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The North American Free Trade Agreement

The North American Free Trade Agreement. A net beneficial free trade area from the perspective of Mexico. David Loveland Scott Swisher May 29 th , 2007 – Latin American Economics. Thesis Statement and Outline. Thesis Statement:

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The North American Free Trade Agreement

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  1. The North American Free Trade Agreement A net beneficial free trade area from the perspective of Mexico David Loveland Scott Swisher May 29th, 2007 – Latin American Economics

  2. Thesis Statement and Outline Thesis Statement: “For Mexico, NAFTA has had a positive net effect; the gains in manufacturing, trade, and macroeconomic stability have outweighed the losses in agriculture and economic independence” Outline: • History of NAFTA • Agreement structure • Macroeconomic stability • International trade flows • Gains/losses by sector • Political consequences • Net effect of NAFTA • Conclusion

  3. The North American Free Trade Agreement • Free trade area: Mexico, US, Canada • Trade liberalization with caveats • Retention of PEMEX • US-Mexico agricultural tariff phase-outs • US-Canada agricultural exclusions • Side agreements • NAAEC, CEC • NAALC, CLC • NADBank

  4. Historical Context / Timeline • Jan. 1965: Canada-US Auto Pact • 1965: Mexican maquiladora program • 1986: Mexico accession to GATT • 1989: Canada-US FTA (CUSFTA) • June 1990: US-Mexico FTA initiative • 1991: Canada joins NAFTA negotiations • 17 Dec. 1992: signing of NAFTA • Jan. 1994: NAFTA enacted

  5. Mexico: Need for the Agreement • Continuation of apertura reforms • Raise political cost of reversing reforms • Provide new export opportunities • Increase domestic competition • Attract greater FDI inflows • Use NAFTA to build confidence • Engage Canada in trade

  6. NAFTA Structure Article 102: goals of NAFTA Free Trade Commission (FTC) Lowering of tariff barriers Rules of origin Co-operative “commissions” Ineffectual development bank No supranational institutions

  7. NAFTA’s Macroeconomic Effects • Increased reliance on trade flows • Improved GDP growth, two downturns • US-Mexico convergence • Transition to service economy continues • Additional FDI inflows achieved • Macroeconomic stability • Unemployment, inflation • Public deficit/debt

  8. Mexico: GDP Growth GDP Growth (annual % change) Time (years)

  9. NAFTA Members: GDP Growth GDP Growth (annual % change) Time (years)

  10. Mexico: GDP Composition Sector’s Share (% of GDP) Time (years)

  11. Mexico: FDI Net Inflows FDI Net Inflows (% of GDP) Time (years)

  12. Mexico: FDI Net Inflows by Country FDI Net Inflows (billions of USD) Time (years)

  13. NAFTA Members: Inflation (CPI) Inflation (annual % change in CPI) Time (years)

  14. NAFTA Members: Unemployment Unemployment (% of labor force) Time (years)

  15. NAFTA Members: Government Debt Public Debt (% of GDP) Time (years)

  16. NAFTA’s Impact on Trade Flows • Increased reliance on international trade • Expansion of regional trade • US-Mexico merchandise trade up 227% • Trade in autos/parts, agriculture, energy • Gains from NAFTA: estimates range from 5-50% • Rules of origin: trade diversion/creation • Current account deficits persist • Synchronization of imports and exports

  17. NAFTA Members: Trade Trade (% of GDP) Time (years)

  18. Mexico: Imports, Exports Imports, Exports (% of GDP) Time (years)

  19. Mexico: Current Account Balance Current Account (billions of USD) Time (years)

  20. Mexico: Import/Export Growth Import/Export Growth (% of GDP) Time (years)

  21. NAFTA: Manufacturing • 81.1% of total exports • Employs 24% of the workforce • Increasing importance of maquiladoras • 44.8% of total exports from Mexican markets in 2006 • Low wages and gender disparity • Geographical disparity • Automotive Industry

  22. Maquiladora Employment

  23. Maquiladora Employment, Con’t

  24. NAFTA: Energy • NAFTA left PEMEX and CFE intact Inefficiency and Instability • NAFTA liberalized trade, not investment • Lack of domestic investment in exploitation of new reserves and underinvestment in electricity capacity growth • SOEs in generation/transmission/distribution • Oil accounts for 15.6% of total Mexican exports • PEMEX profits used as source of government revenue • Dependence on world oil prices • Slight Liberalization: natural gas, electricity

