Did Mexico Benefit From Nafta Economics Essay

About all ratings of the understanding agree that the period showed negligible or negative consequences for Mexico. As the developing-country spouse of the understanding, Mexico ‘s experience under NAFTA has major deductions for other developing states negociating free trade understandings ( FTAs ) , peculiarly with the United States.

More than two decennaries subsequently, it is clear that the promise on which the understanding was negotiated did non carry through the outlooks. In the early 1990s, NAFTA boosters asserted that the understanding would hold lead Mexico into the First World, go forthing behind decennaries of poorness and underdevelopment and doing the state ‘s economic system strong plenty to vie on trade market even with its spouses.

On the Eve of the signature of the understanding, economic experts and politicians were still reasoning whether the NAFTA would hold proved to be good for all the spouses of the going-to-be common market- as it had been for the European Union, or if this understanding would hold earnestly hurt USA and Canada- harmonizing to the fact that low rewards together with a slack ordinance of labour market and low costs of Mexican production would hold destroyed the USA and Canadian economic systems ( this is the instance, e.g. of the American Trade Union and a portion of the Democratic Party ) . Doubts were cast besides about the scarce Mexican environmental criterions ; to make an understanding two addendums were added to NAFTA: the North American Agreement on Environmental Cooperation ( NAAEC ) and the North American Agreement on Labor Cooperation ( NAALC ) .

The expected dramatic economic growing of Mexico to the hurt of USA and Canada clearly did non occurred. The NAFTA decennaries showed turning spreads between Mexico and its northern spouses in the countries of growing, rewards, employment, in-migration, agricultural subsidies and environment. This paper will briefly analyse some of the countries in which NAFTA operated and will demo the consequence of this peculiar understanding on Mexico ‘s economic system, labour market and environment.


A right analysis of the NAFTA results with respect to Mexico ca n’t be made regardless of some major facts that took topographic point in the state before and during the signature and execution of the understanding.

At foremost the one-sided trade liberalisation from 1985 to 1988: trade and Foreign Direct Investment ( FDI ) as a portion of GDP grew quickly, existent rewards in fabrication activities improved compared to their down degrees after the 1982-1984 crisis. This evidents makes harder to recognition NAFTA for the partial accomplishments of Mexican economic system, therefore showing that the understanding did non stand for the first success of the state within the model of liberalisation.

On the other manus, the alleged Tequila macro/financial crisis of 1995 lowered Mexico ‘s medium-term growing public presentation while competition from China put a brake on Mexico ‘s export growing.

Furthermore, other related policy steps besides had a more decisive impact on Mexico ‘s economic system than NAFTA. For illustration, Mexico ‘s gradual devaluation of the peso during most of 1994 and crisp depreciation during the 1994-1995 crisis contributed more to export growing than the liberalisation steps included in the NAFTA text.

Furthermore, the tight macroeconomic policy of the Mexican authorities during the period of the execution to a great extent affected the economic system of the state. The fact that many countries-China, India, Brazil, and Chile-in the last two decennaries had greater success following less Orthodox policies than Mexico ‘s attests the being of a big scope of more successful development schemes that a developing states such Mexico could take.

The aims of NAFTA were to:

“ a ) eliminate barriers to merchandise in, and ease the cross-border motion of goods and services between the districts of the Parties ;

B ) promote conditions of just competition in the free trade country ;

degree Celsius ) increase well investing chances in the districts of the Parties ;

vitamin D ) supply equal and effectual protection and enforcement of rational belongings rights in each Party ‘s district ;

vitamin E ) create effectual processs for the execution and application of this Agreement, for its joint disposal and for the declaration of differences ;

degree Fahrenheit ) set up a model for farther trilateral, regional and many-sided cooperation to spread out and heighten the benefits of this Agreement. ”[ 1 ]

Throughout all the period since the understanding came into force, merely a few of this ends have been reached thanks to the NAFTA.


Sing the three aims that aimed to increase trade, foreign investing, and productiveness while supplying a more stable macroeconomic clime for concern[ 2 ], informations show that those were mostly achieved.

Trade growing.

