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Mexico’s experience with NAFTA underscores the need to reform international trade agreements. Governments must shape new policies that respect the right to development and protect the environment, says a report by the Carnegie Endowment for International Peace.

Link to full report: Rethinking Trade Policy for Development - Lessons From Mexico Under NAFTA

5th February 2010

Mexico’s NAFTA Experience Underscores Need to Rethink US Trade Policies

December 2009 - Eduardo Zepeda, Timothy A. Wise, and Kevin P. Gallagher, Carnegie Endowment for International Peace

U.S. President Barack Obama’s promise to carry out a comprehensive review of existing and pending trade agreements between the United States and developing countries is welcome, as is his vow to establish a “new template” for such agreements. The time is right to revisit the record on the economic benefits and costs of such agreements and the policies they mandate. A good place to start such a review is the North American Free Trade Agreement (NAFTA). NAFTA remains the current template for U.S. trade agreements in the hemisphere—with Chile, the Dominican Republic, Central America, and Peru, and for the pending agreements with Colombia and Panama.

NAFTA may well represent the most any developing country can hope for from such trade agreements. When the treaty took effect in 1994, Mexico was already a high–middle-income country, with a diversified economy and an economic reform process already well underway. Mexico had a long history of bilateral trade with the United States across a shared 2,000-mile border. Most important, NAFTA gave Mexico meaningful preferential access to the U.S. economy during what turned out to be the longest economic expansion in U.S. history. It is therefore critical to begin the review by evaluating the extent to which the path-breaking trade agreement delivered on its promises, particularly under such favorable conditions.

Any U.S. review of NAFTA should go beyond its impact on the United States to assess its effects on Mexico. While there is contentious debate about whether NAFTA has been good for the United States and Canada, it is often assumed that Mexico was the undeniable winner from NAFTA. After all, by gaining preferential access to its neighbors’ huge markets, Mexico expanded exports dramatically and drew increasing levels of U.S. investment, particularly in manufacturing. These two results constitute the core of most positive assessments of NAFTA.[1] The problem, however, is that Mexico’s growth record since NAFTA has been disappointing and the treaty’s effects on income distribution have been at best neutral.[2] After fifteen years, it seems clear that NAFTA’s promise of broad-based dynamic growth did not come true in Mexico.

The NAFTA treaty and its implementation cannot be held entirely responsible for Mexico’s economic performance. The 1995 crisis clearly lowered Mexico’s medium-term growth performance. Competition from China put a brake on Mexico’s export growth and other related policy measures also had a more decisive impact on Mexico’s economy than NAFTA (for good and ill). For example, Mexico’s gradual devaluation of the peso during most of 1994 and sharp depreciation during the 1994–1995 crisis contributed more to export growth than the liberalization measures included in the NAFTA text.[3] Still, NAFTA was a key component of Mexico’s trade-led economic strategy. Access to U.S. markets opened by NAFTA helped to increase exports and investment after the 1995 crisis. Most important, NAFTA locked into place a set of economic policies that collectively produced such disappointing results. These are the policies that are now in need of review.

While attractive at first glance, most of the analysis comparing Mexico’s performance under NAFTA to a no-NAFTA scenario is flawed. Common to this view is the assumption that the no-NAFTA scenario would entail Mexico following the very same policies it has since the 1980s, only without NAFTA.  Such an analysis misleadingly attempts to separate policies—NAFTA and other main economic policies—that should be considered simultaneously. This study’s assessment of Mexico’s performance since NAFTA thus does not attempt to discern the narrow effects of the treaty from the broader impacts of the economic strategy of which they were a part. Nor do we ascribe to NAFTA alone either the credit or the blame for those impacts.

To open the country’s economy, the Mexican government made strategic choices in the late 1980s,[4] opting to integrate more fully with the United States and closely following the tenets of the Washington Consensus with NAFTA as the key international initiative. Many factors played into this choice: a lack of interest from Europe, geopolitical alliances with U.S. strategic interests, special interests in both countries that stood to gain from integration, and an ideological commitment to the free-market model then in vogue. Mexico was indeed at an economic crossroads when NAFTA negotiations began, but the model pursued by Mexico was not the only road that could have been chosen. The fact that many countries—China, India, Brazil, and Chile—in the last two decades have had greater success following less orthodox policies than Mexico’s attests to the range of development strategies that were open to Mexico. It makes little sense, then, to dismiss the poor economic results from the NAFTA period with the argument that things would have been worse without NAFTA.

Drawing from a number of studies and from various statistical sources, this study will assess what did and did not work for Mexico and will contribute to the active debate over how to approach the review of the treaty, should the Obama administration follow through on its promise to re-open the agreement. We also hope to focus these debates over the architecture of trade on the central issue of development. Many provisions in NAFTA are worth reviewing, and a review would in all likelihood improve its functioning. However, even a carefully executed mending of NAFTA will miss the point that the United States and Mexico, as well as other governments in Latin America, need to review their entire approach to trade and its role in achieving broad-based development.

References:

[1] See, for example: USTR, “NAFTA—Myth vs. Facts,” Washington, D.C., Office of the United States Trade Representative, 2008; Gary C. Hufbauer and Jeffrey J. Schott, “NAFTA’s Bad Rap,” International Economy, Summer 2008; Hufbauer and Schott, NAFTA Revisited: Achievements and Challenges, Washington, D.C.: Institute for International Economics, 2005; Sydney Weintraub, ed. NAFTA’s Impact on North America: The First Decade, Washington, D.C.: CSIS Press, 2004. See the essays in the three volume collection edited by Carlos Alba et. al., A diez años del TLCAN, vol. I, II, and III, Mexico: COLMEX, 2005.

[2] A number of studies have been critical of NAFTA on various grounds. See, for example, Robert A. Blecker, “External Shocks, Structural Change, and Economic Growth in Mexico, 1979–2007,” World Development, vol. 37, no. 7, 2009, pp. 1274–1284; Sandra Polaski, “The Employment Consequences of NAFTA,” Carnegie Endowment for International Peace, Testimony submitted to the Senate Subcommittee on International Trade of the Committee on Finance, September 11, 2006, http://www.carnegieendowment.org/files/naftawrittentestimony.pdf; Alicia Puyano and Jose Romero, Diez años con el TLCAN: las experiencias del sector agropecuario mexicano, Mexico: COLMEX-FLACSO, 2005. See also the essays in Carlos Alba et. al., 2005, op. cit.

[3] Estimates from the U.S. International Trade Commission, cited in Polaski, 2006, p. 6.

[4] See Blecker, 2009.

Eduardo Zepeda is a senior associate in the Trade, Equity, and Development Program at the Carnegie Endowment for International Peace.

Timothy A. Wise is director of the Research and Policy Program at the Global Development and Environment Institute at Tufts University.

Kevin P. Gallagher is an associate professor in the Department of International Relations at Boston University and senior researcher at the Global Development and Environment Institute, Tufts University.

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