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Pitchfork Economics with Nick Hanauer
South of the Border: A Mexican Perspective on the Free Trade Era (with Juan Carlos Moreno-Brid)
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The rising inequality and growing political instability.
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That we see today are the direct.
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Result of decades of bad economic theory. The last five decades of trickle down economics haven't worked. But what's the alternative? Middle out economics is the answer. Because the middle class is the source of growth, not its consequence. That's right.
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This is Pitchfork Economics with Nick Hanauer.
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A podcast about how to build the.
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Economy from the middle out.
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Welcome to the show. Hey, Pitchfork listeners. Goldie here. I'm old enough to remember when some politicians promised that free trade with Mexico would lift all boats, while others warned about that giant sucking sound coming from the south. As part of our trade series, producer Freddy Da sat down with economist Juan Carlos Moren from the National Autonomous University of Mexico to unpack how NAFTA and the USMCA transformed Mexico, supercharging exports while wages stagnated and inequality widened. Here's Freddie's conversation with Professor Juan Carlos Moreno.
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Hi, my name is Juan Carlos Moreno Bridge. I'm a professor of economics at the University of Mexico, the Faculty of Economics. It's a pleasure to be here with you. Before joining unam, our national university, I used to be head of research of the Economic Commission for Latin America in the office in Mexico. I've been working on trade and development for many, many, many years. So here I am. Great talking to you and as they say, may you live interesting times. And we're really living interesting times. So.
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Yes, yes, indeed we are. Let's start with the big picture. What was the US Mexico trade relationship like before nafta and how did it change afterward, especially in light of the sweeping trade and economic reforms Mexico had already undertaken in the 1980s and early 90s.
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This is a very good question, Freddie, because some people tend to think that our relationship, or strong relationship with the United States in terms of trade, FDI, even culture, etc. Just started with NAFTA. That bloomed with NAFTA. And to be frank, this goes way, way back. And what NAFTA did. Nafta, the North American Free Trade Agreement. For those of you that don't know what it is, what it did is, was basically institutionalize the very strong relation, economic relation between Mexico and the United States. Canada is another story. We don't really have much relation with Canada already. Mexico. Before NAFTA, Mexico was sending 80% of its commodities to the United States. I mean, our basket of export goods was 80% direct to the United States. And foreign direct investment came mainly from the United States. In addition, we have two other issues which are very interesting. For those of us working on class relations, I mean, migrants too, whether documented or undocumented, are a very important part of our relation. Also part of your economy, agriculture, et cetera, construction. And at the same time, remittances. I mean, the US Remittances to Mexican families is an important part of the income of many poor families in the south of Mexico. So what NAFTA did was institutionalize a relationship that was already on very, very strong grounds.
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Okay, that's interesting. Could you unpack a little bit more about the remittances to Mexican families?
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Oh, the remittances to Mexican families. What we have is not only Mexican families. People from Mexico and Central America, they go to the United States. They've been going to the United States for ages, ages, ages. I mean, the difference between the income per capita in the United States and in Mexico is huge. It's like three times, maybe like four times on average. So there's a huge pull factor for Mexicans to go to the United States. The promised lands, where you pick up dollars in the middle of the street, they're just, you know, floating. You just have to catch them. And, well, that has been going for ages. Different administrations in the United States have approached this issue or problem or challeng in very different ways. Some of them look at it as a complementary relation, which I think that's the way it should be, and others thinking it's a very competitive relation, that Mexicans in general shouldn't be allowed in the United States. Like the. Well, like what I believe is the current approach of the Trump administration that trying to kick out everybody that is not actually born in the United States. And if you are born in the United States, not undocumented, I don't know what happens. So remittances slowly but steadily have been an important part of the income of poor families in Mexico. Mind you that the very, very poor don't have the money to travel to the United States. It's not cheap. You have to pay lots of mordidas, we call it in Spanish, illegal payments to different officers. But having said so, it's still poor families that send some of the father, the mother, the kids, etc. And then, well, when they finally end up having a job in the United states, they send $100, $200, which may not seem a lot for an American family, but it means a lot for poor families in the south of Mexico. So now that the administration is trying to tax remittances, well, this is going to be a huge blow to some poor Families in Mexico and in Central America also.
