trade] negotiations, then global trade talks, and all three participants have benefited from the increased opening of global markets.
So what have we learned? Well, first and foremost commercial benefits and expanded opportunities alone are insufficient to generate broad support for a comprehensive trade agreement like the NAFTA, much less intensive social and political integration that some have addressed; the so-called NAFTA-plus approach. The rallying cry of no more NAFTAs succeeded in preventing our president from obtaining trade negotiating authority for eight years, eight long years, and it still reverberates, that slogan, that mantra, in the United States.
To enable our governments to move forward with further integration in the North American region, we will need to persuade a far greater number of our citizens that economic interdependence is the best tool that we have to generate economic growth, alleviate poverty, and encourage stability. And we will fail in that task unless we admit up front that trade does not make every citizen a winner and pledge to help those left out not by closing down trade, but rather by allocating some of the gains derived from trade to help those displaced because of the changes driven primarily by technology, but also by trade. That will require us to give much more emphasis to education to raise the skill levels of those most adversely affected by low-cost competition, and we will need to develop better mechanisms than our current trade adjustment of programs to deal with displacement.
The Institute of International Economics has done some excellent work on wage insurance, a means to supplement the income of displaced workers who take an entry-level position in a new, more promising sector. Such a program would encourage a displaced worker to stay in the workforce, even though it's a job different than the one he or she had before, thus cutting outlays for unemployment insurance. And it would provide the most effective training that is available, that is, training on a job. The Institute also studied the effects of subsidizing health insurance for displaced workers. Cost was surprisingly reasonable, between three [billion dollars] and six billion [dollars] a year, and much more work needs to be done in both the area of education and the area of help for the displaced worker.
But equally important, if we're going to stay on track with integration, it will require those in a position to speak about the benefits of NAFTA to speak out. All three governments could provide far greater leadership in this area, but the effort to explain the merits of trade is not something that government should be expected to do alone. Universities, think tanks, especially businesses, and yes, the Council and members of this Council could do a whole lot more, and we could talk about that and what could be done in the question and answer.
And let me conclude by where we go from here. The leaders of Canada, Mexico, and United States pledged at the Quebec Summit [of the Americas] in 2001 to, and I quote, work to deepen a sense of community, promote our mutual economic interests, and to ensure that the NAFTA benefits extend to all regions and social sectors. To achieve these objectives, they call for coordinating efforts in support of efficient North American energy markets, strengthening trilateral cooperation to address the legitimate needs of migrants, while promising to examine options to further strengthen our North American partnership.
But there has been no real effort to spell out the means whereby we would achieve these objectives. [Mexican] President [Vicente] Fox proposed that the three governments consider the European experience and form a common market, which is basically a customs union with a common external tariff in which labor can move freely. But the time does not seem right for the NAFTA partners to devote their energies and political capital to try to create a European-type customs union or common market. The European Union was the product of a half-century of effort, forged by an overwhelming political desire to end the cycle of war that had plagued the continent since 1870. Our political dynamics are very, very different.
In my view, our populations are not ready for free movement of labor. Given the enormous income disparity between Mexico on the one hand and the United States and Canada on the other, a common market would create a politically untenable incentive for northward migration. In one survey, 70 percent of Mexicans stated that they would migrate to the United States if that were permitted. That's 70 million people. If even half that number came, the consequences would be dire both in Mexico and in the United States. In Mexico, although remittances would increase, domestic investment and entrepreneurial zeal would plummet, as would U.S. wage rates for less-skilled workers. By contrast, Europe did not have such sharp disparities in wages and the enormous willingness to migrate. Very few from Greece or Portugal moved north.
But in addition, September 11th shattered any dreams for even talking to our public about a common market in the near term. Our priorities changed overnight. Our security became paramount, and we felt the need to clamp down on ingress and egress to our country. And yet shutting our borders had a paralyzing effect on the economies of both of our neighbors, for over 80 percent of their trade is with the United States.
Our three nations are at a stage of interdependence where a crisis in one is keenly felt in the other two, and hence the political imperative for us to work together has escalated dramatically. Not surprisingly, with different histories and traditions and culture, we approach issues from differing national perspectives.
What we need, I believe, as a first step, is a serious and intense trilateral dialogue on a wide range of issues that will create a context within which we can try to develop the means that will both deal with key challenges and take account of our divergent interests. In that way, we can build political trust and cooperation. The annual cabinet meetings in Mexico or the various bilateral meetings with Canada are probably insufficient to build that kind of trust or to deal with today's complex challenges.
Professor Robert Pastor [vice president of international affairs and professor of international relations at American University], among many, many others, has suggested the creation of a number of new institutions. I would buy one as a first step, and that is an advisory North American commission whereby each of the three leaders would appoint five members. The commission would be tasked to give serious attention to how the three governments, working together, might better tackle challenges like perimeter and border security, energy sufficiency, transport infrastructure, environmental protection, immigration, regulatory conflicts, and, yes, law enforcement. And they would be authorized to commission studies, to bring in experts, and to recommend an agenda of issues to be addressed by the three leaders at biennial or yearly or more frequently summit meetings.
