The North American Free The North American Free Trade AgreementTrade Agreement

David LovelandDavid LovelandScott SwisherScott Swisher

May 29May 29thth, 2007 – , 2007 – Latin American EconomicsLatin American Economics

A net beneficial free trade area from A net beneficial free trade area from the perspective of Mexicothe perspective of Mexico

Thesis Statement and OutlineThesis Statement and Outline

Thesis Statement:Thesis Statement:

““For Mexico, NAFTA has For Mexico, NAFTA has had a positive net effect; had a positive net effect; the gains in the gains in manufacturing, trade, and manufacturing, trade, and macroeconomic stability macroeconomic stability have outweighed the have outweighed the losses in agriculture and losses in agriculture and economic independence”economic independence”

Outline:Outline:I.I. History of NAFTAHistory of NAFTA

II.II. Agreement structureAgreement structure

III.III. Macroeconomic stabilityMacroeconomic stability

IV.IV. International trade flowsInternational trade flows

V.V. Gains/losses by sectorGains/losses by sector

VI.VI. Political consequencesPolitical consequences

VII.VII.Net effect of NAFTANet effect of NAFTA

VIII.VIII.ConclusionConclusion

The North American Free Trade The North American Free Trade AgreementAgreement

Free trade area: Mexico, US, CanadaFree trade area: Mexico, US, Canada Trade liberalization with caveatsTrade liberalization with caveats

Retention of PEMEXRetention of PEMEX US-Mexico agricultural tariff phase-outsUS-Mexico agricultural tariff phase-outs US-Canada agricultural exclusionsUS-Canada agricultural exclusions

Side agreementsSide agreements NAAEC, CECNAAEC, CEC NAALC, CLCNAALC, CLC NADBankNADBank

Historical Context / TimelineHistorical Context / Timeline

Jan. 1965: Canada-US Auto PactJan. 1965: Canada-US Auto Pact 1965: Mexican 1965: Mexican maquiladoramaquiladora program program 1986: Mexico accession to GATT1986: Mexico accession to GATT 1989: Canada-US FTA (CUSFTA)1989: Canada-US FTA (CUSFTA) June 1990: US-Mexico FTA initiativeJune 1990: US-Mexico FTA initiative 1991: Canada joins NAFTA negotiations1991: Canada joins NAFTA negotiations 17 Dec. 1992: signing of NAFTA17 Dec. 1992: signing of NAFTA Jan. 1994: NAFTA enactedJan. 1994: NAFTA enacted

Mexico: Need for the AgreementMexico: Need for the Agreement

Continuation of Continuation of aperturaapertura reforms reforms Raise political cost of reversing reformsRaise political cost of reversing reforms Provide new export opportunitiesProvide new export opportunities Increase domestic competitionIncrease domestic competition Attract greater FDI inflowsAttract greater FDI inflows Use NAFTA to build confidenceUse NAFTA to build confidence Engage Canada in tradeEngage Canada in trade

NAFTA StructureNAFTA Structure

Article 102: goals of NAFTAArticle 102: goals of NAFTA Free Trade Commission (FTC)Free Trade Commission (FTC) Lowering of tariff barriersLowering of tariff barriers Rules of originRules of origin Co-operative “commissions”Co-operative “commissions” Ineffectual development bankIneffectual development bank No supranational institutionsNo supranational institutions

NAFTA’s Macroeconomic EffectsNAFTA’s Macroeconomic Effects

Increased reliance on trade flowsIncreased reliance on trade flows Improved GDP growth, two downturnsImproved GDP growth, two downturns US-Mexico convergenceUS-Mexico convergence Transition to service economy continuesTransition to service economy continues Additional FDI inflows achievedAdditional FDI inflows achieved Macroeconomic stabilityMacroeconomic stability

Unemployment, inflationUnemployment, inflation Public deficit/debtPublic deficit/debt

Mexico: GDP GrowthMexico: GDP Growth

Time (years)

NAFTA Members: GDP GrowthNAFTA Members: GDP Growth

Time (years)

Mexico: GDP Composition Mexico: GDP Composition

Time (years)

Mexico: FDI Net InflowsMexico: FDI Net Inflows

Time (years)

Mexico: FDI Net Inflows by CountryMexico: FDI Net Inflows by Country

Time (years)

NAFTA Members: Inflation (CPI)NAFTA Members: Inflation (CPI)

Time (years)

NAFTA Members: UnemploymentNAFTA Members: Unemployment

Time (years)

NAFTA Members: Government DebtNAFTA Members: Government Debt

Time (years)

NAFTA’s NAFTA’s ImpactImpact on Trade Flows on Trade Flows

Increased reliance on international tradeIncreased reliance on international trade Expansion of regional tradeExpansion of regional trade

US-Mexico merchandise trade up 227%US-Mexico merchandise trade up 227% Trade in autos/parts, agriculture, energyTrade in autos/parts, agriculture, energy Gains from NAFTA: estimates range from 5-50%Gains from NAFTA: estimates range from 5-50%

Rules of origin: trade diversion/creationRules of origin: trade diversion/creation Current account deficits persistCurrent account deficits persist Synchronization of imports and exportsSynchronization of imports and exports

