NAFTA was both good and bad for Mexico. In both cases, it required a different approach to doing business, and the effects of that shift are still playing out.
Mexico is home to both very strong local players and a full array of multinational service providers from around the world. Since the North American Free Trade Agreement (NAFTA) was signed under President Carlos Salinas, Mexico has been forced to open up its economy and integrate with international markets. This treaty influenced greatly, for better or for worse, the Mexican economy.
Carlos Gottfried, president of Potencia Industrial, an electrical motor producer, details the background of Mexican economic policy: "The government was pursuing an import substitution policy, together with an active policy of building up Mexican expertise throughout all sectors, but especially in core industries such as electricity and the oil and gas field. It is my belief that these policies were very successful. The country grew extensively. It did present some problems, such as high outlay for imports, and there was a cost to the end consumer, but this was balanced out by the huge advantages to Mexican companies. If you were producing quality goods at a reasonable price, you could grow. This situation was radically changed in the late 1980s by the growing influence of the Chicago School economists within the Mexican administration. These U.S.-educated bureaucrats came back [to Mexico] with ideas of laissez-faire capitalism and the free market. When Carlos Salinas came to power in 1988, he told us that he would introduce these free-market ideas slowly over his six-year term. In fact, within six months the border was open and Mexican firms began to suffer. They closed down 200,000 Mexican companies, four and a half million Mexicans lost their jobs, and industry suffered. Many of these skilled workers moved permanently to the U.S., seriously damaging the Mexican economy."
Others would argue that it became easier to invest in Mexico, and while NAFTA opened up Mexican companies to compete with the best and most experienced global companies, it also opened the international market to Mexican companies.
Rogelio Lopez-Velarde, lawyer at LVHS, argues: "My opinion is that the NAFTA agreement forced the liberalization of the electricity sector, and the fact that it came from an external rather than an internal driver is something overseas investors need to consider."
Felipe Ochoa, chairman of Ochoa y Asociados, explains the impact of NAFTA on energy projects: "Until 1994, when we signed the NAFTA agreement, there was a strong participation of local firms, both in construction and the engineering and design of energy projects. Previously, most of the engineering and design took place within the ministries; they had very strong teams for these activities. After NAFTA many of these teams were dismantled, so we lost a lot of this capacity."
This transformation is what makes the Mexican environment unique. The movement from a national, inward-looking economy where Mexican companies were protected from international competitors and enjoyed the active support of the government, to an environment in which Mexican service companies were left to sink or swim, was radical and painful. Although the advent of NAFTA meant that the cheaper manufacturing costs in Mexico proved advantageous in certain circumstances, Mexican labor is not cheap when compared with that in Vietnam or China. Mexican entrepreneurs are well aware of the dangers of relying on price to remain competitive. This puts Mexico in a difficult situation: How can it compete in the global economy when it can’t compete with East Asia on costs or the U.S. on technology?
As Fernando Calvillo, CEO of Fermaca, a gas pipeline company, explains, "There is a lot of potential in Mexico. We have 5,000 kilometers of land bordering the U.S. and an internal market of 114 million people. We are an integral part of NAFTA, and we have free trade agreements with many European and Asian countries. Mexico is a land of opportunities." The proof of this statement is demonstrated by a large number of Mexican service companies that have learned how to grown and prosper under the new conditions.
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