Many of these challenges that we face are interconnected. Mexico's low growth rate affects its migration. Its energy policy depresses growth potential. Security requires border scrutiny, yet the cost and efficiency of trade flows and investment flows across borders are reduced by tough border measures and so forth. In addition, this commission could help develop ways to eliminate unnecessary commercial regulation that reduces the competitiveness of specific sectors. They might, for example, consider the feasibility of adopting a common external tariff in particular sectors— take chemicals, for example— that would eliminate the need for very complicated rules and the costly paperwork that accompanies.
The commission could also study the idea of integrating our payment system, bringing Mexico into the automated clearinghouse system and integrating sovereign debt markets. They might also examine the idea of a single, uniform North American customs procedure. In my view, the hostility to NAFTA in the United States and the considerations of 9/11 make it imperative that we build trust with our neighbors and build support here at home before we announce a grand strategy for deepening North American integration.
And I would just close with a postscript. The NAFTA partners should not ignore the fact that they have a historic opportunity to collaborate in advancing the cause of trade liberalization throughout the hemisphere and in the Doha Rounds [of trade negotiations]. A coordinated effort by our three governments would increase the chances of success in both areas, and these agreements would yield enormous benefits economically to our respective economies, and it would help with future security. Thank you. [Applause.]
ROY MACLAREN: Thank you, Richard, and thank you for inviting me. I'm delighted to be here with my old friend, Carla, and Jaime, and speak from a Canadian point of view. I had prepared a great, long paper for this occasion, but this morning Richard said, Throw it away and just talk extemporaneously. Perhaps that's good advice.
I was in Montreal for a petroleum conference a few years ago when I was introduced as the keyhole speaker— [laughter]--and the prince of Saudi Arabia, a prince was actually the keyhole speaker, and he— his assistant put on the podium before he was to speak the text of his speech. But the first speaker was the mayor of Montreal, and he got up and went "eh," and welcomed us all and then it was the prince's turn. So he comes up the podium and says, "As mayor of Montreal, I want to thank you all for coming," and da, da, da, da. [Laughter.] So perhaps it's a good idea not to have written text.
In any event, I did write down a couple of points that I wanted to deal with. [Laughter.] The first thing I want to say is simply this, that there are two NAFTAs. We're attempting today to talk about one NAFTA as if there were only one NAFTA. In fact, there are two NAFTAs. Indeed, in my travels in the United States, I was speaking at the University of Texas a few months ago on NAFTA and the audience listened to me with kind attention, and afterwards one of the members came up to me and said, "Is Canada in NAFTA?" [Laughter.] Which I thought reflected the degree to which the concentration, Jaime, is necessarily, in essence, on the United States and Mexico.
Canada came to NAFTA, as most of you would know, through the Canada-United States Free Trade Agreement, and that agreement was negotiated with some difficulty, and indeed with some controversy in Canada, some years before NAFTA itself. I was not a member of that government, so let me be perfectly clear that you cannot hold me responsible for that agreement. But in any event, the agreement, as I want to tell you in a few minutes, seemed to me basically flawed, and that flaw has been carried into NAFTA in a way that I want to describe.
But first I want to say that I find unconvincing the sort of statistics that are bandied about, about NAFTA. Those proponents of NAFTA argue that the statistics demonstrate conclusively that NAFTA has brought great benefit to all three partners. It may have, it may have, but I'm not convinced that many of those benefits would not have flowed from the fact that the United States, in particular, through most of the 1990s enjoyed unparalleled growth and a dynamic economy that would have necessarily generated much of the trade increase, and indeed investment increase, from which Canada and Mexico have benefited during the past 10 years.
I know I'm not an economist, thank goodness, but I'm a— [laughter]--I wanted to say that I guess the task of desegregating— is that the word?--of disassembling the statistics and trying to say this is a benefit of NAFTA and this would have happened in any case is a difficult challenge for any econometrician. But it seems to me that, by any logic, we have to assume that some of the growth rates to which NAFTA has been identified would have occurred in any event, with or without NAFTA. Well, I'll leave that point, but I wanted to begin with that because I don't know that I at least am entirely convinced by all the supposed benefits that have flowed from NAFTA when they're presented in statistical terms.
I said a minute ago that I'd speak a little about the fact that when we negotiated the Canada-U.S. Free Trade Agreement, there was a flaw in it that has, to my mind at least, been carried into NAFTA itself, and that simply is a question of trade remedies. Carla will know this a good deal better than I do because she was there at the table, I think. But basically, as I understand it, what the United States said in the Canada-U.S. Free Trade Agreement was that the commerce power rests with Congress— constitutionally rests with Congress— and therefore if Congress wishes to pursue its so-called trade remedies, anti-dumping in particular or countervailing duties, that it's free to do so, it must be free to do so, and that Canada must recognize that that right, that constitutional right cannot be negotiated away by a free trade agreement. The result was [that] you have at the very heart of the free trade agreement a basic flaw. I mean, you cannot have trade remedies in a free trade agreement. If you remove all trade barriers, as supposedly you do in a free trade agreement, there can be no remedies because there are no barriers; well, in a way. There it is, sitting there still today.
