NAFTA’s first decade – Accomplishments and failures from the Mexican perspective

Table of contents

1. Introduction: NAFTA’s first decade – Accomplishments and failures from the Mexican perspective

2. Mexico – an emerging country in the shadow of the USA
2.1 Mexico – A flagging economy before NAFTA
2.2 Mexico’s motivation for joining NAFTA

3. NAFTA’s impact on Mexico’s economic development
3.1 Trade
3.2 Foreign direct investments

4. NAFTA’s impact on Mexico’s social issues
4.1 Employment and wages
4.2 Living conditions in rural areas
4.3 Environmental aspects
4.3.1 Political dimension of the environmental side agreement
4.3.2 Real dimension of the environmental side agreement

5. NAFTA – A first balance after one decade

6. Bibliography

List of abbreviations

illustration not visible in this excerpt

1. Introduction: NAFTA’s first decade – Accomplishments and failures from the Mexican perspective

On January 1, 1994, Mexico, Canada, and the United States established the largest free trade area under the North American Free Trade Agreement (NAFTA) after two and a half years of negotiation. This agreement created a free trade area on the North American subcontinent with approximately 431 million inhabitants and a GDP of about $15.3 trillion in 2006.^[1] NAFTA represented an important milestone in global trade policy, not just because of the sheer size of the free trade area it has created, but also with regard to the comprehensiveness of the agreement. It covered not just merchandise trade but also issues related to investment, environmental policies, energy generation, and labor markets.^[2]

NAFTA’s primary goal was the creation of a free-trade area with free movement of goods, service and capital, but no common market. In order to prevent the abuse of different external import tariffs, NAFTA implemented strict rules of origin. NAFTA is focused on economic cooperation and does not - in contrast to the European Union - intend a deeper political integration or the transfer of national sovereignty to a supranational organization.^[3]

The creation of NAFTA is based on the fact that three countries, despite different size, economic structure, and ethnical background pursued the same goal, the establishment of a closer regional economic integration. Differences in economic terms between the member countries can be clarified by the distribution of NAFTA’s GDP in 2006. More than 86.2 percent of NAFTA’s total GDP was generated by the United States whereas Mexico contributed only 5.5 percent, which reflects the state of Mexico’s economic development. Additionally, the Mexican GDP per capita amounted to only 18 respectively 20 percent of the GDP per capita in the United States and Canada.^[4] This heterogeneity between the three participating countries may be the most significant aspect of this agreement.

This paper discusses NAFTA’s accomplishments and failures after its first decade from the Mexican perspective as the agreement has been confronted with skepticism from its inception until today. While Mexican officials understood NAFTA as a measure to modernize the country through free trade, critics feared the transformation of the Mexican economy to a huge maquiladora where investors are mainly focused on the exploitation of Mexico’s low labor costs.^[5] Since the beginning of negotiations, Mexico’s former President Salinas has raised high expectations on the Mexican side in economic and social terms with his statement: “The whole point of NAFTA for Mexico is to be able to export goods and not people. That means creating jobs in Mexico.”^[6] In order to highlight whether NAFTA resulted in economic as well as social improvements, this paper focuses on a comparison of these two aspects.

After this introduction the paper deals in its second chapter with Mexico’s economic conditions and its motivation for joining NAFTA. In the third part, Mexico’s post-NAFTA economic development with a focus on trade and foreign direct investments is described. The fourth chapter deals with social aspects such as the development of employment, real wages, and environmental issues. The last chapter gives an outlook and compares NAFTA’s accomplishments and failures from the Mexican perspective.

2. Mexico – an emerging country in the shadow of the USA

2.1 Mexico – A flagging economy before NAFTA

The Mexican society has been characterized by large inequality regarding the distribution of wealth. In 1989, the richest ten percent of Mexicans earned approximately 38 percent of total income whereas the poorest 40 percent received only 13 percent. The 1990 consensus revealed that 63.2 percent of the Mexican population had a disposable income of less than $200, representing twice the minimum wage, while price levels approached those in the United States. Mexico has suffered among others from a long absence of free election caused by a failing democratic regime and no emancipated labor movement. The rule of law has helped to keep the outcome of economic growth in the hands of a majority.^[7] Although Mexico generated high levels of postwar economic growth (five to six percent per year from 1950s to 1970s)^[8] even during recessionary phases of the U.S. economy, it could never smooth out its huge disparities in income distribution. Recessions in the 1980s, an import-substituting industrialization model and a strong dependence on oil exports, representing 75 percent of total exports in early 1980s, have additionally deteriorated the economic situation.^[9]