Mexico ‘s exports increased 311 per centum in existent footings between 1993 and 2007, and non-oil exports increased 283 per centum.[ 3 ]The export growing was overwhelm in fabrication, with fabrication exports lifting from 43 per centum of entire exports in 1990 to 77 per centum in 2007.[ 4 ]Agricultural exports doubled in existent footings from 1993-2007.[ 5 ]

Mexico is now the 15th largest exporter in the universe and the United States ‘ 2nd largest export market, doing about 12.21 per centum of U.S. entire exports in 2009, with every bit high as 80.5 per centum for Mexico ‘s exports traveling to the U.S.

Mexico ‘s economic system suffered greatly during the 2008 planetary fiscal crisis and U.S. economic downswing, due to a bead in U.S demand of exports. ( see Fig.1 )

Mexico ‘s exports to U.S fell from US $ 234.6 billion in 2008 to $ 184.9 billion in 2009. GDP ( PPP ) of Mexico besides posted a negative 5.25 per centum growing in 2009, a bead from US $ 1.553 trillion in 2008 to US $ 1.471 trillion in 2009.[ 6 ]

Foreign Direct Investments ( FDI )

FDI more than tripled between 1992 and 2006.[ 7 ]The bulk came from the United States as a consequence of the NAFTA proviso for investing liberalisation.[ 8 ]

Besides in this field Mexico suffered the effects of the crisis, chiefly because of the strong nexus with the USA economic system: FDI tumbled from circa 26 billion US $ in 2008 to 16 billion US $ in 2009. Datas from 2011 show a growing up to 20 US billion US $ .[ 9 ]

FIG.1 Mexico ‘s exports from January 1993 to January 2012

Macroeconomic stableness

Macroeconomic volatility in Mexico declined markedly after the origin of NAFTA.

In peculiar, the lessening in volatility could be the consequence of NAFTA ‘s consequence on intra-industry and perpendicular trade, and the increased importance of regional instead than country-specific dazes in driving the Mexican concern rhythms.

The lessening in the volatility of concern rhythms has besides been the consequence of increased stableness of domestic macroeconomic policies: rising prices was brought below 5 per centum, from over 80 per centum in the eightiess[ 10 ]. Since NAFTA, federal budget shortages have been low, approximately 1 per centum of GDP ( at least until the current economic crisis when shortages ab initio increased to excite the economic system ) .

Rising productiveness

Researches show that NAFTA contributed to entire factor productiveness in Mexico. For illustration, Lopez-Cordova ( 2002 ) , utilizing plant-level informations for the period 1993-99, studies that NAFTA raised entire factor productiveness by approximately 10 per centum in Mexico over the sample period, partially in response to foreign capital influxs. Schiff and Wang ( 2002 ) usage informations for 16 fabrication industries over the period 1981-98 and set up a positive nexus between entire factor productiveness in Mexico and the addition in the volume of intermediate inputs trade after NAFTA. In peculiar, they estimate that NAFTA increased entire factor productiveness in Mexico by 5.5-7.5 per centum.[ 11 ]


The logic behind the signature of the NAFTA was that the accomplishments of the three above-named ends would hold of course lead to economic growing and, therefore, to an betterment in the criterions of life.

This premise follows standard broad economic theories which predict that the creative activity of a free market with the ensuing addition in trade, foreign investings and exports demanding will profit the state as a whole.

Reducing protection would hold aid Mexico to happen its comparative advantage, therefore increasing productiveness and taking to a monetary value equalisation between the trading states, every bit good as a decreased inequality. Employment and rewards will lift in the spread outing sectors, and the state will see an epoch of economic growing.

Despite the trade growing and the monolithic influx of foreign capitals in Mexico, economic growing was slack and degrees of entire investings remained low. The state remained extremely dependent on oil grosss and to its wont to over-value the currency ( the most outstanding illustration is provided by the peso crisis of 1994 ) .

In resistance to what the theories predict, rewards did non meet with the American 1s, alternatively turning of a less per centum than how was expected.

If poorness decreased thank to multiple factors, inequality remained high.

But all the costs of the gap of the Mexican economic system to a great extent felt on the agricultural sector- that in the state represented the support of a huge part of the population- due to the monolithic competition of American goods.


