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North American Free Trade Agreement retrospective with Luis de la Calle

North American Free Trade Agreement retrospective with Luis de la Calle

NAFTA negotiator for Mexico and ex-Mexcan Trade Minister, Luis de la Calle takes a retrospective look at the North American Free Trade Agreement.

Tecma Group of Companies:

Hello and welcome to another edition of Tecma Talk podcasts. These particular discussions are between external experts or Tecma staff with internal expertise on the topic of manufacturing in Mexico or issues that are related. Today we are very pleased to have with us Luis de la Calle. Luis was one of the individuals who negotiated for Mexico in 1994 with respect to the NAFTA, he is involved with the Woodrow Wilson Center at Princeton and today he is in private practice in Mexico City with his law firm, de la Calle, Madrazo and Mancera. Luis, how are you today?

Luis de la Calle:

I’m good, how are you?

Tecma Group of Companies:

I’m doing fine, I’m wondering if you could tell us a little bit about your activities today.

Luis de la Calle:

Well I’m working in my legal practice with firms that do business in Mexico, as well as firms from overseas, on the strategic matters that they have. I try to provide them guidance and quality, value-added advice.

Tecma Group of Companies:

It’s been a long time since the NAFTA was enacted—put into effect—first in 1994. There have been a lot of stories printed recently, principally at the beginning of this month, about what has transpired over the last 20 years with respect to the North American Free Trade Agreement. As an exercise in prequel, for our listeners, can explain to us what were some of the events that actually led to the idea of negotiating the NAFTA between Mexico, Canada and the United States?

Luis de la Calle:

Well, I gather the most important elements to explain why Mexico decided to negotiate with the U.S., and, then, also with Canada have to do with the crisis that we faced in the 1980s, what’s considered the lost decade. We had a debt problem in 1982, we had high inflation in 1987, and then, of course, in 1989 the Berlin Wall fell, so the world changed. Mexico had to make a decision as to whether it was going to use the opening as an instrument to improve the economy—to make it more productive, more competitive, and to do it in a credible manner. We discussed that, and we decided that the best way to guarantee that the opening would be broad-based and permanent was to negotiate an agreement with the U.S. This idea was first proposed by Ronald Reagan in 1980, and then taken up again by Mexico in January of 1990 after the Davos meeting in Switzerland from the point of view that sending the signal that the modernization of the Mexican economy was good and was going to be permanent and broad-based. Those are the reasons that explain why in the end on the Mexican side decided to pursue the goal of a North American Free Trade Agreement.

Tecma Group of Companies:

So, in brief synopsis, the answer to the question would be it was that the impetus for the discussions that ended up in the actual signing of the NAFTA were events that took place during the 1980s.

Luis de la Calle:

That is correct.

Tecma Group of Companies:

Just to be a little bit more specific with respect to your activities, what was your role in the discussions?

Luis de la Calle:

Well I participated in several of the negotiating groups on rules of origin, where we were doing groundbreaking disciplines that were not negotiated before. We also did the negotiations on financial services. Lastly, I also actively participated in the promotion and the implementation of the NAFTA. After the North American Free Trade Agreement came into effect, I became Mexico’s Minister of Trade, so I was in charge of the implementation of agreement during its the first years. Then also the NAFTA led to other negotiations, and Mexico negotiated agreements with the European Union with other Latin American countries that, in a way, were also the result of the NAFTA. I participated in not only the negotiations but also in the first years of the implementation of agreement.

Tecma Group of Companies:

So Mexico, after NAFTA was implemented, continued to strike free trade agreements with other countries, and today, I believe the number that they cover is 44, and for all intents and purposes it’s been a really good strategy, at least from our perspective, to attract foreign investment to Mexico ,and manufacturing in particular. Companies, which come from the European Union, and other areas of the globe, that Mexico has free trade agreements like Japan want to use or that are presently using Mexico as an export platform for which to sell both directions—to North America and to South America.

