NAFTA at 10

Judging the effects of the North American Free Trade Agreement (NAFTA) ten years after its inception is far from an empirical exercise. Parsing which factors have been responsible for various economic phenomenon is subject to interpretation. And to make the analysis particularly complicated, another major event took place in Mexico in 1994, the year NAFTA was put in place — a peso devaluation that buffeted the Mexican financial sector.

For the United States, the impact of NAFTA appears to be mixed. Although U.S. employment grew by more than 20 million jobs between 1993 and 2000, America’s trade deficit with NAFTA countries grew from about $9 billion in 1993 to $87 billion in 2002. With an economy the size of the United States’ ($11 trillion), gauging the impact of NAFTA, with its $620 billion in total trade, is subject to much conjecture. In and of itself, NAFTA wasn’t expected to affect the United States significantly, (giant sucking sound predictions not withstanding). Trade in the aggregate would be a different story, though.

To a large degree, therefore, the ultimate barometer of the effects of NAFTA is the impact the trade agreement has had in Mexico, with the smallest economy. A close and fair look at the many variables involved seems to suggest that NAFTA has better prepared the country to weather global financial storms and to compete in an increasingly globalized economy. But the improvement is a question of degree, and Mexico’s failure to expand its value-added economy will limit its ability to counter rising challenges, particularly from China. Since China entered the World Trade Organization in December 2001, Mexico has had less of a trade advantage over its more productive Asian competitor.

The increase in Mexico’s productivity since 1994 suggests that NAFTA has given Mexican producers an added incentive to decrease costs of production through investments in capital and other means. Foreign direct investment has grownby almost 250 percent since NAFTA took effect, reaching $58 billion last year. Also, since NAFTA, Mexico has for the first time consistently posted trade surpluses with the United States.

Interestingly, the Mexican economy didn’t suffer a reversal during the economic crises of 1997 to 1999, during which time a capital exodus from emerging markets in Asia, Latin America and Eastern Europe threatened the global economy.

More negatively, growth has been unimpressive in Mexico, with the economy growing just 1.2 percent annually over the last decade. Wages have been falling in real terms. However, these negatives could be largely due to Mexico’s devastating devaluation of 1994. But non-trade barriers, such as agricultural subsidies in the United States and Canada, have also reduced the benefits of trade.

Also important, though, are the non-trade effects of NAFTA. The trade accord was advocated as a means to lower Mexican immigration to the United States by improving living standards south of the border. But when NAFTA was signed, there were conservatively estimated to be 2.4 million Mexicans illegally in the United States, and that number has more than doubled.

The 1995 bailout of Mexico, spearheaded by the United States, was made necessary, in part, by the NAFTA trade link. That bailout has been highly controversial in Mexico, because the Mexican taxpayer is still paying for the $40 billion rescue package.

Another highly controversial aspect of the trade accord has been the special tribunals that were established under it. These tribunals are less than transparent, and many argue that they interfere with the democratic sovereignty of local governments of NAFTA countries to pass regulations dealing with the environment and other areas.

Also, Mexico has limited its own benefits. The trade accord did create significant winners in the Mexican economy, and therefore presented the country with an opportunity to broaden its tax base. But the effort of Mexican President Vicente Fox to do just that was recently shot down in the legislature.

For the time being, NAFTA will continue to present opportunities for both the supporters and opponents of free trade to make their arguments. What remains clear, though, is that free trade in and of itself cannot counteract a country’s more entrenched problems.