And it's led in Canada's case— I will leave Jaime to speak for Mexico— but in Canada's case, it's led to such situations as our ongoing dispute over soft-wood lumber. A pedestrian enough subject, but one which, despite repeated successes in the dispute settlement mechanism provided for in NAFTA, Canada is still subjected to these challenges on our trade— on our lumber practices from the United States. And that in itself, while it may be regarded as only a mere incident of no great impact, in fact has, in the Canadian economy, a substantial impact. But more than that, it's led in Canada to skepticism about the free trade agreement and, by extension, about NAFTA because despite what those who advocated the agreement assured the Canadian people— that it would bring full, free trade— it has not. And therefore, there remains in Canada, whenever Canadians think about it, a skepticism about the true value of bilateral free trade, and of course more recently multilateral free trade.
I have to say that when the day came to settle on NAFTA, I was the trade minister. We had just recently come to office in 1993, and [then-U.S.] President [Bill] Clinton had introduced the idea of side agreements on the environment and labor, which were an interesting innovation and caused us to think a little, but we accepted that. And we went forward with NAFTA in part because we were eager to see Mexico, in some small measure at least, dilute the rather stark relationship between the mouse and the elephant, as [Canadian] Prime Minister [Pierre] Trudeau once memorably said. We felt a little more comfortable with three than with two, and indeed we, as I will say in a moment, feel a lot more comfortable with the World Trade Organization than we do with bilateral or regional free trade agreements.
That leads me to a second— and I have lost track of how many points I've made— but anyway a second point about the Canadian attitude toward first the bilateral agreement and subsequently the trilateral— and that was that in some Canadians' minds. It was seen as an abandonment of our postwar commitment to the GATT [General Agreement on Tariffs and Trade, the precursor to the World Trade Organization] and, of course, more recently to the World Trade Organization created by the Uruguay Round. Canada has long benefited, as indeed the United States has, from the GATT and from the World Trade Organization more recently in rather different ways, and it's our conviction that that basically is the road to go. But perhaps I'd better qualify that. I said "our conviction." My conviction. My conviction that it's the road to pursue.
I remain doubtful about the real benefits of bilateral or regional trade arrangements. I don't think you get the full benefit of trade liberalization on a regional or bilateral basis. Agriculture is one obvious example where it's impossible to conceive that liberalization benefiting the world can be achieved on a sub-multilateral basis.
Well, and perhaps I've said enough, but I want to -- I have got a couple more points that I wrote down this morning. No customs union, no common market. Now, I agree entirely with what Carla said, but not for the same reasons. The real reason in Canada that there is skepticism about— indeed opposition to— the idea that somehow NAFTA is a straight-line progression to a common market and a customs union and a common market. It isn't. Certainly, it's not in any way comparable to that straight-line progression that succeeded in Europe. The European Union is a political entity. It's not an economic entity primarily. It's a political entity, and there's no way that Canada's going to engage in a political integration in North America as would be represented by movement toward a customs union and common market. I say that because we're deeply concerned in Canada about a subject that will be fully familiar to Americans, and that is our sovereignty. We are conscious that the United States, to which 85 percent of our merchandise exports now go, has, as the result of that extraordinary trade flow, a certain leverage, and it makes us uneasy that that leverage has reached the degree that it has.
And it's certainly true, if any public opinion poll is to be believed, that any further integration, ostensibly economic, would give rise to all sorts of misgivings amongst Canadians about the degree of political integration that would follow. I mean a common trade policy, a common tariff policy, a common trade policy would lead to a degree to a common fiscal policy, and a common fiscal policy would, to a degree, lead to a common foreign/international policy, and that gives a lot of Canadians real misgivings.
You know, I think the present— and I would just say one more thing. I think the present policies of the United States in the Middle East have increased that attitude of misgiving. And we are determined that we're not going to place ourselves in a situation in which we would have to conform with [U.S. trade representative Robert] Zoellick's recent statement that any country seeking closer economic ties --I paraphrase, but it's something to the effect that closer economic ties with the United States must necessarily integrate further with security and political directions. Uh-oh. I don't think so. And so for me, we've gone about as far as --what's that song in Oklahoma!? She's gone about as far as she could go. Anyway, I date myself. We've gone about as far as we could go in North America, and I don't look for any further economic integration in North America. I'm doubtful about further economic integration in the Western Hemisphere as long as Brazil is sitting there, but that's another story.
What I do think we should all do is attempt to make the WTO work. It's flawed, as I said about the bilateral agreement between Canada and the United States. It's flawed in rather different ways. I'm very glad that Peter Sutherland [former director-general of GATT and the WTO, 1993-1995] and some others are at work, attempting to reform even already --I mean, already— the new organization which has had impossible tasks imposed on it. But we must all seek to reform that multilateral organization and render it effective and place our eggs in that basket. Thank you. [Applause.]
HAASS: I'm afraid some of the trade protection is taking their toll on the diskette that was brought along, but I think we can --if you will bear with me a second, I think we can get this squared away and the presentation can be— [Technical direction.]
SERRA: Thank you. Apparently we have fixed the problem with the computer. First of all, I'd like to thank Richard and the Council for the invitation to join you in this conference. It's a great pleasure to be here for many reasons, but I would point three out. First, to be with Carla with whom we have made excellent friends after the negotiation, which I think is a good symptom after negotiating for two years, hard and tough.