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I'm glad we talked about that because I feel like that's something that I don't think people see or notice when we have these discussions.
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I think it comes also, Freddie, with people may not see the. Also the value of having Mexican workers in the United States, whether documented or undocumented. I mean, some of the jobs that they carry out are very, very important for the US Consumer. If you don't have Mexican farmers in California picking up, you know, whatever you're going to end up having inflation, having scarcity, having lots of problems and even social problems. That progressive politician, or actually a sensible or sensitive politician should be aware that it's not a question of punishing, but trying to build a relationship in the spirit that NAFTA was created. NAFTA was created. Let's go back to NAFTA if you want, in the spirit that the United States cannot compete by its own with Asia or with the European Union, so that there are advantages of having this large market with Canada and with Mexico and obviously the United States. If you go back to traditional trade theory, very orthodox trade theory, Mexico could provide cheap labor and the United States can provide capital, machinery, innovation, etc. And then both countries. I'm forgetting about Canada, but let's put Canada in the same package of the United States because they are basically the same type of technology differences between Canada, the United States and Mexico. And both nations, or both nations would benefit because Mexico would start specializing in the use of its abundant factor, which would be cheap labor force. And the United States, on the other hand. And that. That was the idea. But theory, as they say, there's no difference between theory and practice. But in practice there is, and that didn't happen. It's still the case that the spirit should be. Now that the USMCA is going to be. I don't know whether renegotiated or neculated, whatever it should be that the region should work as a region, not as just the United States and these guys that happen to be the neighbors, that they don't like us, that we can.
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Be more competitive with other regions of the world by combining what makes us individually stronger.
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Certainly. I mean, economies of scale, economies of scope, you name them. But there's a big difference also between the European Union, the way the European Union has been created, and the NAFTA or the usmca. We don't have free travel of labor. So that's a big issue. If capital can move from one country to another, basically undeterred. But labor that that's not the case.
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Yeah, and that's a really important point. When NAFTA was being debated, there was a real public conversation about it in the United States. Was the same thing happening in Mexico? How was it framed politically the same? Was it seen as a consensus policy? I think you said earlier that it was basically just formalizing a lot of the existing trade relationship, trade and investment relations.
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Yes. Ferdi, let me remind your, your audience that NAFTA is like the cherry of the cake in strategy that Mexico started in 1981, 1982, Mexico moved away from state led industrialization and input substitution to what we call now neoliberalism, or we call them market reforms. So in that sense, the big discussion or the big issues or the big debates were in 1982, 1983, whether Mexico should move away from its traditional development agenda of state led industrialization and input protection, protectionism, trade protection and to adopt market liberalization, start shrinking the state, starting opening the economy. And that was the reaction. That was the decision of the Mexican government. And not only the government, academics, the few that were against nafta, they were a very small minority. Remember that. Well, for your audience, in 1981, 82, Mexico came to, woke up to the surprise that from being an oil giant and the future of the developing world, we defaulted. Our external debt, GDP collapsed, unemployment soared, precariousness and poverty were just rampant, et cetera. So something had to be done. And the decision was to move away from the other approach to development to this one in which Mexico in the mid-1980s, 95, 1986, 87 was one of the most open economies in the world. We were the poster child of trade liberalization and financial liberalization. So by the time that Salinas, de Gottari and Bush, as far as I remember they signed the agreement, it was just like evident, it was very welcome. Mexico was supposed to become part of the club of the rich economies. And there was some debate, but really not a lot of debate. I mean the intellectual climate in Mexico, the political climate in Mexico was very much in favor of, wow, let's join the, let's join the U.S. let's be like the United States instead of. You wish to have a saying that oh, poor Mexico, so close to the United States and so far away from God and well, yes, and Salinas administration, I think he was a very keen politician and the climate was in favor of that had already been like eight years moving in that same direction of trade liberalization. So why not join the United States and profit from being placed as a special export platform to the United States. Then came China. And then things happened in a very different way. But there were some debates, some discussions, some people worried about what were the. There was going to be winners and losers. So what would happen with the losers in particular in the agricultural sector, farmers, whether the imports of corn are going to wipe them out of the market or end up being very poor. And there were some clauses in NAFTA protecting some of those sectors. But in general, the whole approach to nafta, I could say it was a welcome approach that Mexico was going to finally lift away from its trap of slow growth, poverty and inequality. And thanks to export led growth, who can discuss that exports are going to be the engine of the economy and then move us closer to any states in the sense of well, being income per capita, et cetera, et cetera. So it was very much a given and a welcome. I'm not saying there was no opposition. There was some opposition, but in general.
