How NAFTA Explains the Two Mexicos

The re-negotiation of the landmark trade deal will shape the country’s future.

A sign is pictured where the third round of NAFTA talks involving the United States, Mexico and Canada is taking place in Ottawa, Ontario, Canada, September 23, 2017.  (Chris Wattie / REUTERS)

On January 1, 1994, the Zapatista Army of National Liberation, a group of indigenous rebels in Mexico, seized public buildings in towns and cities across Chiapas, the country’s poorest, southernmost state. On that day, the North American Free Trade Agreement (NAFTA) had gone into effect, heralding a new era in economic integration and freedom of trade across the United States, Canada, and Mexico, eliminating tariffs among the countries and symbolizing a new post-Cold War consensus on free markets and trade. But for the Zapatistas, NAFTA represented the recolonization of their country, and they sought to give voice to their protest through armed struggle. The Mexican military put their uprising down swiftly, and the Zapatistas retreated into autonomously governed caracoles, or communes, where they live to this day, rejecting government aid and living largely on proceeds from San Cristóbal’s NGO-run tourist industry and wealthy supporters abroad.

Twenty-three years later, backpackers, activists, and academics, still descend on San Cristóbal de Las Casas, a jewel of a city in the highlands of Chiapas, to celebrate the Zapatistas, who became instant icons of the nascent alter-globalization movement. Yet as visitors fill the rebel-themed cafes and art galleries in the city’s colonial center, they are notably less attracted to its notorious “Misery Belt” on the outskirts, an area of unpaved streets and crumbling shacks. Here, young men and women migrate from the countryside to work in the informal street-vendor economy or head north to Mexico City and the assembly plants along the U.S. border that NAFTA helped create, seeking not revolution, but gainful employment in the capitalist economy. “We came here to make a fresh start … because work was scarce in our village,” Miguel Gómez, a flower vendor in San Cristóbal’s municipal market, told me. His three siblings have already migrated north to seek work, he said. “But it’s not easy. In this city, everything depends on tourism.”

Today, officials from Mexico, the United States, and Canada, are gathering in Ottawa for the third round of talks to renegotiate NAFTA. The prospects for such an upgrade are uncertain. President Donald Trump initially threatened to terminate the agreement, declaring it the “worst trade deal … maybe ever,” citing U.S. job losses and a growing trade deficit; he has since accepted the need for a relaunch. Canada wants to reform dispute settlement mechanisms and secure improved labor and environmental standards. The Mexican government has also called for an improved deal that takes into account its newly opened energy and telecoms sectors, along with other upgrades.

NAFTA’s impact on Mexico has long been a subject of debate. For many, it represents the “two Mexicos”—one increasingly industrialized and affluent, the other largely rural and impoverished—and the widening gap between them. With Mexico set for a crucial presidential election in July 2018, it is on this issue, rather than Trump’s border wall, that the real debate over the country’s future lies.

NAFTA coincided with a wider period of change for Mexico as the country sought to rebuild after its infamous “Lost Decade.” By the time the Latin American debt crisis, spurred by a collapse in commodity prices, struck in 1982, Mexico’s economy looked much like Venezuela’s today, trapped in a cycle of oil dependence, debt, and inflation. Amid the string of political and economic reforms that followed, its de facto one-party state, run by the Institutional Revolutionary Party (PRI), crumbled. In 2000, democracy was consolidated by the election of President Vicente Fox from the pro-market National Action Party which governed until 2012; under the current administration of Enrique Peña Nieto, the Mexican congress has passed market reforms touching nearly every sector of the economy from education to energy.

These changes have fundamentally transformed Mexico. Exports have grown by more than 500 percent since 1993 thanks to growth in manufacturing. Mexican universities are increasingly producing high-skilled workers while firms in the aerospace, tech, and the financial industry, are innovating at a rapid clip. The country’s middle class grew by 11 percent between 2000 and 2010. Meanwhile, NAFTA’s integrated legal framework, which strengthened property rights and dispute mechanisms, has enhanced the rule of law in a private sector long hamstrung by political interference. “This has been one of the most understated achievements of NAFTA,” Valeria Moy, an economist at the Autonomous Technological Institute of Mexico, told me. “The market has helped usher in changes that the Mexican government couldn’t.”

Yet the results have been uneven. Foreign investment has overwhelmingly clustered in states like Chihuahua and San Luis Potosí, which tout their well-designed infrastructure and easy access to the U.S. border. The removal of tariffs and subsidies on agriculture, notably corn, caused massive job losses in the country’s rural south, prompting both migration and social unrest. According to Mexico’s official statistics agency, while 60 percent of the population of Nuevo León, the country’s wealthiest state, per capita, which borders Texas, are middle class, 80 percent of those living in Chiapas dwell in poverty. Referring to this divide, Macario Schettino, an economist at the Technological Institute of Monterrey, said: “Latin America begins not at the border with the U.S., but [halfway down] in Mexico City.”