Many of Mexico’s economic problems can be traced back to the country’s inability to attract foreign capital – the condition for substantial economic growth in emerging countries. Mexico’s costs of attracting foreign investments were high in the past: High interest rates and reduced domestic spending burdened the economic development significantly. Consequently, the Salinas Administration intended to break the cycle of current-account deficits, currency depreciation, higher interest rates and inflation, the coming economic downturn and an increasing reliance on foreign capital to finance the deficit. However, despite several stabilization programs including trade liberalization, privatization and reduced restrictions on foreign investments, the country faced serious economic imbalances by early 1994.^[10]

In order to create jobs for its population and attract foreign capital, Mexico established the maquiladora industry on the border to the United States in the mid-1960s. Companies located in this area were allowed to import components and machinery free of duty and reexport the assembled products. Only the added value had to be taxed. Maquiladora plants were attractive to foreign investors because it was beneficial to transfer labor-intensive operations to Mexico due to its cheap labor costs.^[11] On average labor costs in Mexico amounted to only 11 percent of those in the United States.^[12] In particular, the United States made use of this cheap production factor, lower environmental standards and the absence of labor unions. Thus, U.S. investors were major capital providers and accounted for 43.1 percent of total FDI in 2003.^[13] The program was important for the Mexican economy because it was an area with high growth rates regarding production and employment. In 2000, 1.3 million workers were employed in the maquiladora industry representing more than one third of all workers employed in manufacturing processes. However, over the last couple of years, growth in the maquiladora industry has diminished due to increased competition from China and Central America.^[14]

[...]

^[1] World Bank, “Macroeconomic data”, URL: http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20399244~menuPK:1504474~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html [04.07.2007].

^[2] M. Ayhan Kose/Guy M. Meredith/Christopher M. Towe, “How Has NAFTA Affected the Mexican Economy? Review and Evidence“, IMF Working Paper 04/59, 2004, p. 4, URL: http://www.imf.org/external/pubs/ft/wp/2004/wp0459.pdf [04.07.2007].

^[3] Jörg Dunker, Regionale Integration im System des liberalisierten Welthandels (Frankfurt am Main: Peter Lang, 2002), p. 138-143.

^[4] Own calculation based on “Macroeconomic data”.

^[5] Hans-Joachim Lauth, “NAFTA – Das nordamerikanische Freihandelsabkommen“, in: Lateinamerika – Analysen, Daten, Dokumentation, No. 14 (1994), p. 4.

^[6] Patricia Fernández-Kelly/Douglas S. Massey, “Borders for Whom? The Role of NAFTA in Mexico-U.S. Migration”, in: Patricia Fernández-Kelly/Jon Shefner, NAFTA and Beyond: Alternative Perspectives in the Study of Trade and Development (Philadelphia: The American Academy of Political and Social Science, 2007), p. 105.

^[7] Jorge G. Castaneda, The Mexican Shock (New York: The New Press, 1995), p. 51.

^[8] Frank D. Bean/B. Lindsay Lowell, “NAFTA and Mexican Migration to the United States”, in: Sidney Weintraub (Hg.) NAFTA’s impact on North America: The First Decade (Washington D.C.: Center of Strategic and International Studies, 2006), p. 271.

^[9] Weintraub, “Trade, Investment, and Economic Growth”, in: Sidney Weintraub (Hg.) NAFTA’s impact on North America: The First Decade (Washington D.C.: Center of Strategic and International Studies, 2006), p. 10.

^[10] Kose/Meredith/Towe, “How Has NAFTA Affected the Mexican Economy?“, p. 9-10.

^[11] Kerry A. Chase , Trading Blocs – States, Firms and Regions in the World Economy (Ann Arbor: The University of Michigan Press, 2005), p. 191.

^[12] Weintraub, “Trade, Investment, and Economic Growth”, p. 16.

^[13] Georg Scheerer, “Zehn Jahre NAFTA”, Discussion paper SWP Berlin, 2004, p. 8, URL: http://www.swp-berlin.org/common/get_document.php?asset_id=1704, [04.07 2007].

^[14] Weintraub, “Trade, Investment, and Economic Growth”, p. 9.