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No NAFTA? No problem, says one Mexican city

U.S. Trade Representative Robert Lighthizer, right, and Mexican Secretary of Economy Ildefonso Guajardo Villarreal talk after the conclusion of the fourth round of negotiations for a new North American Free Trade Agreement in Washington last month. The fifth round began Wednesday in Mexico City, with significant diasagreements remaining. (Andrew Caballero-Reynolds/AFP/Getty Images)

Josué Vidales considers his business a NAFTA success story. The 43-year-old father of five founded his engineering firm a decade ago, on the eve of the world economic crisis, to capi­tal­ize on the factory boom in this burgeoning industrial city 250 miles north of Mexico City.

The business stumbled at first but subsequently blossomed, swelling to 25 employees as manufacturers poured into San Luis Potosi and hired the firm to design and install electrical substations.

Now, the free-trade treaty that jump-started the city's prosperity is being renegotiated — a fifth round of talks kicked off Wednesday in Mexico City. Amid threats by President Trump to tear up the agreement, Vidales admits to some disquiet. Yet like many entrepreneurs here, he still thinks his business — and San Luis Potosi — could survive if that happened.

“Of course we’re concerned. It could impact us hard, especially if tariffs increase or they block access to the U.S. market,” Vidales said, sitting in a popular cafe here. But, he added, “we’ll get through this, and much more quickly than before, because we have much more know-how and much more experience.”

Such optimism is common in San Luis Potosi, a charming colonial-era city and state capital that sells itself as a free-trade miracle — a place where manufacturing replaced mining and farming, and young people stay and work rather than migrate to the United States.

But not every community in Mexico feels as prepared for life after the North American Free Trade Agreement. Twenty-three years of the treaty has affected the country very unevenly, and what works for San Luis Potosi may not apply elsewhere.

Over the past five years, this city has seen economic growth of 5 percent and attracted $6 billion in foreign investment. But the country as a whole has found NAFTA less rewarding, averaging an anemic 1.2 percent growth rate per capita from 1994 to 2016 as gains in the industrialized north were canceled by stagnation in the rural south.

Mexican Foreign Minister Luis Videgaray has said it “won’t be the end of the world” if the treaty is scrapped.

“Mexico is bigger than NAFTA,” he told reporters in October. “Of course we think this is the best economic situation for the country, with a good renegotiation. But if that’s not achieved, we will have to be ready.”

Mexico shrugs off Trump’s threats to scrap NAFTA

That sense of confidence is far from unanimous. In the short term, Mexico's currency would probably depreciate post-NAFTA, raising prices locally. The United Nations Economic Commission for Latin America and the Caribbean foresees the country's economy contracting 1.9 percent without the agreement. There is also concern about how investors would react in its absence.

“Investment flows would slow down quite a bit,” said Jonathan Heath, former chief economist for Latin America at HSBC. “If you look at private investment, it’s basically been flat for the last year and a half. A good explanation for that is uncertainty surrounding NAFTA.”

In a report Monday, the International Monetary Fund also expressed misgivings about Mexico's economy if the treaty ends, noting that "substantial impediments to bilateral trade could have a significant impact on financial markets, investment and growth."

Others say Mexico’s business class is likely to pull its money out of the country if NAFTA ends, as it has done during previous periods of turbulence.

“Within five minutes, they will have transferred all their capital abroad. They will have bet everything against the peso,” said Federico Estévez, political science professor at the Autonomous Technological Institute of Mexico. “And they will have put a stop to every investment project for the next two years.”

San Luis Potosi once ranked among the poorest areas of northern Mexico, known for little more than peyote, prickly pears and silver mining.

It boomed under NAFTA, leveraging its ideal geography — it sits roughly equidistant from Mexico City and Monterrey and offers easy access to both coasts and the U.S. border — as well as its existing infrastructure and abundant low-cost labor. In the mid-2000s, the auto sector arrived, starting with a General Motors plant.

With Trump’s election and rumblings over NAFTA’s future, there have been setbacks. Ford pulled the plug on a planned manufacturing plant in January. That was balanced out, however, by German automaker BMW saying it would continue to build its own San Luis Potosi plant, scheduled to open in 2019.

Despite this year’s reversals, San Luis Potosi state Gov. Juan Manuel Carreras López noted, “we’ve had the best job creation numbers that we’ve ever had.”

That is the model Mexican business executives are hoping for: If U.S. investors and markets recede, other countries will take their place.

With Mexico having signed so many free-trade agreements with other countries, analysts say, manufacturing in Mexico still makes sense for many automotive firms, even without NAFTA.

“There are currently companies, mostly European and Asian, which are very interested in San Luis Potosi,” said Héctor Soto, director of the San Luis Potosi Automotive Cluster, an industry promotion organization.

Soto projects the number of suppliers investing in the state to reach 330 by 2020, up from the 230 firms operating today and 40 when GM arrived in 2006. Even U.S. firms are still showing interest, according to Soto, who hosted a delegation from Michigan in October.

“Regardless of what happens with NAFTA,” Soto said, “supply chains are so integrated that they’re difficult to break.”

Josué Vidales, the entrepreneur, grew up the 11th of 16 children. Among other projects, he founded a custom manufacturing business, Evolt de México, with a younger brother, Otoniel.

“We’ve adopted the best business practices” of the firms investing in San Luis Potosi, Vidales said, looking every bit the businessman-engineer in a charcoal suit with a pen clipped between his shirt buttons.

Otoniel Vidales, 36, expanded on the sentiment. “It will only be a transition,” he said of the possible demise of NAFTA. “We’re ready now. We know how do things. We’re very Americanized.”

While Trump bashes NAFTA, it’s Americanizing Mexico

At an industrial park along busy Highway 57 — the so-called NAFTA Highway connecting Mexico City with the U.S. border — workers admit to mixed opinions about the treaty that changed their lives.

“The price of everything goes up, but our salaries stay the same,” said Oscar Ruiz, 33, a truck driver for a box factory, who earns roughly $85 a week plus overtime. “It’s a noticeable change here [since NAFTA was signed], but our personal economic situations continue to be the same. I have to work an extra 40 hours a week to make ends meet.”

Yet worries persist about what could happen after NAFTA, which is still viewed positively by 60 percent of Mexicans.

Carlos del Pozo, 41, once washed dishes in the Dallas area, but he returned to San Luis Potosi, studied systems engineering and now earns $1,400 a month with an auto-parts maker.

“I’m scared of being poor again,” he said as he tried to sell a tricked-out Volkswagen Jetta at a Sunday market for used cars where he moonlights. “It’s going to be a crisis.”

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