Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 1 - Evidence, February 25, 2004
OTTAWA, Wednesday, February 25, 2004
The Standing Senate Committee on Foreign Affairs met this day at 4:12 p.m. to examine and report on the Canada- United States of America trade relationship and on the Canada-Mexico trade relationship.
Senator Peter A. Stollery (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, today we will hear from our first panel of witnesses in Washington, D.C., via videoconference.
The committee has completed chapter one of the review of the free trade agreement between Canada and the United States. Chapter two is concerned with the impact of exchange rates of trade between our two countries. We will now embark on the Mexico-NAFTA section to complete our reference from the Senate. We will travel to Mexico City to hold hearings on Monday and Tuesday.
Ms. Polaski, please proceed.
Ms. Sandra Polaski, Senior Associate and Project Director, Trade Equity and Development Project, Carnegie Endowment for International Peace: Honourable senators, thank you for the invitation to appear before your committee to share my research and my perceptions about the situation in Mexico after 10 years of NAFTA. When the impact of NAFTA on Mexico is discussed, two headline figures are used as measures of its success. Those two figures are the increase in the flow of foreign investment, and the increase in the volume of trade between the countries. However, these measures in themselves do not tell us much about the success or failure of NAFTA.
With regard to foreign investment, it can be an important component of economic growth or it can be destabilizing as it was when foreign capital inflated the Mexican economy in the early 1990s and then fled Mexico during the peso crisis of 1994 and 1995. It can also mean simply a change in ownership of banks, rather than an increase in economic activity, as when Citigroup or Scotiabank buy Mexican banks.
Trade was being liberalized in Mexico before NAFTA, both through unilateral liberalization measures and advances in technology and transportation. The conclusion of the Uruguay Round was also a factor in increased trade flow and lower tariffs.
The more fundamental point is that an increase in trade and investment alone are not a proper measure of success because they are not economic ends in themselves. They are only a means to allow trading partners to specialize in what they do best and, thus, to become more efficient, grow faster, and become wealthier.
The questions that we posed in this study that we published a few months ago are: What happened to productivity? What happened to economic growth, to employment and to income? What happened at the microeconomic level, in the households, factories and farms of Mexico? These changes at the foundation of the economy determine what happens at the aggregate macroeconomic level and over the medium and long term. They are also essential to understanding the political impact of the trade pact, who won and who lost.
I will be using trade data for the U.S. and Mexico because that is overwhelmingly Mexico's trade and it would be more complicated and slower if I refer to Canada-Mexico trade.
The overall pattern of trade between the U.S. and Mexico since NAFTA has seen Mexico was the net winner with regard to trade and manufactured goods, and the net loser with regard to trade and agricultural goods and services. This is reflected in the employment results.
I hope that you have received a packet of PowerPoint slides that include the figures that I am about to use in my presentation.
Mexico keeps manufacturing employment data in two separate data series until we look at it separately for maquila and non-maquila manufacturing. From January 1994 to September 2003, the maquiladora sector gained 523,000 jobs. If you have the packet, it is the first figure.
This program was not created by NAFTA, but there were important tariff cuts under NAFTA that affected maquila products, notably textiles and apparel. NAFTA was significant, but not the only factor in increasing employment in the maquiladora sector. Meanwhile in the non-maquila sector, which is the main large manufacturing sector in Mexico, employment increased briefly but then declined. It finished the 10 years of NAFTA with fewer jobs than before NAFTA.
The Mexican statistical survey does not separate production for export and production for domestic consumption so we cannot say how much of that loss was due to trade. One probable cause of the reduction in manufacturing jobs in the non-maquila sector was import competition from other low-wage countries such as China. However, another partial explanation is that as a result of NAFTA changes Mexican parts and material suppliers, who had produced for multinational companies in Mexico, lost ground to imports those multinationals can source from their global supply chain without paying tariffs. On balance, in manufacturing employment, non-maquila manufacturing in Mexico now has 122,000 fewer jobs than before NAFTA, while in the maquilas there are 520,000 additional jobs over that period. That produced a net gain of 400,000 manufacturing jobs in Mexico from 1994 to October 2003.
Meanwhile, in agriculture, 1.3 million jobs were lost over the same period. Mexican agriculture has been a net loser in trade with the U.S., and employment in the sector has sharply declined. It is not possible to say how much of that decline was directly attributable to NAFTA, but NAFTA involved very significant tariff reductions on Mexican agricultural products. The pact was clearly one important factor, among others, that accounts for the job losses. Chart No. 3 details the pattern of agricultural employment.
It is important to note, of course, that U.S. agricultural exports often benefit from significant U.S. government subsidies. In addition to efficiency advantages that U.S. crops have, they may also be sold in Mexico below their production cost, and this has pushed corn prices down. In some crops, production has declined significantly, which we can relate to the drop in employment. That would be true in wheat and in soybeans. Maize production has not fallen off because its production has been maintained for so-called "auto-consumption", or for household consumption. The fall in prices caused rural incomes to fall and as a result, many households have been forced to send members to work in non-farm occupations.
The Mexican horticulture sector has done well under NAFTA, and it includes fruits, vegetables and flowers. In that sector, 450,000 jobs have been added on commercial farms, but the net loss of 1.3 million jobs that I mentioned earlier is after those horticultural jobs are taken into account.
It is indisputable that the agricultural sector in Mexico has faced the most negative impact of NAFTA, and rural households have borne a very heavy adjustment cost. These households received little or no assistance from their government to make the adjustment.
One would have expected Mexico to be the big winner in job creation as a result of NAFTA. Mexico has surplus labour, which means that it has more workers who want jobs or who want better jobs than are available. With the increase in foreign investment and with the opening of the U.S. and Canadian markets under NAFTA, you would have expected a significant job growth in Mexico, but instead it has been surprisingly weak and certainly disappointing in light of Mexico's need to create employment for its growing population.
The fourth chart shows the average employment growth by sector for the nine years before and after NAFTA. It shows not only the decline in agricultural employment but that both the manufacturing and service sectors grew more slowly after NAFTA than in the period before the pact. Real wages for most Mexicans today are below the pre- NAFTA period. However, this cannot be primarily attributed to NAFTA. A sharp decrease in wages occurred as a result of the severe recession caused by the peso crisis in 1994-95. Wages stayed down for most of the 1990s and only began a slow recovery in the last few years. That still leaves most workers in most industries receiving real wages at levels below what they received in 1994.
The fifth figure shows the pattern of real wages and productivity in Mexico. Productivity, as you will see, has increased strongly and steadily in Mexico over the last 10 years. That is good news, because it has allowed Mexican workers to become more competitive in the global economy, and of course productivity growth over the long run can translate into wage growth and lift incomes and relieve poverty. However, the productivity increases have not translated into wage increases. This is a cause for concern for several reasons. It means that overall poverty rates have stayed stubbornly high, and it means that consumer demand in Mexico has not grown satisfactorily. This skews both the benefits that Mexico expected from the pact and also those that Canadian and U.S. export sectors had hoped for on the basis of growing Mexican demand. This has also made Mexico overly dependent on the U.S. market, since its own internal market has under-performed due to low employment growth and low wages.
Part of the wage picture can be attributed to an oversupply of labour, but some part of it is also attributable to Mexican government policies, which have included repression of the minimum wage and independent trade unions. There is some indication that the Fox administration has relaxed the policy of repressing minimum wage over the last few years, and minimum wages are beginning to recover a bit. However, there has been no progress on reforming freedom of association.
Let me just talk for a moment about inequality. Gauging the effect of a trade pact on real people also requires an assessment of who won and who lost. The gains and losses from trade are not distributed evenly. Inequality in Mexico is high, as it is in much of Latin America. This is a cause for concern because it undermines social stability and political cohesion, and because highly unequal economies have been shown to reduce poverty less effectively than more equal societies.
What has happened? Since 1994, inequality has been on the increase in Mexico. Compared to the period before NAFTA, the top 10 per cent of households have increased their share of national income, while the other 90 per cent have lost income share or seen no change.
Concerning the overall performance of the Mexican economy since NAFTA, I would like to mention the rate of growth of the overall economy or gross domestic product. From 1994 to 2003, in the 10 years of NAFTA, the key growth averaged about 2.5 per cent a year. The average rate of growth of the economy for the 10 years before NAFTA, which included many of the years of the "lost decade" of the 1980s, was almost identical. More surprisingly, as illustrated in the chart, in the decade before that, from 1974-83, growth averaged a much more robust 5 per cent a year. This means that there is no evidence to date that NAFTA has resulted in faster, overall economic growth in Mexico than in the decades preceding NAFTA.
One final measure that is worth mentioning is the microeconomic or household level, and that is the rate of migration. Looking at migration to the U.S., the main foreign destination, we see a very sharp increase from 1996 onward. The increase continues upward after September 11, 2001, despite the heightened border security, and interestingly enough, it increases during the period of the slowdown in the U.S. economy over the last three years. While migration is a product of a complex array of factors, including both the pull of the American economy and also a push of where they are leaving, the fact that migration has increased despite the slowdown in the U.S. indicates that there is still a very big push out of the Mexican labour market. This suggests finally that NAFTA has not achieved the heightened overall growth that economic theory predicted and that Mexico so badly needs.
We must ask ourselves what could have been done differently? What should have been done differently in negotiating the trade pact, or what could be done differently by other developing countries negotiating with rich countries like Canada and the U.S.?
I have included some possible lessons for other developing countries, and perhaps we could come back to these in the question period.
I would like to discuss three ways in which Canada might consider the impact of NAFTA on Mexico. I can do that now or in the question period, if you prefer.
The Chairman: Do it now, please.
Ms. Polaski: As I said, NAFTA has not contributed to Mexican development as strongly as economic theory predicted. Mexico's development should have been a more conscious and prominent objective in the negotiation of NAFTA, both by the Mexicans and by the negotiating partners.
