Sep 16, 2018 in Analysis

How Did Mexico Benefit from NAFTA

North American Free Trade Agreement has played a key role in the economic relationship between Mexico and the USA since the year of 1994. Two countries are closely connected in bilateral investment and trade, and in spheres of mutual concern like security, migration, health, and environmental challenges. The effect of NAFTA on Mexico and the state of the Mexican economy as a whole have implications for the overall relationship between two countries, and also for the American political and economic interests. The Mexican economy experienced various difficulties in the 1980s having a significant index of poverty. The purpose of Mexico in entering NAFTA was to raise export diversity through foreign direct investment, which would increase wage rates, reduce poverty, and create jobs. At the period, NAFTA went into effect, many studies forecasted that the agreement would cause the total positive influence on the Mexican economy (Villarreal, 2010).

The Mexican economy is strongly tied to the American economic conditions, making it very sensitive to the economic developments of the USA. Mexico is highly confident on export, and most of the Mexican exports go to the USA. Mexico’s exports as a percentage of Gross Domestic Product equaled thirty one percent in 2008, comparing with ten percent twenty years ago. Then, over eighty percent of Mexico’s exports went to the USA The state of the Mexican economy is considerable to the U.S. because of the investment and trade ties between two countries. Other political and social challenges could be affected by the economic conditions and its concerns to migration problems. Not all the changes in investment, trade patterns and economic growth in Mexico can be referred to NAFTA since 1994. The economic state has also been affected by other factors like previous market measures, business cycles, financial crises, exchange rates, and oil prices. Trade-related jobs get benefits and disadvantages since NAFTA has accelerated trends that were permanent and not completely attributable to the trade agreement. Isolating the economic results of NAFTA from other political and economic aspects is difficult. Mexico has experienced two main events outside NAFTA with significant economic consequences. The currency crisis of 1995 and one-way measures of trade liberalization affected economic growth, real wages, and Gross Domestic Product (GDP) per capita in Mexico (Villarreal, 2010). Upon realization, almost seventy percent of American import from Mexico and fifty percent of American export to Mexico received a duty-free approach. The agreement has also involved protection of intellectual property rights for the American companies. Also, it includes protection of American foreign direct investment in Mexico, and provision for market access of major service sectors.

Some investigations have revealed that NAFTA has brought social and economic advantages to the Mexican economy as a whole, but the benefits have not been equally distributed throughout the country. After NAFTA, most of the researches have found out the effect on the Mexican economy tended to be modest in most of the cases. While there have been negative and positive growth after the agreement was performed, much of the increases in trade appeared in the late 1980s when the country began implementing trade liberalization measures. Although the economic effects may have appeared as positive, NAFTA itself has not had enough power to decrease revenue disparities within Mexico, or among Mexico, Canada, and the USA (Villarreal, 2010).

While the total effects of NAFTA on the Mexican economy might have been positive, the effects have still been unequal across the sectors and regions. The index of employment and wages tend to be higher in the states, which experience significant level of trade and foreign direct investment. The results of trade liberalization have widely varied among regions. While trade liberalization may decrease revenue inequality with other countries in the long run, it may indirectly cause larger disparity in income level within the country.

NAFTA has undoubtedly created the global largest area of free trade. The agreement allows four hundred fifty million people in Canada, Mexico and the USA to export at a lower cost to each other. Consequently, the agreement is responsible for $1.6 trillion dollars in services and goods annually (Amadeo, 2013). NAFTA definitely brings advantages in trade relations. Firstly, the agreement eliminates tariffs and helps to decrease inflation by reducing the costs of import. Secondly, NAFTA proposes agreements for business investors on international rights. It helps to reduce the cost of trade, which motivates growth and investment mostly for small business. Thirdly, NAFTA guarantees the ability for companies to bid on government contracts in member countries. Fourthly, the agreement also defends intellectual properties.

Prior to the 1980s, Mexico’s international trade policy has been characterized by high quotas and import tariffs along with limitation on foreign ownership and investment. While living in a severe economic crisis of the early 1980s, Mexico began liberalizing its protectionist policy. NAFTA has excluded the majority of taxes on production traded among the countries, phasing out other tariffs. The authorities have claimed to re-negotiate or suspend the agreement. It is obvious that both the USA and Mexico have significantly benefitted from open trade after almost fourteen years of activities under the treaty.

The Mexican economy is the thirteenth largest in the world. Yet, Mexico is the second largest market for American export and the third largest trading partner of the USA. Such partnership owes much to the agreement. The mutual trade between the USA and Mexico has more than quadrupled since NAFTA was realized. The value of Mexican goods exported to the U.S. grew from almost forty billion dollars in 1993 to two hundred eleven billion dollars in 2007. It was an increase of almost four hundred thirty seven percent. The USA exported one hundred thirty seven billion dollars of goods to Mexico in 2007. It was an increase of almost two hundred forty two percent since the year of 1993. Over that time, Gross Domestic Product (GDP) grew up to fifty percent in the USA and forty six percent in Mexico (Somner, 2008).

