The North American Free Trade Agreement

1. The North American Free Trade Agreement A net beneficial free trade area from the perspective of Mexico David Loveland Scott Swisher May 29th, 2007 – Latin American Economics

2. Thesis Statement and Outline Thesis Statement: “For Mexico, NAFTA has had a positive net effect; the gains in manufacturing, trade, and macroeconomic stability have outweighed the losses in agriculture and economic independence” Outline: • History of NAFTA • Agreement structure • Macroeconomic stability • International trade flows • Gains/losses by sector • Political consequences • Net effect of NAFTA • Conclusion

3. The North American Free Trade Agreement • Free trade area: Mexico, US, Canada • Trade liberalization with caveats • Retention of PEMEX • US-Mexico agricultural tariff phase-outs • US-Canada agricultural exclusions • Side agreements • NAAEC, CEC • NAALC, CLC • NADBank

4. Historical Context / Timeline • Jan. 1965: Canada-US Auto Pact • 1965: Mexican maquiladora program • 1986: Mexico accession to GATT • 1989: Canada-US FTA (CUSFTA) • June 1990: US-Mexico FTA initiative • 1991: Canada joins NAFTA negotiations • 17 Dec. 1992: signing of NAFTA • Jan. 1994: NAFTA enacted

5. Mexico: Need for the Agreement • Continuation of apertura reforms • Raise political cost of reversing reforms • Provide new export opportunities • Increase domestic competition • Attract greater FDI inflows • Use NAFTA to build confidence • Engage Canada in trade

6. NAFTA Structure Article 102: goals of NAFTA Free Trade Commission (FTC) Lowering of tariff barriers Rules of origin Co-operative “commissions” Ineffectual development bank No supranational institutions

7. NAFTA’s Macroeconomic Effects • Increased reliance on trade flows • Improved GDP growth, two downturns • US-Mexico convergence • Transition to service economy continues • Additional FDI inflows achieved • Macroeconomic stability • Unemployment, inflation • Public deficit/debt

8. Mexico: GDP Growth GDP Growth (annual % change) Time (years)

9. NAFTA Members: GDP Growth GDP Growth (annual % change) Time (years)

10. Mexico: GDP Composition Sector’s Share (% of GDP) Time (years)

11. Mexico: FDI Net Inflows FDI Net Inflows (% of GDP) Time (years)

12. Mexico: FDI Net Inflows by Country FDI Net Inflows (billions of USD) Time (years)

13. NAFTA Members: Inflation (CPI) Inflation (annual % change in CPI) Time (years)

14. NAFTA Members: Unemployment Unemployment (% of labor force) Time (years)

15. NAFTA Members: Government Debt Public Debt (% of GDP) Time (years)

16. NAFTA’s Impact on Trade Flows • Increased reliance on international trade • Expansion of regional trade • US-Mexico merchandise trade up 227% • Trade in autos/parts, agriculture, energy • Gains from NAFTA: estimates range from 5-50% • Rules of origin: trade diversion/creation • Current account deficits persist • Synchronization of imports and exports

17. NAFTA Members: Trade Trade (% of GDP) Time (years)

18. Mexico: Imports, Exports Imports, Exports (% of GDP) Time (years)

19. Mexico: Current Account Balance Current Account (billions of USD) Time (years)

20. Mexico: Import/Export Growth Import/Export Growth (% of GDP) Time (years)

21. NAFTA: Manufacturing • 81.1% of total exports • Employs 24% of the workforce • Increasing importance of maquiladoras • 44.8% of total exports from Mexican markets in 2006 • Low wages and gender disparity • Geographical disparity • Automotive Industry

22. Maquiladora Employment

23. Maquiladora Employment, Con’t

24. NAFTA: Energy • NAFTA left PEMEX and CFE intact Inefficiency and Instability • NAFTA liberalized trade, not investment • Lack of domestic investment in exploitation of new reserves and underinvestment in electricity capacity growth • SOEs in generation/transmission/distribution • Oil accounts for 15.6% of total Mexican exports • PEMEX profits used as source of government revenue • Dependence on world oil prices • Slight Liberalization: natural gas, electricity

25. NAFTA: Agriculture • 2.8% of total exports • Employs 18% of the labor force • US/Mexican agricultural commodities have become largely complementary • Trade volumes have grown in both imports and exports • Mexican grain farmers were seriously hurt by several US products flooding Mexican markets • Income Supports: Procampo, Alianza, Produce Capitaliza • Points of contention • Corn • Sugar, high fructose corn syrup

26. Agricultural Trade Levels

27. NAFTA: Services • Largest sector of the economy • Trade accounts for a nearly negligible percentage of GDP • Most service production consumed domestically • Majority of service exchange is tourism • Trade in services liberalized by NAFTA • Expansion of inter-NAFTA trade concentrated in transport • Financial sector changes are important as well

28. NAFTA: Political Implications • US as core of NAFTA system • Contraction in economic independence • NAFTA legally enforces trade reforms Trade stability • Pressure to liberalize energy sector • Business cycle liberated from political cycle

29. The Net Effect of NAFTA • Gains: • Political legitimacy, lock-in of reforms • Macroeconomic stability • Increased competitiveness, maquiladora growth • Losses: • Increased reliance on external trade flows • Dependent on the US as central player • Agricultural issues persistent • Net Effect: positive, NAFTA is beneficial

30. Conclusion • “For Mexico, NAFTA has had a positive net effect; the gains in manufacturing, trade, and macroeconomic stability have outweighed the losses in agriculture and political independence” • Mexico is better off as a result of NAFTA • Continue trade liberalization process • Agricultural problems need to be addressed • Social/cultural adjustment costs?

31. The Future of NAFTA for Mexico • Current challenges • End of PRI dominance • American anti-NAFTA sentiment • Post-9/11 security concerns • Future expansion • Security and Prosperity Partnership of North America • North American Union?

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