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the new nafta

A pivotal moment for a fragile country

NAFTA has helped Mexico become an export powerhouse, albeit one where poverty remains endemic. But as Stephanie Nolen reports, changes to the deal could also have destabilizing political consequences for the country

Jesus Jamie Garcia, and his son Sebastien Jamie Martinez, age 15, in Irapuato, a small community outside of Silao.

Jesus Jaime was a young man, still in his late teens, when he travelled north with some friends from this town in the dry central plains of Mexico, up to Tijuana. They went to have a look at the border into the United States, and they discussed finding a coyote to smuggle them across. Mr. Jaime considered his options – and then he turned around and went south again. There were plenty of risks in crossing – that was a deterrent. But unlike many young migrants before him, he had something else, as well: the sense that there might be options, back home.

Growing up, Mr. Jaime wanted to join the federal police. But he didn't make it out of high school, and he was looking at a low-wage job, maybe in the bakery where his dad worked. "And then the boom came and everyone said, 'Let's go to Silao and make trucks,'" he said with a laugh. Mr. Jaime is a lean and wry 42-year-old these days, with a love of motorcycles and his latest-model smartphone. He is a line boss doing quality control on an assembly line for Silverado pickup trucks. He earns about $175 a week – not a fortune, but enough that he could put his son in a good private school for his early years, get a mortgage on a house, and park both a Harley and a Kawasaki out front.

The GM plant came to Silao in 1995, a year after the North American Free Trade Agreement took effect. It was the start of an economic upsurge in this region, one that hasn't really slowed since.

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But in the view of U.S. President Donald Trump, it was a boom that came at the expense of Americans: He has said repeatedly that Mexico has "stolen" good jobs from the U.S. through NAFTA, has sucked away growth and prosperity that by rights belong to Middle America.

Mr. Trump pledged repeatedly during the campaign that he would "tear up" the free-trade accord if elected, insisting the pact must be redrawn to provide much more favourable terms for the U.S. This month, his administration formally launched plans to renegotiate the treaty. Mr. Trump also promises to build a border wall and make Mexico pay the cost of building it, possibly through a 20-per-cent tax on imports.

The Mexican government says there are changes it would like to see in the trade pact, as well – advisers to President Enrique Peña Nieto say the intent of the new talks cannot be unilaterally to improve the terms in favour of the United States. "If the premise of the negotiation is that the U.S. is losing, this negotiation will not be successful," said Luis de la Calle, a member of Mexico's original NAFTA negotiating team who today advises Mr. Peña's office.

The looming showdown with the U.S. over NAFTA is a pivotal moment for Mexico. NAFTA has, on the one hand, helped this country become an export powerhouse. Major manufacturers have proliferated here, making a wide array of vehicles, parts, machinery and equipment, and creating millions of new jobs. Mexico sent nearly $400-billion of goods to the United States in 2016, up from just $54-billion in 1993, according to the Congressional Research Service. Over that time, a small U.S. trade surplus with Mexico turned into a deficit of $85-billion.


But despite those gains, and its sizable middle class, Mexico has yet to create widespread prosperity from NAFTA.

In the 20 years after the trade deal was launched, the country's per-capita GDP growth sharply lagged the rest of Latin America, its poverty rate has remained high, and real wages have barely budged, according to a study by the Washington-based Center for Economic and Policy Research. Low-cost U.S. agricultural imports also wiped out the livelihoods of many Mexican family farmers, the study said, and emptied whole communities; and, facing poor economic prospects at home, millions of Mexicans went north to the U.S. in search of work.

Should the U.S. pull out of NAFTA, there will be devastating consequences for Mexico. There is the economic impact, of course – the United States is by far the country's largest trading partner, buying 80 per cent of its exports. But there is far more at stake, potential fallout that is much less discussed: An end to NAFTA would have political and institutional consequences, too, weakening an already fragile state. For all the visible gains brought by the treaty in a place such as Silao, you do not have to go very far to find a vision for what a destabilized Mexico, with a shrunken economy and undermined institutions, deteriorating social conditions, and new spaces for organized crime, might look like.

