Taiwan’s Investment and Trade Relations with Mexico
5.2. Mexico’s Integrationist Response: The NAFTA Factor
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scholars within and outside the country.357 However, it is certain that mainland China remains as the major destination of the outflows of Taiwanese investment, and that it would take many years to dismantle the cross-strait supply chains being developed since almost thirty years ago, when the first Taiwan relationship enterprises moved some of their operations to China.358 Therefore, when we analyze the economic links of both sides of the Taiwan Strait with the rest of the world, it is important to keep in mind the Taiwanese relationship enterprises. This phenomenon is even more evident when analyzing the case of the NAFTA impact in the Mexican economy, as it will be seen in the following section.
5.2. Mexico’s Integrationist Response: The NAFTA Factor
5.2.1. Major Motivations behind NAFTA
Historically, many elements of economic cooperation in the US-Mexico bilateral relationship can be found since both countries got involved in World War II. As members of the Allied forces, the United States government provided loans and economic aid to its Mexican counterpart, while a program to accept temporary workers from Mexico, also known as
‘braceros,' was started in 1942 as a response to the lack of workers in the American industry and agriculture as a result of the war. The program formally ended three years later, but it continued under different forms until 1965, after pressures in both sides regarding the situation of workers' rights and the supposed threat they posed to the creation of jobs for the American population in general.359 That year, a new bilateral program was developed, when the first ‘maquiladoras' were built along the Mexican Northern border, dedicated to assemble manufactured goods, including cars and auto parts, which were later re-exported to the United States.360 This way, the United States would show its continued willingness to provide material help to its southern neighbor through job creation. However, this type of programs
357 Kwei-bo Huang, “Preliminary Political Analysis of Taiwan’s ‘New Southbound Policy’,” paper presented at the International Conference: Taiwan’s Foreign Policy After 2016 US Presidential Election. April 14, 2017.
(Taipei: National Chengchi University).
358 Official data from the Ministry of Economic Affairs Investment Commission of the ROC, 2017.
359 Ronald L. Mize, & Alicia C.S. Swords, Consuming Mexican Labor: From the Bracero Program to NAFTA.
(Toronto: University of Toronto Press, 2011), 3-24.
360 Leslie Sklair, Assembling for Development: The Maquiladora Industry in Mexico and the United States.
(Winchester, MA: Unwin Hyman Inc., 1989), 43-75.
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has been constantly criticized because its inability to promote a provision of high quality jobs, also making it difficult for domestic companies to spur innovation and absorb foreign technology.361
As it was analyzed in the previous chapter, years after the first maquiladoras were opened, neoliberal economic reforms in Mexico were carried within a changing international environment, deepening the country’s integrationist approach throughout the 1980s and 1990s. The recovery of post-war Japan and Germany, and the economic success of the Asian Tigers convinced other governments about the advantages of export-led growth, hence highlighting the importance of the attraction of foreign direct investment (FDI). Concerned about the competition from these newly industrialized countries (NICs), along with the former socialist countries in Eastern Europe, which were also reforming their economies in order to invite international investments, the Mexican government believed it needed new ways to maintaining the pace of its reforms, by making them more appealing to foreign capital.
Since leftist movements in Mexico still had considerable support in different parts of the country, including factions within the ruling PRI, the Salinas administration had to ensure neoliberal reforms would be irreversible, and that no further governments would attempt to cancel them. That way, investors could feel more comfortable to invest in the country by knowing their capital would not be confiscated or nationalized by ensuing administrations.
For Mexican decision makers of the time, a good path to follow was to replicate the
‘maquiladora model’ in the whole country and rely on the export of manufactures to the United States for the procurement of hard currency and the attaining of high rates of economic growth.362 A free trade agreement would have to be signed with the largest consumer market in the world, in order to achieve those goals.
On the American side, the negotiation of an FTA with Mexico could be seen as part of the strategy to advance economic liberalization in other parts of the world, to deepen economic integration in North America, and as a tool to put some pressure on the European Economic Community (EEC) to adjust its position and unlock the negotiations of the
361 Jorge Carrillo & Redi Goméz, “Los retos de las maquiladoras ante la pérdida de competitividad”, Comercio Exterior, 53:4 (April 2003), 318-327.