Second, to be as well with Roy, that although we never negotiated with each other formally and officially, because he was the shadow cabinet, the shadow trade minister as an MP [member of Parliament] in Canada, which had great contacts— and actually I'm glad we didn't negotiate with him because we Mexicans, we use a lot of economic analysis and statistics— [laughter]--I'm sure that he would have been quite upset with that negotiation. I must say that we negotiated with two excellent trade ministers in Canada who Roy knows very well. One of them was John Crosby who was a tremendous fellow. And once, we were launching NAFTA, and he said that the only thing that separated Mexico from Canada were lots of bush and hills. (Laughter.) I always thought that was a very good statement. It turned out to be an asset, not a liability, in the negotiation process. And then with Michael Wilson, who was the fellow that literally carried the negotiation. And third, to be with many of you that were very involved in the NAFTA years, like David, who helped us tremendously with all the— with very good ideas and with support. And I think that makes this meeting very pleasant.
I would like to make six points in this 15 minutes, Richard.
One is: what happened to trade flows? What has happened to investment flows? What has happened to an issue that I think is very relevant in Mexico and has not been captured yet in the debate in the U.S. that has to do with macroeconomic stability? And then I would like to make a few points about jobs and wages, which are permanently raised. And probably comment on agriculture and a few ideas on what's to come.
Let me start with this quote. Actually Carla already quoted this study, but literally I was reading this study last Friday and I thought that writing this quote was important. This is the first serious analysis with econometric-sound methodology that I have seen on the 10 years of NAFTA. Of course, they're not in years yet because statistics for 2003 are not ready for all the three countries.
But they made the point that the treaty has helped Mexico get closer to the levels of development of its NAFTA partners— that, as Carla was saying, Mexico's global exports would have been about 25 percent lower without NAFTA. FDI [foreign direct investment] would have been 40 percent less without NAFTA. And the amount required by Mexican manufacturers to adopt U.S. technological innovation was cut in half, which I think is very important. And that trade can probably take some credit for more declines in poverty that we have seen in Mexico, and it has likely had positive impacts on the number and quality of jobs.
I'd like to start with that because Mexico went through a process of openness of its economy that has been rather dramatic. As you can see there, in the last 22 years, when Mexico was considered to be a closed economy, our exports and imports as a percentage of our total GDP [gross domestic product] represented 22 percent. When we joined GATT, they went up to 30 [percent]. And then when we joined NAFTA, they went up to over 50 percent. Today, more than half of total GDP in Mexico is explained by trade.
Now, how did that affect the export mix of the country? And probably this is a very shocking— the pie to the left is how much Mexico used to export and what Mexico used to export in 1980. As you see, almost 60 percent of our total exports was oil. Our total exports were $18 billion and manufacturing exports were 30 percent— $5 billion. Twenty years later, our total exports went almost nine times higher, to $116 billion. Oil represents nine percent out of the total, and manufacturing is almost 90 percent of our total exports. So manufacturing exports have gone up 25 times, to $142 billion.
The country that is represented by the pie to the right is a different country from the one that is represented by the pie to the left. The question I'm always asked, and I'm going to— [inaudible]--is: Does NAFTA explain this? And Roy himself was saying, you know, I'm not sure that all those growths and so on are explained by the trade agreement. Here I have the same time series, and I have the period when Mexico was closed, and you can see that exports were growing in a very shy way. When we joined GATT, rate of growth of exports grew a little bit, not much. And then when it really exploded is when we joined NAFTA.
So it's not that we have a perfect proof. Nobody will come up with an exact, scientific way of proving that because of NAFTA, that rate of growth increased so dramatically. But intuition tells you, and using some of the statistics that are official, by the way, Roy— [laughter]--that exports did grow and these are non-oil exports in the country, which I think is very important to define.
Now, probably another indicator of that is when you look at the trade between the U.S. and Latin America. In 1985, for instance, the whole of Latin America used to export $27 billion to the U.S.--the whole of Latin America without Mexico, I must say. And Mexico used to export $19 billion. As you can see, the dark line represents Mexican exports into the U.S.; the gray line represents Latin American exports without Mexico to the U.S. And nowadays we export twice as much to the U.S than the rest of Latin America, including Brazil, Argentina and all lumped together— another indication that probably NAFTA does make a difference, the statistics. But at the end of the day we don't have much more than the statistics to make these points. And in terms of imports in Latin America— that is U.S. exports to Latin America— exactly the same phenomenon. And when you see when the GATT opens up, it's like in 1994 when NAFTA entered into place. So I say that in general, NAFTA has had a major impact in the possibility of Mexico to export, and basically to increase non-oil exports, and basically manufacturing exports.
Now, when I was negotiating NAFTA and I had a huge counterpart like Carla Hills with the asymmetry of information that we had between the two countries. And I'm sure the Canadians experienced the same problem. When Carla said something here in New York or in Washington when we were in the middle of the negotiation, it would come up in the Wall Street Journal, page 28. [In] Mexico, [it would be on the] front page in every single paper. And then when I would say something trying to push the Americans, it would not come up in the U.S. papers, but it would come up in the Mexican papers saying that I was selling out the country. (Laughter). So what was really the question was that there was a huge asymmetry between our two countries— that we were a very poor nation incapable to compete with the Americans, and therefore that as soon as NAFTA kicked in, we were going to be slaughtered by American products.
