On December 8, 1993, President Bill Clinton stood in Washington’s Mellon Auditorium—the same hall where Harry Truman signed NATO into being—to celebrate the creation of the North American Free Trade Agreement (NAFTA). Like NATO, Clinton said, NAFTA would help establish a new world order, one that would lead to “more growth, more equality, better preservation of the environment and the greater possibility of world peace.”

Critical to that order, he said before signing the NAFTA legislation, was the nurturing of new markets for U.S. companies. “Over the long run, our ability to have our internal economic policies work for the benefit of our people requires us to have external economic policies that permit productivity to find expression not simply in higher incomes for our businesses, but in more jobs and higher incomes for our people. That means more customers.”

With the fall of Soviet communism, new markets were emerging worldwide. But nowhere was there a market with more potential than Mexico. Here was a country of almost 100 million people, coming off several decades of rapid economic growth and experiencing an explosion in its middle class. As the Mexican, U.S., and Canadian economies integrated and as Mexico continued to implement political and legal reforms, the trade deal’s supporters predicted that the country would become a haven for U.S. business eager for new markets and investment opportunities.

But as NAFTA reaches its 15th birthday, the record has proven decidedly cloudier. Foreign direct investment (FDI), primarily from the United States, did increase initially, but it did so mostly along the border, in the so-called maquiladora plants that produce goods for immediate shipment back to the United States. That growth, however, has been choked off in recent years, largely because manufacturers found even cheaper labor in China.

Meanwhile, much of the rest of the country remains in a pre-NAFTA state, largely cut off from international economic contact. And that means less growth in Mexico: While other advanced developing countries like Brazil, China, and India have experienced near-double digit growth rates for the last decade, Mexico’s has hovered between 3 and 5 percent. And, a deal that was supposed to bring Mexico and the United States into economic and social synchrony has instead driven up the income disparity between the two nations by 10 percent.

Nor has the country made the improvements to its regulatory and physical infrastructure necessary for the sort of economic integration NAFTA boosters predicted.

“It’s changed very little,” said Herb Schmidt, president of Con-way Truckload. “Basically, it’s the same business model as twenty years ago.” Citing driver security issues, a predominantly cash economy, a poor regulatory infrastructure, and a host of other factors, Con-way has forgone opportunities to move directly into the Mexican market, and instead takes deliveries from Mexican affiliates at the border—and that means lower efficiency, longer delivery times, and less profit.

Take Con-way’s experience, multiply it across industries, and you have a chastened view of NAFTA’s achievements 15 years later.

Fifteen years ago, no one predicted quite how fast China would grow as a global exporter, and how much of an impact it would have on Mexico. And yet, after several years of export-led growth in the 1990s, Mexico suffered greatly as factory owners closed up shop along its northern border and moved across the Pacific—in 1999, Mexico made 70 percent of imported U.S. televisions; by 2004, as production shifted to China, that number had plummeted to 45 percent.

Investment rates reflect similar shifts. In 1994, FDI to Mexico was $10.6 billion, and in reached $27 billion in 2001. But the next year the number dropped to $18.1 billion, thanks in part to the U.S. recession, and in 2004 to $13.7 billion. By 2006, it was still at $14.1 billion. The maquiladora plants along the border lost 200,000 jobs between 2000 and 2002, and they still employ fewer workers than they did in 2000.

Indeed, even as Mexican FDI growth increased between 2000 and 2001, FDI in manufacturing actually fell, from $9.8 billion to $5.4 billion. The difference was made up for in the phenomenal but short-lived boom in the near-shore outsourcing of services, which soon migrated overseas as well—between 2001 and 2002 service-sector FDI fell by more than half, from $21.4 billion to $10.2 billion, and by 2005 it was a mere $5.9 billion.