362 León Bendesky, et al., “La industria maquiladora de exportación en México: Mitos y realidades,” in Estudios Sociológicos, 22:65 (May-Aug. 2004), 283-314.
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Uruguay Round, which had begun in 1986 but was reaching an impasse in the early 1990s.
By supporting the establishment of the Asia-Pacific Economic Cooperation (APEC) forum, and creating a North American trade block, the US government was sending a signal to its European counterparts about the American advantages at looking at other parts of the world to build strong economic alliances. Finally, after the Mexican government raised the initiative, the new administration of George H.W. Bush immediately endorsed it and the consultations and first talks began in 1990.363
After the official announcement was made by both governments, Ottawa responded by showing its intentions to join negotiations. The Canadian government had signed a FTA with the United States in 1987; however, a new trade deal between the US and Mexico could create trade diversion, harming Canadian exporters, who might not be able to compete against the Mexican cheap labor and proximity to strategic niches in California and Texas. By joining NAFTA, the Canadian policy makers made sure that they would also receive the same benefits that were given to Mexican businessmen by the government in Washington, while having access to the markets and natural resources in Mexico.364
NAFTA has been praised by officials in the three countries as the first FTA signed between a developed and a developing country;365 but has been more controversial within the academic circles where it is regarded as an encompassing agreement which contemplates the granting of national treatment to foreign investments from the other signing countries, while also including commitments regarding environmental protection, rules of origin, labor conditions, and the opening of agricultural sectors.366 Opposition to this kind of commitments was found in the three nations. Being a country with a hegemonic-party regime and a paternalist state tradition at the time, Mexican civil society was not as effective as its
363 Clement, Norris C, et al., North American Economic Integration: Theory and Practice. (Northampton, MA:
Edward Elgar, 1999), 279-316.
364 Héctor Alimonda, “NAFTA blues. La crítica canadiense a los acuerdos de libre comercio en América del Norte,” in Nueva Sociedad, 133 (1994), 88-101.
365 See Jorge G. Castañeda, “NAFTA’s Mixed Record: The View from Mexico,” in Foreign Affairs, 93:1 (Jan.-Feb., 2014), 134-141; Carla A. Hills, “NAFTA’s Economic Upsides: The View from the United States,” in Foreign Affairs, 93:1 (Jan.-Feb., 2014), 122-127; Michael Wilson, “NAFTA’s Unfinished Business: The View from Canada”, in Foreign Affairs, 93:1 (Jan.-Feb., 2014), 128-133.
366 Gary C. Hufbauer & Jeffrey J. Schott, NAFTA Revisited: Achievements and Challenges. (Washington, DC:
Institute for International Economics, 2005), 1-78.
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American counterpart in demanding the recognition of certain concerns affecting their lives after the signature of the agreement.367
Environmentalists and Trade Unions in the United States successfully lobbied representatives at Congress, who eventually put some pressure to the Clinton Administration in order to demand more commitments from the Mexican government, arguing that the loose regulatory framework in the country could cause a mass exodus of American companies south of the border, leaving thousands of American blue-collar workers unemployed. The unexpected American demands uncovered the unpreparedness of Mexican negotiators when dealing with issues as complex as environmental regulations and other commercial issues for a developing nation. Both Canada and the United States were founding members of GATT, and had been used to negotiate in those areas with other well prepared countries in Western Europe and Japan, as evidenced during the Tokyo Round.368 As it was seen in the previous chapter, Mexico became a member of GATT only in 1986, after a long tradition of protectionism, which made officials believed it inhibited the competitiveness in domestic industries and made more difficult the elevation of factor productivity rates.
Within the country, economic reforms were announced by the Salinas administration as the ultimate strategy which could lead Mexico into the developed world; and the signature of NAFTA, along with the support received from the United States to become a member of the Organization of Economic Cooperation and Development (OECD), were seen as a welcome given by the wealthy and powerful nations to a country that was doing the right things. When NAFTA was first implemented in January 1st, 1994, Mexico woke up to a very different reality. The Zapatista uprising in the southern state of Chiapas, the poorest in the country and mostly inhabited by indigenous people, showed that Mexico was still far from reaching the status of a developed nation.369 The ensuing political motivated assassinations of PRI's presidential candidate Luis Donaldo Colosio and the Party Secretary Francisco Ruiz Massieu, caused alarm among the financial circles, where businessmen were quietly withdrawing their portfolio investments from the country. The new administration of
367 For an example see Blanca Torres, “Las ONG ambientalistas en las relaciones México-Estados Unidos,” in Foro Internacional, 39:4 (Oct.-Dec., 1999), 453-478.