And let me just show you, this is how quickly the economies opened under NAFTA. This is what happened in our trade between Mexico and the U.S. The year before NAFTA, we had pretty much a balanced trade. We were exporting $43 billion, the Americans were exporting to Mexico $45 billion. And Mexico today has a surplus of $36 billion. With the Canadians— and there I agree with Roy— we have a major problem with Mexico-Canada statistics, because many of Mexico's exports into Canada are registered as exports to the U.S., because we use the U.S. as a pass-through. And Canadian exports into Mexico suffer the same problem. So these numbers underestimate— we have a deficit with the Canadians. And the overall trade balance with North America gives Mexico a surplus.
Now the group was having a little dinner last night. We were discussing about surplus and trades, and I decided to show you who Mexico has a deficit with. Mexico has a deficit with the European Union, as you can see, that is quite strong, even though we signed a free trade agreement— not a NAFTA. I would say a NAFTA-minus type of agreement with the Europeans. Minus-minus, Carla says. [Laughter.] Here's the problem, here's the problem. The problem is our trade deficit with Asians, particularly China.
So I did a little graph here that might be relevant— I mean could be of interest to this crowd— and it is that Mexico has an overall trade deficit, but has surpluses. If I lumped together all those countries with whom Mexico has free trade agreements, we have a surplus. And if I lump together all those countries with whom we do not have a free trade agreement, we have a deficit, which goes in the direction opposite to what people were saying when we were negotiating NAFTA— said, "We're going to run into huge deficits; we are going to be flooded by American products."
A country like Mexico, I must say, has to have necessarily a trade deficit, because the country needs to attract capital from the rest of the world into the economy to complement domestic savings that are not sufficient. But this is an interesting disaggregation.
Now, let me move to investment flows. Very quickly, this is what has happened to foreign direct investment in Mexico. When we were a closed economy, we used to receive $1.3 billion per year, average, on foreign direct investment. Again, Mexico needs those resources badly. When we joined the GATT, we received $3.5 billion. After joining NAFTA, it went up to over $14 billion per year, average. So you can see that it has gone more than 10 times the foreign direct investment flows into the country compared to the pre-GATT years, and almost four or five times during the GATT years. And that investment comes mostly from North America— 70 percent comes from North America— and it goes mostly to manufacturing, which I think is an important lesson of NAFTA. So it's difficult to establish a one-to-one scientific correlation, but as you can see that starting in '94, all those bars are higher, right? So one would suspect that NAFTA did make a difference for the country to be able to attract FDI. So, first two conclusions is that NAFTA did result in the larger trade flow, particularly exports for Mexico, particularly manufacturing exports; and second, increased investment— foreign direct investment— flows into the country.
Let me now go quickly into the issue of macroeconomic stability, which I think is an issue that has not been, as I said, properly discussed. Before NAFTA, Mexican and U.S. GDPs used to be countercyclical. We had a correlation of minus-35 percent. After NAFTA, not only the sign changed, but also the value of the correlation. Now we have a plus-74 correlation, 74 percent correlation. So today there is a high correlation between U.S. GDP and Mexican GDP; before, we were countercyclical.
And if you compare Mexico's GDP with industrial production in the U.S., that correlation is much higher. Now that has resulted in a trade balance for the first time in the history of Mexico that has become an automatic stabilizer, because when our exports grow, since most of them come to the U.S., our imports grow, since most of them come from the U.S. And when our exports go down, since most of it comes from— go to the U.S., our imports go down, since most of it comes from the U.S. And therefore, we have a permanent stability in our trade balance, which I think has resulted in a clear elimination of volatility of the exchange rate.
Turns out that after the Mexican [economic] crisis [of 1994], when you look at what has happened to the exchange rate between the peso and the [American] dollar, it looks very much what has happened between the Canadian dollar and the [American] dollar. And they have less volatility than the euro or the deutschemark or the [Japanese] yen. The American— I mean the Canadian dollar and the peso have been more stable vis-a-vis the U.S. dollar than the yen or the mark, which I think has had a very important impact on inflation rates. Inflation now is converging for the first time in many years, and I see many people here that I could tell— you know, Sidney Weintraub [William E. Simon chair in political economy, Center for Strategic and International Studies]--I have told Sidney, in 2004 Mexico's going to have an inflation rate that is probably one point higher than the American, two points higher than the American— [inaudible]--Jaime went crazy. Well, that's what is happening now. And the same thing has happened with short-term interest rates, which I think has helped stabilize the Mexican economy in a major way. Of course, there are two very important components in this— that the governments of [President Ernesto] Zedillo and Fox are conducting a very serious and responsible fiscal policy and monetary policy, and that, of course, is the core. But this trade integration with the U.S. has helped.
