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Show Hinckley Journal of Politics Spring 2000 The Post-Nafta Mexican Peso Crisis: Bailout or Aid? Isolationism or Globalization? By Brett M. Humphrey This essay discusses the events of the J 994/1995 Mexican peso crisis, subsequent U.S. Congressional/Executive debate over sending U.S. financial aid, and executive action. The United States had entered the North American Free Trade Agreement (NAFTA) one year earlier, and investors and politicians were hailing it as a great success. The United States seemed positioned to be the financial leader of the new post-cold-war era. But beginning on December 20, J 994 when Mexico decided to no longer support the peso against the dollar, the peso's value dropped over 50%. This devaluation hurt Mexico, international investors, and the legitimacy of the NAFTA and trade liberalization. Those in support of the NAFTA felt the side effects of inaction in response could possibly reach neighboring countries, and result in an economic crisis. President Clinton could ill afford to sit idly by. However, the J 04th Congress was sympathetic towards the anti-NAFTA labor-left and the anti-NAFTA protectionist-right. The recently elected "Contract with America" Republicans were elected on an agenda of government reduction not increased spending. This essay examines events leading to the devaluation, subsequent debates, and the President's action. It concludes that if the United States is to maintain its economic dominance it must continue towards liberalized trade and globalization, and withstand the protectionist and labor movement's desire to move towards isolationism. Introduction The United States has enjoyed 50-plus years of economic prosperity. And on October 27,1999, President Bill Clinton announced that the United States had experienced its largest single-year budget surplus ever. It seems the United States is poised to enter the 21st Century and a new millenium with continued economic success and a future that could hardly be brighter. However, with the end of the cold war, globalization of the world's economy, and the global introduction of the internet, the world seems more and more economically and politically interconnected. An event as far away as India can have an immediate and direct impact on the United States. This new form of interconnection has many positive aspects and has been one of the key reasons for the continued eco- Brett M. Humphrey graduated from the University of Utah in May of 1999 with a Bachelor of Science in Political Science, Bachelor of Arts in Japanese, and a Certificate in International Relations. Brett is currently a Coordinator of International Relations for the Japanese Government in Gifu-Hashima City Hall, Japan. Brett wants to thank those who helped him with his paper, specifically Andrew P. CorteH and Natalie A. Noel. nomic success of the United States. Unfortunately however, it can also spell disaster due to interdependence. Continually, as countries rely more and more on each other they become increasingly vulnerable to each others' successes and failures. Thus, this interdependency creates a situation where an economic collapse in one country has the potential of causing economic turmoil in another, as witnessed during the 1997 Asian economic crisis. Could a like crisis be the eventual downfall of the American economy? In 1994/1995 the Mexican peso collapsed. News of this collapse riveted the financial world. The United States, Mexico and Canada had just entered the North American Free Trade Agreement (NAFTA), creating a new form of interdependence among the three countries. With this new form of interdependence between the United States and Mexico, created under NAFTA, as the peso collapsed many investors along with economic experts were left to wonder whether the United States would be affected by the crisis. Leaders in the U.S. executive branch under President Clinton felt the United States was dependent upon a strong peso and the success of the Mexican economy, and therefore supported immediate financial assistance to Mexico in order 33 |