Latin America

NAFTA was always something that created tension between the US, Canada and Mexico in areas of debate that were never an issue before the concept of free trade became an ethos of foreign policy. NAFTA, originally built on from the Canadian-American Free Trade Agreement (CAFTA), was a progression of the US-Canada Auto Pact which set to reduce barriers to trade in the auto sector, expanding through CAFTA to include other consumer good and into NAFTA, to integrate Mexico into a North America wide trade agreement. The benefits and costs never were ultimately weighted to one side or the other. Canada would benefit from a secured auto market and less restrictions in selling its good to the US, now numbering around 92% of Canada’s exports abroad. Mexico would benefit from becoming a base for manufacturing goods to sell into the US and Canada and allow for employment in their own country in an attempt to curb poverty and increase much needed investment into the Mexican economy. Both would benefit from having a NAFTA Tribunal which would allow for judgments in a binding forum which would assist the two countries in registering just disputes with its massive neighbour, the United States. In turn, US companies would be able to access those markets and allow for US multinationals to set up investments and cross border trade within their own organizations as well as with other companies. US exports to Canada and Mexico since 1994 has made these two countries two of the top importers of American goods. With a population of 32 million and 100 million respectively, Canada and Mexico rival some of the largest markets in the world for US exports. It is hard to measure the true benefit of NAFTA for each country, but with the stability of the modern Mexican economy, the great effect of US companies on the Canadian and Mexican economies and the ability for the US to have two of the world’s largest economies within its economic and political influence, NAFTA was seen as a success by many policymakers in all three countries.

Recently NAFTA has been attacked by Hillary Clinton and to a lesser extent Barak Obama in their bloody and senseless campaigning towards degrading the Democratic Party. With the support for Hillary Clinton coming from many blue collar workers in Ohio, Pennsylvania and other manufacturing regions in the US; NAFTA, Mexico and immigration has become the keys to winning seats over Mr. Obama and his calls for Change. Damage has not only been inflicted on the Democrats, but on America’s neighbours. Countries like Canada and Mexico who have given a lot of support to the US, despite the poor impression of Mr. Bush in both countries, have been fairly good neighbours with the US in the last few years. Canada alone has born the brunt of much of the conflict in Afghanistan since Al Qaeda resumed its offensive two years ago, with most US forces stuck in Iraq. Mexico has opened its oil and petroleum industry towards the US, bringing closer economic ties despite the move by many American companies to China and away from Mexico. Mexico even has taken great steps to alienate Cuba, once a friend of the island nation, now in a cold peace with the Communist nation. The costs and benefits of NAFTA were summed up recently in the North America Leaders Summit in New Orleans where Mr. Bush, Stephen Harper of Canada and Felipe Calderon of Mexico met to discuss the future of North America.

The first volley of issues came as a response to Clinton’s campaign strategy to re-negotiate or scrap NAFTA. The North American Competitiveness Council, a group of 30 business leaders issued a statement promoting NAFTA and its increase since 1994 to creating trade amounting to over a trillion dollars. They also commented of how recent protectionist dialogue would do little to improve the relationship between the countries. Much of the losses of recent employment has come from American companies moving to China, so beating up on NAFTA and not addressing China trade when assisting blue collar workers in the US may simply hurt the relationship with the few neighbours Mr. Bush hasn’t already alienated in the last 8 years. This attack does nothing more than give a false solution to the US economy except for gaining a few votes for Mrs. Clinton and stirring sentiments against Latino immigrants in the US and trade in general.

Despite many in the US attacking Canada and Mexico for taking American jobs and wanting to integrate into the US, and many in Canada trying to tie Prime Minister Harper into the conservative right in the US to prompt and election, the Canadian Prime Minister has been strong in taking a stance on resolving NAFTA and other issues involving its neighbors. Mr. Harper has done a respectable job in addressing problems in NAFTA such as softwood lumber, defining Canada’s role in Afghanistan as a force to create a sustainable environment for aid, and his environmental policies has done a great deal to benefit Canadians and dialogue with Americans alike. Mr. Harper addressed Mrs. Clinton’s assessment of its neighbours as well, making the strong point that in this global energy crisis, Canada is one of the world’s largest exporters of petroleum and gas to the US and has a reserve some say as large as Saudi Arabia.