Let me look quickly into the issue of jobs and wages. Here again, this is a correlation between the rate of growth of exports on the axis of the— [inaudible]--on the horizontal axis and the rate of growth of employment on the vertical axis. And you can see that there is a high correlation; the higher the rate of growth of exports, the higher the rate of growth of blue-collar jobs. Something similar happens with real wages: the higher the rate of growth of exports, the higher the rate of growth of wages. Again, it's an indirect indication, but if we at least accept that NAFTA increased our rate of growth of exports, we, according to these correlations, need to accept that NAFTA increased jobs and wages. If we believe in these correlations— again, with all the problems that statistics may have, as Roy pointed out in his presentation— I'm not surprised that that correlation happens for one very simple reason: wages paid in export-oriented firms in Mexico are 40 percent higher than the average wage in the country; and in the U.S. it's 18 and in Canada it's 35. So what has happened— of course, in Mexico, wages are lower than in the U.S. --but what has happened is that, although wages have gone up— because there has been a reallocation of resources to exportable industries that happen to pay higher wages than the average in Mexico. And I think that explains part of the previous correlation.
I know that a lot of debate and things have been said about agriculture here in the U.S. and in Mexico, probably in Canada as well. Let me tell you, people have been looking at agricultural issues and then impacts of NAFTA only on corn, and I will deal with that issue because indeed it is the most sensitive issue for Mexicans.
But let me first look at the other side of the coin, and it's how is Mexico exporting agricultural products into the U.S.? Our agricultural exports have gone up 100 percent since NAFTA was implemented, from $2.7 billion to over $5 billion. But probably this is more interesting: agri-industrial exports of Mexico into the U.S.--the whole world in the period '93 to '01 increased agri-industrial products— exports— into the U.S. by 70 percent; the Canadians by 56; the French by 89; Australia by 112 percent; the Italians 195— huge growth; Mexico, 224 percent. That is Mexican agri-industrial products have been growing a great deal with the natural implication for agricultural activity.
Now, we are the number-one supplier to the U.S. market from the whole world in all those products that you see there, all the way from sunflower seeds to chile to lemon pulp to nopal to jojoba to tamarind, guayava. Some of those translations are funny because we don't know how to translate tamarind. But I want— [inaudible]. But that's all the products in which we are the number-one supplier. And probably this will shock you the same way it did shock me. Out of total U.S. consumption, more than half of the cucumbers come from Mexico; 9 out of 10 lemons and mangos come from Mexico; one out of 10 aubergines or eggplants come from Mexico; one out of three tomatoes; one out of four asparagus and melons; one out of five kilos of spinach; and one out of six watermelons.
So Mexico has been exporting agricultural products in which we are competitive; those [that] are for small surfaces, labor intensive. And we have been increasing, very importantly, as a result of NAFTA, because the negotiation of NAFTA— and Carla and I discuss a lot— was to open up some windows during the year when production in the U.S., because of climate, could not take place. And gradually those windows are widening for the whole year. And that resulted in this very interesting rate of growth.
Now, people have been saying that the damage and the poverty in Mexico is explained by NAFTA, basically because we are importing huge amounts of corn into the country. And it's a very misinformed conception. Corn is very important; out of total basic grains in Mexico, corn and beans represent 85 percent of total production, and that's why in NAFTA, we negotiated a 50-year period for the transition of the liberalization of corn and beans. And look at what's happened. The tariff for corn coming into the country has gone from 215 percent at the beginning of NAFTA to 109 percent last year. And that means that we're still highly protected.
Now what has happened to the domestic production of corn in Mexico? If it was true that we have been destroying peasants and farmers in Mexico that dedicate themselves to the production of corn, at the very least, production should have stagnated or, of course, should have gone down. Turns out that it went from 18 million tons to 20 million tons during these NAFTA years. And if you were to run a correlation between that kinky curve there that describes the production and rainfall in Mexico, it's almost one-to-one.
So the only argument I could buy from these articles that I read that NAFTA has destroyed production of maize and corn in Mexico is if, and only if, NAFTA has damaged the rainfall in Mexico— [laughter]--and that's a bit too ambitious, but you never know. Carla is very powerful. [Laughter.] With beans you have something very similar. We went up from 1.3 million tons to 1.5 million tons. And those are the two most sensitive crops in the country.
Now, I'm not saying that agricultural activities do not have a problem in Mexico. Of course they do. There's lots of poverty, very low productivity. But it's not a trade issue. Let's not get confused, because if we get confused in the assessment of this issue, we are not going to find the right solution. The problem is we have very small surfaces. We do not irrigate. We need to wait for the rain to happen for all the cereals and grains to be produced, and is very capital intensive. For the production of one tomato compared to the equivalent unit of corn, you use ten times more people producing tomatoes than corn. So what we should be concentrating on is in vegetables and fruits that you can produce in the smaller plots, the price [of which] gives you enough room to irrigate and invest in the infrastructure of irrigation, and uses lots of labor, as opposed to produce corn. And that was the whole philosophy behind the negotiation of the agricultural sector, to be shifting gradually towards those sectors that were competitive vis-a-vis the U.S. and Canada, and having the Americans and the Canadians producing grains and cereals.
Let me just quickly mention something about— this is something that I don't like to raise. I mean, it's too long. But let me just quickly go into the issues that I think could be a part of the agenda— quickly— of the North American commission that Carla has proposed, which I think is a great idea.
