NAFTA Will Help Mexico
Don't Worry About the Peso Crisis
Back during the NAFTA debates, H. Ross Perot darkly warned that if NAFTA passed, we would see a drop in the peso, a "giant sucking sound," which would lure U.S. companies south of the border. Now, in the wake of Mexico's recent peso devaluation, it is not just Perot who is saying, "I told you so."
The cheaper peso means that wages will be even cheaper in Mexico, making it profitable for more companies to begin producing materials there. In turn, the devaluation of the peso means that Mexican companies will be able to be more competitive on the world market, thus taking away some of our share of manufacturing.
So, we are told, America is in trouble because of the lower peso. This is decidedly not the case. True, it is partly due to NAFTA that the peso has lowered, but only because NAFTA has forced Mexico to face some economic realities, not because of some plan to lure away American jobs. In fact, it is NAFTA which will enable Mexico to survive this crisis, even allowing both countries--the United States and Mexico--to come out ahead in the long run.
The peso has plummeted 35 percent since its initial devaluation on December 20th, from around four pesos to the dollar to, as of January 4, about 5.4 pesos to the dollar. In truth this was not totally unexpected. The four-to-one exchange rate that President Salinas kept in place was regarded as somewhat unrealistic, and Wall Street had been waiting for an announcement of devaluation.
This expensive peso meant that jobs were somewhat scarce, and thus contributed to some of the rural unrest. When the rebels seemed to be readying for a new round of attacks, President Zedillo decided to lower the peso by about 12 percent. Then, in a surprise to almost everyone, he allowed the peso to float against the dollar. Investors were used to being warned well in advance of a devaluation. This sudden move scared them, causing them to start unloading Mexican securities. The peso continued to drop.
The plunge in the peso has caused much panic, both within the Mexican government and among outside investors. President Zedillo has released a plan which he hopes will keep inflation at around 15 percent in the short term and have growth at around 1.5 to two percent. This is quite a bit different from the four percent inflation and four percent growth that had been predicted a month ago, before the devaluation. In addition, he hopes to cut government spending by about 1.3 percent. More ominously, though, nearly $8 billion in foreign investment has fled the country since the drop. This is about 12 percent of all foreign investment in Mexico.
So what Perot saw as an evil plan to suck away American jobs seems to have the Mexican government scared--and rightly so. Yet the result is quite different from Perot's original prediction. Perot had pictured a secret, planned devaluation, not an occurance which is clearly a function of the market. In fact, the sucking sound he envisioned has yet to materialize at all.
It is true that since NAFTA passed, U.S. imports from Mexico have grown from $7 billion to $40 billion, but at the same time our exports to Mexico grew from $8 billion to $42 billion. (Mexico's world-wide trade deficit is currently around $30 billion.) Mexico had large protectionist barriers before NAFTA, the removal of which has caused this growth in exports. The Commerce Department has credited NAFTA with creating 130,000 new jobs in the third quarter of 1994 alone. In addition, American consumers are now being provided with cheaper goods from Mexico.
It is NAFTA which will ultimately help Mexico get out of her crisis. Because of the devaluation, the country's goods will be cheaper. As a result, manufacturing should go up, creating jobs. (Incidentally, this increase in jobs should hold back the wave of illegal immigration that has also been predicted in the wake of a peso devaluation). NAFTA also guarantees Mexico a certain amount of foreign investment--which is much needed right now.
It will also not allow Mexico to set up trade barriers to protect its economy in the wake of this crisis.
This will benefit Mexico in the long run, by forcing it to remain competitive, and it will also help the U.S. because it will enable us to keep selling our products over the border to what will hopefully become a better-paid working class.
So NAFTA will be good to Mexico following this devaluation, but this does not mean that it will be bad for us. Trade is not a zero-sum game; now that we are in a free-trade zone, we benefit when Mexico benefits. And isn't that partly the goal of NAFTA anyway; to help improve life in Mexico through trade? We should enjoy our new connections with Mexico and be glad that we are in a position to help the country out of its currency crisis through trade and investment.
We should also be glad NAFTA has forced Mexico to face certain global economic realities. The expensive peso was unrealistic, but could be kept high under a protectionist economic policy.
Now that Mexico is becoming a larger player in the world economy, it has been forced to concede to currency market forces. By doing so, Mexicans should both create jobs and boost trade in their own country. Thanks to NAFTA, is should do the same in our country. The only true sucking sound is that between Perot's ears.