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People were largely in very much in.
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Favor and it seemed that the normal thing to do. And it was like, wow, finally a developing country, Mexico was admitted to the club of the rich. And then we were admitted also to the oecd, wto, you name it. It was part of a movement away from state led growth.
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And you've actually written about how this new era of prosperity was supposed to bring new exports, foreign investment, integration with more developed economies. But you wrote that while exports boomed, economic growth and living standards didn't really keep pace with those things. So why do you think the export success didn't translate into sustained national development and growth and income?
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It seemed quite a paradox, Freddie, because if you look at the share of exports in GDP, exports went from being like 15% to 33% or from 10% to 33%. And exports from being oil basically came to be manufactured manufactured goods and also high tech manufactured goods. So it was like, wow. I mean, this is what was supposed to happen. This engine, a very dynamic engine was going to pull the rest of the economy. But although exports soared, imports also soared. Ferdinand because the way that the policy, or industrial policy was implemented in Mexico was that the idea was to boost the exports, the gross value of exports. But nobody paid a lot of attention to the value added of exports. So there were a lot of incentives to export and it didn't matter what you were going to buy as inputs, inputs from Mexico or inputs from abroad. So exports soared, imports also soared. So what economists call that is linkages, backward linkages. You have like in trains, you have the Engine and you have all the linkages, the rest of them, the cars. What happened is that exports became a very, very dynamic but lonely player, say in the economy. They were great exporting, but when you looked at what we were exporting inside those products, inside that export basket, there were a lot of imported inputs. So there are a lot of empirical studies and oh great, this industry or this firm ended up being one of the key players in the world and exports of manufacturers. But actually he was just bringing imported inputs into its production. We were more like an assembly box, not really manufacturing, but assembling. So in that sense, the link between exports and growth was not going to happen. Didn't happen. There were two additional factors that didn't help. One is that without investment, investment for economists is the production of machinery, equipment, infrastructure, because most of people is putting money in the bank. But investment that didn't react in a dynamic way. In a sense, the shift from one agenda to the other development agenda led some entrepreneurs, or the business sector in particular to a wait and see attitude. Well, is this real? Is this going to happen at the same time that the investment from the public sector collapsed? The idea, the theory behind that was that the public investment was crowding out private investment. And that ended up being baloney because it was not the case. The thing is that both public and private investment tend to work together. So private investment didn't react in a dynamic way to compensate the collapse of public investment. So our say productivity or the whole business climate or our whole competitiveness was not improved. So you ended up in a very polarized economy in which a few firms did wonderfully. See, if you take from the middle of the 80s to 1994 when NAFTA signed, Mexico is among the five top players in the world of exports of manufacturers, in the sense of that increased its share of market share. China increased it enormously. But Mexico is among its fifth behind Vietnam after NAFTA from 1994 to 2008, more or less, Mexico is second to China in the number of points, percentage points of the market that Mexico was able to appropriate to penetrate in the world market of manufacturers. So it's a beautiful story. I mean, it's a very important story. But unfortunately it kept running out of players. It's like if I know you play football, but you may have a great player, but if he cannot play alone at the end of the story. So we have this magnificent success. But investment didn't react. And also the type of linkages were not promoted. Backward linkages and forward linkages in the economy. So we ended up de. Industrializing. Instead of industrializing, we ended up deindustrializing. Since the late 80s, actually before NAFTA, the share of manufacturing in GDP and in employment started to decline, Freddie. And we never were able to enter into that stage of industrial development, which is the production of machineries by machinery. So we are not able to produce capital goods. If you come to Mexico, we don't have a firm that builds machines named Moreno or Perez or Cruz. You go to Germany, you go to Japan, you go to China. So our registration process got, you know, like stuck in no man's land in a way. So as a consequence, manufacturers stopped being an engine of growth. And Mexico actually, instead of closing the gap with the United States in terms of income per capita, it widened that gap. So we did everything that was supposed to be done according to the orthodox textbook, but that didn't happen. There's a.