First, I think the security issue has become a trade issue as well. The new bioterrorism law that was enacted in the U.S. is going to damage countries that export into the U.S. You are looking at some of the agricultural exports and agri-industrial exports. They are relevant. They are important. They have been growing seriously. And the bioterrorism law that has been introduced could damage that. So being able to come up with arrangements on customs and so on under a security umbrella could help a lot further integration in North America. And here I disagree with Roy, [in] that I do think there is room for further integration, not through customs unions, I don't think, but on the specific issues like security. The only issue that I think is very relevant is that now that we have achieved variables on macroeconomic behavior that are quite similar for the three countries, we could be exploring a macroeconomic coordination of the North American region, and probably that might be a relevant issue for the agenda.
A very important issue in my view is the issue of agriculture. As I was describing, we have a natural complementarity, and if we approach that rationally, we could benefit the three countries, or specifically Mexico and the U.S. And that is closely related to migration, because all the expelling of jobs, or non-jobs in Mexico— [laughs]--comes basically from the poorest areas in the agricultural sector. So if we were to allocate resources to the production of vegetables and fruits, that would indeed have a very important effect on migration flows.
And finally, the issue on energy, which I think is very important. On energy and transportation, I think we, as North Americans, have an advantage vis-a-vis the Chinese. The Chinese are already facing blackouts in the Shanghai area and they have transportation costs to come into this region that are very large. If we were able to coordinate our energy and transportation mechanisms in a regional way, I think we would increase the competitiveness of the region vis-a-vis the Chinese and other regions.
Let me just conclude with one statement I used to make when we were in the middle of the negotiations and I used to make during the roadshows that Carla and I did. And it is that, to me, it's a natural. To me, NAFTA and North American integration is a natural. And whether we like it or not and whether we have a debate, an ideological debate, that's very legitimate. That is fine, as long as they are serious and well documented. But what is a reality is that we will be neighbors forever. So we can choose to integrate and have a better community, or not to. I am on the camp of the first option, to be good neighbors. Thank you. [Applause.]
HAASS: I want to thank all three panelists. We are off to an extraordinarily good start and Jaime's was so good it may actually end some of my prejudice toward PowerPoint presentations, I will confess. [Laughter.] The first one I've learned from in decades.
What I would like to do is maybe abuse my prerogatives here and just ask a few questions and then open it up to you all. I wanted to begin with Carla. You make a very strong case for NAFTA. Clearly, however, its popularity, shall we say, is finite. And I guess I've got a two-part question. You alluded to it in part in your comments. One is: Why the disconnect? Why the disconnect so much between what you take to be the objective case— and Jaime's statistics support it— and the perception? And secondly, if you had to do it again, would you have done some things differently? Were there things done either substantively or politically in presentation of it and so forth or in the follow up that could and should have been done differently? Are there lessons to be learned, if you will, either acts of commission or omission from NAFTA, that would help us better sell trade agreements?
HILLS: First question is NAFTA's lack of popularity. In part, I think that too few who have knowledge about what NAFTA accomplished have spoken. And we have come into a new era of high anxiety over jobs, probably throughout the region. It was certainly seen on a globalized basis [at the December 1999 WTO meeting] in Seattle. But a lot of Americans participated in 1999 in objection to— to protest against globalization and trade, and the slogan No More NAFTAs--even though there we were talking about launching a new global trade agreement— really had resonance.
Nineteen ninety-nine was the beginning. In 2000, our economy went into a recession and I think that that probably accentuated concerns over jobs. And it's counterintuitive— that trade increases growth, raises standard of living, but we cannot claim that, in spite of the charge, we cannot be absolutely certain that trade per se increases jobs. What trade does is improve the quality of jobs, what I call the distribution of jobs. And in the United States that's been very, very fundamental.
There's a wonderful study out as to what generated our growth during the go-go years of the '90s. And it was the IT [information technology] revolution that was heavily emphasized in the '90s, on the lowering of prices of computers. All of you didn't use computers in 1985.
HAASS : I still don't.
HILLS: I scarcely think any of you did in a fundamental way. And today all of you do use computers. Indeed, you carry them around in your brief cases. And today you're paying the price for a computer that is a fraction of what you paid for them when they first came out. That means that we're all more efficient, that we need services on the IT side. The projection is that on software and on IT services— its going to give the decade of 2000 another boost of productivity, and that whereas jobs for computers were growing at twice the rate of jobs in the overall economy, jobs in services in IT will grow at three times the rate.
And so the very fact [is] if we permit outsourcing to take place, as we did with computers, we will be able to harvest this benefit. If we cut it off and say we don't want jobs to go to India, we won't. So we've got a big education on what the popularity is because people are anxious. That's why I say, what do we have to do? We have to bring people from the lower areas where they face competitive pressures in textiles and apparel and furniture and heavy glass and move them up into the IT sector. And we have to provide transitional assistance. We cannot simply horde the gains that we get from trade and not be willing to allocate some of them for education and training and help— a helping hand. That's what we need to do and we've done that poorly, I have to say, in this country.