Harper has always been amicable to the US President, but is clearly not a George Bush of Canada. His support of Canada’s national healthcare system and standing social policies would be savored by many Democrats in the US during an election campaign. Harper clarified his relationship with Mr. Bush at the Summit: “What I appreciate most, what I’ve appreciated in our relationship over the past couple of years, is the fact that whether we agree or disagree, we’re always able to talk very frankly, very upfront,” Felipe Calderon of Mexico also promoted the benefits of NAFTA, helping to grow the Mexican economy to one of its most stable periods since the late 1960s. Both leaders, while surely realising the unpopularity of President Bush, coordinated their address at the Summit in support of NAFTA and against major changes or eliminating the agreement altogether. In the end, anti-NAFTA talks will likely progress into anti-China trade or simply disappear when Clinton loses the nomination for her party to Mr. Obama. With the recognition of America’s neighbours as true colleagues, issues of trade, aid and immigration can be addressed in a progressive manner in Obama’s or McCain’s first term of office.

Behind oil export and above tourism, remittances from Mexicans abroad to their home country makes up a large part of the cash that builds homes and futures in many Mexican communities. With the recent economic crisis in the US, America’s neighbours are starting to feel the fallout of the Mortgage Crisis that is slowly presenting problems in countries outside of the G8. With many Mexicans living in the US in hard hit areas, those funds that used to pay for medicine, food, homes and everything else for families of migrants from Mexico are now suddenly being cut off with great effect.

With a decline in remittances of 7% since last year, many in Mexico who were just keeping afloat may slip into poverty this year. Many small villages who sent their young men and women over the border and who often are mired in economic troubles are the hardest hit communities in Mexico when economic troubles loom. With remittances to Mexico increasing five and a half times since 1997 to $24 billion, these funds are not only a necessity, but is Mexico’s second largest source of foreign revenue. What also seems to focus the tension on Mexico is that areas in the US where Mexicans have migrated to are also those worst hit by the crisis. While migrants from El Salvador and Guatemala are also affected, those communities often have settled in the Washington-Maryland areas which have been less affected by the crisis according to The Washington Post.

The likely effect of the crisis outside the US may result in more illegal migration across the border. Despite the troubles in the US, communities in Mexico near poverty will not weather the lack of funds as easily as much of the United States. Economies tied in with the US will slowly feel the effects of economic troubles in their largest export market. The lack of sympathy for future trade agreements and harder policies on immigration will also likely take hold with the poor economy and continued anti-NAFTA and FTA sentiments in the US Congress. The next American President will have a lot of repair work when beginning his or her job in 2009.

Two countries have stood out in their respective regions as economically progressive policy successes in the last ten years. In Europe, Spain along with Ireland have seen much of the positive development and economic growth when the rest of the EU has been wrestling with high unemployment rates and drastic changes in governments. In Latin America, Brazil under Lula and under the former Cardoso Administration have grown at a steady positive rate, breaking the traditional Latin American plague of economic collapses and large booms that seem to be commonplace in almost all South American economies to date. With success, the importance of Spain and Brazil have taken on a new form in their regions and abroad. Traditionally the place of the United States, these emerging regional powers now seem to be inheriting some of America’s traditional problems.

Brazil has always been a country of immigration. The population of Brazil, while taking in only some immigrants from Asia, Africa and Europe in the last few years, was one of the countries that absorbed much of the world’s immigration since the 1880s. This open policy remained, and while economic problems and changes from populist, to military, to democratic governments took shape since the 1930s, immigration remained strong as long as there were jobs to be done in one of the world’s largest countries. With traditional economic instability and some recent success, many Brazilians have chosen to go abroad to either find more work or utilize their assets to enjoy life abroad. In Spain, this emigration from Brazil has taken a foothold with both emigrants coming and living illegally for work or working in legal low paying jobs, as well as those upper middle class Brazilians coming to make a life and career in Spain as professionals and entrepreneurs.

While the general impression of Brazilians in Spain is a positive one, there have been some problems against immigrants at the main Spanish airports and in society as a whole. Many immigrants, including many Brazilians often enter Spain and stay illegally. This has been a problem one many fronts, as many Latin Americans, Africans and other Europeans do not go through the normal procedures to live and work in Spain but come as temporary workers or as refugees or simply pass through the border and disappear. With Spain having some economic expansion and the closing off of the US to many immigrants, the Spanish immigration system has become overwhelmed. Since 2006, the number of Brazilians coming into Spain has nearly “tripled or quadrupled”, while at the same time in Spain eight Brazilians a day are deported.