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This didn't work out the way it was.
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It didn't work out. No, it worked beautifully if you're an exporter, but for the rest of the economy it didn't help. Poverty was more than 50% of our population at that, say 2008-09. Well before Andres Manuel got into power, poverty was still five Mexicans, four Mexicans described as income poor or didn't have enough access to health, food, etc. So the word vulnerable is the word we use. So after many, many years of reforms of nafta, now usmca, you name them, the promise of export led growth of trade liberalization, et cetera, it didn't turn out to be a reality. So to something. Well, we have to move in a different way. And with the United States now. Well, the question is we're further away from the United States in terms of welfare.
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And have there been conversations about how improving the trade relationship and economic relationship between the United States and Mexico would be the key to a more resilient economy for both countries?
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There are two sides on that issue that you're bringing, Freddie. One is that should we be closer to the United States? But the impression is that with the vision of the Trump administration, is that being close to the United States, what does that mean? I mean, he already said that he wants to buy Canada or make Canada, you know. Well, it must be a joke, but when you live in Canada, I don't know how it's very different swimming with a shark than seeing a shark in an aquarium. When you swim with a shark, you don't laugh at many things until you get out of the Aquarium. So that point that you're making that yes, it would be great if we could have something like an agreement like in the European Union that labor was able to freely move from one country to another and we could have, say, similar tax policies, etc. But that's not going to happen in the foreseeable future. So the question is to what extent can Mexico have a delinkage with the United States and be closer to China and move away from the agenda of export led growth, whatever, to the United States as the key market? But then we enter into one of your preferred topics, which is politics. Freddie, can Mexico right now, does Mexico have the degrees of freedom to say, well listen, we don't care about the USMCA and let's move closer to China? That's basically politically impossible. Some of the information that we read in the newspapers is that Chinese firms that were thinking of investing in Mexico, not only Chinese but Asian firms that were thinking of investing in Mexico are stopping, their plans have stopped. I don't know whether canceled, but at least interrupted their investment plans until they see what's at the bottom of the coffee, you know, where they can read the future.
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They're trying to wait and read the tea leaves, I guess.
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Yes, it's very difficult. I mean, right now the damage is already done. Freddy, whether Mexico, well, our privileged position as an export platform with certainty that you knew if you came to invest in Mexico, you're going to be able to export with preferred or preferential tariffs to the United States. States. Now that's ludicrous. Nobody knows what's going to happen because we have a beautiful agreement and not so beautiful promises one way or another. He says, president, the president says that he's going to have 200 deals, trade deals, and then he says at the same time that a deal for him is whatever he wants to be a deal. So uncertainty has hit very, very much investment. Mexico is now in the middle of a recession and there's no clear view or clear vision that we're going to start growing again this year or in the next year. The renegotiation or the termination of the USMCA or this issue with the division of President Trump concerning North America is a warning, it's a very important warning to Mexico that we have to start thinking of a different agenda. And it's not that we're stealing jobs from the Americans. Actually, we're providing jobs, well, people to work in the United States. We have been deindustrializing, although we do have a trade surplus with the rest of, let's say, with the United States, we have been having trade deficits with China, with Asia. As long as the United States or the president doesn't believe in the region, in North America as a region, not only as America, Mexico is in a very difficult situation. We should be somewhere else. We should have it more independent, either closer to the United States, but not like Puerto Rico, whatever that may mean. With all due respect to my Puerto Rican friends, but I don't think that it was a very good hand that they were delivered getting close to the United States. But do we have an option? Brazil has an option. I don't think we have any option. We have the menace of having the, the US Military being sent to, to our country and our exports. Right now, 80% go to United States or foreign. Direct investment comes mainly from the U.S. not. Not in such a big figure. So we're tied to a boat that doesn't like us.
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C
So, yeah. So it seems like for good or for ill, you're very tied to a country whose president at this moment sees you as the enemy when we're incredibly more connected than. Yes, even he realizes. So really it's the uncertainty that seems to be driving all of this.