368 Joseph M. Grieco, Cooperation among Nations: Europe, America and Non-Tariff Barriers to Trade. (New York: Cornell University Press, 1990).
369 Enrique Krauze, La presidencia imperial. (Mexico City: Maxi Tusquets Editores, 1997), 472-479.
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President Ernesto Zedillo received a difficult financial situation from the outgoing Salinas administration, and after a catastrophic mistake known as "error de diciembre" which caused the outbreak of the peso crisis and its famous "Tequila Effect," the idea that Mexico was still a fragile economy that needed more than just free trade in order to attain sustainable development was reinforced.370
5.2.2. A New Era for Bilateral Relations
The 1994-5 financial crisis was the first test in the new phase of Mexico-US bilateral relations.
Through the approval of an up to US$50 billion bailout package consisting in loan guarantees, the Clinton administration showed its willingness to relieve the pressure of its high level trade partner, which if unattended, could create more problems for the American economy and erode the plans to set NAFTA as a role model for a future integration of the Western Hemisphere under the US leadership.371 By 1997, the Mexican economy was growing again, based mostly on the growth of manufacturing exports to the United States, helped in part by the stimulus provided through American assistance. In just a few years, capital goods got to occupy the largest share of Mexican exports to the United States, while raw materials, particularly oil and other minerals, that were the largest share during the 1980s, decreased their importance in the bilateral trade (Figure 5.2).
After the NAFTA experience, Mexican policymakers embarked on the negotiation of further FTAs with other parts of the world. These developments changed the face of the Mexican economy, and social transformations were felt as well. The deal with the European Union, in 1997, brought more pressures to the Mexican government to continue the process of political openness and democratization, which had started in 1977, and was completed with the triumph of the opposition National Action Party (PAN) in the 2000 presidential election.372 The new FTAs did not contribute to the goal of trade diversification, and the Mexican exports increased their dependence on the American market. Actually, most of these agreements were mainly thought to make use of the rules of origin provided by NAFTA and
370 Nora Lustig, Mexico: The Remaking of an Economy. (Washington, DC: Brookings Institution, 1998), 143-169.
371 Ibid, 177-190.
372 Francisco Gil Villegas, “México y la Unión Europea en el Sexenio de Zedillo,” in Foro Internacional, 41:4 (Oct.-Dec., 2001), 819-839.
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attract multinational companies based in Europe and Japan to outsource part of their operations to Mexican soil, and export their final products to the US. This way, the country could exploit its competitive advantage of geographic proximity and cheap labor, fulfilling its economic goal of job creation through export-led growth.373
Figure 5.2. Basic Composition of Mexican Exports to the United States (selected years)
Source: Data obtained from The World Bank – World Integrated Trade Solution (WITS), 2017.
During the first years, this strategy showed positive results, and Mexico accelerated previous trends to become the US second largest trading partner by the beginning of the new century. However, this situation would change dramatically when a new competitor would offer better incentives for investors interested in exporting manufactures to the United States:
The People’s Republic of China (PRC). Since the 1990s there has been a silent integration of China to the production chains in North America.374 This trend was reinforced since the PRC's accession to the WTO in 2001. Afraid of Chinese competition and suspected unfair
373 Amapola Grijalva, “Los efectos de las incongruencias arancelarias en las relaciones comerciales México-Estados Unidos-China. Una propuesta alternativa a la política de protección,” in Enrique Dussel & Yolanda Trapaga (eds.), Hacia un diálogo entre México y China: Dos y tres décadas de cambios socioeconómico.
(Mexico City: Senado de los Estados Unidos Mexicanos, 2010), 391-415.
374 Francisco J. Haro, “China en el norte de América: la relación con México y Estados Unidos,” in Nueva Sociedad, 203 (2006), 160-170.
