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Monday, June 14, 2010

NAFTA and the Mexican Economy

M. Angeles Villarreal
Specialist in International Trade and Finance

The North American Free Trade Agreement (NAFTA), in effect since January 1994, plays a very strong role in the bilateral economic relationship between Mexico and the United States. The two countries are also closely tied in areas not directly related to trade and investment such as security, environmental, migration, and health issues. The effects of NAFTA on Mexico and the Mexican economic situation have impacts on U.S. economic and political interests. A number of policymakers have raised the issue of revisiting NAFTA and renegotiating parts of the agreement. Some important factors in evaluating NAFTA include the effects of the agreement on Mexico and how these relate to U.S.-Mexico economic relations. In the 111th Congress, major issues of concern are related to U.S.-Mexico trade issues, economic conditions in Mexico, the effect of NAFTA on the United States and Mexico, and Mexican migrant workers in the United States. 

In 1990, Mexico approached the United States with the idea of forming a free trade agreement (FTA). Mexico's main motivation in pursuing an FTA with the United States was to stabilize the Mexican economy and promote economic development by attracting foreign direct investment, increasing exports, and creating jobs. The Mexican economy had experienced many difficulties throughout most of the 1980s with a significant deepening of poverty. The expectation among supporters at the time was that NAFTA would improve investor confidence in Mexico, increase export diversification, create higher-skilled jobs, increase wage rates, and reduce poverty. It was expected that, over time, NAFTA would narrow the income differentials between Mexico and the United States and Canada. 

The effects of NAFTA on the Mexican economy are difficult to isolate from other factors that affect the economy, such as economic cycles in the United States (Mexico's largest trading partner) and currency fluctuations. In addition, Mexico's unilateral trade liberalization measures of the 1980s and the currency crisis of 1995 both affected economic growth, per capita gross domestic product (GDP), and real wages. While NAFTA may have brought economic and social benefits to the Mexican economy as a whole, the benefits have not been evenly distributed throughout the country. The agricultural sector experienced a higher amount of worker displacement after NAFTA, in part because of increased competition from the United States but also because of Mexican domestic agricultural reforms. In terms of regional effects, initial conditions in Mexico appear to have determined which Mexican states experienced stronger economic growth as a result of NAFTA. Some economists argue that while trade liberalization may narrow income disparities over the long run with other countries, it may indirectly lead to larger disparities in income levels within a country. 

Over the last decade, the economic relationship between the United States and Mexico has strengthened significantly and the two countries continue to cooperate on issues of mutual concern. President Barack Obama met with Mexican President Calderón in May 2010 during the Mexican president's official state visit to the United States. The two leaders reaffirmed their commitment to increasing cooperation in a wide range of issues, including enhancing mutual economic growth. A key component for their global competitiveness initiative is to create a border the for the Twenty-First Century that will expand and modernize border facilities for a secure and more efficient border.

Date of Report: June 3, 2010
Number of Pages: 23
Order Number: RL34733
Price: $29.95

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