Mexico ‘s economic system grew at an one-year per capita rate of merely 1.6 per centum between 1992 and 2007 ( see Fig.2 ) . This is low by Mexico ‘s ain standards-from 1960 to 1979, existent per capita growing averaged 3.5 percent-and low by developing state criterions as good. Mexico had one of the lowest growing rates in Latin America. Countries with less tight trade and development policies-India, Brazil, and China- achieved growing rates in the same period that were much higher than Mexico ‘s. Contrary to Mexico ‘s accent on deficit-reduction, these more dynamic states adopted pro-growth policies with high degrees of public investing to maximise the growth-stimulus of spread outing trade.

Mexico ‘s gross domestic merchandise ( GDP ) contracted by 6.6 % in 2009, the biggest diminution of any Latin American economic system ( see Table 1 ) . Mexico ‘s trust on the United States as an export market and the comparative importance of exports to its overall economic system make it extremely vulnerable to fluctuations in the U.S. economic system. Most other Latin American states are non as dependant on the United States as an export market. Still, economic reforms over the past 20 old ages and the authorities ‘s responses to the effects of the planetary fiscal crisis have helped Mexico defy the economic downswing and better conditions in 2010.[ 12 ]

FIG. 2 Mexico GDP growing rate from January 1993 to January 2012

Table 1. Percentage Change in Real GDP for Selected Countries: 2007-2009



2009[ a ]













El Salvador




















Beginning: tradingeconomics.com

To the extent that Mexico ‘s exports involved small value-added production on imported constituents, as was the instance in much of the fabrication sector, the lifting value of Mexico ‘s exports offered a deceptive value of domestic economic activity.[ 13 ]

The most outstanding fact is that Mexico ‘s growing was even smaller if it is taken in consideration the discriminatory entree to US market that the state had since 1994. No other developing state had comparable advantage over its possible trade challengers.

This penchant with the USA has been earnestly damaged since the 2000-2001: Mexico is in fact confronting a monolithic competition with China that is going the 2nd exporter to the United States.[ 14 ]


The monolithic influx of FDI in the state has non meant a growing in the overall investing rates in Mexico and this is one of the grounds of state ‘s sulky economic growing.

FDI may hold tripled, but domestic investing receded, so overall investing degrees ( foreign plus domestic ) languished at around 19 per centum of GDP ( see Figure 3 ) . This is low by Mexico ‘s criterions ; investing before 1982 was around 24 per centum of GDP.[ 15 ]

Harmonizing to Zepeta[ 16 ], FDI failed to raise entire investing degrees for several grounds: 1. When the Mexican market joined the NAFTA, it had hapless substructure and deficiency of recognition as results of old reforms. Because of the force per unit area of new imports, many domestic houses went out of concern ;

2. The FDI were used to purchase domestic houses alternatively of making new 1s, an operation which does non increase the stock of capital.

3. FDI in fabrication has been concentrated in maquiladora sector, that is the 1 in which “ mills import stuff and equipment on a duty-free and tariff-free footing for assembly, processing, or fabrication and so export the assembled, processed and/or manufactured merchandises, sometimes back to the natural stuffs ‘ state of beginning ”[ 17 ]. This generates limited spillover effects, as for illustration merely 3 per centum of inputs are sourced from Mexican houses ; , while 97 per centum are imported, a portion that has non improved with NAFTA.

4. Mexican houses have found it peculiarly hard to associate with foreign companies and thereby excite local economic systems.

5. Public investing collapsed as portion of the macroeconomic accommodation enacted to cut down the financial shortage, policies really much in line with the free-market antipathy to public intercession. This diminution in public investing was non compensated by a rise in private investing.

Fig.3 FDI vs Investment Rate, 1992-2005[ 18 ]


The chief job of Mexico ‘s financial policy is the recurrent resort to the over-valuation of its currency, the peso. This makes it more hard for manufacturers to vie with other developing state exporters, such as China. In the long term, an overvalued peso leaves the state vulnerable to runs on its currency and sudden devaluations, as occurred in 1994-1995, and every bit occurred once more in the recent fiscal crisis, when the peso lost about half its value.[ 19 ]

Many believed that the monolithic and uninterrupted influx of US capitals into Mexico fueled by NAFTA would hold recovered the state from currency onslaughts. This proved to be incorrect and in the interim the fiscal sector remained far from being competitory harmonizing to international criterions.

As already stated antecedently, another major job is constituted by the strong dependance of the Mexican economic system on oil grosss.