The lesson to be learned is that trade pacts between developing countries and developed countries work as development tools only if tariff liberalization is sequenced and timed to allow the developing country and developing economy to adjust and grow before it is subjected to the full force of competition. Agricultural subsidies by a rich trading partner undercuts the natural comparative advantage of the poorer country, and special provisions should be made to delay liberalization of subsidized crops until multilateral negotiations can address the underlying subsidies issue.
Unfortunately, the recently negotiated issues between the U.S. and Central America replicate many of the weaknesses of NAFTA. Canada can do better in its own negotiations with Central America and with other developing countries if it sets out the goal to assist those countries in their own development as part of the trade pact.
Trade is also foreign policy and good trade pacts make good foreign policy, while bad trade pacts do the opposite. If trade pacts are seen as fair and if they work to develop the poor country partner, it will strengthen the overall relationship between the countries with positive spillover to other spheres of the relationship. Improved cooperation on non-trade issues is a likely gain in such a virtuous circle. By contrast, trade pacts that are seen as unfair or tilted towards the richer or more powerful trade partner will undermine the overall relationship and breed resentment.
Mexico's experience highlights the urgent need to strengthen social safety nets and trade adjustment assistance before liberalization in developing countries. Mexico's farmers were not helped to adjust and this has come back as a major political problem for the Mexican government. It has deepened poverty in the countryside and overall inequality in Mexico and has fed rapidly increasing migration to the U.S.
The European Union approach has been to assist in the adjustment of poorer countries to the process of economic integration, and is, in my opinion, the world's current gold standard for good trade integration policy. Something on a similar scale will not happen in the western hemisphere in the foreseeable future, but there are lesser steps that can and should be taken in this direction. Trade adjustment assistance should be built into trade pacts between rich and poor countries, and the multilateral development banks should be encouraged to take an active role in trade adjustment and transition assistance. The voice and vote of Canada could be used in that direction.
The Chairman: Thank you, Ms. Polaski. That was most interesting.
Mr. Servén, please proceed.
Mr. Luis Servén, Lead Specialist, Regional Studies, World Bank, Office of the Chief Economist of the Latin America and Caribbean region: Thank you Mr. Chairman, honourable senators, for this opportunity to appear before the committee.
Our introductory remarks will be based on a report on the effects and lessons from NAFTA that we have recently completed at the World Bank.
We face serious limitations when we evaluate the effects of NAFTA. We must realize that just ten years have passed, and many other events have occurred that have greatly affected Mexico. As Ms. Polaski mentioned, there was the tequila crisis in 1995, which caused a major recession, loss of jobs and a sharp decline in the standard of living. The unilateral reforms that Mexico undertook in the late 1980s also had some effect into the 1990s. There was a boom in foreign investment to Mexico and many other emerging market economies. There was a worldwide decline in commodity prices among agriculture prices. There were already some ongoing employment trends in Mexico that continued during the NAFTA period.
In other words, we cannot attribute everything that happened after NAFTA to the treaty itself. We have to disentangle the other factors from the treaty. In this report we tried to separate the different factors. We looked at different time periods but that was not enough. We also looked at different countries that have similar treaties. We compared the evolution of the different economic sectors to see how the effects of the treaty evolved in each of them.
Our conclusion is that on the whole, Mexico did benefit from the treaty. However, the benefits were not as large as the proponents had promised and not as bad as the critics had claimed. We conclude that Mexico received a modest impulse towards economic convergence with its North American partners.
In terms of per capita income and standard of living, Mexico did receive a significant impulse in respect of trade and foreign investment. The benefits that the country received were not equally shared by all economic sectors or by all regions of the country. Most importantly, the benefits were not automatic.
This kind of treaty needs to be accompanied by complementary domestic reforms, in education, technology, and infrastructure. To a large extent, the magnitude of benefits that can be received from this kind of trade agreement are largely dependent on how far those reforms go.
During the next few minutes, we will discuss some of the major areas in which the treaty had an impact: trade, investment and income convergence with North American partners. We will also discuss the divergence across Mexican states, and the issues of productivity and innovation in the labour market and agriculture.
NAFTA did impact significantly on the degree of openness of the Mexican economy. In the presentation that we filed with the committee, we show a number of graphs that clearly describe how the imports and exports rose in Mexico under NAFTA to represent today, almost 100 per cent of the Mexican GDP, which is high for an economy of that size. Here, like in many other areas, the free trade agreement was not the only ingredient at work. In fact, the real devaluation of the peso in 1994-95 and the unilateral evaluation measures undertaken by the country in the late 1980s, and other factors, also made a major contribution.
We conclude that the treaty helped increase Mexican exports by approximately 25 per cent to 30 per cent relative to what they would have been had NAFTA not been in place.
There was also a significant increase in foreign investment in Mexico. However, Mexico was not the only country receiving that increased investment influence after the passage of NAFTA. Indeed, we can see that Mexico received significantly more than other countries in the first couple of years after the treaty but after that, other countries also started receiving significantly increased flows. Therefore, there was not a large difference in between the performance of Mexico and the performance of other countries in the region.
Although, on the whole, the treaty did raise foreign direct investment significantly, by as much as 70 per cent more than without the treaty, the failure of investment to continue increasing reflects, to a large extent, some shortcomings of the investment climate of the business environment in Mexico, in particular the institutional weaknesses to which I will speak in a minute.
More important, perhaps, than trade and investment is the performance of the standard of living, how well the country did in terms of closing the gap on its northern partners. We concluded that the treaty made a modest contribution toward helping to close that gap. However, if we were to take the longer perspective, Mexico has suffered major setbacks in terms of its standard of living at the time of the debt crisis of the early 1980s, and the tequila crisis of early 1990s. Compared with that, the effect of the treaty has been modest. We estimate that had the treaty not been present, per capita income in Mexico today would be about 4 per cent to 5 per cent lower than it is. There is a contribution, but it is not so great.
When we considered the ingredients that, over the long run, limit the ability of Mexico to close the gap on its northern partners in respect of the standard of living, we conclude that among the key obstacles to prosperity in Mexico is the weak institutional environment and, most importantly, perhaps, the poor environment of the rule of law and the high degree of corruption, factors that limit the willingness of domestic and international investors to create jobs and prosperity.
Across regions in Mexico there was also quite a difference in the benefits from the treaty. Our analysis concludes that the southern border states of Mexico benefitted very little from the passage of NAFTA, whereas the northern states actually experienced an increase in the rate of growth of the per capita income. In the southern states, basically nothing happened. The NAFTA trained passed them by.
That is not new to the period after NAFTA. Rather, it had been happening in Mexico for many years. Southern states have continued to fall behind just as they did prior to the passage of NAFTA. Why are they falling behind? There are a number of factors that explain why some states managed to benefit less from NAFTA than others. Key factors in the southern states are low education levels, poor endowments of infrastructure, weak institutions, and political instability. If the southern states had access to the same conditions for education, infrastructure, et cetera, they would certainly have done much better than the richer states.
Mr. William Maloney, Lead Economist, World Bank, Office of the Chief Economist of the Latin America and Caribbean region: I will continue with the balance of the same presentation.
I want to finish with one topic related to what Mr. Servén presented and then I will discuss in more detail the labour markets and agricultural sector.
We spent a great deal of time on issues of productivity and innovation. One theme throughout our report is that NAFTA was good for Mexico but that NAFTA has not been enough. This includes transparency, institutions and infrastructure. The area of productivity needs reforms of the national innovation system and, overall, their national innovation efforts. I raise this because it is also a topic in Canada. Daniel Trefler has done much work on how Canada can benefit more from its relationship with the United States.
The graphs on research and development efforts in Mexico show that there is a trend toward increasing research and development expenditures within the development process. We see that countries that Mexico thought it might become; Korea, Israel or Finland, it has not become. Part of the reason is that Latin America generally invests in innovation far less than the average country for its level of development. We think this is part of the reason that it will be difficult for Mexico to move beyond simple maquilas of manufacturing activities to higher levels of sophistication and production.
This lead is especially vulnerable to low-cost regions such as Asia. It is not NAFTA, of course, that is leading to this loss of jobs to Asia. Rather, we think that it is partly the lack of investment in research and development and the like that are important.
The next graph shows the research and development gap in Mexico. The top line represents the average for a country of its level and Mexico is far below that average. After NAFTA, there was an increase in Mexico's research and development effort, and after eliminating many other possibilities we feel that it may be because of the changes in the intellectual property rights regime that occurred along with NAFTA.
We will now go to issues of labour markets. You will note that we have different perspectives, which I will highlight. Did NAFTA hurt Mexican workers? I want to emphasise that it is extremely difficult to separate the effect in the labour market from other effects in the economy. NAFTA and the tequila crisis happened simultaneously, accompanied by a sharp decline in real wages of about 20 per cent. We do not view this as specifically related to NAFTA but rather to the crisis. There was also a slow recovery across time. Employment growth in the maquila sector was rapid because of devaluation and NAFTA may have actually helped Mexico recover from the crisis faster than it might have. That is just a conjecture but the rapid expansion of employment after NAFTA in that sector certainly helped the economy to recover.
Mexico hit the highest level of unemployment at about 6.5 per cent in the last 20 years during the crisis. By 2001 it reached the lowest levels of unemployment on record for the last 20 years. It is difficult to make the case that overall in the labour market, there is a high degree of slackness caused by NAFTA and a high degree of degradation in job availability. This is also important because across this same period of time there was about 0.5 per cent of the total population increase in the labour force because of women entering the labour market.
Given the very low rate of unemployment and the overall reasonably rapid adjustment of the labour force after the crisis, compared to what occurred in Argentina or Columbia where they experienced periods of unemployment up to 10 years, and including the absorption of a large increase in female participation, we think the labour market is not doing so badly in the post-NAFTA period. In any case, we want to say that it is extremely hard to evaluate the impact of NAFTA because of the tequila crisis and other factors. We must use indirect ways of looking at the impact. We could simply look at whether the jobs created in the traded sectors are better jobs or worse jobs than those in the non- traded sector.