NAFTA Members: TradeNAFTA Members: Trade

Time (years)

Mexico: Imports, ExportsMexico: Imports, Exports

Time (years)

Mexico: Current Account BalanceMexico: Current Account Balance

Time (years)

Mexico: Import/Export GrowthMexico: Import/Export Growth

Time (years)

NAFTA: ManufacturingNAFTA: Manufacturing

81.1% of total exports81.1% of total exports Employs 24% of the workforceEmploys 24% of the workforce Increasing importance ofIncreasing importance of maquiladoras maquiladoras

44.8% of total exports from Mexican markets in 44.8% of total exports from Mexican markets in 20062006

Low wages and gender disparityLow wages and gender disparity Geographical disparityGeographical disparity

Automotive IndustryAutomotive Industry

Maquiladora Employment

Maquiladora Employment, Con’t

NAFTA: Energy

NAFTA left PEMEX and CFE intactNAFTA left PEMEX and CFE intact Inefficiency Inefficiency and Instabilityand Instability NAFTA liberalized trade, not investmentNAFTA liberalized trade, not investment

Lack of domestic investment in exploitation of new reserves and Lack of domestic investment in exploitation of new reserves and underinvestment in electricity capacity growthunderinvestment in electricity capacity growth

SOEs in generation/transmission/distributionSOEs in generation/transmission/distribution

Oil accounts for 15.6% of total Mexican exportsOil accounts for 15.6% of total Mexican exports PEMEX profits used as source of government revenuePEMEX profits used as source of government revenue

Dependence on world oil pricesDependence on world oil prices

Slight Liberalization: natural gas, electricitySlight Liberalization: natural gas, electricity

NAFTA: AgricultureNAFTA: Agriculture

2.8% of total exports2.8% of total exports Employs 18% of the labor forceEmploys 18% of the labor force US/Mexican agricultural commodities have become largely US/Mexican agricultural commodities have become largely

complementarycomplementary Trade volumes have grown in both imports and exportsTrade volumes have grown in both imports and exports Mexican grain farmers were seriously hurt by several US Mexican grain farmers were seriously hurt by several US

products flooding Mexican marketsproducts flooding Mexican markets Income Supports: Procampo, Alianza, Produce CapitalizaIncome Supports: Procampo, Alianza, Produce Capitaliza

Points of contentionPoints of contention CornCorn Sugar, high fructose corn syrupSugar, high fructose corn syrup

Agricultural Trade Levels

NAFTA: ServicesNAFTA: Services

Largest sector of the economyLargest sector of the economy Trade accounts for a nearly negligible percentage Trade accounts for a nearly negligible percentage

of GDPof GDP Most service production consumed domesticallyMost service production consumed domestically Majority of service exchange is tourism Majority of service exchange is tourism

Trade in services liberalized by NAFTATrade in services liberalized by NAFTA Expansion of inter-NAFTA trade concentrated in Expansion of inter-NAFTA trade concentrated in

transporttransport Financial sector changes are important as wellFinancial sector changes are important as well

NAFTA: Political ImplicationsNAFTA: Political Implications

US as core of NAFTA systemUS as core of NAFTA system Contraction in economic independenceContraction in economic independence

NAFTA legally enforces trade reformsNAFTA legally enforces trade reforms Trade stabilityTrade stability

Pressure to liberalize energy sectorPressure to liberalize energy sector Business cycle liberated from political cycleBusiness cycle liberated from political cycle

The Net Effect of NAFTAThe Net Effect of NAFTA

Gains:Gains: Political legitimacy, lock-in of reformsPolitical legitimacy, lock-in of reforms Macroeconomic stabilityMacroeconomic stability Increased competitiveness, Increased competitiveness, maquiladoramaquiladora growth growth

Losses:Losses: Increased reliance on external trade flowsIncreased reliance on external trade flows Dependent on the US as central playerDependent on the US as central player Agricultural issues persistentAgricultural issues persistent

Net Effect: positive, NAFTA is beneficialNet Effect: positive, NAFTA is beneficial

ConclusionConclusion

““For Mexico, NAFTA has had a positive net For Mexico, NAFTA has had a positive net effect; the gains in manufacturing, trade, and effect; the gains in manufacturing, trade, and macroeconomic stability have outweighed the macroeconomic stability have outweighed the losses in agriculture and political losses in agriculture and political independence”independence”

Mexico is better off as a result of NAFTAMexico is better off as a result of NAFTA Continue trade liberalization processContinue trade liberalization process Agricultural problems need to be addressedAgricultural problems need to be addressed Social/cultural adjustment costs?Social/cultural adjustment costs?

The Future of NAFTA for MexicoThe Future of NAFTA for Mexico

Current challengesCurrent challenges End of PRI dominanceEnd of PRI dominance American anti-NAFTA sentimentAmerican anti-NAFTA sentiment Post-9/11 security concernsPost-9/11 security concerns

Future expansionFuture expansion Security and Prosperity Partnership of North Security and Prosperity Partnership of North

AmericaAmerica North American Union?North American Union?

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