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And regardless of whether the Trump plan ends up involving a total scrapping of NAFTA or, instead, an attempt to make the terms on Mexico more onerous, this country is poorly placed to confront it. President Peña, who was already mired in corruption scandals and bad policy choices pre-Trump, has bumbled his engagements with the new U.S. leader and left his citizens convinced he has neither the brains nor the backbone to manage this crisis. His popularity rating stands at 19 per cent.

Many of his frustrated citizens say this is a fine opportunity for their country to walk away from NAFTA and build ties elsewhere, but economic interdependence with the U.S. makes Mexico supremely vulnerable. Foreign direct investment into Mexico, the bulk of which once came from the U.S., fell by 20 per cent in 2016 compared to the year before. Since then, Mr. Trump has ordered border-security agencies substantially to increase their enforcement ranks, and their detention facilities, and broadened the list of those eligible for deportations. An estimated six million Mexicans live undocumented in the U.S. and they sent home $36-billion in remittances last year – 2.6 per cent of Mexico's GDP.

And yet despite all that, there is a startling lack of discussion in the capital, Mexico City, about trying to lessen this dependence, of looking south or west for new trade partners, of trying to build an internal economy that does not rely on the newly capricious northern neighbour.

The General Motors plant in Silao, in May of 2017.

In NAFTA's 23 years, the North American supply chain – especially for vehicles, assembled with cheaper Mexican labour here in the region called the Bajío – has become one of the most integrated in the world. It is difficult to imagine an end to the seamless cross-border production. The whole idea of tearing up NAFTA seems absurd to Mr. Jaime and the men who work on the assembly line with him. "What shareholder would allow that?" he asked, as he and a few friends had breakfast not long ago, on a day off from 12-hour shifts at the plant. "They've invested a lot of money here. They're not just going to say, 'Okay, let's go then.'"

They also find it difficult to imagine that the steady pace of development in the region could suddenly dry up. When they were young, there were only farms here – and a tiny elite of wealthy landowners who employed, sporadically, everyone else as manual labour. Today there is a solid middle class, and there is work for most who want it. Silao is wired into the rest of the country – the rest of the continent – by a network of highways and rail lines. The land where their grandparents once grew corn is now an "inland port," lined with appliance factories and auto-part makers, and an airport with flights to Houston and Chicago. In Léon, the state capital, and Querétaro, the second-largest city, there are shiny buildings, car dealerships packed with new models, and lineups at drive-through American chains Papa John's and Chili's.

But if Mr. Trump thinks that the people who live here feel they have received some sort of windfall, he's wrong, says Mr. Jaime.

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"Trump says they're good jobs: sure, they're good jobs," he said. "And they're paid differently. We're not in Detroit." The average Mexican's income is only a quarter the average American's, no higher in relative terms than it was before NAFTA.


Mr. Jaime's weeks speed by; he spends at least 15 hours a day away from the house, his son sometimes still asleep when he leaves and asleep again when he gets home. "You don't have a social life. You work, you go home, you sleep and you go to work." Yet he does not earn enough to set anything aside to pay for his son's dream of medical school. The cost of living is rising so fast that his paycheque buys less each month. "Trying to maintain your standard of living, it's … " he trailed off with a shrug.

Mr. Jaime has worked at the GM plant for 19 years, and he imagines retiring from there with a pension – nothing like the pension he would have in Canada, but enough to get by. "The one good thing the job offers," he said, "is the stability."

Or at least, it did.

A view of the town of Xichú.

Options, yes, but limits as well

If Silao is the modern Mexico, all wide highways and multinational manufacturing facilities, the town of Xichú is one frozen in another century. Xichú is nestled in a crook of the Sierra Madre, just 200 kilometres from Silao as the crow flies – but decidedly farther for non-avian visitors. It is a four-hour drive on twisting roads that can suddenly fog over or be pelted with stones in a rock slide. The industrial corridor falls away, and then the more prosperous towns, until the road ends on a steep hill descending to a tree-shaded plaza, a towering church, and a small covered market – where sacks of locally grown oregano are heaped beside stacks of cheap Chinese plastics, the one hint of connection with the wider world.