The solution to the Brazil-Spain situation needs to be addressed by both countries. Brazil needs to reform its immigration to fit with its position as an emerging power in the world. With 3-4 millions Brazilians living abroad, Lula will have the responsibility to create and international Brazil without losing all of the most talented to other countries and still maintain funds coming from those emigrants abroad. Spain will also have to accept Brazilians and the diversity of the Brazilian social strata now living throughout the Iberian Peninsula. It will take a long time to adapt the infrastructure to treat foreigners in a respectful fashion, but attempts need to begin immediately. Brazilians and others will be challenged living in Spain in becoming Spanish. While it might be easier from some, it is doubtful that those migrants to Spain who are not seen in a positive light will be so easily welcomed in the near future.

A tradition has formed in economic thought since the 1960s in comparing two regions with similar levels of poverty and inequality. Both regions have traditionally been open to economic measures to promote growth and achieve the level of development of North America and Europe. Asia and Latin America are both regions which have suffered historical economic problems and large structural reforms, and in the 1960s were considered at the beginning of new forms of development. While many Asian countries set off to promote trade and investment and increase Foreign Direct Investment in their economies, Latin America sought to follow the trend started by Raul Prebisch, by raising tariffs and trade barriers and producing their own products internally and keeping investment inside their own individual economies. The independence of Latin America from the industrialized world would take its form in Import Substitution Industrialisation policy for the region. The exception to the rule in Asia was China. A Communist system left China locked into trade with other Communist countries and limited trade with the West. Upon the onset of problems between China and the Soviet Union in the 1970s, some moves towards greater trade with the West came after Nixon’s trip to open relations with China. Since then the progressive growth and eventual acceptance of China into the WTO has made China the world’s next Superpower, or at least the country that manufactures everything for the world’s current Superpower.

With economic progress came inequality. In Latin America economic success could always be measures by the percentage of people that benefitted or were lifted out of poverty by a boom in any of the Latin American economies. Boom and Bust cycles dominated Latin America well into the 1990s and beyond into Argentina’s financial collapse in 2001. This debate dominated the World Bank, as neo-liberal ideas were debated comparing Latin America’s failures to East Asia’s successes in the report on The East Asian Economic Miracle, giving credit to reduced barriers and increased trade as the reason for East Asia’s success. Dissent came from the head of the World Bank itself when Joseph Stiglitz published Rethinking the East Asian Miracle after the financial turmoil of many of the Asian Tigers at the time and clear collapse of Argentina later on. Equality was still an issue as 30-40% of Latin Americans remained in poverty, East Asia reorganized and China slowly started to rise as an economic giant.

Lessons learned from the World Bank’s debates and the past economic crisis in Latin America and Asia showed that fast growth often promotes cultures of decadence for those who benefit from it and marginalize other parts of a society which do not have the means to raise themselves out of poverty. Systemic poverty among rapid growth was often the result, and became entrenched in the society in the long run.

In an article this week in FT.com, China is advised by the author to take lessons from Brazil in dealing with inequality while managing an economic boom. Not until the late 1990’s did progressive governments in Brazil seek to challenge the country’s historical inequality while absorbing slow positive growth and attacking poverty in a country of over 170 million people. Brazil’s past reflected much of that of Latin America’s with short periods of growth followed by economic collapse which left the impoverished in Brazil in constant chaos. While China does have a large amount of savings as opposed to those nations in East Asia and Latin America in the 60s, poverty still must be challenged in China as not to create an underclass in society. Economic booms have always been used to justify economic policies, but in almost every case the boom eventually turns to bust as economic cycles often do. Past policies to absorb the gains of booms are not put into addressing social problems that are often historical and require time and money to resolve past the boom cycle. While China is not Brazil, these two giants could learn a lot from each other. Both economies are considered to be economic miracles in their own right, but stability and long term growth are only truly successful if it benefits all citizens to a greater degree over a long period of time. While poverty is a constant reality in all countries, the plague of poverty inherited or created can be helped by proper economic and social policy during times of prosperity. With proper economic policy, the trend of inequality with growth do not have to be the result of economic progress.

No other issue seeks to dominate the next few months than the troubles in the US economy. Besides the well documented mortgage lending scandal, the roots of the fragile US economy are the movement of large amounts of manufacturing jobs to China as well as the approximately one-third to one-half of US debt that is held by China, Japan and other foreign creditors in order to assist the US fund the wars in Iraq and Afghanistan. During the last week of campaigning a new nemesis has been created within the dialogue between Clinton and Obama, that is the NAFTA agreement and the threat Mexico and Canada pose to the US economy.