We have graphed the wages of the Mexican workers once you adjust for human capital and experience by more exposure to exports as a share of the production of the firm and more exposure to imports in the sector. We find that not only in wages but also in levels of formality — registration with the social security institutions — firms that are more exposed to international trade do better. That is not to say that these firms are nicer or that their owners are more altruistic. It has to do with the fact that these firms demand higher levels of human capital and, therefore, to attract better workers they will have to pay more for them.
We looked at other measures, for instance individual states and how wages differ, and tried to correlate that with elements that might have been affected by NAFTA. We found that real wages increased more in states of Mexico that had higher labour force education, which goes back to Mr. Servén's remarks on the southern states; higher levels of foreign direct investment, which is one the goals of NAFTA; higher levels of imports and a share of the GDP; and, of course, the percentage of the population that migrated to the United States. It often becomes difficult to separate the impact of FTI or imports and just being a border state with easy access to the U.S. market. We have to be honest about all those factors. Nonetheless, the correlations with trade, foreign direct investment and wages do suggest that more integration with the U.S. economy has been good for jobs.
Is there an inequality story? Yes, but I do not think it is the one that Ms. Polaski was highlighting. If you were to compare 1992, before NAFTA, using both the World Bank calculated index and the official Mexican index, with 2000 or 2002, you would find that we are actually below the previous figure. We do not attribute that fall in inequality solely to NAFTA. We do not have a causal mechanism to explain it. Wage inequality increased slightly at the beginning and later decreased. However, it is hard to say that inequality increased in any way as a result of NAFTA; overall inequality appears to have fallen.
Under trade and employment, Ms. Polaski correctly pointed out that maquila employment grew dramatically, especially after the depreciation in 1994 and, perhaps, with the signing of NAFTA. It is hard to distinguish those effects. There is a decrease after about 2000 that is probably attributable to competition from East Asia and may continue to increase. It is important to note that industries with higher levels of sophistication did not migrate and those competing purely on a basis of low wages appear to have suffered most.
Agriculture is a tricky issue. We do not have the data to determine for certain the effects of NAFTA on agriculture. Ms. Polaski showed that the decrease after NAFTA is difficult to pinpoint because it measures overall agricultural employment.
It began in 1993. Then there was a change in survey in 1994, and from 1995 to the present there was a consistent series, this means that means that we have had trouble comparing the before and after periods. In particular, we cannot really compare the rates of employment growth or decline in the agricultural sector. This is very important because we know that in all countries in the development path there is a slow elimination of jobs in the rural sector and a movement towards the urban sectors.
In the United States we have 1 per cent or 2 per cent of our workforce employed in agriculture. That clearly was not the case in 1900. The same thing happened in Canada. We need to know a longer run trend.
One series, admittedly not comprehensive, is the amount of agricultural employment that is registered with the Social Security Administration. This will not capture most self-sufficient farms, but it does indicate some overall trends in the agricultural sector that we think are worth paying attention to. When you look at this dotted line, you see there was a longstanding decrease in agricultural employment across the 15 years before NAFTA. There was a brief increase in employment after NAFTA, but we think that is more due to the devaluation that happened in 1995 and not particularly to NAFTA itself.
Why do we see this trend? Much has to do with long-term degradation in commodity prices, which would be partially offset by the devaluation. Part of it happened from the natural processes of development of people moving to the cities. It is very hard to say that NAFTA led to the acceleration of this movement. In fact, we are actually more worried that there was not enough of an impact on the agricultural sector, in the sense that those small, rain-fed plots will not be sustainable in the long term. They will have to change to something more productive. Hopefully, a generation of more modern agricultural sectors will provide one alternative, or the manufacturing sector will provide another. We know there is no gain without pain, and some sectors will need to disappear, as happened in Canada and the United States where the rain-fed agriculture sector declined.
Taking a more specific look at productivity and production in the agricultural sector, we find that imports from the United States indeed increased dramatically after NAFTA. Mexican agriculture imports and the production of sensitive agriculture products, which includes the products that we were worried about, would be most adversely affected by NAFTA. If you look at the two bar charts on the left of the black line and then to the right, the first grey bar suggests an increase of maybe 40 per cent. It is also interesting that overall Mexican production also increased dramatically. We see imports from the United States, but we also see greater production and greater exports from Mexico. There is ample room for a win-win situation. In fact, if you look at which kind of agriculture was more damaged, or maybe more affected, it appears to be irrigated agriculture, which is the third bar from the left. That graph shows that irrigated agriculture grew less and perhaps shrank from 1991-93, but that rain-fed agriculture actually appears to have grown. Since production increased in the rain-fed sector, it is hard to argue there were major employment losses in that sector.
Why did NAFTA not affect this as much as we thought? We see that NAFTA had a very limited affect on Mexican commodity prices. We did not find that U.S. or Canadian agricultural prices and Mexican agricultural prices started tracking each other better after NAFTA. There was not a large price effect. The second thing is that there was a lot of internal demand growth in both Mexico and in the United States in the relative boom of 1995-2000. There was a big growing market for all three countries' production. There was productivity in the Mexican agriculture irrigated sector that led to increased overall production of the sector, although it probably did not help particularly much on the job front. The government also began several innovative agricultural support programs.
In the end, there are a variety reasons why there was not a strong adverse impact on rural agriculture, and I think the challenge is thinking of how to have an impact in the longer term on particularly small-scale, rain-fed, self-auto- consuming agriculture in such a way that these people move to more productive sectors, but in a way that is not incredibly disrupting and does not increase poverty or inequalities. Thank you.
The Chairman: Thank you very much. I must remind every one that we have to end this part of our meeting at exactly 5:30, because I believe that at that time the system will turn off.
Senator Graham: I want to ask the witnesses to what extent they believe that weak labour laws and perhaps inadequate union representation are preventing wages from rising. Perhaps they give us a general overview of the state of free collective bargaining in Mexico.
Ms. Polaski: Let me say that in terms of collective bargaining, the picture in Mexico is somewhat complex. There are some sectors in which collective bargaining is reasonably healthy, and where the institutions appear to be democratic and representative of the workers. In these sectors the results of collective bargaining track roughly with the productivity and profitability of industries, which is what you would expect to see from competent democratic unions.
There are a number of industries, however, and this certainly includes most of the maquiladoras and many other sectors in Mexico, where it is not really possible to say that the unions are democratic or representative of the workers. There have been some studies done, but the methodology is not rigorous enough to have a lot of confidence, showing that as many as 90 per cent of the unions in the Maquiladora sector may be ghost unions or phantom unions, where someone is making profit by making a deal. In these situations people make a collective bargaining agreement between the employer and I suppose the representative the workers, but the workers have never been consulted and have not elect the representatives.
Mexico has exclusive representation as one of its tenets of collective bargaining. Once a contract is concluded, if the workers say they do not really have a union or a representative, it still holds true that whoever holds that contract in agreement with the employer is allowed to forestall union organizations.
There have been numerous documented cases, and many of these cases have been brought before the North American Commission on Labour Cooperation and the ministers of labour of the three countries. Hearings have been held in the United States and in Canada looking into those cases. I think it is fair to say that the documentation exists that, in many sectors, and again particularly in the Maquiladora sector, and elsewhere, there is not real collective bargaining and real freedom of association.
How much impact does this have on the results in terms of wages? I think we have to say that the imbalance between supply and demand in the labour markets is probably the biggest single factor affecting the pattern of wage growth, except from those periods after the peso crisis, and the debt crisis in the 1980s, when we saw a very sharp drop in income. Aside from those two catastrophic regressions in income, I think we have to attribute the overall pattern primarily to an imbalance and oversupply of labour. However, there clearly is some impact of institutions.
The fact that the Mexican government held down minimum wages and that collective bargaining is not robust certainly is a contributing factor, at least in labour markets that are not completely unskilled, and I think that some attention to the institutions is an important part of a pass forward for Mexico.
The Chairman: Would someone from the World Bank like to give a brief observation?
Mr. Maloney: Although the issue of labour unions is really tricky in Mexico, Mexico has the largest share of unionized workers in Latin America. However, those unions have been tightly affiliated with the ruling government party for much of the last 70 years, so there has been what we call a "corporatist" system where the unions have a high degree of control of the workers. What the unions will evolve to under democracy is still an open question. It is the case that, in the past, unions in Mexico, as elsewhere, have been more preoccupied with creating and holding jobs than raising wages.
We cannot fool ourselves that either minimum wages or union power will increase wages much in a serious way. You might raise wages 10 per cent or 20 per cent, but the big gains in productivity, and in standard of living, come from productivity gains. Wages in Chile rose 3 per cent a year during the 1990s.
The Chairman: I will interrupt because the Senator Graham asked about the state of free collective bargaining, and official unions.
Senator Grafstein: He has answered the question.
Mr. Maloney: Many of these unions were affiliated with the PRI, the former governing party, and they are not in power now.
The Chairman: Are you saying that they were not independent unions, but connected with the PRI?
Mr. Maloney: Mexico has been a democracy over the last number of years of the NAFTA experiment, so it is very hard to know to what degree they were actually behaving freely. In any case, I do not believe that is the solution to raising Mexico's wages.
Senator Graham: I believe we understand that.
In the first part of your presentation, Mr. Maloney, you talked about wage inequality, and you mentioned the minimum wage in Mexico.
What would the effect of higher minimum wages be on Mexico's international competitiveness?
Mr. Maloney: The answer to that question varies between the experts that you speak to. If you talk to people in the Guadalajara computer sector, they will tell you they are working with a 4 per cent margin in labour costs over Malaysia. That is to say that if wage costs rose 5 per cent, they would lose their industry to Malaysia. I have no way of independently evaluating that statement.