With the Mexican government's singular focus these days on the preservation of NAFTA, it is easy to overlook that the trade agreement has had an uneven impact on the country – and you don't have to go all the way to the abandoned maize farms of Oaxaca in the far south to see it. Even here in Mexico's prosperous middle there are a great many places that were left out of the supposed benefits of free trade – and where the value of the enterprise is openly questioned.

Leticia Gil grew up in Xichú, and she is fond of it – the clean air, and the streams that run down the hillsides – but she doesn't see a way she can possibly stay here. "Jobs, a livelihood – that's the only thing this place is missing," she said.

Leticia Gil, 21, looks into a pool of water used for crops, in her friend’s farm in Xichú.

Ms. Gil is 21, short, round-cheeked, with an air of shy determination. Last August, she and her best friend, Digna Resendiz, got jobs in a Korean appliance factory in Querétaro. It paid pretty well – $175 a week. But it was brutal work: lifting heavy sheets of glass to fit them into stove fronts, or standing and leaning all day to coil wiring through a fridge. The commute each way was three and a half hours. The shifts were six days a week, 12 hours long – they had barely six hours at home on each workday, nearly all of which they spent sleeping. They asked the company for Saturdays off so they could take classes at a college in the next town; the foreman said no. After four months, they quit.

"There are options now, like this college program, or online education," said Ms. Gil. She and Ms. Resendiz are studying criminology. "And that's what we're focused on."

When she was a small child, Ms. Gil's father did what nearly all the men of Xichú do, and went to work in the United States. He stayed away for a few years, but then he came back in search of a job closer to home. Since 2002, he has worked as a carpenter in Querétaro. He comes home every two weeks or so to visit. She doubts that she will get home even that often, once she leaves.

This kind of talk pains Manuel Casas, the optimistically titled Economic Development Officer for the town. "Our wealth is natural, the flora and the fauna, and we need to figure out how to live off that," he said: He envisions a sustainable industry making products from a local herb, chilcuague, that is a natural anesthetic. He can imagine drawing tourists here – although the two hotels in the town, one of which offers hot water and en-suite bathrooms, will need an upgrade. But none of it seems very likely, he admits: Trump rhetoric notwithstanding, crops of young men, and a few women, leave each week to take their chances at the U.S. border. There is one change: The guest-worker program in Canada is increasingly popular: Mr. Casas said that those who have gone to Canada report that while the work pays in a weaker dollar, they get treated somewhat better than they do in the U.S.

NAFTA, he said, didn't do anything for them. In fact, it's only in the past couple of years that they have begun to feel connected to the rest of Mexico. Ms. Gil's community, on a hill above the town, was wired into the electrical grid six years ago. It got a school last year. The village still doesn't have a sewage system. And despite a much-vaunted telecommunications reform, Xichú has no cellphone network coverage.

Ms. Gil and Ms. Resendiz have ambitions to be civil servants, working in the justice system, but they think about Canada's guest-worker program, too. Picking tobacco or peaches is not much of a job – but it might be the best opportunity for a way out of Xichu, at least for a while, that comes their way.

'NAFTA forced us to change'

No one much remembers this these days, but when NAFTA was being negotiated in the late 1980s, the U.S. government had concerns well beyond trade. Members of the George H. W. Bush administration said that the agreement was necessary to bring stability to the country's volatile southern neighbour, to bolster a rickety government, staunch the tide of undocumented migrants flowing north, and bolster fragile democratic institutions. Any direct economic gain for the U.S. would be a bonus.

Defenders of the agreement today, such as Mr. de la Calle, suggest it did all that – that it brought modernization, growth and an entrenching of the rule of law. It was a condition of NAFTA that disputes would be settled by international bodies, and that gave would-be investors in Mexico something they had never had before: recourse to a transparent system that could not be bought or manipulated. That experience, he argues, had a knock-on effect into other areas. "NAFTA forced us to change and become a much more serious country," he said. Some credit the trade agreement with creating the space for Mexicans to elect their first government from a party other than the Institutional Revolutionary Party (PRI) in 71 years, in 2000.

"It's a democratic country," Mr. de la Calle went on. "We have built institutions … that doesn't mean we don't have problems."

