In 1982, declining oil prices and skyrocketing interest rates sent Mexico into its most serious economic crisis since World War II. In reaction, the government implemented a trade liberalization policy and undertook a major devaluation of the peso. The devaluation made the hourly labor costs of production workers in Mexico’s manufacturing sector lower, for the first time, than those of workers in the emerging economies of Taiwan, Korea, Singapore and Hong Kong. As a result, large textile companies such as Levi Strauss, electronics companies such as Zenith and automobile companies opened large assembly facilities known as maquiladoras along the U.S.-Mexico border. Companies such as General Motors, which already had manufacturing plants in Mexico, now opened large new factories near the border. Unlike their old plants, which sold only in the Mexican market, their new operations were state-of-the-art facilities assembling parts and components for the highly competitive U.S. and international markets. 

As mexico faces the new reality of low-wage global competition, its own domestic political climate could contribute to further erosion of the country’s competitive edge.

The number of maquiladoras grew from 620 in 1980 to more than 3,000 in 2000, the peak of the industry’s growth. Cheap labor, spatial proximity to the U.S. market and a climate of political stability fueled the extraordinary growth of this sector. Proximity allowed managers to work in Mexico but live in the United States and send their children to U.S. schools. It also allowed both the transportation of heavy products that would be too expensive to ship from Asia and the implementation of the just-in-time inventory systems that became popular in the 1980s.

In 1994, the United States, Canada and Mexico signed NAFTA. Contrary to popular belief, NAFTA did not radically transform the Mexican economy—most of the dismantling of tariff and nontariff barriers to trade had already occurred in the 1980s. Rather, the benefits of the treaty are, for Mexico, more intangible. First, NAFTA continues a policy change in favor of foreign investors that started with Mexico’s 1989 Foreign Investment Law that guaranteed increasing legal certainty and established simpler and quicker procedures for new foreign investors. Second, NAFTA assures foreign investors that Mexico’s free market policies and commitment to privatization are here to stay—radical policies such as the 1982 nationalization of the banking system are a thing of the past. As if to underscore this point, Mexico has signed more free trade agreements than any other country in the world.

This nearly two-decade long trend of economic modernization has also encouraged much-needed political reform. For many Mexicans, the election of Vicente Fox as president on July 2, 2000, was comparable to the fall of the Berlin Wall. For the first time in 71 years, an opposition presidential candidate defeated Mexico’s ruling Institutional Revolutionary Party. Fox, the candidate of Mexico’s center-right National Action Party, is a former Coca-Cola executive who was perceived as being supportive of the private sector. Ultimately, owners of small and medium-size businesses were crucial to Fox’s victory. U.S. companies also responded to the business-friendly environment Fox fostered, and foreign investment in the maquiladoras continued to grow. Fox eliminated import quotas for NAFTA partners, but maintained them for other countries under the Multi-Fiber Arrangement that diverted textile investments from other countries to Mexican factories.

Marital Discord
While commercial interests on both sides of the border benefited from NAFTA and the maquiladora system, the relationship between the United States and Mexico was often criticized, particularly north of the border. For the past two decades, U.S. organized labor has seen Mexico as its primary threat. During his 1992 presidential campaign, Ross Perot characterized this mood when he quipped of a “giant sucking sound” of manufacturing jobs departing south to Mexico.

Many believe that the country’s only hope for competing globally is through building a technically skilled labor force, rather than merely a cheap one.

When NAFTA was being negotiated in the early 1990s, proponents expected that the newly created employment opportunities, especially for low-skilled workers, would diminish migration to the United States. Many in Mexico’s government, and on its streets, blanched at this, seeing their labor-hungry northern neighbor’s view as somewhat hypocritical and even racist. Ultimately, maquiladoras could not absorb all the workers displaced by trade liberalization policies, and immigration failed to subside in the 1990s. As a result, the U.S.-Mexico border became increasingly militarized in an effort to control Mexican illegal immigration into the United States. After 9/11, the issue of border control became even more sensitive.

While China presents the largest threat to the Mexican “maquilinization” model in today’s economic environment, López Obrador, the leader of the center-left Party of Democratic Revolution, presents the biggest threat to a well-honed image of a country friendly to foreign investors. Although the July 2006 presidential election is still some months away, López Obrador possesses a substantial popular advantage over his rivals. According to current opinion polls, he is leading candidates from the other major political parties by 10 to 20 points. López Obrador, like presidents Luiz Inacio “Lula” da Silva of Brazil and Hugo Chávez of Venezuela, is perceived as a leader of the poor people. Many in the business community fear that, if elected, López Obrador would adopt a more confrontational style with the United States. Such posturing could occur within free market rules, as in Brazil, or within a more populist agenda, as in Venezuela. López Obrador has already criticized the effects of free trade policies on the poor, but has not directly attacked President Bush or the United States, indicating that he will probably follow da Silva’s style rather than Chávez’s agenda. Either way, global capital avoids populism, a fact that could compound Mexico’s current economic challenges.

Today, Mexico has only one competitive advantage: Its proximity to the United States allows it to cheaply ship heavy goods such as automobiles to the U.S. market. While an inevitable global rise in petroleum prices may eventually lead American and other foreign manufacturers to reconfigure their supply chains around factories that are geographically closer to the American market, competition from China, India and any number of low-wage nations for foreign investment has changed forever the convenient relationship from which the United States and Mexico both benefited for so long. This fact is forcing Mexico to address questions that it has long been avoiding: How can it compete in a more advanced stage of the value-added chain? How can it offer the global economy more than cheap labor? Many believe that the country’s only hope for competing globally is through building a technically skilled labor force, rather than merely a cheap one. In some places, this transformation has begun. Guadalajara has been called the Silicon Valley of the South because of its success in attracting state-of-the-art electronics facilities. This success is due in large part to the presence of seven universities and several technical institutes that prepare the labor force with the skills needed to compete with Chinese workers. Interestingly, electronics companies such as Motorola continue to expand in Guadalajara despite the opportunities in China.

Mexico can continue to be an opportunity for U.S. investors, but only if it succeeds in developing an international image as a country with two essential requisites for competing globally: an energetic, educated workforce and political stability, regardless of whom is elected as Mexico’s president next year. Should it fail in either of these arenas, the commerce-based, U.S.-Mexico marriage of convenience will devolve into nothing more than tense bickering over border security issues and a host of other problems that, like in a bad marriage, have no easy solutions and, ultimately, benefit neither side. 

Elsie Echeverri-Carroll is the director of the Economic Development Program, McCombs School of Business, University of Texas at Austin.