What would we do differently? Perhaps we oversold the agreement. But as we discussed last night, it was almost inevitable, because the opposition was so strong with strident misstatements about the millions of jobs we were going to lose. The idea that an economy like Mexico's, which then was about 300 billion, and we were at about eight trillion— you know, [Mexicos economy was] smaller than the size of south Florida— was going to destroy the United States economically, was, you know, ridiculous. But it got sort of a credence. It was repeated in the press. It was on television. We're seeing the same thing today on television about economic integration and it does trouble me. It wouldn't take too much in the face of current creeping protectionism to fall back into the era of the '30s. But we did talk about the job creation. And as I say, it is not a fair economic proposition [to say] that trade creates jobs. It raises standards of living and creates growth, which is good for the whole economy, but it doesn't necessarily create jobs.
HAASS: Thank you. Mr. MacLaren, you— [inaudible]--I'll just be provocative, for essentially putting out a straw man saying we don't want to have a European model of North American integration. Well, no one's suggesting that. The question is, would there be steps, integrative steps between where we are now, but still less than a European model, that you think Canadians would buy into? Perhaps in some functional areas such as energy, infrastructure development or security?
MACLAREN: Well, on statistics— I suppose if I can remember your three points— [inaudible]--statistics. You know, I said at the beginning, there were two NAFTAs. And Jaime's statistics, I'm sure, are very good and true and illustrate accurately the benefits that NAFTA has brought to Mexico. I'm not talking about that. I was talking about Canada. And what I had in mind was simply this: that when Canada and the United States concluded the Free Trade Agreement— not NAFTA, the bilateral free trade agreement— we had already in place a tariff regime with the United States whereby 80 percent of our merchandise trade went into the United States tariff-free, and a similar proportion of U.S. exports— and, in fact, rather higher— entered Canada tariff-free. It was the auto pact that provided for the major element in our merchandise trade to pass freely between us. Farm machinery had been tax— levy-free since 1945. A range of agricultural products, et cetera, et cetera, entered each of our markets free of duty.
What we intended to do in the Free Trade Agreement, the bilateral free trade agreement, was to escape from the capricious application of trade remedies— in our view, capricious application by the United States of trade remedies. It wasn't so much to reduce tariffs— which, in any event, were gradually coming down under the aegis of GATT. Therefore, what I was suggesting about statistics is that if one extrapolated those trend lines which had been determined by the trade liberalization that we had already engaged in, I wonder whether the results wouldn't have been rather the same with or without the free trade agreement— so that is the root of my skepticism about statistics, [19th century U.K. Prime minister Benjamin] Disraeli and I.
HAASS: So you were not moved, I take it?
MACLAREN: No, no. No, not in the slightest, no. [Laughter.] Oh, gosh. Now I'm getting so old, I've forgotten your other two questions.
HAASS: Only one question. Just basically, are there forms of what you might call North American integration, short of a European mode,l that you think Canadians would be willing to be into?
MACLAREN: Oh, yeah. Well, I raised the European model in passing, merely because Carla had touched on it in her earlier presentation and I wanted to make certain that we all understood that NAFTA and the European Union are in no way comparable, nor have the same common goal. On other forms of integration, yeah, I suppose— I don't know. On energy, which was provided for in the bilateral Free Trade Agreement, there was provision made in it for sharing Canada's enormous energy resources with the United States in a way that disgruntled some Canadians, but at least provided the foundation for a North American energy market. And I suppose one could take that a little farther, but I don't know whether the problem really doesn't exist more with Mexico and the United States than it does with Canada and the United States.
Other forms of integration— I have to tell you the security thing gives me some real problems, but perhaps that's because I simply don't understand it. Well, yeah, I guess there are specific sectors where we might move toward a little more integration, but I remain absolutely committed to the multilateral route. I think our salvation lies in the WTO. It doesn't lie in further North American integration.
HAASS: Thank you. Jaime, you had that interesting slide where there were 20 vegetables sold at your local stand where Mexico had benefited.
HAASS: Was it nine out of 10 cucumbers— I think was one of your statistics? That's one I'll take away from this. One out of six watermelons and so forth.
SERRA: Not bad, eh?
HAASS: Clearly— well exactly, not bad. And it's interesting. If you were giving that talk in Mexico I would expect that a lot of your Mexican audience would go, "Not bad." But here you are in New York. How is it you make the argument that that is also good for the United States? That all the gains that accrued to Mexico according to your statistics from NAFTA, that this is, if you will, a win-win situation, and that these gains— America, the United States did not, to some extent, pay for these Mexican gains?
SERRA: Well, I think it's a matter of who you ask, right? If you ask the— for instance, the producers of sugar in this country that have been subject to a ridiculous protectionist program for many years called the Sugar Program, who are two or three guys, and the American society and the rest of the world in transferring huge amounts of money to these guys. They'll say, Come on, bringing sugar from Mexico is a killer to this country. Of course [it is] a killer to them. And that's why we're not exporting sugar to this country, by the way, in spite of the agreements. But if you ask the consumer if such a figure exists— and I was saying the other night that I think part of this disconnect between reality and perception and benefits versus cost is that the consumers do not have a very clear voice. The big winner of a free trade agreement like this one is the consumer, right? So you can find tomatoes all year round that have good flavor and are ripe and they are healthy and they are organic and all the things that we could do very competitively in Mexico. I don't know how that could hurt Americans. Probably some of the interests