Luis de la Calle:

Yes, Mexico made a deliberate decision to have strategic negotiations around the world with countries with which we’ve had an opportunity—cultural, geographical, and linguistic—like in Central or South America, and then countries that have a strategic value for Mexico beyond Canada and the U.S. like the European Union, of course, which is the other largest world trading bloc, and then Japan with the intention of making sure that most of our exports—I would say today 95% of Mexico’s exports—have preferential access to all of these markets. So, Mexico is one of the countries with the largest percentage of preferential access for its exports, and that has given the international trade segment of the economy a rule of law. This is because the main benefits coming out of the North American Free Trade Agreement and the other similar trade accords are that we have clear rules, rules that are permanent, and there is a clear commitment to comply with those rules. Part of the success with NAFTA, so far, has been exactly that we have made the economic opening permanent, and that has given a sense of direction to Mexico and to the Mexican economy.

Tecma Group of Companies:

Two quick questions, the first one has to do with free trade agreements, the second one is a little bit of a side issue, but I think it might be directly related. The first question would be I know that the free trade agreements that are in effect that Mexico has put together include an agreement with Mercosur. In the context of that agreement, what is the status of free trade talks with Brazil? I know there’s a limited agreement in the auto sector—could you fill us in on what the trade relationship between Brazil and Mexico is presently?

Luis de la Calle:

Yes, well Mexico has an agreement, which is broad-based with Uruguay, which is part of Mercosur. We have an agreement with Argentina, which is not as broad-based as Uruguay, but it covers several sectors in it. And then we have a sectorial agreement with Brazil, in auto and chemical products mostly. We have tried to negotiate a broad-based trade agreement several times with Brazil, but we haven’t been able to actually begin those negotiations with the Brazilians. Brazil has taken a position, strategic as well, to try to concentrate their trade policy in Mercosur on the one hand and on the Doha Round on the other hand. Unfortunately for the Brazilians, Mercosur has not become a good instrument for increasing trade and investment in that region because there is no true opening, and there is a little uncertainty as to whether sectors are truly open to international trade. The Doha Round has run into difficulties, as well, as little progress has been made on the cultural issues and industrial sectors worldwide in part because there is some imposition by some large countries like India and others. Brazil has their eggs in the basket of Mercosur and the Doha Round. Mexico has taken a different pattern of negotiating directly with the most important trade parties that we have, beginning with the U.S. and Canada.

Tecma Group of Companies:

Thank you. The second question that I have is related to a statement you made a few moments ago about the certainty that Mexico and its trade partners have because of statutory agreements that have been made. On the political side of things, would you credit trade agreements—initially the North American Free Trade Agreement and then the ones that followed—with having influenced stability in the political realm that Mexico has experienced for the last 20 years?

Luis de la Calle:

The democratic process in Mexico, and democratic opening in Mexico that we’ve seen in the last 20 years, runs parallel to the NAFTA. There is not a direct connection between the two, but there’s a shared mission because the NAFTA puts the consumer at the center of Mexico’s trade policy because at the end, when we talk about trade agreements, most of the discussions in the media and other places have to do with which sectors are doing better than others or who won and who lost. The central impact of the trade agreement is actually the welfare of consumers because consumers in Mexico today have a much wider array of choices, much better quality in goods and services, and lower prices. The main beneficiary of a trade agreement is the consumer. In Mexico we have a 112 million consumers because all Mexicans are consumers. The democratic opening has centered the citizen in the same group, as the consumers and citizens are of course in the same group. Mexico’s trade opening runs parallel to Mexico’s democratic opening in which instead of putting at the center of attention groups, Mexico is finally putting at the center of its attention, politically and economically— the individual Mexican citizen. This is a tremendous change that lays the foundation for Mexico for the years to come.

Tecma Group of Companies:

What were some of the difficulties when you were running up to the passage of North American Free Trade Agreement twenty years ago? What were some of the difficulties that had to be overcome in the negotiations?

Luis de la Calle:

The first difficulty was proving to the Mexican private sectors that negotiating was a good idea. When we talked to industry groups or industry associations, they always said the idea of the NAFTA is the best idea for Mexico, but my sector is not ready.
There was consensus from the private sector that it was a good idea, but not for them.

