Twenty years after the implementation of the North American Free Trade Agreement (NAFTA) between the US, Mexico, and Canada, with the long-term goal of fostering improved and increased trade relations and a mutually beneficent economic partnership, many are looking back on the impacts and effects on each of the three signatory nations. Mexico is no different, and economists are not entirely in agreement as to exactly as to what the effects of NAFTA on Mexico have been vis- à-vis the economic partnership with the US and Canada.
NAFTA in a Nutshell
NAFTA eliminated import tariffs across industries, from agriculture to textiles to automobiles. Almost 70% of U.S. imports from Mexico and 50% of US exports to Mexico immediately received duty-free treatment under the deal with all imports and exports transactions free of levies over the next 15 years. Intellectual-property protections were implemented, dispute-resolution mechanisms were established, US foreign direct investment in Mexico was particularly enshrined and protected, and regional labor and environmental safeguards were created. As a result of changing foreign investment rules, one of the concrete effects of the NAFTA on Mexico was its ability to attract increased foreign direct investment, or FDI.
Effects of the NAFTA on Mexico in Retrospect
“NAFTA was designed to promote economic growth by spurring competition in domestic markets and promoting investment from both domestic and foreign sources. It has worked.” -Gary Clyde Hufbauer and Jeffrey J. Schott, Peterson Institute for International Economics
While the benefits of the NAFTA have not been uniform across the Mexican economy and while some experts question the extent of the effects of the effects of the NAFTA on Mexico in terms of overall economic growth, several studies have found that, on the balance, the impact of the agreement has been a positive one.
One study, in particular, conducted in 2005 by the World Bank concluded that NAFTA had helped Mexico achieve levels of development closer to those of the US and Canada.
Furthermore, some analysts have concluded that the implementation of NAFTA predisposed Mexican manufacturers to adopt and acclimate to US technological and innovations, as well as react to global market exigencies more quickly.
Cross-border investment and travel have grown rapidly since NAFTA. The US trades more in goods and services with Mexico than it does with most other trade partners, and foreign direct investment is surging in Mexico more than at any time in the past. The trade deficit before NAFTA was $1.7 billion US surplus compared to a $61.4 billion deficit in 2012.
Another finding of the aforementioned World Bank study was the decline of macroeconomic volatility and wild GDP growth variations in Mexico’s economy since NAFTA went into effect.
While Mexico’s wage disparity with the US has not decreased as was hoped by NAFTA’s proponents, many studies have concluded that a number of other domestic factors are at work and that a free trade agreement alone is simply not entirely sufficient to narrow the disparities between the two countries.
The development of continent-wide, integrated supply chains has been credited to NAFTA, and many companies are now benefiting from cost-reducing, international production lines. It is now estimated that 40% of the content of US imports from Mexico originate in the US, and that for every dollar’s worth of manufactured goods that Mexico exports thirty cents in revenue is generated in the US.