The high monetary value of oil in recent old ages has covered many shortages in Mexican trade and balance history. ( covering for illustration the fact that non-oil shortage that has worsened since the 1994- 1995 peso crisis and by 2008 reached 6.2 per centum of GDP[ 20 ])

Mexico deserved recognition for keeping a federal budget shortage around 1 per centum of GDP before the current crisis. Anyway, the state-owned oil company, Pemex, provides more than 30 per centum of federal grosss. Mexico collects a really low portion of grosss from revenue enhancements, good under 15 per centum of GDP, 25 compared to 36 per centum for OECD states[ 21 ].

Mexico ‘s economic system is besides now overly dependent on the United States both as an export market ( a fact that has made the crisis effects even tougher ) and as the state from where many relations send their remittals to Mexican households.

Sluggish JOB GROWTH.

When NAFTA was signed, politicians in both sides declared that, apart from the expansion of the trade traffic, the chief benefit would hold been an outstanding growing in employment rates.

The NAFTA limited employment additions in fabrication and services have been offset by big employment losingss in agribusiness.

Overall, the Mexican labour force grew from 33.7 million instantly before NAFTA to 43.4 million in 2004, intending that Mexico needed about a million occupations a twelvemonth merely to absorb the growing in labour supply.[ 22 ]


Overall employment in non-maquiladora fabrication in Mexico was lower in 2006 than it was in 1994, except in microenterprises, which are chiefly in the informal sector. Employment in the non-maquiladora fabrication sector stood at about 1.4 million in January 1994, declined aggressively during the peso crisis, and so began a recovery that produced an extra 91,000 occupations at its extremum in May 2000 before worsening once more. In June 2006 there were 1.26 million occupations in non-maquiladora fabrication, about 130,000 fewer than when NAFTA took consequence.

The diminution since 2000 has been caused in portion by the U.S. recession and weak recovery, every bit good as by planetary alterations such as the rise of competitory exports from China.

The growing in maquiladora occupations is non chiefly attributable to NAFTA, since the plan day of the month back earlier than that treaty, but NAFTA did supply important duty cuts on dress and as a consequence stimulated that subsector of the maquiladoras.

Employment in Mexico ‘s non-maquiladora fabrication sector was lower in 2008 than it was in 1994 ( except in micro-enterprises, which are largely outside the formal sector of the economic system ) . In August 2008, there were 1.24 million non- maquiladora fabricating occupations, 159,000 fewer than when NAFTA took consequence.

Non-maquiladora formal fabrication employment was already in diminution early in 1994, and new occupations were merely added one time the daze of the 1995 crisis started to ease and houses reacted to the extremely competitory exchange rate that the crisis created.[ 23 ]

The ground behind the failure of the employment growing end are multiple.

The first, obvious, one is the rise in productiveness, which reduces the sum of occupation creative activity for any given degree of exports.

In dependence export fabrication in Mexico is progressively based on a production theoretical account in which constituent parts are imported, so processed or assembled, so re- exported. In this theoretical account, the spillover consequence of such operations on the broader economic system is really limited, because merely a narrow scope of processing or assembly operations benefit the labour market. Vertical integrating, including creative activity of concerns that supply parts and stuffs, has non occurred, restricting the multiplier consequence of any growing in exports.

Another of import factor restricting fabricating employment growing is that some Mexican industries have been displaced straight by imports.

The last 1 is, of class, the competition with new US trade markets, such as China, which adds a ample pool of lower-wage labour to the available regional labour supply, sabotaging Mexico ‘s current advantage.


With no uncertainty, the agricultural sector is the 1 who suffered the most the negative effects of NAFTA.

As Figure 4 shows, entire employment is down from 8.1 million in the early 1990s to 5.8 million in the 2nd one-fourth of 2008, a loss of more than 2.3 million occupations.[ 24 ]

The liberalisation steps introduced through NAFTA with the coincident allotment from the US authorities of agricultural subsidies ( The 2002 US Farm Bill authorises an 80 % addition in subsidies over the following 10 old ages ) in the same period produced dramatic effects on a already weak farming sector.

Beginning: INEGI, Encuesta Nacional de Empleo, sector primario ( 1995-2008 ) ; Audley et Al. NAFTA ‘s Promise and Reality, 2004, for 19993 estimation ( 1994 informations non available )

While the entire sum of necessary workers in the sector decreased due to the running procedure of agribusiness industrialisation, the portion of seasonal workers grew quickly, without conveying any lasting benefit to the employed sector.

