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PART II: CHAPTER 1 MEXICAN FOREIGN TRADE
(Revised February 2004)
As noted in Part I, Mexico pursued a development strategy called importsubstitution industrialization for over 30 years. This means that Mexico was attempting
to avoid dependence on international trade in its pursuit of economic growth and
development. In the 1980s and 1990s, Mexican policy changed to one of greater trade
liberalization. In examining this significant change, let us first portray some facts about
Mexico's international trade.
SOME FACTS ABOUT MEXICO'S TRADE
Examine the data on Page 2. First, notice that, from the end of World War II
through 1981, the amount of Mexican trade was relatively small. In these years,
imports rarely equaled much more than 10% of Mexico’s GDP. This 10% figure is below
that found in the United States and much below that found in East Asia or Europe. It
reflected the policy of import-substitution industrialization. Second, notice how much
trade has grown since 1981. Imports rose from only about $2.5 billion in 1970 to an
estimated $184 billion in 2004. And exports rose from only about $1.3 billion in 1970 to
an estimated $176 billion in 2004. Third, notice that Mexico had trade deficits most of
these years. Until the beginning of the 1970s, these trade deficits were small. But the
trade deficits became a significant problem in the 1970s and again in the 1990s. During
the austerity periods of the 1980s and 1995-1996, Mexico experienced trade surpluses.
These trade deficits continued into the beginning of the 21st century. Fourth, notice that,
during this period, the United States was Mexico's main trading partner. A very high
proportion of Mexican exports and imports involved the United States, making Mexico
very dependent on the United States. This has affected Mexico greatly in recent years for
two reasons. First, the United States entered a recession in 2001. Recovery from the
recession was slow. The weakened American economy reduced American buying of
Mexican exports. Second, Mexican exports into the United States face increasing
competition. Approximately 20% of Mexican exports of manufactured goods into the
United States face direct competition from China. In 2002, American imports of
manufactured goods from China exceeded those from Mexico for the first time. And
while Mexico is very dependent on the United States, the reverse is not true. Only
about 5% of American imports come from Mexico.
What kinds of goods and services did Mexico export? Until recently, Mexican
exports were dominated by primary products (agricultural products and natural
resources). From the mid-1970s through the 1980s, over 60% of Mexican exports were
oil. Prior to the discovery of oil, Mexico exported other natural resources or agricultural
products. These products have an inelastic demand. This means that, as prices change or
as incomes change, the demand for these products changes very little. The relative
prices of these goods --- the prices of export products compared to the prices of import
products --- is called the "terms of trade". The terms of trade for Mexico generally fell
until the mid-1970s, then rose briefly as oil prices rose, and finally collapsed in the 1980s
as oil prices fell. Because of the inelastic demand, as prices of Mexican export
products fell, buyers did not buy much more. As a result, the revenue received from
Mexican export sales fell.
Beginning in the mid-1980s, Mexico was able to shift to greater reliance on
exports of manufactured goods. By 2000, 88% of Mexican exports were manufactured
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Table 1:
Mexico Trade: 1938-1988(Millions of dollars)
Imports Exports Surplus (Deficit)
1949
514.4
701.1 186.7
1950
555.7
493.4 (62.3)
1951
822.2
591.5 (230.7)
1952
807.4
625.3 (182.1)
1953
807.5
559.1 (248.4)
1954
788.7
615.8 (172.9)
1955
883.7
738.6 (145.1)
1956 1,071.6 807.2 (145.1)
1957 1,155.2 706.1 (264.4)
1958 1,128.7 709.1 (419.6)
1959 1,006.6 723.1 (283.5)
1960 1,186.4 738.7 (447.7)
1961 1,132.6 603.5 (335.1)
1962 1,143.1 906.5 (236.6)
1963 1,239.7 944.1 (295.6)
1964 1,439.1 1,026.7 (412.4)
1965 1,559.6 1,126.4 (433.2)
1966 1,602.1 1,169.9 (432.2)
1967 1,736.8 1,102.9 (633.9)
1968 1,917.3 1,165.1 (752.2)
1969 1,988.8 1,341.8 (647.0)
1970 2,500.5 1,289.6 (1,210.9)
1971 2,432.6 1,365.6 (1,067.0)
1972 2,963.7 1,666.4 (1,297.3)
1973 4,165.7 2,071.7 (2,094.0)
1974 6,545.1 2,853.2 (3,691.9)
1975 7,128.8 3,062.4 (4,066.4)
1976 6,679.7 3,655.5 (3,024.2)
1977 6,022.5 4,649.8 (1,372.7)
1978 8,336.5 6,063.1 (2,273.4)
1979 11,979.7 8,817.7 (3,162.0)
1980 18,832.3 15,134.1 (3,698.2)
1981 23,929.6 19,419.6 (4,510.0)
1982 14,437.1 21,229.7 6,792.6
1983 7,720.5 21,398.7 13,678.2
1984 11,254.3 24,094.6 12,840.3
1985 13,460.4 21,783.4 8,323.0
1986 11,384.4 15,759.3 4,374.9
1987 12,200.0 20,600.0 8,400.0
1988 18,800.0 20,900.0 2,100.0
1991 50,300 41,200 (9,500)
1992 64,000 46,200 (17,800)
1993 65,400 51,800 (13,600)
1994 79,300 60,800 (18,500)
1995 72,500 79,500
7,000
1996 89,500 96,000
6,500
1997 109,800 110,000
200
1998 125,200 118,000 (7,200)
1999 141,900 136,400 (5,400)
2000 174,500 166,400 (8,100)
2002 168,700 160,800 (7,900)
2003es170,000 164,500 (5,500)
2004es184,400 176,000 (8,400)
U.S. Share (%)
Imports Exports
86.8
78.6
84.3
86.3
81.5
70.4
82.7
78.5
77.1
72.2
80.4
60.1
79.3
60.6
78.3
65.1
77.1
64.3
76.9
61.5
72.9
60.7
72.1
61.4
69.8
62.6
68.2
62.6
68.4
64.7
68.4
60.9
65.7
57.4
63.8
55.7
62.8
56.1
62.9
59.8
62.4
58.1
63.6
60.7
61.4
61.5
60.3
70.1
59.5
62.5
62.2
58.1
62.7
61.3
62.5
62.1
62.9
66.7
60.5
69.4
62.2
68.6
67.6
64.7
66.1
53.9
59.7
53.3
60.1
58.1
68.7
58.2
69.8
61.4
65.3
66.6
69.2
69.1
74.2
75.4
74.7
76.7
74.1
73.1
77.2
81.4
78.1
77.4
78.2
80.1
80.4
81.7
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goods. But Mexico is still highly dependent on exports of just a few products. As of
2003, 34% of Mexico’s exports of manufactured goods were in electronics, 32% were in
automobiles, and 25% were in textiles.