We devised a strategy with the U.S. and Canada that implied that the negotiation was going to have 100% coverage with no exceptions, so that not a single sector could say “I want to opt-out.” It formed a nation of trade buyers for all of the sectors. That is why the discipline that allows those in Canada, Mexico, and the U.S. to convince our private sectors that the negotiations were going to happen. That was the first difficulty. Then the other difficulties had to do with the level of passion that the NAFTA evoked that was more than proportional to its economic importance. The NAFTA was the first agreement that was publicly discussed on TV shows and radio and in the press. This was, of course, before social media. Trade agreements before NAFTA were not discussed by the public at large. NAFTA was the first agreement that would have to be fought in the public domain with very intense participation in the media. Government officials like myself and others had to transform ourselves from being negotiators, to selling to the public on the potential benefits of the NAFTA agreements for Mexico, the U.S. and Canada. We traveled around these three countries very intensively, talking to businessmen and women, to universities, to associations, and to members of Congress to convince them that joining a developing country like Mexico with high levels of discipline in agreements such as NAFTA with the U.S. and Canada made sense. It was a difficult sell, but, in the end, we won the argument.

Tecma Group of Companies:

I have a lasting vision of Ross Perot and his flip charts, but that was on this side of the border.

In what areas, when you look at things retrospectively up until this point, obviously this is an agreement in which the results are still unfolding and will unfold for some period of time going into the future, but looking at the past twenty years, in what respect do you believe that the NAFTA could be considered a success?

Luis de la Calle:

Mexico, Canada, and U.S. industries are fully integrated. People don’t realize that if we shut down the Mexico-U.S. border, most of the U.S. industry would stop because they wouldn’t have the components, the parts, and the inputs to run the industry and conversely, of course, if the U.S. – Mexian border shut down, the entire Mexican industry would stop. I don’t think people realize how deeply integrated manufacturing is in North America.

Today when you buy a car in the U.S., it might be made in Mexico or in Canada or in the U.S., with that car we have components from three countries. The same thing applies for appliances and electronic goods—TV sets, iPhones, you name it. The most successful aspect is that today we have a fully integrated manufacturing base in North America. This manufacturing base is probably the most competitive in the world, when taken together. Mexico, Canada, and the U.S. can now envision becoming net exporters to the world for manufactured goods including to China. This is something that was unthinkable some years ago.

When we negotiated the North American Free Trade Agreement twenty years ago, the purpose was to increase trade among Canada, Mexico, and the U.S. Measured by that yardstick, the agreement has been widely successful, because we have increased trade many times over. But the other challenges to help transform North America into a net exporter for manufactured products, particularly to Asia, and the increase competitiveness that we have now in North America, is, in part thanks, to the NAFTA. This gives good reason to believe that manufacturing in North America is competitive enough to conquer the world—Asia and Europe.

Tecma Group of Companies:

So in short, would it be accurate to say that today because products are coming from North America, and those products are incorporating certain added value based upon whatever the comparative advantage happens to be in each one of the participants, each countr is contributing to the elaboration of a product which is then exported and that product can sit on a shelf competitively with products from other countries due to the fact that we’re combining the comparative advantage of the Canadian labor force and manufacturing base as well as the U.S. manufacturing base and labor force and Mexico’s as well, would that be an accurate statement?

Luis de la Calle:

Yes, last year in 2013, Mexico exported to China 1.2 billion dollars worth of cars, which we might say is not that much, but when you consider that 4 years ago it was zero, the rate of growth of auto exports to China is very high. Those cars that we are exporting from Mexico to China are Canadian, U.S., and Mexican depending on the brand and the type/model, you may have more or less content from the three countries, but those are North American cars. If we succeed at exporting those to China, everybody is better off, people in Ohio and Michigan and Tennessee and of course also in Puebla, Queretaro and Guanajuato, Mexico. I don’t think the public realizes how deep the integration is, and how that degree of integration is what is going to drive wealth for the North American region going forward.

Tecma Group of Companies:

There’s a figure that I’ve read, and I don’t know if you’ve come across this but, in terms of every dollar exported from Mexico, there was some data that I happened to come across, I forget the source at the moment, that says 38 cents of income is generated for the United States as a result of each dollar of Mexican export.

Luis de la Calle:

That is correct, the U.S. Commerce Department estimates that for every dollar of export coming out of Mexico, 38 cents are U.S. content. On average, that includes of course everything that we export, including oil, for which U.S. content is zero, that includes electronics and high-tech products and aviation parts and all those where they U.S. contents are high. The difference between trading with Mexico and trading with China is that when the U.S. trades with Mexico, we co-produce, we provide the resources—the energy, the labor, the capital, the logistics, the brand, the distribution systems, the engineering. Each country competes together. Whereas when we trade with China we mostly provide a market for the Chinese products coming into the region. The psychology now is that we need to migrate to manufacturing back to North America. We see China not only as a threat to North American manufacturing, but we need to start seeing China as a potential market for our products, and convince ourselves that if we do it together we will be much more competitive than we with each North American country competing on its own.