In a recent World Bank study in the Chief Economist's office, we found that minimum wages do have a negative impact on employment and, depending on how high you push them, the employment effect can outweigh the wage effect. In the case of Colombia, it caused more poverty.
In Mexico, the small changes that there have been had no impact whatsoever, and in Brazil it had a minor, small positive impact on poverty.
Senator Di Nino: Canada's entry into NAFTA created an opportunity for Canadian goods and services to be exported to the U.S. and Mexico, as well as to create an opportunity for our own FDI investments.
Has NAFTA created that kind of an opportunity for Canada and Mexico?
Has the reform of institutions, particularly the judicial and regulatory institutions, come up to a level where we can feel comfortable to recommend to companies and/or manufacturers to invest or situate themselves in Mexico?
Ms. Polaski: On the last part of the question about the regulatory and judicial institutions, I think that Mexico has a long way to go before there can be confidence in the transparency and the lack of corruption in those institutions. I think that is true across many of the regulatory institutions in the judiciary. In the area of the rights of workers and enforcement of labour laws, there has been disappointingly slow progress to improve those institutions.
Mr. Servén: While we did not determine in detail the performance of Canadian exports and investment in Mexico under NAFTA, I can say that, from an institutional perspective, it is true that Mexico, under the NAFTA treaty, has made significant progress in terms of improving its institutional framework. However, there is still a lot of work ahead, and the fact of the matter is that many other countries have moved ahead faster than Mexico. That is one of the reasons why foreign investment into Mexico has not kept pace with other countries.
Senator Di Nino: The economy in Mexico has now grown to a level where we may be able to export products.
Has Mexico achieved a higher standard of living and productivity as a result of NAFTA?
Has NAFTA created a market to which Canada can sell its goods and services?
Mr. Servén: NAFTA has helped somewhat, but on its own it is not sufficient to guarantee the prosperity that was expected in Mexico and that would be needed for that permanent impulse for demand for exports from Canada and other places.
The lack of sufficient action in education, the infrastructure, and the institutional domain to enhance the productivity of the Mexican workers, has much to do with that.
If Mexico has not done better, it is not so much perhaps as a result of the effects from NAFTA, but the lack of sufficient action in the complementary agenda that we have mentioned.
Senator Grafstein: We are here to make recommendations to the Canadian government about where we should take our trade relationships within NAFTA and beyond.
The history is very interesting, and we are where we are with Mexico. You have changed my mind, really, after listening to the evidence today. Rather than criticize Mexico, we should encourage Mexico to expand its trade relationships with South America and Europe in order to develop a market for our goods.
Do you agree with that conclusion?
Ms. Polaski: I agree with the conclusion that Mexico should expand its trade. I do not think that isolation will help any country in the global economy. I think that pacts between a developed country like Canada and a developing country like Mexico can be structured in a way that would advance employment and income faster and better if it were structured as a development pact.
I commented earlier about the sequencing and timing of tariff liberalization. If this is done properly there will not be negative shocks in agriculture that swamp the manufacturing labour market. This goes back to the previous question about the market for Canada.
Expecting dramatic short-term results in terms of increasing demand in developing countries is unrealistic. Pacts can be structured so that you do expect and see demand develop over time and in a sustainable way. That is what has to be built into these trade pacts.
There is no magic way to do it and you will see a great increase in the beginning, particularly in the current global environment where you have a global surplus of labour in unskilled labour categories. You can avoid the negative shock to agriculture so that you see not only progress, and not setbacks and then progress. Under those circumstances, you can expect to see more mutual benefits from the trade pacts over the medium-term than we have seen from NAFTA. I certainly hope that Canada, in its negotiations with Central America, will take more of a developmental approach than what ended up with the U.S. negotiations.
Senator Grafstein: Based on your evidence from both the World Bank and the Carnegie studies, the most devastating impact on Mexico that has driven down wages and upset its fragile economy has been farm subsidies. Farm subsidies seem to be as devastating to Mexico as they are to Canada.
What steps is the World Bank taking with respect to its leverage with Europe and the United States to ratchet down these horrendous farm subsidies that are killing Canadian agriculture and, obviously, devastating Mexican agriculture?
Mr. Servén: The World Bank has been sharply critical of the agricultural subsidies granted by industrial countries. We think it is a major item in the global negotiation agenda and will be difficult to address if it is not a part of global agreements.
However, farm subsidies from industrial countries do not necessarily harm every developing country. If a developing country is a net importer of farm products, the effect of farm subsidies is to make those imports cheaper, to the extent that Mexico, for example, is a net importer of maize and has been for many years.
The fact that maize can be bought more cheaply than it would otherwise be without subsidies is not harmful to the standard of living of most Mexicans who consume maize.
This is not the case in other countries such as Brazil or Argentina who are net exporters of major agricultural commodities; they suffer significantly from agricultural subsidies.
Mr. Maloney: To repeat my previous conclusion, there is not any evidence of devastating impact on Mexican agriculture after NAFTA. There is no evidence that Mexican agricultural prices started tracking U.S. agricultural prices anymore closely after NAFTA. There are good reasons to think hard about agricultural subsidies in the United States and in the developed world. The experience of NAFTA does not inform that debate.
Senator Eyton: I happen to know that there were great hopes that the Mexican sugar industry would have greater and better access to the U.S. market under NAFTA. There was considerable investment made in the sugar industry in Mexico but those hopes were dashed. The sugar industry had great difficulties and most of the companies went into receivership. There was a vast disappointment with the effects of NAFTA in respect of the sugar industry. Please comment.
Mr. Servén: I am not aware of the specific performance of the sugar industry. We have seen the trends in traditional agricultural exports as a whole. The aggregate did not look significantly worse under NAFTA than they looked before NAFTA; in fact, they did better. Having said this, I am sure there is some diversity in the different products, however, I cannot comment on sugar.
Ms. Polaski: I do not have a breakdown of the employment patterns of the different crops. It is not easy to determine from the Mexican data. It certainly is the case that Mexico expected much greater access to the U.S. market for its sugar than what it has received. This has been an ongoing dispute between the parties. I believe the issue has been before a dispute settlement panel under NAFTA. I am certain, as honourable senators are aware, that because of the frustration over the U.S. failure to provide greater access for Mexican sugar, the Mexican Congress has, as a countervailing measure, increased tariffs on corn syrup to the U.S.
Sugar should give Mexico and Central America a comparative advantage. Increased employment from increased sugar exports would have absorbed other labour from the countryside where the subsistence farmers badly need employment. However, because of the lack of access to the U.S. market that did not happen. At a minimum, it was a missed opportunity in terms of the positive impact on the labour market and a big issue with Central America.
The Chairman: I have been in the sugar and cotton-producing areas of Mexico. I am quite aware of the fact that the American sugar producers make it difficult for cheaper sugar to enter the United States.
I do not mean to be critical of NAFTA but we are talking about a developing country that has similar disputes concerning agricultural products. This committee has heard extensively about our agricultural disputes with the United States.
You mentioned the NAFTA dispute settlement mechanism. In Canada, this committee has heard that it has not been particularly successful and as a result, our disputes are going before the WTO.
Are disputes over products such as sugar and perhaps maize being taken to the WTO?
Ms. Polaski: The disputes that I am aware of have been filed under NAFTA. That is not to say that Mexico has not forgone the NAFTA dispute mechanism process and gone to the WTO. Perhaps my colleagues in the World Bank could answer your question.
Mr. Servén: Despite perceptions that are sometimes held, there is no evidence of any increase in the extent of disputes between Mexico and the U.S after NAFTA. U.S. actions against Mexico and Canada have remained more or less as frequent as they were before NAFTA. Actions from Mexico against the U.S. or Canada have become less frequent than they used to be before the passage of the treaty.
That does not mean that the dispute settlement mechanism is any good. In fact, that is one of the issues that, for future trade negotiations, should be looked into. Current mechanisms are not transparent and are subject to arbitrary decisions. There are other, better ways, such as temporary safeguards, that would be more preferable to the current dispute settlement mechanism.
The Chairman: We have a free trade agreement with the United States. It is said in trade circles that the disputes with Canada have become even less solvable as time goes on. I will not bore you with the softwood lumber issue but disputes have not been resolved.
The costs of these disputes have become enormous. It becomes difficult for me to think that although Canada and the United States are close friends and long-standing trade partners, we still have these unsolvable problems.
The legal fees for the softwood lumber dispute are in the area of $1 billion, with $200 million U.S. for the latest round at the WTO.
Are you saying that Mexico does not have similar difficulties?
Mr. Servén: I am saying that Mexico does not have them more frequently than it had them prior to NAFTA.
The Chairman: Does Mexico have frequent trade disputes with the United States?
Mr. Servén: Complaints from Mexico against the U.S. have declined significantly. Complaints the other way have stayed more or less the same.
The Chairman: This discussion has been very interesting. We have exhausted the subject, or have we?
Senator Grafstein: We have examined the good work of the World Bank. I would be interested, if you are able to comment, on the role of the World Bank with respect to the tequila crisis.
Mr. Servén: Honourable senators, at the time of the tequila crisis none of us were at the World Bank so we are hard- pressed to comment on that situation. However, my recollection was that the crisis was not widely anticipated. My understanding is that the World Bank, along with other international organizations, and bilateral authorities, tried to help, but I really cannot get any deeper than that because I just do not have the information.
The Chairman: We all remember that the bank is a fund and the fund is a bank. Is that not what was said when they were founded?
Senator Grafstein: When we look at the statistics, we see that the tequila crisis played a role in reducing real wages and devaluing the currency in Mexico. Therefore, when we look at our relationship it is very important to take a look at the role of international financial institutions as to how they safeguard the fiscal status of these trade relationships.