Schettino and many other observers cite four key reasons for the gap. Mexico’s tax system, long dependent on dwindling oil revenues, currently brings in just under 9 percent of the country’s GDP from non-petroleum sources (compared to 26 percent in the United States). Mexico’s public-education system has long been the worst among Organization for Economic Cooperation and Development nations. Vast geographical discrepancies—Mexico stretches across 761,606 square miles—mean that many citizens live in isolated mountain regions, cut off from infrastructure and public services. Finally, and crucially, an adequate rule of law continues to evade the country.

Chiapas remains a microcosm of such challenges. Its government recoups a measly 1.5 percent of its budget in taxes, due to the fact that 80 percent of the local population works in the informal labor sector. Regulation and cronyism continue to hamper many industries, stifling entrepreneurship. The state’s education system, one of Mexico’s worst, was virtually paralyzed for three years as teacher unions violently protested a 2013 reform. Cash-transfer programs are frequently used to buy political support.

The argument on the left has long been that neoliberalism—or, the absence of the state and supremacy of the market—is to blame. In 2016, however, Chiapas boasted the fifth-largest budget of Mexico’s 32 states. Since the Zapatista uprising, it has received billions of additional dollars in the form of federal aid. Yet extreme poverty has only increased in that time while the state ranks fourth nationally in infant mortality and first in illiteracy.

The reasons for the situation in Chiapas are various. Chief among them is what political scientist Sarelly Martínez, a native of Chiapas, described as an “auction pyramid” in which political parties selectively distribute aid to resolve local conflicts and social leaders protest violently to secure more funding. In rural parts of the state, the blocking of highways and hijacking of municipal buildings are commonplace. Politically motivated assassinations, often barely reported amid Mexico’s drug-related violence, are increasingly frequent. The murder in 2016 of the mayor of San Juan Chamula, an indigenous municipality popular with tourists, was one of the few cases to draw national headlines. Political changes have failed to break the cycle. In 2006, the leftist Democratic Revolutionary Party won Chiapas for the first time; debt increased, as did poverty and social strife. The story has been repeated under current governor Manuel Velasco of the Green Party, who, in 2015, oversaw local elections condemned by opponents as among the most corrupt in Mexican history.

Blame is frequently directed at the federal government for failing to impose order. Yet political necessity and the lack of an independent anticorruption system—currently the subject of an endless congressional fight—highlight the fact that since the 1980s Mexico has prioritized growth and political stability over consolidating the rule of law. Analyst Carlos Mota has argued that the two Mexicos are also reflected in the Mexican state: one known internationally for world-class economists whose talents are sought after by the World Bank; the other gripped by the clientelism of old.

Given the stark inequality that continues to plague Mexico, the debate over the role of the market versus that of the state that NAFTA provoked in 1994 is unlikely to disappear. Much like the United States and Canada, Mexico needs both a strong, transparent government that can uphold the law and lure investment (as is currently happening with the country’s burgeoning tech sector in Jalisco State) and dynamic markets that can incentivize talent and innovation. The parts of Mexico that have begun striking this balance have thrived; those that haven’t have fallen behind.

The debate will continue when Mexicans go to the polls in 2018. With the current administration marred by both corruption scandals and mediocre growth, the frontrunner is leftist Andrés Manuel López Obrador, or AMLO, who favors greater state intervention in the economy and has vowed to hold referenda on the country’s market reforms. AMLO is frequently compared to both Trump and Venezuela’s late Hugo Chávez for his outspoken views and cult-like following. Yet while some view him as a radical in the Chávez vein, he most closely resembles Mexico’s leaders of the 1970s who used populist rhetoric to justify heavy spending while showing little appetite for genuine reform.

If elected, however, AMLO would inherit a very different Mexico from the one of 35 years ago. The country’s democracy is increasingly competitive, as evident in the way citizens fought for the passage of a grassroots anticorruption bill in recent months. Its media is more independent. Its people travel more widely than ever before. AMLO would also lack the compliant congress and high oil revenues of prior administrations. Popular in the country’s southern and central regions, yet far less so in the north, AMLO, too, represents the two Mexicos. Regardless of the outcome of the NAFTA talks, which may yet provide a boost to the country’s economy, it is how Mexico resolves its divide that will ultimately determine its future.