What these dramatic drops reflect is the rather superficial advantage that Mexico offered to U.S. investors post-NAFTA: cheaper labor, combined with geographic proximity. The goal of NAFTA was never to simply open up markets. Rather, it was to open markets as a way of spurring economic and political reform in Mexico, which would quickly lift the country into the ranks of the almost-developed world.

The failure to achieve that sort of socioeconomic critical mass ensured that as soon as Asian export capacity and telecommunication technology made investment in manufacturing and services overseas a possibility, investors fled. The things that might have kept them—a healthy regulatory structure, good infrastructure, all the elements promised by NAFTA—simply did not exist.

Take the regulatory structure. It takes 74 days to start a business in Mexico, double the OECD average. Exporting a standard shipment takes five documents and 17 days, at an average cost of $1,302 per container, well above even the regional average.

To be fair, Mexico has taken great strides in expanding regulatory transparency and getting new laws on the books. The Federal Commission on Regulatory Improvement (COFEMER), a government body, requires regulatory agencies to prepare impact statements for all new rules, and in 2007 the government launched an eight-year constitutional overhaul of the country’s legal system.

But enforcement is another matter. Mexican courts are infamously slow and corrupt. “Few cases end up in court, because when you end up in court it can take years to get a conviction,” said Karel van Laack, Mexico country manager for Atradius, a credit insurer. This has kept much of the Mexican economy from rooting itself in the rule of law and the regulatory system—individuals and companies alike would rather negotiate the ins-and-outs of the informal economy than deal with an entrenched bureaucracy that can’t promise better results.

It’s a similar story with the tax system. While Mexico has the lowest tax-collection rates among OECD nations, the system is nevertheless especially onerous on businesses. According to a 2008 World Bank study, “During the course of a year, a medium-sized company can expect to pay an average of 27 different taxes and spend 552 hours managing the administrative tasks related to these payments”—as compared with the OECD average of 183 hours. It’s even worse than the regional average of 407 hours.

And even with regulatory reform in some parts of the economy, Mexico has particularly weak corporate governance rules, especially when it comes to shareholder protection. A recent study by Atradius found that 24 percent of foreign companies operating in Mexico have had difficulties with debt collection and 23 percent believed the legal system was too slow and inefficient. And these are companies that have nevertheless decided to do business in the country; many others have opted not to.

“The improvement of investor protection would require rather radical changes in the legal system and/or unilateral internal company-level governance changes,” concluded economists Alberto Chong and Florencio Lopez-de-Silanes in a 2006 paper by the Inter-American Development Bank.

And it’s not just the lack of protection that is keeping foreign investors out of the Mexican economy—it is the lack of access to local capital. Eighty-five percent of Mexican banks are foreign-owned, and almost all the available capital is external. Commercial loan opportunities exist, but they are rare and unreliable enough that most companies in Mexico prefer to rely on retained earnings to expand.

The Mexican Stock Exchange is miniscule, with most public companies seeking a spot on the New York stock listings instead. The ratio of IPOs to population is almost 50 times lower than in the United States, and the ratio of domestic firms to population is some 13 times lower.

Bureaucracy and legal obstacles are a particular challenge in the transportation sector, where U.S. and Canadian companies are allowed to own 100 percent of Mexican operators but have often met with agonizing tie ups in Mexican courts.

“It’s a challenging business market, and one you have to take a big step into,” said Con-way’s Schmidt.

Size matters in Mexico for another reason: Several sectors are concentrated in just a few firms, many of them state-owned or otherwise well-connected to government officials, making it prohibitively difficult for all but the biggest outside firms to get in the door. This is, unfortunately, the case in many of the sectors in which foreign businesses have the most potential for growth: telecommunications, commercial transportation, infrastructure development, and resource extraction.

An added complication is pervasive corruption and fraud. A 2008 study by KPMG found that 77 percent of businesses in Mexico reported being the victims of fraud—46 percent of which was internal—totally $900 million in annual losses.