The Chairman: Senator Grafstein, I agree, that is a very good point. I believe the IMF would be the big player in a crash, rather than the World Bank, but the point is very well taken.
Senator Di Nino: We have heard that NAFTA is not as valuable today as it was when it first came into being.
Does Mexico feel that NAFTA is still a benefit to their economy?
Ms. Polaski: Mexico's benefits under NAFTA are eroding. The combination of the possibility of greater multilateral liberalization, and the multiplication of bilateral and regional trade arrangements are clearly eroding the benefits that Mexico enjoyed under NAFTA. The accession of China to the WTO has also had an effect on that erosion. In terms of the bilateral relationships between Canada and Mexico, or the U.S. and Mexico, or the entire North American relationship, there needs to be some real cooperation on institutional deepening and help given to strengthen Mexico.
Mr. Servén: Were NAFTA to be removed tomorrow would the Mexican economy suffer? The answer is most definitely yes.
The Chairman: I am sorry, I do not mean to cut you off but we have been through this before. The tariffs have already been lowered. For it to be ended they would have to be raised. I do not know that Senator Di Nino is suggesting that be done.
Senator Di Nino: That was not the question.
The question is: Is NAFTA still of benefit to Mexico, or should there be changes or revisions made to it?
We have heard evidence that the benefits have run their course. If this is going to continue as a relationship it should be seriously reconsidered.
Mr. Servén: Could Mexico still extract more benefit from NAFTA? The answer is my view is yes. If Mexico were to do many of the things we have discussed today it would draw a large benefit in terms of more investment, more jobs and more prosperity. That does not mean, however, that NAFTA could not be improved or modified along some lines that would make its benefits also greater for Mexico and the other partners. That has to do with how rules of origin and conflict, dispute settlement mechanisms and so forth are addressed in the treaty. It would take too long to get into those details but there are areas that could be improved.
The Chairman: On behalf of my colleagues, thank you for your important information. We thank you for your participation. Our people have been taking notes. Some of this will undoubtedly appear in our report.
Honourable senators, we have with us now from the Canadian Foundation for the Americas, FOCAL, Mr. Donald Mackay, the executive director, and Mr. Paul Haslam, the senior analyst.
I have been asked about the difference between the Canadian Foundation for the Americas and the Canadian Council for the Americas. Mr. Mackay, would you tell us the difference?
Mr. Donald Mackay, Executive Director, Canadian Foundation for the Americas (FOCAL): Thank you very much for the invitation. I am the executive director of the Canadian Foundation of the Americas. The distinction between the two is that the Canadian Council of the Americas is an organization based in Toronto. It is under the chairmanship of David Winfield, with whom some senators may be personally acquainted.
The Chairman: He appeared last night before the committee.
Mr. Mackay: Mr. Winfield was Canada's ambassador to Mexico for six years. I had the pleasure of serving under him at the Canadian Embassy in Mexico between 1993-95.
The Canadian Council of the Americas is an organization focused principally on enhancing Canada's commercial relationship with Latin America and the Caribbean, whereas FOCAL, my organization, is more of a policy institute, a think-tank, an entity designed to look at the broad spectrum of Canada's relations with Latin America and the Caribbean. The two organizations frequently work very closely together.
The Chairman: You know our rules or how we work.
Would one of you like to make a reasonably brief statement?
We have just gotten off a teleconference with the Carnegie Institute and the World Bank, and you are our second group of witnesses.
Senator Graham: For clarification, Mr. Mackay, what constitutes your membership? Who do you represent?
Mr. Mackay: I make no claim to represent anyone. The foundation has 14 full-time staff members. We receive funds from a variety of sources, including the Canadian government, but not exclusively from government. We receive funding from the Ford Foundation in the United States, as an example. We are like a small C.D. Howe Institute or a small Fraser Institute. We are not an advocacy group, do not speak on behalf of anyone, nor do we claim to speak on behalf anyone. We produce publications and organize conferences. Our goal is simply to encourage the dialogue between Canada and the countries of Latin America and the Caribbean.
The Chairman: Would you like to give us a summary of your points?
Mr. Mackay: Paul Haslam, my senior analyst will provide you with an overview of the Mexican political system.
I thought, however, in my own remarks, I would pick up on some of the questions that had been asked, and bring a perspective to bear on those questions as that seemed to reflect the areas of interest of the members of the committee.
You asked a question with regard to dispute settlement and whether Canada or the NAFTA members had moved over time to a WTO-based dispute settlement system, as opposed to those contained within NAFTA. I posit that the answer is twofold.
There is within the NAFTA agreement a dispute settlement mechanism that Canadians will be very familiar with, Americans a little less familiar, and that is the Chapter 19 system that deals with anti-dumping and countervailing duties.
This is a unique dispute settlement mechanism that does not exist in any other trade agreement in the world, with the singular exception of the Canada-Chile agreement, where there is a variation on the theme in that agreement.
The Chapter 19 mechanism has been used extensively since it was first introduced in the original Canada-U.S. Free Trade Agreement and was carried over with slight modifications into the NAFTA agreement. All three countries have utilized that mechanism to a fairly high degree.
The Chairman: What does Chapter 19 affect?
Mr. Mackay: When a country comes to a determination that an exporter of the other country is either dumping or has subsidized their exports to the country and, therefore, has applied countervailing duties, the aggrieved party can take those determinations to a binding binational panel to have them adjudicated.
Prior to the invention, if you will, of Chapter 19 in the original Canada-United States trade agreement, the only recourse a Canadian company would have, as an example, against a final anti-dumping determination in the United States was through the American domestic court system.
What the original Canada-U.S. Free Trade Agreement conceived of was a panel system that would be drawn from experts from both countries, and it would take it out of the domestic judicial system. That system was extended to Mexico's benefit as a consequence of NAFTA. One of the key concerns at the time was that the U.S. judicial system, while an independent branch of government, obviously, was one that was subject to politicization, and we were finding at the time that all of the judicial reviews of the anti-dumping or countervailing duties tended to find for the defendant, quite obviously.
Chapter 19, by casting a binational panel review on the matter, raised the threshold, and we found that final duty determinations in all three countries now meet a higher standard and are applied much more rigorously.
The Chairman: We discovered that the U.S. Congress changes some element of the thing, and we wind up at the WTO.
Are the Mexicans having the same or similar problems with the Americans?
Mr. Mackay: Yes. However, the problem is that you are testing whether a country is in compliance with its international trade obligations. Those obligations in NAFTA are also mirrored in large measure in the United States and our own international obligations in the WTO.
I will take the Byrd Amendment as an example.
The Chairman: We are aware of the Byrd Amendment.
Mr. Mackay: Senator Byrd put forward the legislation that duties paid under anti-dumping duty orders would be rebated back to the complaining companies. There were a number of countries that were concerned that the particular piece of legislation contravened the obligations taken on by the United States. Canada could have an option to pursue that case under NAFTA. However, the European Union had the same complaint and same concerns that we did, as did a number of other countries: Brazil, Japan and others.
There has been a gradual shifting of the venue in which the complaints have been adjudicated to the global level rather than the NAFTA level, simply because many of these issues crosscut and touch on the interests of countries that are not members of NAFTA.
Therefore, it would be in the line of a gentleman's agreement that Canada would choose to pursue on those cases which we would be leading, and that we would pursue them increasingly in Geneva as opposed to within NAFTA.
The Chairman: What about the Mexicans? If it is just one country against another what kind of sanctions are imposed?
The problem with the Byrd Amendment is that there you cannot impose sanctions that do not rebound on yourself. If you have 130 WTO countries that win a case the sanctions are much more dramatic.
Do the Mexicans not have the same problem?
Mr. Mackay: Yes, they do. There have been three cases adjudicated under Chapter 20 of NAFTA, which is the government-to-government or party-to-party dispute settlement situation. Two of them involve Mexican-U.S. issues. One deals with transportation, specifically trucking across the border. The other deals with sugar, which Senator Eyton raised in the question period.
In Mexico's case, they have chosen NAFTA to a certain extent, but not exclusively. There are other cases where Mexico has felt that their interests would be better served at the global forum as opposed to a NAFTA forum.
When a country chooses the forum in which it will pursue its rights, it simply does so on a calculation where it feels it will be best served. I would not take that as a commentary on either the architecture or the provisions in other agreements. It is simply a question as to where you think you will win a particular case.
Senator Graham: I know that our witnesses were in the room when we were enjoying the pleasure of our television guests from the Carnegie Endowment for International Peace.
According to the Carnegie study, since NAFTA was implemented, Mexico has lost close to 1.3 million jobs in agriculture. In your opinion, are these job losses the result of NAFTA lowering trade barriers, the result of U.S. farm subsidies, or do they simply reflect a pattern of urbanization typically associated with the transition from an agricultural-based economy to an industrial-based economy?
Mr. Mackay: Mr. Maloney provided the most specific answer to that question. He said that there has been some transition. However, whether you can draw a causal link is a difficult thing to do.
In Mexico, as in other countries in Latin America and elsewhere, we have seen a process of gradual urbanization; people are moving from the rural areas into the cities. Whether they are propelled to do so because of technological changes, whether they are propelled to do so in order to have access to health services which do not exist in the rural areas, or educational services, or as a consequence of trade policy, in a certain sense is immaterial.
As you said, 1.3 million have moved. I predict that over the next couple of years will see more of that phenomenon.
Senator Graham: Do you mean the figure will grow?
Mr. Mackay: Yes. We have seen the same phenomenon in Europe and in North America. In terms of production of the agricultural sector and its value to GDP, in Canada, for example, in terms of employment, agriculture is about 2 percentage points. In terms of its contribution to GDP, it is about 15 percentage points. In Mexico, the contribution of agriculture to GDP is actually only about 4 percentage points, whereas its contribution to employment is much higher. However, that is something that is declining as time goes on and as Mexico industrializes and becomes a much more modern economy.