  25. NAFTA: Agriculture • 2.8% of total exports • Employs 18% of the labor force • US/Mexican agricultural commodities have become largely complementary • Trade volumes have grown in both imports and exports • Mexican grain farmers were seriously hurt by several US products flooding Mexican markets • Income Supports: Procampo, Alianza, Produce Capitaliza • Points of contention • Corn • Sugar, high fructose corn syrup

  26. Agricultural Trade Levels

  27. NAFTA: Services • Largest sector of the economy • Trade accounts for a nearly negligible percentage of GDP • Most service production consumed domestically • Majority of service exchange is tourism • Trade in services liberalized by NAFTA • Expansion of inter-NAFTA trade concentrated in transport • Financial sector changes are important as well

  28. NAFTA: Political Implications • US as core of NAFTA system • Contraction in economic independence • NAFTA legally enforces trade reforms Trade stability • Pressure to liberalize energy sector • Business cycle liberated from political cycle

  29. The Net Effect of NAFTA • Gains: • Political legitimacy, lock-in of reforms • Macroeconomic stability • Increased competitiveness, maquiladora growth • Losses: • Increased reliance on external trade flows • Dependent on the US as central player • Agricultural issues persistent • Net Effect: positive, NAFTA is beneficial

  30. Conclusion • “For Mexico, NAFTA has had a positive net effect; the gains in manufacturing, trade, and macroeconomic stability have outweighed the losses in agriculture and political independence” • Mexico is better off as a result of NAFTA • Continue trade liberalization process • Agricultural problems need to be addressed • Social/cultural adjustment costs?

  31. The Future of NAFTA for Mexico • Current challenges • End of PRI dominance • American anti-NAFTA sentiment • Post-9/11 security concerns • Future expansion • Security and Prosperity Partnership of North America • North American Union?

  32. References • Clement, Norris C. et al. (1999). North american economic integration : Theory and practice. Cheltenham, UK: Edward Elgar. • Cypher, J. M. (1993). In Bognanno M. F., Ready K. J. (Eds.), The north american free trade agreement : Labor, industry, and government perspectives. Westport, Conn.: Quorum Books. • Davis, C. L. (1998). Mass support for regional economic integration: The case of NAFTA and the mexican public. [Electronic version]. Mexican Studies / Estudios Mexicanos, 14(1), 105. Retrieved May 23, 2007, from JSTOR database. • Encyclopedia Britannica. (2007). North American Free Trade Agreement.Retrieved May 27, 2007, from http://search.eb.com/eb/article-9002251 • Hufbauer, G. C. (2005). NAFTA revisited : Achievements and challenges. Washington, DC: Institute for International Economics. • Leamer, E. E. (1993). In Garber P. M. (Ed.), The mexico-U.S. free trade agreement. Cambridge, Mass.: MIT Press. • Lederman, D. (2005). Lessons from NAFTA for latin america and the caribbean. Washington, D.C: World Bank. • MacArthur, J. R. (2000). The selling of "free trade" : NAFTA, washington, and the subversion of american democracy. New York: Hill and Wang. • Mayer, F. (1998). Interpreting NAFTA : The science and art of political analysis. New York: Columbia University Press. • McKinney, J. A. (2000). Created from NAFTA : The structure, function, and significance of the treaty’s related institutions. Armonk, N.Y.: M.E. Sharpe. • Morris, S. D., & Passé-Smith, J. (2001). What a difference a crisis makes: NAFTA, mexico, and the united states. [Electronic version]. Latin American Perspectives, 28(3), 124. Retrieved May 23, 2007, from JSTOR database. • Orme, W. A. (1996). Understanding NAFTA : Mexico, free trade, and the new north america. Austin: University of Texas Press. • Ostry, S. (1992). In Randall S. J., Konrad H. and Silverman S. (Eds.), North america without borders? : Integrating canada, the united states, and mexico. Calgary: University of Calgary Press. • Pastor, M., & Wise, C. The origins and sustainability of mexico's free trade policy. [Electronic version]. International Organization, 48(3), 459. Retrieved May 23, 2007, from JSTOR database. • Patricia Fernández-Kelly and Jon Shefner. (2007). NAFTA and beyond : Alternative perspectives in the study of global trade and development. The Annals of the American Academy of Political and Social Science, 610, 120-202. • Ruiz-Napoles, P., & Ortiz, E. (1996). In Christos C. Paraskevopoulos, Ricardo Grinspun, George E. Eaton (Ed.), Economic integration in the americas. Cheltenham, UK: E. Elgar. • The World Bank. (2007). World development indicators online. Retrieved May 26, 2007, from http://devdata.worldbank.org/dataonline/ • Zárate Ruiz, A. (2000). A rhetorical analysis of the NAFTA debate. Lanham, Md.: University Press of America.

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