Tecma Group of Companies:

If you had to look back, obviously the integration of the three economies from a very macro perspective is a positive thing, if you look back and you think of anything that if quote-unquote I could have done it, I could do it again, what would those things be? What things that maybe aren’t in the North American Free Trade that if you had could have done differently you’d put it in the agreement today? Are there any things that come to mind when I pose that question?

Luis de la Calle:

Sure, the NAFTA continues to be, in spite of being twenty years old, a state-of-theart agreement. Any agreement that is negotiated internationally, including today, we compare it with NAFTA. Is it NAFTA plus or NAFTA minus? NAFTA is still state-of the-art but there are things that we didn’t do that we could have done but could do now to make integration more profitable, and to make the region more competitive.

For instance, I think that we need an education agreement with the U.S. and Canada to have a large student exchange program to form the engineers, the nurses and doctors, the air traffic controllers, the heavy machinery operators and many other trades where educated Mexicans to do that will provide a significant addition to the competitiveness of the region.

I think we also need to negotiate an agreement with the U.S. and Canada to open a basic research center in Mexico, so that we have better capabilities of training high-level engineers and different disciplines of science.

I think we also need to have an agreement on transportation—not only ground transportation but also maritime and air transportation to make North America a hub of excellence in logistics. If we cannot transport or communicate efficiently, it makes it more difficult to be more competitive.

Finally, we also need to make progress on the regulatory barriers to trade. What I used to call the tyranny of small differences. Things like approval for environmental, safety, health, and consumer safety concerns that we should have a more expedited means for those approvals in North America. the reason being that we are each others’ largest markets. Mexico and Canada buy thirty percent of U.S. exports worldwide. That is reason enough for Mexico and Canada to have a preferential access to U.S. regulatory agencies and conversely, of course, Mexico and Canada would have to give the U.S. similar treatments. Those are the areas I think that are more evident now.

The other one that is coming up is in light of Mexico’s recent reforms in the energy market, is that the way to create a fully integrated energy market in North America, because now we have in the region the lowest prices for natural gas and electricity. This will be a tremendous driver toward competitiveness and many industries have that left the region and gonee to Asia—Korea, Japan, and China, will come back to North America now that we have competitive energy. Integrating the energy market between Canada, Mexico and the U.S. I think is one of the more critical components for bettering the region’s economic future.

Tecma Group of Companies:

That last topic, on integrating energy markets in the U.S., Mexico, and Canada, might you be willing in the future to have a discussion on that issue specifically that we could record and disseminate, as well?

Luis de la Calle:

That would be good, I think that it’s very important. That’s what’s going to drive the competitiveness of the region. If North America can incorporate more local value per unit of export because the steel, the glass, and other items that are going into telecom equipment and to electronics. Those will be less expensive, such as chemicals and synthetic fibers, will be of North American origin now that we have cheap natural gas.

Tecma Group of Companies:

Okay then we can make arrangements to do that in the future. But for now, many times when people are listening to this kind of a broadcast they have questions.. Your firm represents domestic and international clients on the international side there could be customers out there, or individuals, that are listening to this conversation that may need some counsel with respect to investing in Mexico. If they had questions would you be willing to answer them? How can individuals get in contact with you, Luis, with any questions that they might have?

Luis de la Calle:

They can follow me on Twitter, Facebook, and they can also send me an e-mail.

Tecma Group of Companies:

What I’ll do is we have a transcript of the podcast that is below the audio player, and I’ll put your email address there and a link to your website. If individuals or businesses want to get into contact with you they’ll be able to do it that way.

Luis de la Calle:

That would be perfect.

Tecma Group of Companies:

Thank you very much, it was an interesting conversation and I am looking forward to speaking to you again on energy, and how that’s going to work within the three countries in the future.

Luis de la Calle:

On the contrary, thank you for proceeding to share thoughts about the NAFTA.

Tecma Group of Companies:

Thank you, have a great day.

Luis de la Calle:

You too.

Photo credit: CHRISTOPHER DOMBRES

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