NAFTA’s Effects on the US-Mexico Border Economy

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Introduction

In 1990, Mexico approached the US with a trade agreement to improve the Mexican economy through a bilateral agreement that would benefit both parties (Villarreal 1-3). Negotiations birthed the North Atlantic Free Trade Agreement (NAFTA) in 1994, which included three countries – Mexico, America, and Canada. Since its inception, NAFTA has played an instrumental role in improving the economy of its member states (Thompson 121).

Using this agreement, Mexico aimed to attract foreign investments and improve its economic performance in the same regard. For example, it strived to create new job opportunities and find new markets for its products (Thompson 121). These needs emanated from a period of the economic slump that hit the Mexican economy in the 1980s and 1990s. These poor economic conditions had caused economic desperation in Mexico (Hufbauer 51-52).

The main expectation of approaching the US for a bilateral trade agreement was to increase investor confidence in the country and improve its economic fortunes in the same regard (Villarreal 1-3). Other expected outcomes included improved export diversification, increased wage rates (for local workers), and increased sophistication of the local workforce (Thompson 121-122). Over time, Mexico hoped that the NAFTA agreement would also help it to reduce wage differentials with America.

Consequently, NAFTA would affect the economy of the US-Mexico border in multiple ways. Besides the economic advantages of the agreement, the three members of the NAFTA treaty have similar agreements in other areas of cooperation, such as health, security, and environment (Villarreal 1-3).

The treaty has interested observers, scholars, experts, and governments alike (Thompson 121; Hufbauer 51-52). In this regard, different parties have considered renegotiating the treaty, expanding its scope, and bargaining for better terms. Others have developed new concerns concerning the economic disparities of the interested parties and the effects of the agreement on immigration issues among member states (Villarreal 1-3).

In this paper, I argue that it is difficult to separate the economic benefits of America-Mexico economic integration without considering the political, social, and economic differences on both sides of the border. Therefore, although NAFTA has created positive and negative effects on the economy of the US-Mexico border, structural differences between Mexico and America would make it difficult to realize the wholesome benefits of the trade agreement.

Comprehensively, this paper shows that if nothing changes, the US-Mexico border economy would not realize the wholesome benefits of NAFTA. Nonetheless, before delving into the details of this argument, it is important to understand the positive effects of the NAFTA treaty on the US-Mexican border economy.

Positive Effects

Increased Exports

The NAFTA treaty helped to improve Mexico’s profile as America’s largest trading partner (Thompson 121). This position stems from efforts by Mexico to liberalize its economy (throughout the 1980s and 1990s). These economic changes increased the growth of the US-Mexican border economy and the Gross Domestic Product (GDP) of the same region (Thompson 121). Before signing the NAFTA treaty, Mexico had earlier experienced a two-decade sprint of economic prosperity between 1960 and 1980 (Villarreal 4).

During this time, the country reported a 6.5% GDP growth. However, in the early 1980s, this trend changed as the 1982 debt crisis caused a significant decline in economic fortunes (Villarreal 4). Consequently, the country’s productivity changed to negative growth. The NAFTA treaty helped to change this situation by creating new markets for the country’s exports (Thompson 121).

In line with this observation, economic experts said the NAFTA treaty helped to improve the volume of trade along the Mexico-US border through the increased flow of goods and services (Córdova 12-14). Before Mexico signed the NAFTA treaty, it suffered a trade deficit of more than $1 billion, but after signing the agreement, the country reported a trade export surplus of more than $80 billion (Villarreal 10).

This benefit was not exclusive to Mexico because America also increased its exports to Mexico through the trade agreement (Córdova 12-14). However, its volume of exports did not match that of Mexico.

For example, at the height of the 2007/2008 economic crisis, the US imported $216 billion worth of goods from Mexico, while it exported $131 billion worth of goods to the same country (Villarreal 10-12). Nonetheless, the volume of trade, along with the US-Mexico border economy, further decreased because of the adverse effects of the economic crisis.

Broadly, the NAFTA treaty eliminated trade barriers between both countries. America imported 70% of duty-free products from Mexico through the NAFTA agreement, while Mexico imported 50% of its products from America (Córdova 12-14). The same agreement increased Mexican exports to America through the expansion of US export markets. American firms also received protection from the Mexican government through the treaty (Córdova 12-14).

This provision also included the protection of US copyrights and patents in Mexico. Observers predicted these positive effects of the NAFTA agreement on the economy of the Mexican-US border when both countries signed the NAFTA agreement in 1994 (Córdova 12-14). They also predicted that the agreement would reduce the price gap of goods and services between both countries (Villarreal 5). These predictions were true.