Mr. Paul Haslam, Senior Analyst, Canadian Foundation for the Americas (FOCAL): Honourable senators, I wish to add another point to what Mr. Mackay is saying. We must remember that looking at the agricultural sector in Mexico is not like looking at our own agricultural sector where family farms were transformed into large agri-businesses.
In Mexico, there is a specific institutional development across the country called the "ajido"; that is a communal form of working the land. This development came out of the revolution. Effectively, what it means is that a group of peasants worked together on basically subsistence agriculture, mostly for the purpose of survival instead of export. This did not happen because of NAFTA. However, something that happened at the same time as part of the domestic liberalization that Mexico underwent in the 1990s is that the ajido system was effectively disbanded. In some parts of Mexico, the peasants literally sold their lands. In other parts of Mexico, the communal ajidos were divided up into plots.
What you see, essentially, is that also created a displacement of the rural population. That means that many people living in the poorest parts of Mexico view their plots essentially as subsistence agriculture. In many cases, these are survival strategies for the very poor.
In many respects, when you are talking about the displacement of population from the rural area, one must realize that rural Mexico has always been poor and survival strategies in these areas are of paramount importance.
Senator Graham: Both of you heard Ms. Polaski's final comment that Mexico's advantages under NAFTA have rapidly eroded. Do you agree with that statement?
Mr. Mackay: I am quite familiar with the Carnegie study; one of the coauthors with Ms. Polaski is John Audley, who has been a friend for some 15 years.
I disagree with their conclusions. I agree that their advantages under NAFTA are being eroded in the sense that there are other liberalization elements that are taking place, partially as a result of the Uruguay round of WTO negotiations and partly as a result of the fact that the United States has now signed a trade agreement with Chile. They have just concluded agreements with Australia and the Central America countries. In that sense, Mexico's relative position is being eroded. If that is her argument, then technically, she is correct. If it is an absolute statement, however, my answer is no. My answer is that the stamp of approval that NAFTA placed on Mexico was probably one of the most important elements of the entire agreement. It was the fact that the United States and Canada, two industrialized countries, had agreed to come into an agreement with Mexico, a developing country. That was a major motivator for much of the foreign investment and much of the trade that has gone into Mexico and from which Mexico has benefited as a result.
My argument for this is actually fairly simple. If you look at the tequila crisis in 1995, versus the previous peso crisis in the 1980s, you will see that in 1995 Mexico was a member of NAFTA. They had acceded to the OECD. They had an economic team in place that was highly credible to the international financial community.
The rescue package of some $51 billion, in which the Bank of Canada also participated to the tune of $5 billion, pulled Mexico out of that crisis. Mexico paid off each and every dollar of debt that it had accumulated ahead of schedule.
By 1998 at the latest, Mexico was out of that crisis. It was able to recover much more rapidly. In the 1980s it took a decade to dig itself out of a similar situation. I say that Mexico's position within NAFTA is by far a greater benefit than its position outside of NAFTA.
Senator Di Nino: I am not sure that I want to ask the Mexicans a question that keeps going through my mind.
The statistics and comments we have seen and heard have given me the impression that there has been productivity improvement of some 50 per cent to 60 per cent. I get the impression that Mexico has gained a great deal since NAFTA, or because of NAFTA, whether it is the stamp of approval to which you referred or the FDI from different parts of the world. I think that is related to the fact that there may be a door to the big U.S. markets through Mexico, which may not be available directly.
For whatever reason, it does not seem that all of these productivity and employment gains, particularly in the manufacturing and service sectors, have filtered down to the people to the degree that one would have expected.
How much is this is related to corruption? How much is related to the fact that the profits are being made but they are not being shared with the Mexican workers?
This could create a situation where the wealth and the prosperity are not with the people. Our goods and services are not saleable to that market.
Mr. Mackay: The average wages in the Maquila area are about one-third higher than say the Oaxaca area in southern Mexico. One-third higher, however, is still not very high, and would not be what we would call a "living wage."
The wages in Mexico remain in the $2 to $3 range per hour at the industrial or the manufacturing level. Within the maquiladoras we have seen productivity increase that has drawn in higher skilled labour. That is a key reason why there is a premium being paid for those wages in those sectors. However, it is still far from what an autoworker in Detroit or Windsor can and should expect.
The Ford motor company plant in Mexico was audited a number of years ago. It was found to be the most efficient automotive assembly operation anywhere in the entire world. That speaks of productivity gains that have been accumulated.
Has all that spread throughout the entire economy? No, it has not. In Canada, we enjoy a standard of living with a per capita income of $28,000 a year. There are portions of this country where $28,000 a year per capita income would seem unimaginable.
Is Mexico headed in the right direction? In my view, yes they are. It will take at least another generation, but they are headed in the right direction.
Mr. Haslam: Your question is getting at the fundamental question of whether NAFTA is having a positive effect on poverty in Mexico, and if it is not, why is it not? We are assuming that it is not having a positive effect on poverty.
Much of the responsibility is with the Mexican government. If we are looking to a trade agreement to magically develop Mexico, it will not happen. It did not happen for us that way; it is not going happen for any country that way. This is about putting appropriate policies in place so that liberalized markets can work to give people better life chances. For example, we were talking about people leaving agricultural areas. This is partly a question about the inadequacy of Mexican state policy towards rural areas and the fact that people who live in rural areas cannot get the access to infrastructure, services and basic things like loans that will them to make productive use of the lands that they have.
We did not get to it but my presentation was about how the Mexican political system has evolved in the last 10 years. Remember, Mexico has only been a consolidated democracy for three years. We forget that because there was a party system that had developed over the last 20 years or 30 years.
However, there has only been a change in power in the last three years. This is a political system that is not used to serving the interests of the people.
This is a political system that is used to controlling people. This is an important point. The party of opposition, the PRI, the Institutional Revolutionary Party, is a party that has deep roots in society, and those roots are all about control, and patron-client relationships that culminate in the president.
The current governing party, the PAN, does not have the roots that the PRI has because it is a newer party and is based in the northern region of Mexico.
We have a political system that is not yet used to articulating people's interests. I argue that it is not yet used to serving people's interests.
Part of the answer as to how we can make the Mexican political system make NAFTA work is about consolidating that system. Part of it is about building better institutions so corruption is not a part of daily life. When a policeman stops you on the street for speeding, the answer to that problem is not to go to the town hall and pay your parking ticket. In Mexico the answer that you tip the police officer and then you do not get as big a fine. This is a common occurrence. That kind of structural corruption clearly does have a negative effect. Getting rid of it is a matter of building better institutions. Part of building better institutions that will make markets work better is building better representative institutions that will allow people to express their interests and allow civil society to have a voice in how development should be oriented.
Senator Di Nino: Let me just then quickly interpret your words. Is it correct to say that there are profits being made but they are not getting to the people?
Mr. Haslam: It is not just that profits are being made; huge profits are being made. Mexico, I believe, has the longest list of billionaires of any country in the Americas.
The Chairman: Is it worthwhile noting that the PAN and PRD are all people who fell out from the PRI?
They were all in the PRI and they had fallings out. Some who were more conservative went to the PAN, some who were more to the left went to the PRD, but they are all the same people.
Mr. Haslam: That is not exactly true. The PRI as an institution, as a party, has existed essentially since 1924.
The Chairman: Since 1924.
Senator Di Nino: He was there.
The Chairman: No, but I was at the fiftieth anniversary of the founding.
Mr. Haslam: You are correct that the PRD did emerge out of a left wing splinter from the PRI in 1989 following the presidential election where Cárdenas lost to Salinas.
The Chairman: Who was also with the PRI.
Mr. Haslam: He was.
The Chairman: As was Munoz, his manager, with the PRI. He was the secretary-general of the PRI and went to the PRD.
Mr. Haslam: There is no doubt that the PRD is originally a splinter of the left wing of the PRI. What I contest is that the PAN does have different roots.
First, the PAN was founded in 1939. Even if it was related back then it is a long enough period that you can talk about an independent evolution. It is based is socio-Christian thought, which is distinct from the anti-clericalism of the PRI, and it is also regionally based in different areas.
The Chairman: I did not mean to get into that but it has implications for Mexican society in that they all, basically, come from the same tree.
Senator Day: This is a very interesting and helpful discussion. I am wondering about the other free trade agreements that Mexico has entered into. It might be because they have not been in place long enough, but they did acknowledge that there were other factors that would impact on their analysis of the impact of NAFTA.
What impact have these other agreements had on the NAFTA effect?
Would you also comment on Ms. Polaski's argument to let developing countries have an opportunity for a delayed liberalization of tariff reductions or a liberalization of their market, and if any of these ideas have been implemented?
We were discussing Chapter 19 and Chapter 20 and the dispute resolution mechanisms. The real problem is that countries have not given up their national regulatory schemes for trade.
Has there been any resolution of that situation in any of the other agreements?
Mr. Mackay: The answer to the last question is no. Trade disputes reflect economic interests and economic interests tend to have a certain amount of influence within political systems. There is no secret on that front.
I note that Senator Carney is a member of this committee and certainly few people in this country know as much about the softwood lumber issue as Senator Carney. I believe Senator Carney will tell you that this is a dispute that in one form or another goes back to the 1870s.
The Chairman: It goes back before that, it goes back to about 1795. This committee is quite informed. That was the first item that was dealt with after the Constitution was written.
Senator Grafstein: Fisheries was first and lumber was second.
Mr. Mackay: I will certainly bow to the senator's expert knowledge on that subject.
The point is that you have long-standing economic interests. You have powerful economic interests. You have powerful geographical sectors. If you were to ask an American to appear before your committee and ask him or her what the biggest difficulty in Canada was, I am sure one of the things that he or she would point to would be our system of supply management in the dairy and poultry sectors.
