Mexican president Vicente Fox has been pushing President Bush to formally open the American border to Mexican workers for two and a half years now. A post-9/11 Bush won’t sign off on the migration scheme. But Fox soldiers on, for pursuing an open-border policy is easier than fixing problems at home. Mexico is losing its NAFTA-created jobs by the hour to cheaper labor markets, as initiatives to attract and keep foreign employers remain stalled in the nation’s deadlocked legislature. Unless Fox can win a victory for his party in Mexico’s midterm legislative elections next week, Mexicans can expect more of the same.
The decade-old North American Free Trade Agreement tied Mexico’s fortunes to those of the United States. Bilateral trade has nearly tripled since NAFTA was ratified. But this growth has stagnated since 1999, and not just because of the weak economy here. Mexico is hemorrhaging its jobs to China.
Mexico can no longer compete with China on cost. The average Mexican worker makes $2.96 an hour in salary and benefits; the Chinese worker makes just 72 cents. Mexico has lost 200,000 jobs directly to China in the last 18 months alone, Fitch Ratings reported last month. China has surpassed Mexico within the past three years to become the top apparel exporter to the U.S.
But the jobs erosion is not limited to unskilled labor sectors. Companies that have exported jobs from Mexico directly to China in the past two years include Philips, Sanyo, and Sony, according to a report released earlier this year by Merrill Lynch strategist Robert Berges. Motorola has also cut some of its Mexican production in favor of new factories in China. Even SARS can’t stop the Chinese juggernaut; Berges reported last month that China continues to close the gap despite the virus’ expected “marginal positive impact” on Mexican exports.
China has also beaten Mexico in manufacturing markets. China continues to gain ground in the mid-skilled telecom equipment-making industry, having increased its share of that market from 12 percent in 1999 to 17 percent last year while Mexico has stagnated, according Berges. At this rate, China will soon surpass Mexico as the world’s second-largest exporter of goods to the U.S.
So how can Mexico save itself? Mexico excels in manufacturing and exporting products that require close proximity to the U.S. market, like autos and other heavy equipment. But Mexico risks losing these jobs to China as well if it cannot improve its domestic investment environment.
International analysts from across the political and economic spectra agree that President Fox must spearhead legislation to improve energy infrastructure, to simplify tax rates, and to foster a more diversified labor pool in order to attract jobs to his foundering nation.
A top-down reform of Mexico’s electric-power system is central to attracting foreign industrial investment. Today, industrial electricity users in Mexico must choose from a complicated array of regulations to ensure reliable access to the aging power grid. Investors who are willing to spend up to $500 million of their own capital to build proprietary sources of power still can’t avoid years of negotiations with Mexico’s federal power authority before they can break ground on new power plants.
International corporations shoulder a disproportionate burden of corporate taxes in Mexico, due to rampant domestic tax evasion. Although Mexico’s federal corporate tax rate will fall from 33 to 32 percent this year, Merrill Lynch’s Berges said, international investors in Mexico must dedicate significant financial resources toward keeping up with constantly changing state and local tax laws.
Mexico’s lawmakers would do well to simplify the corporate tax structure and to broaden the country’s tax revenue base to reduce reliance on payments made by foreign corporations. An increase in the national value-added tax on consumer goods would diffuse the tax burden, Berges said. But he added that he is “not optimistic on this one.”
As for human capital: In addition to damage done over decades of union corruption, the labor pool itself is shallow. Mexico has not done enough to reduce its dependence on the oil industry and to create an educated middle class that would attract the offshore customer service-oriented jobs that are buoying the economies of India and west Africa. A decade into NAFTA, Mexico still derives a full third of its federal tax revenues from the export of oil.
Progress on these fronts is scarce. Fox’s National Action party (PAN) does not control either house of Mexico’s legislature. Fox’s early attempts at structural reform have been consistently blocked by the rival Institutional Revolutionary Party (PRI), whose leaders in congress are unused to their new role as the opposition after nearly a century of exclusive power.
Fox has just one chance to regain momentum before his single term allowed under Mexico’s constitution ends in 2006 — he must alter the balance of power in the lower house of Congress via a midterm election victory for the PAN in July. Fox’s party must win 43 percent of the total popular vote in the July 6 legislative election to gain a full majority of seats in the house under Mexico’s unique “governability clause” of proportional representation.
Fox’s PAN party has unveiled a reform-minded slogan for the election: “Vote for the PAN; take away the brakes on change.” But Fox must campaign aggressively over the next week to make any headway against the PRI, whose greatest electoral ally is voter apathy.
To win, Fox must repeat the high-turnout strategy that propelled him to victory in the 2000 presidential election. According to Merrill Lynch political strategist Carlos Peyrelongue, Fox must convince 70 percent of the electorate to come out to the polls in July to counter the PRI’s expertise in conducting more selective get-out-the-vote drives. Recent trends work against him; disillusioned by two years of paralysis, a majority of voters boycotted statewide elections this year.
As of last week, Fox’s PAN party trailed the PRI by five percentage points in the polls, with 33 percent and 38 percent shares of the electorate respectively, according to local newspaper Reforma
. More ominously, the PAN has actually lost four points against the PRI since an earlier poll was taken, and is down 14 points from a December 2002 peak. Meanwhile, the PRI has quietly picked up support, advancing from a nadir of 30 percent when Fox won the national election to 38 percent today. Reforma
reported that polls show voter absenteeism could reach 50 percent. Young Fox supporters, depressed from two years of political inaction, are the most likely to stay home.
The good news? Fox doesn’t need Bush’s help to overcome these hurdles. At best, Fox’s fixation on free migration to the U.S. is a distraction. (One can see why he sticks to it. Dollars earned by Mexican citizens in the U.S. and wired to relatives at home serve as a de facto unemployment insurance program in Mexico; entire towns subsist on Western Union transfers.)
For Bush to accede to Fox and sign off on open migration to help Mexico would just delay the obvious and the inevitable: Mexicans need jobs at home. Fox and his citizens must stop looking for a miracle across the desert.
— Nicole Gelinas is a third-year candidate in the Chartered Financial Analyst (CFA) program and is a frequent contributor to the New York Post op-ed page.