Question

Did NAFTA fail Mexico? What objective data is there to show whether NAFTA was a relative success or a relative failure? Was Mexico better off or worse off as a result of NAFTA? How do you know?

Answer 1

The North American Free Trade Agreement of 1994's effects on Mexico have long been overshadowed by the debate on the Agreement's effects on the economy of the United States. As a key partner in the agreement, the effects that NAFTA has had on the Mexican economy is essential to understanding NAFTA on a whole. A key factor in this discussion is the way the Agreement was presented to Mexico; namely, that it would increase development of the Mexican economy by providing more middle class jobs that would enable more Mexicans to lift themselves out of the lower classes. Thus, wages, employment, attitudes, and migration all present essential areas of analyses to understand effects NAFTA has had on the Mexican economy. The overall economic effects of NAFTA on the Mexican economy have been mild in light of the promises made about the deal when it was being negotiated. Economic growth has been steady at around two percent, but that growth is far from the growth the deal was supposed to bring. However, NAFTA has boosted foreign investment in Mexico, and it has allowed Mexico to boost exports which now compose a large portion of the Mexican GDP. NAFTA has had a mild effect on employment, and wages have largely remained static over the years that NAFTA has been in place. Finally, Mexicans overall have a critical view towards the trade deal, but are generally opposed to a complete repeal of the law.

From 1993 to 2015, the U.S.'s real per-capita gross domestic product (GDP) grew 39.3% to $51,638 (2010 USD). Canada's per-capita GDP grew 40.3% to $50,001, and Mexico's grew 24.1% to $9,511. In other words, Mexico's output per person has grown more slowly than that of Canada or the U.S., despite the fact that it was barely a fifth of its neighbors' to begin with. Normally, one would expect an emerging market economy's growth to outpace that of developed economies.

Prior to NAFTA, the trade balance in goods between the two countries was modestly in favor of the U.S. Today Mexico sells close to $60 billion more to the U.S. than it buys from its northern neighbor. NAFTA is an enormous and enormously complicated deal; looking at economic growth can lead to one conclusion, while looking at the balance of trade leads to another.

Critics of NAFTA commonly focus on the U.S.'s trade balance with Mexico. While the U.S. enjoys a slight advantage in services trade, exporting $30.8 billion in 2015 while importing $21.6 billion, its overall trade balance with the country is negative due to a yawning $58.8 billion 2016 deficit in merchandise trade. That compares to a surplus of $1.7 billion in 1993 (in 1993 USD, the 2016 deficit was $36.1 billion).

For optimists in Mexico in 1994, NAFTA seemed to be full of promise. The deal was in a fact an extension of the 1988 Canada-U.S. Free Trade Agreement, and it was the first to link an emerging market economy to developed ones. The country had recently undergone tough reforms, beginning a transition from the kind of economic policies that one-party states pursue to free-market orthodoxy. NAFTA supporters argued that tying the economy in with those of its richer northern neighbors would lock in those reforms and boost economic growth, eventually leading to convergence in living standards between the three economies.

Almost immediately, a currency crisis struck. Between the fourth quarter of 1994 and the second quarter of 1995, local-currency GDP shrank by 9.5%. Despite President Salinas' prediction that the country would begin exporting "goods, not people," emigration to the U.S. accelerated. In addition to the recession, the removal of corn tariffs contributed to the exodus: according to a 2014 report by the left-leaning Center for Economic and Policy Research (CEPR), family farm employment fell by 58%, from 8.4 million in 1991 to 3.5 million in 2007. Due to growth in other agricultural sectors, the net loss was 1.9 million jobs.

CEPR argues that Mexico could have achieved per-capita output on par with Portugal's if its 1960-1980 growth rate had held. Instead, it clocked the 18th-worst rate of 20 Latin American countries, growing at an average of just 0.9% per year from 1994 to 2013. The country's poverty rate was almost unchanged from 1994 to 2012.

NAFTA does appear to have locked in some of Mexico's economic reforms: the country has not nationalized industries or run up massive fiscal deficits since the 1994-1995 recession. But changes to the old economic models were not accompanied by political changes – at least not immediately. Jorge Castañeda, who served as Mexico's foreign minister during Vicente Fox Quesada's administration, argued in a December 2013 article in Foreign Affairs that NAFTA provided "life support" to the Institutional Revolutionary Party (PRI), which had been in power without interruption since 1929. Fox, a member of the National Action Party, broke PRI's streak upon becoming president in 2000.

Mexico's experience with NAFTA was not all bad, however. The country became a car manufacturing hub, with General Motors Co. (GM), Fiat Chrysler Automobiles N.V. (FCAU), Nissan Motor Co., Volkswagen AG, Ford Motor Co. (F), Honda Motor Co. (HMC), Toyota Motor Co. (TM) and dozens of others operating in the country – not to mention hundreds of parts manufacturers. These and other industries owe their growth in part to the more than a four-fold real increase in U.S. foreign direct investment (FDI) in Mexico since 1993

Mexico had reduced many of its trade barriers upon joining the General Agreement on Tariffs and Trade (GATT), the precursor to the WTO, in 1986, but still had a pre-NAFTA average tariff level of 10 percent.

Mexican policymakers saw NAFTA as an opportunity to both accelerate and “lock in” these hard won reforms to the Mexican economy. In addition to liberalizing trade, Mexico’s leaders reduced public debt, introduced a balanced budget rule, stabilized inflation, and built up the country’s foreign reserves. Thus while Mexico was hard hit by the 2008 U.S. recession due to its dependence on exports to the U.S. market—in 2009 Mexican exports to the United States fell 17 percent while its economy contracted by over 6 percent—its economy was able to bounce back relatively quickly. Mexico returned to growth in 2010, its GDP expanding over 5 percent, and subsequently falling to around 2 percent in 2014 and 2015.

But Mexico’s NAFTA experience has suffered from a disconnect between the promises of some of its supporters—that the pact would deliver rapid growth, raise wages, and reduce emigration—and the deal’s more mixed outcomes. Between 1993 and 2013, Mexico’s economy grew at an average rate of just 1.3 percent a year during a period when Latin America was undergoing a major expansion. Poverty remains at the same levels as in 1994. And the expected “wage convergence” between U.S. and Mexican wages didn’t happen, with Mexico’s per capita income rising at an annual average of just 1.2 percent in that period—far slower than Latin American countries such as Brazil, Chile, and Peru.