In reality the United States has often determined the course of NAFTA and its rulings since the agreement came into effect with Canada and Mexico in 1994. Until recently, Canada and Mexico have been the top trading partners with the United States, switching between Japan and the EU for top spot which has recently been adopted by China. Trade with the US and its neighbors is more than 92% with Canada and approximately 80-85% in Mexico and has increased more than 100 percent with both neighbors since 1994. The US’s NAFTA partners do not only export to the US, but import the majority of their goods from the United States, becoming a net benefit to US exporters in the process, especially those in border states such as Texas, California, Michigan and New York.

Problems encountered by the Canadian and Mexican governments often had to deal with the reality of the US holding a lot more economic weight and power in commercial activities, political weight, and control in official NAFTA hearings which often did not have any real power in enforcing its decision inside the US. Of great concern was NAFTA Chapter 11 which details the rights of companies to have legal recourse over government policies if they believed harm was done to them. This was one of the first times in international law where a company was represented without the support of a country, as before Chapter 11 only states had legal rights of representation under international law. In case law, American companies and policymakers who for the first time promoted the ability for a private company to gain a legal reward often supported this policy. The results were cases such as Metalclad, where a Mexican municipality was denied the right to stop the creation of a waste management plant, despite its concerns that it would harm the local environment. In S.D Myers, a Canadian law preventing the ban of toxic waste to the US was challenged as well, despite the regulations being there to protect the health and safety of the environment in both jurisdictions. Change only came in recent appeals in the NAFTA appeals hearing regarding Methanex, which challenged California state policy to prevent environmental damage inside the United States itself, the first of a number of appeals limiting the rights of companies over governments, namely the governments of California and the US.

Despite the recent criticisms by Clinton and Obama, it was Bill Clinton who ratified NAFTA during his time as President with no opposition from his wife, as well Obama who did little to appease the passing of NAFTA until the United States opened trade relations with China upon its acceptance into the WTO. The effect of the Methanex appeal is that the US trade policy has moved towards fair and equitable treatment of companies. As seen in the newest version of the US Trade Act and new trade agreements with Singapore and others, public policy is paramount over a companies rights over its investment as long the treatment is fair and equitable with due process and just compensation. This turn around took place not for Chapter 11’s negative effects on Mexico or Canada, but on the US itself. Policies from the US and American Labour Unions challenging Canadian softwood lumber, or taking the production of corn, a staple of Mexico, and limiting it through NAFTA rules was a power advantage of the United States over its greatest trading partners in many cases. As seen in NAFTA tribunal cases and trade policy, the US has nothing to fear from its neighbors, but more from its debt and poor leadership which has sent American jobs and money to China. Criticisms of Mexico and Canada have died out long ago, and do nothing but create scapegoats such as NAFTA in order to win votes in Ohio and Texas.

John McCain this week showed his prudency in this election campaign. Despite talk of referring to Mr. Obama as Barak Hussein Obama and actions by his opponents in defacing America’s good trading partners in Canada and Mexico, McCain had tried to keep the election campaign free of issues which seek to rip apart the country and mire the election in issues which do nothing more than to create a false crisis and give the Presidency to someone who can create the most paranoia for the American people. Ironically this tactic that was used so effectively by Bush is being countered not by the Democrats, but by another Republican. In reality, the Democrats are creating a lot of political tensions for something which has been created by American companies themselves. American companies have moved to Mexico and put Mexican companies out of the agriculture business while solidifying their control over staple Mexican products. American Auto manufactuers have taken advantage of the state sponsored health care system in Ontario to set up auto manufacturing in Canada. While these moves do hurt American manufacturing, it is the policies of American companies which have taken employment across the border.  Companies such as Walmart and other retailers have created the most intense changes in the modern US economy by taking advantage of loose rules and laws in China who is slowly absorbing the world’s manufacturing base without Labour Rights or accountability to its employees. Clinton and Obama would do well focusing on China as opposed to scapegoating Mexico and Canada. These two countries do more to purchase American goods than any other countries in the world. It is hard to manage a relationship with a giant, but it is impossible when that giant claims to be the victim of trade, when its certain the American people are being set up to be the victim of politics.

Today the well known leader of the island nation of Cuba, Fidel Castro has started on the first steps to the end of his legacy. He retired finally after 49 years of rule since the Cuban Revolution. He is well known as the one of the only leaders in Latin America to successfully stand up to the United States and the man who took Cuba into the Cold War, socialized government and nationalized health care as well as tackling severe poverty in his country which remains an unmanageable historical inheritance in most of Latin America. He is also known for his suppression of media and independent protest in Cuba and has been characterized in many different perspectives by American directors to Simpsons writers to coalitions for the freedom of Cuba and expat Cubans living in Miami and abroad. Today he took a major step to the end of what is certainly known as Castro’s Cuba to most of the world.