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I think so. The uncertainty. Sometimes you have an uncertainty that it's nice in the sense, well, whether I go to Europe this year or next year. Well, sounds great. But this is the uncertainty. Are we going to be hit more? Are we going to be hit less? Going to hit more often? I mean, what's going to happen from one day or another? And we're close. Trade wise, investment wise, family wise. I mean, workers, Mexican, I don't remember them. The million of Mexicans that live in the United States. And remittances also. And if you want to limit, also crime and arms, et cetera, or drugs, we are having many similar problems, but we're not facing them, I believe, in a consistent, coordinated, say friendly way. I know that it's a very harsh environment. The economy is about competition, but it's about regional cooperation. If you look at Asia, if you look at Europe, I mean, it's a very different story. And we are now in the middle of. In the middle of the desert.
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Freddie, given everything that we've learned and that we've discussed in this interview, what do you think a fair and resilient trade relationship between Mexico and the United States would actually look like? What would make the biggest difference for the relationship itself and for working people in both countries?
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I think when you talk about trade or you talk about production, Fair trade. One would talk about the fair treatment of workers and the fair treatment of entrepreneurs in both sides of the equation. So let's start with entrepreneurs. We should have like similar tax systems. I'm not saying exactly the same taxes, but I think the tax system system should be aimed to work like in Europe, like in that union, in such a way that you are not favoring the competition of let's see who charges less taxes to corporations in order to attract them. So I think one has to look at that part. And when I say taxes, I can also mention environmental standards, labor standards, all that type of regulation that makes up a fair business or a business that is, I don't know what you call it, human, whatever that has, if you want to call it and put it in economic terms, that all the negative externalities internalized in such a way that it doesn't matter very much whether you produce in the United States or you produce in Mexico. That would be one thing. That treatment of the entrepreneurs, tax system, environmental standards, etc. Also labor laws. And in that same sense, the fair trade. Well, it should be based that the workers are not. If you want to think of exploitation, that the work relation is an exploitation, well, okay, it's an exploitation. But workers should be treated fairly and squarely in both sides of the rivers that separate us. Whether we should also have industrial innovation policy that is shared that if you have. The United States tended to complain about industrial policy in other countries and the W2A is against many subsidies for innovation, but at the same time they have applied it. So I think that there should be preferential treatment in such a way that in Europe what they have is with the taxes and expenditure. They have a common way of spending on infrastructure that the regions that are poor or poorest tend to receive more so that you can move up. And I think that should also be when I talk about policy and taxes, also about expenditure that one should have like a common type of government. But right now it's. This is just fairy tale because we don't have anything similar to that at the moment. I would just settle with that migrants are treated decently, are not treated inhumanely. That it should have law, the American law that respects human rights to Americans, respects human rights to undocumented aliens, whatever they may call it in the United States. And that going back to trade, it should be based. Right now, if we could get rid of uncertainty, that would be great. I've been putting the bar very, very low. But right now this is a big mess. The uncertainty created on tariffs, the uncertainty created on foreign direct investment or investment in general. When President Trump said if you want to avoid tariffs, you have to come and produce in the United States. You don't even have the workforce to absorb all that possibilities. So I think it's a fair trade should start with a change of the framework of some politicians that think that the only good American is a white American.
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C
And it seems like at, at minimum, you said you were setting the bar very low. At minimum, just a withdrawal of all the uncertainty and viewing America as the only entity that's able to produce anything of value in this part of the world, it seems like. And just if we can get rid of that sort of mentality, then that's a good start for.
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But that's not going to be easy. You may remember more correctly than I do, there was a SP speech by Vice President Vance saying that the idea was not that all these were going to catch up with the Americans. That was not the way globalization was supposed to work. And say, wow, when you have a vice president thinking that that's not the way it should work. Well, we have a big problem because at the end it's.
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That's not what everyone else was thinking. No.
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And there are some things that if they don't work elsewhere, they won't work in terms of climate action, for example, and many others.
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C
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate and review us. Wherever you get your podcasts, find us on other platforms like Twitter, Facebook, Instagram and threads. Itchforceconomics Nick's on Twitter and Facebook as well. Ickhanhauer for more content from us, you can subscribe to our weekly newsletter, the Pitch over on Subscrib Stack. And for links to everything we just mentioned, plus transcripts and more, visit our website, pitchforkonomics. Com. As always, from our team at Civic Ventures, thanks for listening. See you next week.