We have a system in Canada that reflects certain realities, some of which are economic, some of which are political, some of which are geographic. The Americans do not necessarily see that. They have systems in place that we do not necessarily see in that same way. We are each jockeying for advantage and that is part of what government officials are paid to do: They are paid to try and gain the maximum advantage for your country on the export side and protect what you are instructed to protect on the domestic side.
One of the interesting things that you raise, Senator Day, was Mexico going forward with the philosophy of trade liberalization, which is something that, of course, started under President Salinas, continued under President Zedillo and has continued under President Fox. Mexico has become the key exporter of the NAFTA model, which is both historically and quantitatively accurate.
Mexico has replicated a NAFTA approach about a dozen times at this stage. Canada, for our part, has got off the ball a little slow. We did negotiate a NAFTA-style arrangement with Chile. We are in the course of doing so with Central America.
Mexico, immediately on the signature of NAFTA, went off and negotiated an agreement called the Grupo de los Tres, the Group of Three, with Columbia and Venezuela. They then replicated the approach with Bolivia, followed by Nicaragua. They had an old agreement with Chile dating back to the early 1990s, which in 1996 they updated to make it look like NAFTA-style agreement. They then went across the Atlantic and negotiated an arrangement with the European Union.
In the mid-1980s, before Mexico joined the then General Agreement on Tariffs and Trade, they were a relatively closed economy. From then they have progressed, liberalized and reformed to roughly the same degree that we have in Canada, except that it took us some 45 or 50 years. Mexico realized that they did not have that sort of time-frame to play with and compressed it into approximately a decade.
Your third question, senator, was whether those other FTAs or other arrangements had unique dispute settlement mechanisms that may have solved or made easier some of these sort of issues. On that, I am afraid, I do not know the specific answer as to the exact type of dispute settlement mechanisms in all of those agreements.
The big issue is how each of us each of us solves our relationship or how we manage our relationship with our very large and very powerful neighbour in the United States. You would not necessarily get the same sort of disputes between Mexico and Guatemala as you do between Mexico and the United States. Similarly, with Canada and Chile, I am not aware of us having any disputes, whereas certainly both Canada and Chile have disputes with the United States.
Senator Day: Can we realistically analyze the impact of NAFTA on Mexico when they have all these other agreements?
From the point of view of looking at GDP, unemployment and those general factors, other than just the trade between the countries, can we realistically use the statistics to tell us how NAFTA has done?
Mr. Mackay: I think you can, senator. I think you can analyze it. A larger question comes up: What do you do with whatever it is that you conclude?
These trade arrangements and trade policies have worked their ways into commercial practice, into banking practice, into how it is that countries, companies and individuals set up their lives.
It is not like you realistically have an option of decoupling yourself from the NAFTA in any event. It is like the proposal that the invention of the computer certainly led to job losses in the typewriter industry, but you cannot "uninvent" the computer. You cannot "de-engineer" yourself from a major public policy initiative like the NAFTA. You actually can, but it will cost you a great, great deal and it will hurt you.
You can do your analysis and reach conclusions, but what do you do after that becomes the question.
Mr. Haslam: We can talk about NAFTA and NAFTA's effects because trade with the United States, for Mexico, accounts for such a huge proportion of their trade. They can have free trade agreements with the EU, but if they are not actually trading with them then that does not matter so much for the structural changes that are going on inside the Mexican economy.
The Chairman: When you talk about trade with Venezuela, Colombia and Bolivia, these are countries with little economic significance.
Mr. Haslam: Correct.
Senator Day: You extrapolate the volume of trade to the unemployment situation, the reduction in employment.
Senator Grafstein: We really do not know the impact of their agreements with the EU. We do not know the impact of their agreements with Colombia or Venezuela yet because it is premature. They have been done in a rush in the last year or so. It is just not fair at this juncture to come up with any significant figures. The EU figures are not helpful at this time. They have not had a chance to readjust or adjust to it.
The Chairman: That is not what we are looking at. We are looking at NAFTA.
Senator Grafstein: I want to look at the impacts for us, and that is a very cogent point.
We have looked at NAFTA and if we look at the evidence of the two witnesses today that takes us nowhere. There is no clarity of direction. Much of this is hope and aspiration.
Let me see if I can test a different model for you and see if this makes any sense. How do we accelerate modernization and competitiveness in countries that are lagging behind in developmental ways?
I want to give you two models. First, there is China. If you take a look at the Chinese model, you will see that they did something quite brilliant, which Mexico started to do but stopped. The Chinese handled the agricultural reforms first before they moved to industrial reforms. In other words, they started with special responsibility households in the Chinese countryside. They had fixed prices at a certain level. They had a free market on top of that and they dramatically improved the efficiency and the dollars and the job creation and housing in the countryside. Then they moved to industrialization of the cities. It was quite brilliant and it is working really well.
We have Mexico as an example, which is a basket case, because they did not implement an adjustment on the countryside and their countryside went from bad to worse for all of the reasons we have already heard. Chiapas is an example.
If Simpata came along, he would have a better chance at a revolution today than in 1919. Pancho Villa and Simpata would win the next presidential election and be murdered afterwards.
Are there other models we can look at that could prime these economies?
I am referring to the Hanseatic League. Are you familiar with the experience of the Hanseatic League?
Mr. Mackay: I cannot claim any experience in that system.
Senator Grafstein: In a nutshell, the Hanseatic League started with a couple of trading zones on the North Sea. Ultimately, they ended up with 178 city-states. They became industrial engines of free trade. I am a Manchester Liberal, so I believe in the benefits of free trade. However, I do not think we have the model right.
Would it not be better, as an example, for Canada to enter into free trade exchanges with cities in Mexico? Take Mexico City and Toronto, take two or three of their other major cities and enter into free trade exchanges between the two cities on some tax effective basis. Would that not pump prime those cities and help Toronto, Vancouver and Montreal in terms of focusing and accelerating partnership relationships in a better way than doing it in what I call this longitudinal way where we sort of have general policies and they trickle down? Is there a better model?
Mr. Mackay: In theory, there is a better model. I might make a suggestion to the committee that you speak to Professor Michael Hart from Carleton University. He is with the Centre of Trade, Policy and Law. He was a trade official in the Canadian government, as was I at one point. Professor Hart will tell you that it would be to both Canada's and Mexico's benefit to pursue a customs union. At a theoretical level, I think I could fully agree with his analysis.
The Chairman: We know that will not happen.
Mr. Mackay: That is correct. The difficulty is that your counterparts in the United States Senate will go nowhere near that particular animal and, in order for that particular animal to go anywhere, you need 66 of your counterparts in the United States Senate. I do not see the leadership on either the democratic or republican side going anywhere near that idea.
Is there a better way? Yes, there always is a better way. A more effective question is: What is politically doable? For us, and for our friends in Mexico, that question must always be asked within the context of the United States. Mexico's exports to the United States have tripled under NAFTA. Their exports to Canada have quadrupled. They have gone from $4 billion to $12 billion.
Canadian exports to Mexico have gone from slightly over 1 billion to 2.3 billion, so we have doubled, but it is a still a small potato. Canadian exports to the United States have gone from $150 billion to $367 billion. Canada-U.S. annual trade is $550 billion. The U.S. market is the key to all of this, and the key is what is doable.
I am afraid that there is just no appetite for the large ideas, the grand ideas, in the United States. I think we hit the apex in about the mid-1990s. President Clinton put through the United States House of Representatives and the Senate both the NAFTA and the Uruguay Round, and I think we have seen a re-emergence of protectionist sentiments ever since. If I point your attention to the current primaries in the Democratic Party, the only distinguishing factor with Senator Edwards is his anti-NAFTA stance. If you watch CNN and listen to Lou Dobbs, who otherwise is an intelligent commentator, he talks about the out-sourcing of America and Benedict Arnold companies, a phrase that is attributed to Senator Kerry. There is a feeling in the United States at the moment that the U.S. is under siege, not only in its security interests but also in its trade interests.
Mr. Haslam: Regarding the notion of city-state free trading regimes, I will argue that is a problem with our relationship with Mexico. It is too based on key urban areas like Monterrey, where you have a large Maquiladora, high-tech presence. The problem is not trading with urban areas; the problem is not having an effect on rural areas.
My own person belief is that there is a model. I do not want to attribute it to my institution. In the Americas, the model is Chile. I want to be careful here. Chile means a lot of things to a lot of different people. For some people, it is a paragon of free market reforms; I assure you it is not. What distinguishes Chile from the rest of Latin America and was not a military regime and it was not free markets per se; it was strong institutions. Chile had been developing competent, independent, very important Latin America non-politicized political institutions from almost the beginning of the century. Its development institution dates from 1938, and that is the earliest in the entire region.
The Chairman: We hear about Chile, but Chile is a very utilitarian place. I know Chile very well. We set up Chile as if there is a standard of living in Chile that is comparable to going out to Nepean, but Chile is a very utilitarian society, and people do not have any money. Just take a walk down the street to the shops.
Mr. Haslam: I agree. Chile is a developing country. That is why it is the appropriate comparison for Mexico. I, too, know Chile well. I wrote my thesis on it, and I lived there as well. What I think is so remarkable about Chile is the way that they have developed strong institutions that are non-politicized and that are professional. Chile is also a state that invests in research and development.
Senator Mahovlich: What about their fishers? Are they not number two in the world?
Mr. Haslam: That is an excellent example. Their fishery was a state-created industry. Fishing in Chile did not exist prior to 1965. It was a product not of the military government but of the democratic governments. They invested and put R&D money into building institutions that would promote fisheries. They put money into moving people from non-productive industries into fisheries, where there was more money. There was a lot of state activity and building institutions and making the right choices that were sensitive to people.
Also, it is a place where the rule of law has been institutionalized. There is more judicial security in Chile than any other place. You also have a place where you have a cooperative political gain.