If Mexico experienced over 50 % growing in the value of its exports of major fruits and veggies to the USA, the net incomes have been more than offset by the cost of its imports in grains, particularly maize, which tripled. Some domestic sectors have been virtually wiped out: for case, 99 % of soya beans are imported and wheat cultivation has felt by half.

Furthermore, the benefits of fruit and vegetable export have been limited to a really little figure of big husbandmans concentrated in the northern portion of the state, while grain imports have devastated 1000s of farm supports throughout the state. About two million husbandmans have left the land since the oncoming of NAFTA, eight of every 10 live in poorness, and 18 million earn less than $ 2 a twenty-four hours.[ 25 ]

One of the consequence has been a monolithic out-migration to the United States. In malice of the lifting mobilization of the U.S. Border, migration increased from about 350,000 per twelvemonth earlier NAFTA to about 500,000 per twelvemonth by the early 2000s.

The increased hazards to migrators hold reduced well-established seasonal flows of labour, as migrators choose non to put on the line the one-year return to Mexico. As a consequence, migration to the United States is more lasting now than it was before NAFTA.

The tendency seems to be altering since 2008, likely due to the heightened boundary line enforcement and the diminished U.S. Economy[ 26 ].

Furthermore, liberalized maize imports had an impact on other harvests as good. As the monetary value of maize dropped, livestock manufacturers converted to maize as provender, doing desolation in the sorghum sector. Similarly, although Mexico does non import white maize, processors replaced it with inexpensive xanthous maize in groceries, gnawing the domestic white maize market.


Unlike the anticipation of NAFTA, rewards and monetary values between the developed states and Mexico did non meet but, alternatively, as for the instance of fabrication sector, diverged dramatically.

As published by the ComisiI?n Nacional de los Salarios Minimos the existent value of the lower limit pay has fallen about 30 per centum since NAFTA took consequence.[ 27 ]Besides if, harmonizing to Zepeta, this is non cardinal as non so many workers earn the lower limit, the minimal pay is important because of its economy-wide effects on contract dialogues ( its the mention on which wages are fixed and adjusted ) and many other economic activities, such as the purchase power, for case.

This is besides a clear signal of how the NAFTA ‘s labour side understanding was perfectly deficient, since the bargaining power is still weak and the rewards did non increased despite the growing in productiveness.

Increasing unemployment throughout the state has led to a turning tendency towards informality and self-employment. This turns into a long-run job for the authorities because growing in the informal sector led to increased poorness degrees and lower chances for sustained economic growing.

In dependence the 16 % bead in remittals to Mexico in 2009 has largely affected the hapless. Remittance influxs, which are mostly from the United States, are Mexico ‘s second-highest beginning of foreign currency after oil.

Data show poorness worsening from 53 per centum in 1992 to 43 per centum in 2006 and utmost poorness falling from 21 per centum to 14 per centum. The Poverty head count ratio at national poorness line ( % of population ) in Mexico was last reported at 51.30 in 2010, harmonizing to a World Bank study published in 2012. These are high degrees of poorness for a middle-income state.

As above, portion of the job consist in the bead of remittal, where other ground can be attributed to the economic crisis and to the unsuccessful anti-poverty plans of the Mexican authorities.

Sing inequality, few stairss frontward were taken. The GINI index felt merely by 3,61 % from 1995 to 2008[ 28 ]; with a value of 48.28, Mexico remains one of the Western ‘s extremely unequal states.

NAFTA massively contributed, spread outing the spread between the northern parts, which benefited from the increased trade flow with the USA and the southern parts, which languished behind.


As for the North American Agreement on Labor Cooperation, the Agreement on Environmental Cooperation did non work at the best since the committedness to environmental protection in the post- NAFTA period has decreased, existent disbursement and review degrees in fabrication have declined and the environmental impacts have been good documented.

As an illustration, the cost of environmental harm has averaged 10 % of the Mexican GDP since 1999, tantamount to $ 64.7 billion dollars in 2004, whereas disbursement for environmental protection amounted to 0.6 % of GDP, or 4.1 million dollars[ 29 ].