Poverty Reduction

The NAFTA agreement caused a reduction in poverty among people living along the Mexico-US border (Córdova 12-14). For a long time, poverty has been one of Mexico’s socioeconomic problems (Hufbauer 51-52). Particularly, it has been a common tool for social exclusion in the country because more than 20% of extremely poor people do not enjoy the same social and economic opportunities that other people do (Córdova 12-14).

Many administrations have preoccupied their time with formulating new ways of eliminating, or reducing, poverty (Villarreal 5). For example, the Fox administration made poverty reduction a priority area in his government and devoted most of his time to looking for new ways to create jobs and uplift the welfare of his people (Villarreal 5). The NAFTA treaty helped him to reduce poverty levels for communities and states that lived along the Mexico-US border (Hufbauer 51-52).

For example, after the introduction of the treaty, poverty levels reduced from 24% to 14% (Villarreal 5). These figures show the levels of poverty that affected indigenous people who lived in extreme poverty. Nonetheless, people who lived in moderate poverty also reported the same trend because poverty levels declined from 54% to 50% after the introduction of the NAFTA treaty (Villarreal 5-6).

A study by the World Bank to assess the impact of the NAFTA treaty on the economy of the US-Mexican border showed that the treaty helped to elevate the economic development levels of Mexico closer to American levels (Villarreal 7). Similarly, from an economic perspective, the NAFTA treaty helped to improve technology levels used by Mexican producers to manufacture goods and services.

This technology transfer had a positive impact on the economy of the US-Mexican border by increasing the number and quality of jobs for residents of the region (Hufbauer 51-52). The World Bank survey also revealed that since both countries signed the NAFTA treaty, there has been minimal macroeconomic volatility to the economy of the US-Mexican border (Hufbauer 51-52). Wide variations in the GDP growth of the US-Mexico border economy also stabilized through the same treaty.

Nationally, the NAFTA treaty helped to synchronize business cycles among firms that operated in the US-Mexico border economy. Based on the increased synchrony between Mexican and American businesses, experts argue that the NAFTA treaty helped to boost the economic recovery of the US-Mexico border economy after the 1995 economic slump, which mainly affected Mexico (Villarreal 7).

Indeed, after the crisis, the Mexican government had to implement new economic reforms, but also, at the same time, adhere to the stipulations provided by the NAFTA agreement (Villarreal 7-10). Adhering to these stipulations helped the Mexican government to liberalize its economy.

Therefore, NAFTA helped the Mexican government to adopt market-based economic reforms, which later helped to increase FDI volumes in the US-Mexico border economy. Indeed, studies show that without the NAFTA treaty, FDI inflows into the US-Mexico border economy would decrease by 40% (Villarreal 8).

Negative Effects

The main reason for pursuing the NAFTA treaty was to improve the US-Mexico border economy and reduce the economic gap that characterizes both nations (Thompson 121).

However, studies that have investigated the prospects of economic convergence under the NAFTA treaty reveal that these prospects may not materialize if there are fundamental differences between both nations (Thompson 121). Since these differences exist, the treaty has had some negative effects on the US-Mexico border economy, as highlighted below.

Worker Displacements

The effect of the NAFTA treaty on the Mexican agricultural sector has concerned researchers because since the introduction of the agreement, in 1994, Mexico has experienced worker displacements in this sector (Délano 140). Such displacements have happened because highly skilled workers from America have replaced less-skilled Mexican workers in the sector. Mexican domestic agricultural reforms that the Mexican government implemented through the NAFTA agreement also contributed to this trend (Délano 140).

Many researchers say the negative outcomes in the Mexican agricultural sector stem from economic reforms introduced by the NAFTA treaty (Villarreal 11-12). Particularly, the privatization process in Mexico caused these negative outcomes because state agencies that improved the efficiency of the agricultural sector collapsed under the reform movement (Villarreal 11-12). For example, the Mexican government privatized community land that was instrumental to the country’s agricultural potential.

The collapse of CONASUPO (a state-run agency for agrarian reform in Mexico) also made it difficult for farmers to sell their products at stable prices because they could not benefit from low prices by the government (Villarreal 11-12).

Consequently, they could not buy processed products either, at low prices, because CONASUPO was not there to intervene through price subsidies. The unilateral reform movement made it difficult for Mexico to compete with cheap agricultural products from America, thereby causing high amounts of worker displacement in the sector.

Wage Disparities

Wage differentials in Mexico have consistently followed growth patterns of the Mexican economy. However, researchers say that not all wage differentials that characterize the Mexican economy after the signing of the NAFTA agreement stem from the treaty (Villarreal 9).

Instead, changes in GDP, economic productivity, and currency fluctuations also affect movements in wage disparities beyond the NAFTA treaty. Since wage movements follow economic cycles, the following table shows real wage movements that characterized the Mexican economy after the NAFTA treaty signing.

Figure 1: Mexican Wages and per capita GDP (Source: Villarreal 9).