The real effect will be on the Cuba people themselves. Since the fall of the Soviet Union the economy of Cuba has been supported by massive non-American tourism and petroleum supports from Hugo Chavez and investment from many unnamed companies who wish to avoid being caught under American commercial bans on Cuba. The likelihood of a large change right now is slim, as Castro will still have a large hand in the policy of Cuba while his brother Raul Castro deals with the continuing embargo and loads of tourists coming to the country. Many prospects of change have already started, as some restrictions on owning property have been weakened in the last 7 years. Foreign companies who wish to buy up anything from this tourist paradise have been able to in recent years as long as the Cuban government or citizens share 50% or more of the property. Cuban exports of sugar and tobacco products have found a place in Europe and abroad, and with the open market policies with other communist nations such as China, the restrictions on Cuba are not finding complete support as they once did in the past. The exception is of course the few interest groups who have direct ties to Cuba itself, who are not likely to forget Castro after only one or two generations living outside Cuba.

The expectation of quick change after Castro dies avoids recognition of the slow change that has taken place in Cuba since 1991. For the most part Cuba’s change is inevitable with Castro or without him. The Cuban government in reality has gained a lot of strength in the last 15 years and quick change will most likely come about if the Castro’s decide it, or if a new JFK happens to take great interest in Cuba and its future.

I was lucky to be able to see a lecture at the LSE by the newly minted head of Argentina’s national bank after the first President Kirchner came into power. This was, as many know after a series of failed Presidents in a record amount of time and a massive financial collapse of Argentina’s economy. He was an impressive speaker, and basically said he was the new guy, he was sorry about what happened with the old guy, and that fiscal responsibility, proper market regulations, and slow and progressive growth was the only way to cure burst economic bubbles and ultra liquid financial markets.

In an op-ed by Paul Krugman of IHT.com he seeks out to compare the recent financial sub prime mortgage crisis to failed economies of Latin America pre-2001. While the United States definitely has come into financial crisis because of immoral lending practices, the foundations of the US economy are still strong and has a history of reforming market practices through economic policy and legal enforcement.

While many industries in the US are strong, the comparison between Latin America and the US is like comparing Bananas to Big Macs. In Latin America the crisis of Mexico, Brazil and Argentina were often not just connected to one product market or one industry, but was a result of hyper investment in newly promoted ventures in those countries, a response to state run industries being sold off while they still could produce a profit for in debt governments, and investment regulations which did not regulate hyper liquid investments which could leave the economy with one click of a mouse. While the US also has a massive amount of debt, perhaps one third of it via China, payment of debt was never and is not currently regulated by outside forces such as the World Bank and IMF. Outside debt lending obligations often put many Latin American countries into situations where debt payments pushed more of their population into poverty. At crisis levels of around 30-40% under the poverty line on average in the region, the effect on a country like Argentina is one of a Great Depression, not merely a Great Recession.

In Latin America the economic crisis often resulted in complete systems and economies collapsing due to market bubbles bursting in the Developed world. While the US dollar is down against many currencies, it also allows for US made good to become more attractive to local consumers and leaves foreign imports at a competitive disadvantage. There is also the fact that many trading partners of the US kept their currencies artificially low in order to sell more to the US. The current accusation is that China is currently doing this, and not more than three years ago it was known that Canada’s 64 cents US to one Canadian dollar was so low to help exporters to the US even though the value was likely 74 cents at the time. While Latin American countries such as Mexico, Chile and Brazil are now seen as surviving the current global economic storm, the US will also do so as they all currently have decent regulations and good economic fundamentals.

The issue with the US sub prime mortgage market and the new complexities of the banking system in recent years will effect the US greatly, but mostly it is a massive shot against the world banking markets and that industry. This has come about due to regulations which are not in time with the current markets, but also is a result of immoral, irresponsible and illegal business practices taking place in that industry which create overvalued products and economic bubbles. What the United States has in its favour however is the willingness and ability to prosecute those in any industry who seeks to hurt US markets and the economy with illegal business practices. While not always prosecuted in Latin America or worldwide, corruption and illegalities in commerce in the US is becoming more difficult as competition authorities and regulators crack down on actions which hurt the US and world economy. With actions against Enron, Microsoft, Conrad Black and others, the US economy has the ability to never enter a Peso Crisis or another Depression as their fundamentals will often adjust with haste to address any minor crisis in the US Economy. This does not mean the US will do well, but it does show that it can avoid hyper-inflation and market crashes which has plagued Latin America since the 1960s. Let us hope this becomes the case in most of Latin America as well.