The heavy industrialisation has brought many negative effects, hard to find, but clearly seeable such as the increased H2O usage, peculiarly in export sectors in water- stressed parts, and the burden of N and other agro- chemicals. Economic force per unit area on hapless husbandmans, peculiarly maize manufacturers, has contributed to lost or threatened maize biodiversity under competition and monetary value force per unit areas from maize imports, every bit good as deforestation from the unsustainable development of fringy lands[ 30 ].


In Chapter 3 of Bad Samaritans ( Bloomsbury Press 2007 ) , Chang states that “ Mexico is a peculiarly dramatic illustration of the failure of premature sweeping trade liberalisation “ .

After reading and roll uping informations on NAFTA ‘s impact on Mexico, it ‘s difficult to deny that free trade for this state has been far from being good, turning alternatively into a difficult knock for its economic system and society.

The latest research show that after the eruption of the 2008 crisis Mexico is enduring even more the consequence of its bonds with the USA.

In add-on to the these inauspicious effects, Mexico ‘s economic system is sing legion other challenges, such as the U.S. economic contraction, the escalation of violence- since the authorities ‘s crackdown on organized offense and drug trafficking has led to investor uncertainness in some parts of the state and, later, a crisp diminution in foreign direct investing flows. The impact has been the most terrible on the fabrication industry, which is largely located along the U.S.-Mexico boundary line and has experienced important occupation losingss.

Many of the paperss I read suggest that when Mexico signed the NAFTA, it lacked of the right degree of substructures every bit good as a well-established system of services and Bankss ; but what the state decidedly failed was its domestic policy, excessively focused on the attachment on NAFTA prescriptions to understand the impossibleness of implementing a theoretical account suited for already developed states on a state that was far from being ready for it.

Some of the illustration are provide by Zepeta ‘s research, which underline an overemphasizing tight financial policy over exchange rate fight and economic grow, a weak revenue enhancement aggregation, a falling public investment- which could hold helped herd in private investing, an forsaking of public investing and research in oil and possibly in other industries and a failure to develop government-led plans to rectify for critical failures in recognition markets.

Apart from the occurred growing in trade sum, none of the promises behind which NAFTA has been signed have been fulfilled. The instance of Mexico shows one more clip how negative can be the sudden impact of free trade on developing states, proposing that a solution for turning those states into developed 1s should be found in a different attack.

Its non surprising so that many writers are denouncing the impact of NAFTA in order to supply a warning for those states that are at the present minute negociating with the USA Free Trade Agreements ( FTAs ) .

Infant Industry theories suggest that developing states measuring a similar experience should avoid some of Mexico error in subscribing a FTA with USA.

They should avoid NAFTA ‘s prohibitions on policies for industrial fight: selective publicity of industries, impermanent penchants to national enterprisers in peculiar countries, and similar steps stimulate dynamic domestic economic activity, an grounds that its quite seeable in states like Brazil, China and India.

Mexico failed its agricultural policy when its liberalisation of basic nutriment sector led to a monolithic unemployment because of the incapacity of the economic system to bring forth new occupation chances. The liberalisation of such cardinal sector should be done easy, along with authorities reforms capable to make employment and with continued investings in rural development and agricultural productiveness.

“ Mexico ‘s merely staying defence against extremely subsidised U.S. agribusiness is the protection of cardinal sectors through duties, quotas, voluntary export restraints, or other agencies ” .[ 31 ]

The two side understandings have proved to be uneffective ; those states who are up to subscribe FTAs with the USA should pay more attending to the execution of the labor and environmental issue.

The European Union has been one of the theoretical account by which the NAFTA boosters and signers have been inspired. But they did supply a serious system of establishing for development to assist Mexico viing with the other two involved states. In the original proposals there was a proviso for a North American Development Bank, but support was relegated to a really limited authorization and budget in the North American Border Bank.

I would wish to reason with a commendation of Jess Faux, who, back in 2003, wrote:

“ … one lesson is already clear: Of all the universe ‘s developing states, Mexico was by far in the best place to work the neoliberal theoretical account. Its propinquity to the U.S. market and a domestic U.S. constituency of 1000000s of Mexican American electors gave Mexico advantages under NAFTA that no other Third World state had. The testimony of 100s of 1000s of Mexican workers each twelvemonth doing the difficult and unsafe trip North is grounds that, after two decennaries, the theoretical account is non working in Mexico. If it is non working at that place, it is improbable to work anyplace. ”