NAFTA and its impact on the United States and Mexican economies

Abstract

The politicians were vocal in their promotion of NAFTA though the outcome of the agreement was contrary to the promises. For instance, NAFTA neither solved the problem of unemployment in Mexico, nor converged the per capita income of Mexico and that of the United States. Despite the fact that NAFTA brought about the transformation of Mexico into a key exporter of goods and fortified United States-Mexican integration, the benefits enjoyed by the Mexican economy were watered down by the intense competition with China for its domestic market and the United States market, as well as, the immense dependence on imported inputs required by Mexico to facilitates its export production. The intense Chinese competition also affected the United States in that, its manufacturing decreased by almost five million due to more imports from China than Mexico. Key to note is the stagnation of real wages in both the United States and Mexico, but an overall increase in productivity in both nations that has resulted in greater inequality and higher profits (Guerrero, Lopez-Calva & Walton, 2009).

Introduction

It has been twenty-two years since the signing of the North American Free Trade Agreement and just two years since the twentieth anniversary of NAFTA. Thus, we are in a good position to evaluate the achievements, shortcomings and challenges of the agreement between Mexico, the United States and Canada to foster regional economic integration. The purpose of this research is to evaluate the impact of the North American Free Trade Agreement on the United States and Mexican economies. This evaluation is vital as there are numerous policies and intervening events that have had profound impacts on the economies of the United States, Mexico and Canada. Moreover, the intricate two thousand page agreement which is NAFTA seemed to be complicated to discern or fully implement that is why it is necessary that the impacts of NAFTA on the United States and Mexican economies are explored. While the paper will focus more on the Mexican economy, it will also explore the aftermath of NAFTA on the United States economy.

Expectations and Aftermath

NAFTA was championed in Mexico by president Carlos Salinas as a trade treaty that would not only make Mexico a first world nation but also empower the people by increasing productivity and exports which would in turn decrease or eliminate the need for migration. President Bill Clinton made a similar promise by stating that the increased productivity in Mexico brought about by NAFTA would rid the nation of undocumented Mexican immigration and increase employment in the United States industrial sector that would exploit the successful Mexican market. Given the benefits that the two presidents claimed the nations would gain from each other, the implied message was that the wages and per capita income of both Mexico and the United States were to converge. It is imperative to note that the optimistic forecasts made by the leaders promoting NAFTA were never realized. The fact that there has been no convergence of the United States and Mexican economy since the signing of NAFTA in 1994 evinces just how less the trade treaty has achieved compared to the expectations of the public.

Some researchers have argued that the macroeconomic crises that occurred in the period after NAFTA came into effect led to the divergences in the economies of both the United States and Mexico. However, there is meager evidence that the North American Free Trade Agreement made efforts to steer Mexico back towards the objective of convergence even after the nation recovered following the peso crisis. Moreover, there is no evidence of a long-term increase in the relative per capita income or productivity in Mexico.

Similar results are visible regarding the issue of migration and wages. NAFTA was meant to solve the wage problem in Mexico by increasing productivity which would in turn increase wages and discourage illegal migration from Mexico to the United States in search of greener pastures (Hanson, 2006). Notwithstanding, with the persistent wage gaps between Mexico and the United States, more Mexicans were motivated to migrate to the United States to pursue jobs that would guarantee them high wages. NAFTA failed at controlling this form of migration after it came into effect. It is imperative to note that the North American Free Trade Agreement did not create the large wage gaps that existed between the United States and Mexico and it also did not bring about the business conditions characterized by the United States Great Recession between 2008 and 2009 and the peso crisis in Mexico between 1994 and 1995. These conditions may have led to the waning of migration flows, but they were not created by NAFTA. However, NAFTA did not put in place measures to significantly reduce the wage gap that promoted Mexican-United States migration. More undocumented Mexicans have migrated to the United States in the last twenty-two years since the implementation of NAFTA.

While the North American Free Trade Agreement led to the increase in economic integration between the United States and Mexico as both the nations increased their productivity, these benefits were attenuated when China came into the picture. Following the entry of China into the World Trade Organization in the year 2001, its ideal industrial policies and domestic reforms, as well as, large labor force transformed the nation into an economic superpower. The information technology revolution and the low transportation costs in China also facilitated the globalization of the nation’s production in the late 1990s and early 2000s. China quickly infiltrated the United States and Mexican economies with cheaper exports. The fact that the Chinese yen was undervalued in the late 1990s and early 2000s further expanded the country’s exports. The influx of China’s export goods affected the integration between the United States economy and the Mexican economy in that both countries preferred the cheaper commodities from China.

It is vital to note that as a manufacturing nation, Mexico heavily depended on the import inputs that it utilized to create its finished products for export. China provided most of Mexico’s import inputs through its cheaper exports compared to those of the United States. This meant that the United States-Mexican integration diminished as Mexico relied more on import inputs from China than those from the United States. A parallel reaction also occurred in the United States in that the nation bought more exports from China than those from Mexico. Thus, the North American Free Trade Agreement was forced to welcome an uninvited guest in the form of China that derailed integration between the economies of the United States and Mexico (Autor, Dorn & Hanson, 2013).

In Mexico, the real wages for manufacturing workers appeared to be stagnated compared to the United States where they have risen since the implementation of NAFTA. However, recent years have since seen growth in real wages in both nations though at a slow rate. While real wages grew slowly, the labor productivity in both Mexico and the United States increased significantly signaling increased gross profit margins in the manufacturing sector. The growing gap between the wages and productivity in both Mexico and the United States is the result of several factors besides NAFTA such as Chinese competition, technological transformations, other trade agreements, macroeconomic policies and globalization, but NAFTA has not put in place measures to curb this gap.

Conclusion

The North American Free Trade Agreement did not fulfill the objectives it gave to the people of Mexico and the United States of raising wages, increasing employment and enhancing convergence between the economies of the United States and Mexico. While it might be claimed by some that the failure to achieve these objectives was as a result of other factors such as Chinese competition and economic crises, the fact that the objectives were not achieved after recovery of the countries shows that NAFTA has various shortcomings. All in all, NAFTA is a lesson to the public regarding promises politicians give but fail to deliver (Esquivel, 2014).   

References

Autor, D., Dorn, D., & Hanson, G. (2013). The China Syndrome: Local Labor Market Effects of Import Competition in the United States. American Economic Review, 103(6), 2121-2168. http://dx.doi.org/10.1257/aer.103.6.2121

Esquivel, G. (2014). La Lección del TLCAN. El Universal.

Guerrero, I., Lopez-Calva, & Walton, M. (2009). The Inequality Trap and Its Links to Low Growth in Mexico. No Growth Without Equity? Inequality, Interests, And Competition In Mexico, 111-156.

Hanson, G. (2006). Illegal Migration from Mexico to the United States. Journal Of Economic Literature, 44(4), 869-924. http://dx.doi.org/10.1257/jel.44.4.869