Moreover, 44 percent of companies in Mexico reported being forced to bribe public officials, sapping an average 5 percent from annual revenues. “Corruption,” concluded a 2008 Bertelsmann Transparency International report, “extends to all levels of relations between citizens and the public sector.” But perhaps because of a lack of faith in the legal system, only 40 percent of these cases were reported.

Finally, there is Mexico’s poor physical infrastructure, especially outside the thin strip of the U.S.-Mexico border. Many U.S. drivers refuse to venture into Mexico, and even if they could, insurers usually won’t cover them. The lack of a truly national, modern limited-access highway system, with regular rest and refueling stops and credit-card-friendly re-supply points, makes operating deep inside the country a hazard.

“Just climb in a station wagon and try to go to Mexico City and back,” said Schmidt. “I don’t know if you’d survive it. So imagine hauling goods.”

There are some bright spots, though, in the Mexican economy. With the rising cost of energy, Mexico is looking increasingly attractive to manufacturers, and the opportunity to bring back industrial investors could provide a spur to further reform.

But the best hope lies in the center-right President Felipe Calderon, who won a narrow, bitter electoral contest in 2006 and has since battled with the left-wing opposition to open up the Mexican oil monopoly and to pass a series of tax and regulatory reforms. “Calderon knows how to get things done,” says Atradiu’s van Laack. “He gets things done where his predecessors were unable to.”

The Mexican oil giant, PEMEX, is state-owned and aggressively protected by a coalition of nationalists, leftists, and labor. But it is also incredibly inefficient, resulting in consensus predictions that Mexican oil production will run out by 2018. Reversing course means discovering more supplies, but the lack of competition reduces incentives to take those sorts of risks.

PEMEX’s status is written into the constitution, but Calderon has been pushing for a revision that would allow private companies to explore for new oil in exchange for a share of resulting profits. Many critics fear that this is the equivalent of giving away the public’s birthright, and there is little chance that Calderon will get everything he wants. But after a decade of stalled reforms, he looks to be the best chance to get change moving.

Calderon has also pressed for legal and regulatory reforms. Soon after taking office he instituted the Quality Regulatory Agreement, which prevents the creation of new regulation except when required by law or in an emergency situation. He has also pushed to increase tax income rates from the current abysmal 11 percent of total government revenue, a position supported by even many businesspeople who see it as a necessary step in reducing the country’s over-reliance on oil profits.

Most significantly, Calderon has overseen a multiyear commitment to dramatically expand the country’s infrastructure, with some $37 billion committed to be spent on rail, 12,000 miles of roads, energy plants, and ports during the next five years. This includes new airports at growing tourist destinations like the Sea of Cortes and Riviera Maya, as well as renovations and expansions of airports at established sites like Cancun and Toluca.

Most impressively, it also means expanding operations at Manzanillo, Lazaro Cardenas, and other Pacific ports in expectation of increased shipments diverted from the permanently overcrowded Southern California ports. And the Mexican government isn’t the only one pouring in money—over the last two years Kansas City Southern of Mexico has spent $380 million to expand its rail network and build an intermodal terminal at Lazaro Cardenas.

But these are only beginnings; Calderon’s staunch opposition makes it an open question how much will be achieved. He will have to compromise heavily, said van Laack, in all his efforts. “You get solutions that many people say are useless, but are a lot better than nothing”—hardly the prognosis international investors want to hear.

And despite Calderon’s heady promises, the results have yet to appear. For 2007 the World Bank clocked substantial reforms in only two areas, registering property and collecting taxes. Meanwhile, the country rang in 44th in the Bank’s global rankings for doing business, 75th in starting a business, 83rd in enforcing contracts, and 48th in getting contracts.

None of this means that NAFTA has been a failure—it has greatly expanded the U.S. economy, and it has helped lock in Mexico’s public commitment to economic and political progress. But 15 years after President Clinton signed it into law, the unmet promises of the agreement mean that much remains to be done. wt