In Mexico, for example, in the last three years, the president has not been able to get anything pushed through Congress because Congress blocks everything he does. In Chile, admittedly there are all kinds of dysfunctions of the political system, but you do have parties, be they on different sides of the house, that cooperate.
The Chairman: They are the same families, after all.
Mr. Haslam: This is true.
Senator De Bané: You mentioned at the beginning that Mr. Haslam would give us a brief explanation of the political situation of that country. Would you be so kind as to give us the major points of the political situation in that country, or what you would like to emphasize.
Mr. Haslam: It is important for us to remember how recent the political transition has been in Mexico. This occurred in the 2000 presidential election, which is the first time we had a proven rotation in the party in power. It is important to understand that past for two reasons. First, many of the authoritarian structures of the past continue to operate in Mexico today, particularly patron-client relationships at the state and local levels. That is important. It is also important for us to recognize that democratization is an ongoing process and that Mexico has made great strides in the last 10 years. We expect the institutional and societal elements of Mexico's new democracy to develop with time. Generally speaking, they are moving in the right direction.
As you know, the president is elected for six years. The ban on re-election is noteworthy. Effectively speaking, no political office in Mexico permits re-election. This means that legislator senators are elected for six years, and then they give up their post and are not re-elected. At the federal system, it is bicameral. You have a Senate and a Chamber of Deputies. The chamber deputies sit for three years only and cannot be re-elected. At the state level, you have a replication of the same system, with governors in office for six years, state legislators for three. State legislatures are unicameral.
In this system it is difficult to build institutional continuity. Let us look at municipal governments. Municipal governments have this three-year problem. They have to change people every three years. How do you build institutions that continue to work in three years?
This idea was originally, of course, to stop people being perpetuated in power, which is the problem in so many other Latin American countries. One can see the rationale for it, but at the same time it creates dysfunction. This means that politicians do not become politicians for three years and then end. They circulate through the system. They get different positions in different places. This is something the chairman has mentioned. You have this circulation of elites.
The Chairman: Would you like to explain "clientism"?
Mr. Haslam: Clientism is important and still exists. It was the basis of the Mexican political system. Basically, the PRI, when it was created, was created as a patron-client system. Originally, the PRI was created actually as an institution to manage elite conflict.
Instead of fighting each other for the state, the PRI would circulate the elites in different positions throughout Mexico, giving them access to the state, which is important for access to wealth.
The entire PRI system worked on a patron-client basis and supporters were rewarded. The PRI was a master at co- opting unions so that there were no independents but only unions friendly to the PRI. They made the right decisions for the union as long as the workers were kept in line. That was the main access of control that the PRI had over organized labour in Mexico.
The PRI had a similar line of control over rural areas. The PRI's roots are still very strong in rural areas. There were state-level bosses that controlled the local bosses that controlled the people. The whole system was designed to funnel control downward instead of articulating interests from below, which is how a democratic system should operate.
Many of the major organizations that are needed in a vibrant democratic society to keep it honest, such as the press and independent civil society organizations, were co-opted. Much of the bubbling up from the bottom that you need to make a democracy rich did not exist in Mexico for a very long time.
The PRI began to lose control of its clientelistic networks in the 1980s, and because of the crisis in 1982, it had fewer resources to distribute and, at the same time for reasons of economic stabilization, it was required to cut workers' wages. The PRI ended up enforcing discipline on the system. The result of this was that people no longer had access to the resources of the state. There was a growing independence of people who were no longer affiliated with the PRI and were willing to vote against it. This, combined with a series of electoral reforms during the course of the 1980s, ultimately lessened the power of the PRI.
The Chairman: The very wealthy people in Mexico had to stop the civil war so they bought off many of the so-called "generals" by giving them monopolies. The assistant then managed the monopolies.
Would you like to pursue that comment for the edification of senators?
Mr. Haslam: This is important not only historically but also because of the experience of privatization programs throughout Latin America. I am not saying that privatization is a bad thing but in Latin America, there were elites with connections to the government. Business and government elites were like that; there was an agreement. The Canadian state has not been so different in some ways as well, where historically speaking people who had privilege and knowledge had access to privatizations. They had large fortunes and were able to consolidate monopolies in various areas. In Mexico and in every Latin America country, there is the economic elite that is highly integrated with the political elite. This is normal.
The Chairman: This is particularly so in Mexico because 1 million people died in the civil war and they had to stop it. The only way to stop it was to give monopolies to the people who were causing it.
Mr. Haslam: The unique achievement of Mexico is managing elite conflict in such a successful way. The PRI was successful for 71 years, the longest running government in the history of the 20th century.
Mr. Mackay: The death toll during the Mexican revolution was one of the least violent in all of Latin America. Mexicans have a long, personal and institutional memory of the kind of beast, if you will, that lurks below. I think they are afraid that one day they will allow that beast to escape. It means that, in political terms, there is a very low level of violence. There is personal violence but there is nothing even approaching what one might see in Venezuela, Colombia or other countries of Central America where political violence has been used as a tool. Mexico has completely absolved itself of that largely because of the high death toll of the civil war.
The Chairman: I hope that senators find this interesting because it is part of the fundamental, political culture of the country we will travel to.
Senator De Bané: Obviously, you have a deep knowledge of Latin America and the country we will visit. From what you said about the culture and history of Mexico and even with a new president for four years, the transition has been very blurred because there was no coherence in that government.
Looking to the future do you envision Mexico, Canada and the U.S. having a tightly knit partnership?
The first six countries in Europe signed the Treaty of Rome in 1957. They were like-minded countries and they were at the same level of development. It all began with six very like-minded countries.
I see many similarities between Canada and the U.S. Do you think that in 20 years or 30 years your grandchildren will have a closer relationship with Mexico or will they continue to look only to the United States?
Will they perhaps look south to Latin America? Will Canada be limited to the United States? What do you see?
Mr. Mackay: The projected figures in the U.S. are most interesting. By the year 2030, it is projected that the Hispanic population of the United States will be at 30 per cent. Hispanic Americans are currently a larger proportion of the U.S. population than are black Americans. The United States, and particular geographic areas of the United States, not unnaturally California, Texas, Arizona, Florida, the southwest and the southeast, are heavily Hispanic. That does not necessarily mean that Mexico and the United States will become equal or simply an extension of one another. Part of the direction of your question has a great deal to support it. I would personally warn against the comparisons with the European Union because those comparisons are all too easy. They tend to be done by people who have forgotten history.
The European Union was not a union of European countries that thought integration to be a good thing. The European Union was a process by which the rest of the world said to Europe, "you have engaged in two sets of nationalistic conflict in this century, the magnitude of which has become so devastating on a global basis that we, the rest of the world, cannot allow you to be nationalists any more." There was the Marshall Plan and other efforts to bring Europe together. This was not the French and the Germans suddenly deciding in 1946 that maybe they had made a mistake 1939 in attacking each other, but pressure from the rest of the world. The fighting had expanded to a global level. The same sort of historical forces are simply not present in the Americas, much less in North America.
However, as to the chances that the average Canadian will speak three languages 25 years from now, I would say they are very high.
Mr. Haslam: Sometimes it is hard to look at Mexico and see the huge disparity in wealth. Such objective economic indicators make us wonder if we can ever have a tight relationship. I agree very much with what Mr. Mackay said. We should not imagine this as a European Union, or even an arrangement with a European Union type of future. I do not think that is in the cards in any foreseeable time frame.
However, I think we can look at our common values and, more important, our common interests with Mexico. In terms of values, in this meeting we have looked at the way that Mexico's elites have compromised for peace and stability for 70 years, unlike the rest of Latin America. We, too, have a tradition of political compromise at the highest levels, and in political terms this is very important. It is what distinguishes us from the United States and many other countries.
Perhaps most important is our position in the world. We share with Mexico the position of being on the periphery of a super power in a way that no other country in the world is. We also have a common interest in defending a rules- based multilateral system that, as much as humanly possible, ties the hands of that super power so that we are not constantly harassed.
For example, we can look at the cooperation between Mexico and Canada in the UN Security Council over the vote in Iraq. Mexico was a member of the Security Council at that point; Canada was not. There was cooperation between the two countries. We said to Mexico that it is not just about being nice to the United States in a difficult moment; this is about standing up for principles that count in the long-term. That was a position that the Mexicans agreed with as well as the Chileans. It is important that we have a common, similar vision of how the world should look, as well as how our little corner of the world should look, and we must remember that.
Senator Mahovlich: There are five million illegal Mexican immigrants in California. How many are there in Canada?
Mr. Mackay: There are not very many. The number is only in the thousands.
Senator Grafstein: From my Brazilian and Bolivian experience I know that the economic numbers do not tell the tale. Certainly in Brazil they do not, and I am not sure if that is the case in Mexico or not. I will give an example.
We were told that the average annual income of a family in Mexico is U.S. $4,000. What is the average cost of a small two-bedroom apartment or condominium in a city in Mexico?
Mr. Mackay: That is an impossible question to answer.
The Chairman: Yes, because of the variety that exists.
Senator Grafstein: What is the relationship between the $4,000 and such a home? They are building tiny little homes all over the place.
Mr. Mackay: The purchasing power parity of the average Mexican is now at about U.S. $9,100. Mexico has moved from about $5,000, when we started NAFTA, to about $9,100, which puts them at roughly the same level of development per capita as someone in Poland. There is still a long way to go.
The Chairman: Thank you very much. This has been very useful. I have particularly enjoyed the information on the political structure in Mexico, which is very crucial.
Honourable senators, I need a motion for the small budget that is before you. A bill may be referred to the committee and we will need a legislative budget in order to deal with it.
Senator Grafstein: I move the adoption of the budget.
The Chairman: Is that agreed?
Hon. Senators: Agreed.
The committee adjourned.