Indeed. Mexico has an astronomical rate of violent crime, coupled with entrenched impunity for those who commit it: A staggering 98 per cent of crimes are not solved. The decade-old "war on drugs," and consequent militarization of public security, has left at least 100,000 people dead.

There is speculation on nighttime news shows about what a Mexico without NAFTA might look like, but the country has its own laboratory for what happens when weak institutions are hit by economic crisis. To see it, it's another 600-km drive to the east from Xichú, to the city of Xalapa in the Gulf Coast state of Veracruz.

Again, this is not one of the sun-baked states in the south where peasant farmers were wiped out by NAFTA: Veracruz is an oil state, well developed and, until recently at least, prosperous. But the last 15 years have been brutal: Veracruz has been under the control of three different narco-trafficking cartels, who in recent years branched into the smuggling of people and oil on the north-south corridor as well. But the state government was no counterbalancing force for good – rather, the state institutions gradually merged with the narcos.

"In Veracruz, an alliance between criminal groups and the highest levels of local political power paved the way to an unbridled campaign of violence through the capture of local judicial and security institutions, guaranteeing impunity for both sides," the International Crisis Group, an independent organization researching conflict, said in a report released in February. Local journalists have tried to cover that capture at their peril: Six reporters have been killed so far this year, 37 since Mr. Peña took office; this is one of the most dangerous places in the world to be a journalist.

"This is a very, very complicated moment to be a reporter in Veracruz," said Flavia Morales, who runs a small news agency in Xalapa. "If they want to kill you, they'll kill you." She knew many of the reporters and photographers who were murdered in the past few years; she and her husband, a photojournalist, never go out on assignment together. "If something happens, it should only be to one of us." The range of what she feels she can report on is small these days, and it's a frustrating situation for someone with a passion for news and a keen awareness that there is crime and corruption all around. "Things are terrible – but I believe without us it would be worse. We're a counterweight – very small and vulnerable, but we are."

The extent of the depredation here came fully into the public eye last October, when the former governor, Javier Duarte, was charged with organized crime and embezzling more than $1-billion; he promptly fled, and spent six months on the run before being arrested in Guatemala in April. A new governor, Miguel Yunes, is now in power, and has vowed to regain control of the police. But Mr. Duarte left the state entirely bankrupt, with no funds for, for example, a purge of the police, or the Truth Commission that Mr. Yunes has promised will unravel the complicity of the state in events here.

There is no sign of enhanced state institutions in Veracruz; they are every bit as weak as they were pre-NAFTA. The state prosecutor has a registry of 2,750 disappeared people – but human- rights activists say that is likely just a tenth of the real figure.

Lucia Diaz's son Luis disappeared on June 28, 2013. He was a DJ and a party organizer; an employee saw armed gunmen take him from his home after work one night. He may have been abducted in a kidnapping for ransom, or because someone thought he knew something. "This is Mexico," she says. "It could be anything."

Since the day she realized he was gone, Ms. Diaz has been searching for him – battling incompetence, indifference and outright fear on the part of the officials who ought to be investigating. After fruitless months, she began to talk to other parents of the disappeared, and they formed a group, Colectivo Solecito.

They were preparing a march on Mother's Day in 2016 ("That's a day when it's impossible for us to stay at home") when a couple of young men pulled up in a truck and shoved some papers into their hands, then drove away. They were 15 copies of a map, showing an area called Colinas de Santa Fe, just outside town – marked with 30 crosses, and the message that they would find 500 bodies there.

When they once more encountered disinterest from the state, Ms. Diaz, who is in her 50s, and her compatriots decided they must look themselves: They held a raffle and sold old clothes to buy tools, got a bit of training, and set off to dig. So far, they have unearthed 130 graves, containing the remains of at least 260 people – making it the largest mass grave in the Americas. Just two of the bodies have been identified as their missing children. The horror of it is unrelenting: "There is nothing like this, this uncertainty. It's like playing with people in the worst possible way, it's like torture. You don't know if your son or daughter is eating, if they're cold, where they are. How can you toy with people like that?"

The experience has left Ms. Diaz scornful of all levels of government, and she speaks out with the fearlessness of a person with nothing left to lose. "If there were justice in Mexico, we would know what happened to my son." Some members of the group saw the police take their children, she said; it's no wonder there are no investigations. "Why would you investigate yourself?"

