Understanding the Colonial Economy: Mexico / NAFTA
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Transcript

Transcript of the interview with an expert, Lacey Gallagher, Director of Latin American ratings, Standard and Poor's/DRI - a McGraw-Hill Company.

Rucker:

Welcome to this edition of the McGraw -Hill ECONnections program. We are fortunate to have as our guest Ms. Lacey Gallagher. Ms. Gallagher is the Director of Latin America ratings for the Standard and Poor's Company. She is located in New York City. Let's discuss a little bit about free trade generally. In your eyes, how has it benefited the United States?

Gallagher:

Free trade has benefited the U.S. through the principal of comparative advantage. In general, the U.S. has a comparative advantage more in capital than in labor; whereas Mexico, in particular, has a comparative advantage in labor. So when those two economies are essentially put together through the channel of free trade, goods that are intensive in labor that are produced more cheaply in Mexico are available more cheaply in the U.S. Therefore, American consumers have the advantage of being able to purchase more goods and goods more cheaply and enjoy a higher standard of living.

Rucker:

That certainly lays excellent groundwork for our discussion today. I think with that, given the political and economic implications of NAFTA, what are some of the reasons that Congress passed that legislation back in 1993?

Gallagher:

In addition to the economic benefit, which will only continue to increase over time, there are also the important cultural and political ties between Mexico and the U.S. Given that Mexico, together of course with Canada, are our most important and only other neighbor, where the economic and political stability and prosperity of Mexico is important to the U.S. In that sense, free trade in the same way that it benefits the U.S. will also benefit Mexico and make Mexico a more prosperous and stable nation. With Mexico more prosperous and stable, some of the potentially destabilizing influences of Mexico on the U.S., for example very high waves of immigration during periods of economic recession in Mexico, would be contained. In that sense it's both the economic benefits that would accrue through any free trade agreement with any country and the specific benefit with respect to Mexico, given that it's our neighbor with which we share a long border.

Rucker:

Students are always interested in what does this have to do with me? What implications would you see that NAFTA has on students in both countries as trade increases between Mexico and the United States?

Gallagher:

In addition to the economic benefits which will accrue to students as well as every other American, one of the important sectors in which Mexico is contributing to the cheaper availability of goods in the U.S. is automobiles. Students getting their first licenses can be happy about that. There are also the cultural benefits. Over the past 20 years, we have seen a very important increase in the cultural interchange between Mexico and the U.S. One of the most obvious evidences is Mexican food, which we can now enjoy all over the U.S. More than that is broader exchanges that are possible and are increasing in the arts, for example. Students will increasingly have the opportunity to go on cultural exchanges, for example with Mexico, where they can learn not only about Mexican culture in terms of the arts, but also the Mexican way of life which is more traditional than here in the U. S. I think this can be a very important learning experience and really provide a completely different perspective than students have here in the U.S.

Rucker:

I think that certainly makes a lot of sense and I think that will help students everywhere understand a great deal more about those implications of NAFTA on their lives, particularly in terms of personal transportation. I like that implication an awful lot. We have been using in this particular lesson the quotation from Adam Smith and I wonder, given that quotation on the philosophy of free trade, how would these principals be true as trade between the U.S. and Mexico increases?

Gallagher:

As I mentioned earlier, the U.S. has, broadly speaking, a comparative advantage in capital and in high technology and in sectors that involve not only higher capital but higher human capital in terms of more highly skilled workers that have a much higher educational level here than in Mexico. Whereas in Mexico, the labor force is larger, not in absolute terms compared to the American labor force, but in relative terms of its importance to the economy; therefore those more labor-intensive goods can be produced more cheaply in Mexico. In the same way that in Adam Smith's time, the comparison was, for example, between someone who had expertise in making shoes and would therefore buy his clothing rather than attempt to make it himself. In the U.S., we have expertise in say semiconductors, so we might as well produce that and where Mexicans have expertise in producing clothing or automobiles or other such items, we will benefit by purchasing those from Mexico--as Mexicans would benefit from purchasing higher technology goods from the United States.

Rucker:

I think you have really done a beautiful job in helping us understand NAFTA and the relationship under NAFTA with Mexico and the United States. Do you have any recommendations that would strengthen the objectives of NAFTA in the future?

Gallagher:

I think it's very important for students and Americans in general to always maintain the long-term perspective on issues like free trade and cultural interchanges in general because often we can see the short-term down-side of free trade or other interchanges with any kind of foreigners or people with whom we are not familiar, and we can focus on those. For example, in the case of free trade, while it is certainly true that the economic benefits to most Americans are very important, it is also true that free trade does create difficulties for some Americans who are working in industries which are transferred to Mexico. Those Americans can also be better off by learning new skills and transferring into other industries in which they can thrive. I think this can be easy and certainly politicians in the U.S. sometimes focus on the short-term and local issues. The most important way in which we can further the benefit of free trade is by taking a positive approach to it, taking a long-term approach, and by always remembering that this is really a dynamic benefit to both us and our trading partners--whether it be Mexico or another country.

Rucker:

Lacey Gallagher, thank you so much for being our guest today on ECONnections and helping us understanding the Colonial economy, Mexico and NAFTA. Ms. Gallagher is the Director of Latin American ratings for Standard and Poor's Company, which is a McGraw-Hill company. She is located in New York City.