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practices, the Mexican government was the last negotiating party to agree on the admittance of China to the organization, in which was seen a strategy to obtain greater benefits from Beijing and protect domestic industries and small and medium scale producers in Mexico.375
However, despite this strategy, by 2003 China displaced Mexico as the United States second largest trading partner, and Mexican imports from the PRC grew at an impressive pace producing a large trade imbalance favorable to the Chinese side. An important part of the Mexican trade deficit with China comes from parts that are semi-assembled in the coastal areas of the PRC and are sent to Mexico for the final processes and to be later re-exported to the United States markets.376 This way, in the numbers, Mexico looks very different from other countries in Latin America, by becoming a manufacturing-exports powerhouse in the region. According to the United Nations' Economic Commission for Latin America and the Caribbean (ECLAC), Mexican manufacturing exports accounts for 70% of the country's total exports, a volume larger than the rest of all Latin American countries combined. In this sense, the government's strategy was successful in finishing the country's dependence on oil exports, and promoting the industrial manufactures exports.377
However, it is other type of dependence that has proved more difficult to overcome for the Mexican economy. NAFTA reinforced the Mexican dependency on the American market, making 81% of the country's exports sent to the United States in 2015, according to the CIA World Factbook. This percentage had been decreasing during the previous decade, but grew again in the last couple of years, presenting a big challenge for the Mexican government on the search of a more balanced trade with the rest of the world. This dependence impacted negatively in 2009, when Mexico became the worst-stricken country by the financial crisis that started in the US real estate market months before, when the exports to the US fell dramatically as a consequence of demand contraction in that country.
Nonetheless, bilateral trade has increased dramatically since NAFTA, reaching over US$500 billion a year (Figure 5.3); but the other promises made by the promoters of free
375 Luis De la Calle, “China en la OMC: Espejo para México,” in Foreign Affairs en Español, 2:3 (2002), 152-161.
376 Enrique Dussel-Peters, et al. (eds.), China and the New Triangular Relationships in the Americas: China and the Future of US-Mexico Relations. (Mexico City: University of Miami, University of California in Berkeley and UNAM, 2013).
377 Gerardo Fujii & Rosario Cervantes, “México: Valor agregado en las exportaciones manufactureras,” in Revista CEPAL, 109 (April 2013), 143-158.
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trade have been far from becoming a reality in Mexico. American fears of Mexico sucking off the jobs in the US are difficult to assess, considering that different organizations manipulate the information to look for more supporters to or detractors against NAFTA, as the cases of the US Chamber of Commerce and the American Federation of Labor respectively,378 and during these two decades, large sectors in the three countries with a negative impression of the agreement have remained, mainly blue-collar workers in the US and Canada, and poor peasants in Mexico.379
Figure 5.3. Evolution of Mexico-US Total Bilateral Trade, 1990-2015
Source: Data obtained from The World Bank – World Integrated Trade Solution (WITS), 2017.
5.2.3. The NAFTA Challenges
After 23 years of a renewed relation with North America, based on the promotion of free trade and economic integration, the indicators separating Mexico from its northern neighbors
378 Gary C. Hufbauer & Jeffrey J. Schott, op. cit.
379 See Public Citizen, “NAFTA’s Broken Promises 1994-2013: Outcomes of the North American Free Trade Agreement”, online, 2013, https://www.citizen.org/documents/NAFTAs-Broken-Promises.pdf
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remain greatly unequal. Washington has been reluctant in adopting policies similar to those in Europe that allowed Ireland, Spain, Portugal and Greece, to narrow their economic disparities with the rest of the community, in order to prepare Mexico for a deeper integration and formation of a North American Common Market. Financial cooperation from the United States has been focused in other priority areas for Washington, particularly on fighting drug cartels and organized crime, as in the case of the Mérida Initiative.
At the same time, economic interdependence between Mexico and the United States has an asymmetrical nature, making the former more dependent on the latter than vice versa.
This dependence can prove dangerous for Mexico, especially during a time of relative economic decline of the United States. This problem has been already identified by Mexican policymakers who are now looking to diversify the country's export destinations, looking at Asia's emerging markets as attractive options. Depending less on the American market could also help alleviate the regional economic disparities within the country, which have widened as a result of NAFTA and the maquiladora model.380 Because of the proximity to the United States, most of the assembly lines and factories with foreign capital have been established in the northern bordering states, along with other industrial centers in Western and Central Mexico, while those states in the South depend heavily on small agriculture and services, being these unable to compete internationally, hence concentrating the largest number of people living below the poverty line in the country.
However, attempts to integrate these states with the economies in Central America
However, attempts to integrate these states with the economies in Central America