Thanks to NAFTA, the agricultural export to Mexico and Canada grew from twenty two percent of total U.S. farm export in the year of 1993 to thirty percent in 2007. In perspective, agricultural export to Mexico and Canada were greater than export to six largest markets. The export index has almost doubled with one hundred fifty six percent comparing to a sixty five percent growth to the rest of the world (“North American Free Trade Agreement”, 2013). NAFTA has raised farm export since it helped to eliminate higher Mexican tariffs. Mexico is the top destination for the U.S. exporting beans, apples, beef, rice, soybean meal, and corn sweeteners. It is the second largest export of oils, corn, and soybeans (“NAFTA Facts”, 2008).

The USA is the largest source of foreign direct investment (FDI) in Mexico, accounting for over half of the nineteen billion dollars invested in 2006. Moreover, the American companies contribute around fifty percent of the investment funds to Mexican factories that assemble production like electronic goods and auto parts from imported American components. Such companies respond for almost half of Mexican export providing over forty one billion dollars in annual sales. Investment in Mexico has increased the effectiveness of American domestic production. The majority of manufacturing companies decrease costs by shifting assembly of their production to the maquiladoras (Mexican assemble companies). Such an action has helped enhance the American manufacturing productivity, which increased by almost sixty percent from the year of 1993 to 2006. By contrast, the index of production had increased by only forty two percent in thirteen years before creating NAFTA.

The level of Mexican employment has been more variable since NAFTA implementation. From the beginning of 2005, Mexican departments of American organizations have employed nearly 840,000 individuals who facilitated almost three percent to Mexican Gross Domestic Product. The wages of Mexican employees have steadily grown since the 1994 peso crisis in 1994, reaching pre-crisis level in 1997. Moreover, Mexican industries that export commodities, or they are located in areas with a high foreign investment level, also pay higher salaries. According to the Mexican Secretariat of Economy, exporting firms pay wages thirty seven percent higher than companies that do not export (Somner, 2008).

Mexico is the second largest supplier of oil to the USA, and the sixth largest producer of crude oil in the world. Still, despite the petroleum’s high price, PEMEX, the state-owned oil monopoly financially suffers, and its production is decreasing. Mexico may not be able to tap large reserves from the Gulf of Mexico without significant foreign or domestic investment. However, to turn PEMEX in the right direction could be quite a difficult process. The Mexican nation has traditionally feared that control of their natural inner resources and foreign ownership would lead to a loss of sovereignty. Still, PEMEX demands greater autonomy to use private investment so that it can be operated more rationally and efficiently. It may induce political difficulties to reach such a purpose if to allow Mexican authorities maintain its control. Still, it is economically necessary for PEMEX to remain viable (Somner, 2008).

Another significant challenge is the liberalization of transportation. NAFTA is supposed to allow skilled and qualified Mexican and American truckers to make supplies across the frontier. Liberalization of trucking has been postponed, allegedly following safety concerns, but most likely for political causes. Since eighty percent of trade with Mexico travels by truck, the authorities need to resolve the situation with extreme importance. Nowadays, the delay in opening American markets to Mexican truckers’ costs Americans from two hundred to four hundred million dollars annually in significant transportation costs (Somner, 2008).

Difficult financial circumstances of PEMEX and trucking are not the only challenges the Mexican-American trade faces today. In the USA, opposition to NAFTA and other trade agreements as a whole has become quite vocal recently with increasing appeals for the treaty’s suspension or renegotiation. Acting in such a way would be a mistake since protectionism hurts America’s status as a favored trading partner and supporter of global growth. In addition, leaving the international trading system would allow European Union and Asian countries take a leading position in trade negotiations. As a result, it would put American commodities and services at a competitive disadvantage.

Economic liberalization under NAFTA has been a slow process, and it is still incomplete. Going forward, both Mexico and the USA will undoubtedly face more challenges in free trade. To get over the challenges should be a primary step for the governments. Mexico has a great opportunity to become an attractive destination with a large and growing inner market proposing an open environment for foreign investment and trade. In the USA, trade protectionists convince that free trade ensures a net benefit to the economy, and it will help to reach economic growth and dynamic economy in the future (Somner, 2008). The economic relationship between Mexico and the USA has mutual significance to both countries.

Economic investigation on the Mexican effects of NAFTA could ensure a valuable and great perspective with alternative policy options. Some observers have claimed that one of the main aspects of NAFTA for developing countries is the following: authorities should negotiate trade agreements in a way that would be more profitable and better for them. Possible aspects of discussion for Mexican and American politicians may involve further economic integration between two countries. Also, it will be necessary to promote and strengthen institutes based on NAFTA agreements and take other important measures in order to resolve challenges referred to revenue inequality between the USA and Mexico.


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