"Forget Trump," she snaps. "These are the people who've done all the damage to Mexico. You see the fancy buildings and the cellphones and the cars, and you think Mexico is a modern country, and it isn't."

Men motor through a neighbourhood that overlooks a Ford assembly plant outside a small community near Silao.

A resolute focus to the north

The belligerent stance of the Trump administration might suggest that this is a fine moment for Mexico to lift its focus from the United States: to tell Mr. Trump he can keep his dead-end factory jobs, that Mexico will instead target bio- and information-technology industries; or seek to strengthen trade ties with Asia, building on the agreements that were struck for the now-moribund Trans Pacific Partnership; or to look south, forging commercial and other relationships with Brazil, Colombia and other countries in South America.

Yet, the Mexican focus remains resolutely trained to the north. When other Latin American countries sent their leaders to a regional summit on trade not long after Mr. Trump was inaugurated in January, for example, President Peña skipped it. The cluster of advisers around the president are obsessed with maintaining the U.S. relationship, says political scientist Denise Dresser, who teaches at the Instituto Tecnologico Autonomo de Mexico in the capital, and Mr. Peña stumbles along reacting to Washington: "Everything Peña has done is too little, too late," she said.

He should have taken a harder stand against Mr. Trump's rhetoric about the border wall, she said, and done as Canada did, making clear that if the U.S. imposes new tariffs, Mexico will do the same. Mr. Peña could also be using the threat of an end to migration and security co-operation as a negotiating tool, she said; instead he has sent his foreign minister on appeasement missions to Washington.

Discussion about a post-NAFTA Mexico is left to the populist leader Andrés Manuel López Obrador, who is running in the 2018 presidential election (Mr. Peña is constitutionally barred from standing again) and who is strongly anti-trade. "Everything points to him being elected, and then we'll have uncertainty," said Prof. Dresser.

Andrés Manuel López Obrador at a campaign event on May 18, 2017.

If Donald Trump's government withdraws from NAFTA, trade between the U.S. and Mexico would in theory revert to the World Trade Organization (WTO) bound rates that were in place before the deal. These put an average 5-per-cent markup on Mexican products entering the U.S. – and up to 45 per cent on goods going the other way. (Mr. Trump could of course simply put new additional tariffs on Mexican goods, breaking WTO rules and throwing global trade into chaos.)

Mexico would like to see NAFTA broadened to include new regulations on the environment and e-commerce, to include health care, and more agreements on ground and maritime transportation. But the Peña government may have to settle for some sort of new terms that give Mr. Trump something he can claim as a victory. Anything beyond that, Mr. de la Calle said, "and Mexico will say, 'To hell with it.'"

Mr. Peña will not get away with allowing any major concessions. As it stands, Mexico has the lowest salaries in Latin America and the Caribbean; Mexican GDP per capita grew 19 per cent over the first 20 years of NAFTA, just half the rate for the rest of Latin America, according to the Center for Economic and Policy Research.

The new uncertainty around NAFTA makes for anxious days for Mr. Jaime and his friends at the car factory in Silao – and for millions of other Mexicans on similarly uncertain ground. He reckons that without NAFTA, he would not have earned enough to own a house, or the motorbikes.

But he sees Mr. Trump on TV, and he chafes at his rhetoric, at how divorced it is from the reality of life for his family, for the guys at the factory. He thinks about GM workers who do the rest of the work on the trucks he builds, the ones in Windsor, Ont. and Detroit. They all do the same job, he points out – but they earn in dollars what he earns in pesos. "With what they earn, they live well, they travel. And we, we just live."

Stephanie Nolen is The Globe and Mail's Latin America correspondent.

On June 7 in Toronto, The Globe and Mail is holding a live panel discussion, Globe Talks: NAFTA in Play, on the future of trade with our biggest partner, featuring Globe journalists Barrie McKenna and Joanna Slater with experts Dan Ciuriak, Laura Dawson and Michael Kergin. For details and tickets, visit tgam.ca/NAFTA

Follow The Globe's ongoing coverage of trade issues and track of the renegotiation of the North American free-trade agreement. tgam.ca/trade



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