The NAFTA treaty has failed to reduce wage disparities in the Mexico-US border because it worsened the ratio of skilled and unskilled workers in the region (Thompson 122). For example, in 1988 (before Mexico and the US signed the NAFTA treaty), the average wage of skilled workers was two times higher than the average wage of unskilled workers in the region. After signing the NAFTA treaty, the average wage of skilled workers rose to three times higher than the average wage of unskilled workers in the region (Villarreal 9).

According to the World Bank, although the NAFTA agreement brought immense benefits to the US-Mexican border economy, it has worsened wage disparities in the region (Thompson 122). However, this observation does not mean that all Mexican states experienced poor economic fortunes in this regard because some of them experienced reduced wage disparities. Nonetheless, many international economic agencies believed that the poor wage disparities stemmed from the NAFTA agreement (Villarreal 9; Thompson 122).

Why the NAFTA agreement has failed to provide Holistic Benefits to the US-Mexico Border Economy

The persistent income disparities between Mexico and America have concerned many researchers who thought that the NAFTA treaty would end this problem (Hufbauer 51-52). Most of them found out that a poorly implemented economic reform movement was largely to blame for this challenge (Hufbauer 51-52). Others noted that the lack of important reforms in key economic sectors derailed efforts by the country to realize the benefits of the NAFTA treaty (Villarreal 9; Thompson 122).

For example, the Mexican government undertook incomplete economic reforms in the late 1980s and early 1990s, thereby creating gaps in the reform movement (Villarreal 9). This problem further led to a reduction in economic growth numbers during the post-NAFTA period. The lack of a proper institutional and regulatory framework to steer economic reform accounts for some of the implementation challenges experienced by the Mexican government.

For example, this challenge affected Mexico’s capacity to guide privatization efforts and improve the trade liberalization processes that characterized the country’s reform movement (Villarreal 9-10). These challenges led to worsening economic conditions, especially during the 1995 economic crisis that hit the US-Mexican border economy. Furthermore, these weaknesses led to the creation of private monopolies that filled the economic gap created by state-run companies (Villarreal 9-10).

Sensitivities to the fiscal reform movement also prevented government efforts to adopt comprehensive economic reforms, in line with the NAFTA treaty.

Special interest groups also worsened the government’s economic reform movement because it made them less aggressive in promoting labor movement reforms that were pivotal to the NAFTA treaty framework. Lastly, researchers agree there is a significant lack of a domestic engine to spur domestic demand for goods and services in Mexico, thereby increasing the country’s vulnerability to America’s economic situation (Villarreal 9-10).

Summary

The NAFTA trade agreement has helped the US and Mexico to improve cooperation in different areas that concern both nations. Although this paper shows that the agreement helped to create several social and economic benefits to the Mexican economy, few states in Mexico have enjoyed the holistic benefits of the NAFTA treaty. Particularly, the effects of the trade agreement on the Mexican-US border have been moderate, at best.

While the US-Mexican border economy has improved, the treaty has not reduced income disparities between America and other Mexico. The positive effects of the treaty (mentioned in this paper) emerged after the Mexican government introduced economic reforms in the 1980s. The first economic, social, and political conditions that prevailed before the two countries signed the treaty contributed to the uneven distribution of economic benefits across state borders.

For example, some Mexican states experienced stronger economic growths based on varied political, social, and economic structures. Consequently, although the US-Mexico trade agreement helped to create new economic opportunities in both countries, they could still suffer from larger economic and social disparities in the end. If Mexico intends to reduce these disparities, it should improve its education system and improve the integrity of its state agencies (end corruption and state inefficiencies).

Moreover, Mexico needs to invest (more) in its infrastructure and promote innovation if it wants to narrow its economic disparities with America. However, this problem is not unique to Mexico only because other Latin American institutions are also experiencing the same challenge.

Therefore, Mexico’s capacity to improve its national institutions would be the defining factor concerning how well the country would cope with America in a post-NAFTA period. So far, the country has not done better than its Latin America counterparts have in this regard. Therefore, if nothing changes, the US-Mexico border economy would not realize the wholesome benefits of NAFTA.

Works Cited

Córdova, Ernesto. NAFTA and the Mexican Economy: Analytical Issues and Lessons for the FTAA, Buenos Aires, AR: BID-INTAL, 2001.

Délano, Alexandra. Mexico and its Diaspora in the United States: Policies of Emigration since 1848, London, UK: Cambridge University Press, 2011. Print.

Hufbauer, Gary. NAFTA Revisited: Achievements and Challenges, New York, NY: Peterson Institute, 2005. Print.

Thompson, Samuel. The Obama Vs. Romney Debate on Economic Growth: A Citizen’s Guide to the Issues, New York, NY: iUniverse, 2012. Print.

Villarreal, Angeles. NAFTA and the Mexican Economy. 2010. Web.

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