What kinds of goods and services did Mexico import? Traditionally, most Mexican
imports had been raw materials or capital goods for industry. Only a small amount of
imports had been consumer goods. As of 1994, these numbers had changed very little; in
that year, 71% of Mexican imports were raw materials for industry, 17% were capital
goods, and only 12% were consumer products.
MEXICAN TRADE POLICIES
As noted above, the Mexican import substitution strategy that was in existence from
the 1950s until the beginning of the 1980s had been designed to protect Mexican
producers against foreign competition. In that strategy, exports were seen as necessary
only to earn the money to be able to import the capital goods and the raw materials
necessary for industrialization. Imports were limited to those capital goods and raw
materials through a system of licenses and high tariffs. The protected market was
designed to give Mexican producers the time to grow so that they could become
competitive with American, European, and Japanese manufacturers. This strategy was not
much different from that pursued by Japan or most other Latin American countries in the
1950s and 1960s.
Early in the 1980s, Mexico considered joining the General Agreement on Tariffs and
Trade (GATT). GATT was based on the principle of expanding world trade through the
reduction of tariffs and other trade barriers. Joining GATT would have allowed Mexico to
have greater access to foreign markets. But it would also have required Mexico to
eliminate its licenses and significantly reduce its tariffs. The Mexican government
decided against applying for membership in the GATT. This decision reflected the
political forces in Mexico at the time; those members of the business elite who were allied
with the PRI were the ones who would have been most hurt by having to face the
competition of foreign companies.
As discussed in Part I, under pressure from the IMF and the United States government
following the debt crisis of 1982, Mexico shifted away from its import-substitution
industrialization policies and toward a policy of freer trade (called "liberalization").
The use of licenses to limit imports was gradually reduced until licenses were finally
eliminated completely by 1994. Tariffs were reduced significantly. Most of Mexico's
industries were opened to foreign investors (see the next chapter). The peso was allowed
to continually depreciate to levels set by free markets. In 1986, Mexico reversed its
decision and joined the GATT. Thus, Mexico agreed to become subject to GATT rules.
Mexico hoped that this decision would lead to an increase in its exports. In 1987, Mexico
entered into its first trade liberalization agreement with the United States (see below)
and unilaterally set its tariff rate at a maximum of 20%. Despite the liberalization,
Mexico had to find some way to limit its imports in order to use the dollars it earned from
its exports to pay its international debt. Since it could no longer limit imports by licenses
or by tariffs, Mexico tried to limit imports by what is called “austerity”. Austerity
involved reducing total spending in Mexico by raising taxes, decreasing government
spending, and decreasing the money supply. These policies caused reduced spending
by Mexican citizens for both imported and domestic products.
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The Mexican trade liberalization and resulting increased role of exports in
Mexican development changed the relationship between Mexico and the United
States. As noted above, a high percent of Mexican exports are sold in the United States.
Beginning in the 1980s, some American companies felt threatened by the sales of
Mexican products in the United States. This led to some trade disputes between the two
countries. Mexico also felt threatened by its fear of rising trade protectionism in the
United States and by American trade agreements with Canada and with Israel. In 1987,
there was a trade agreement between the United States and Mexico to create a framework
for trade discussions and resolution of disputes. Beginning in 1990, President Salinas
requested discussions with the United States to create a North American Free Trade
Agreement (NAFTA).
THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)
In August of 1992, the United States, Mexico, and Canada signed the agreement to
form a North American Free Trade Area (NAFTA). In a Free Trade Area, there are no
tariffs or other duties between the countries. In the 1992 agreement, all tariffs and
duties are to be phased-out over 15 years. (65% of American goods gained tariff-free
access to Mexico within 5 years.) The agreement is historic; there has never been such an
agreement between countries with such disparate standards of living. The agreement
involved almost 400 million people and one-third of world Gross Domestic Product. (A
Free Trade Area should not be confused with a Common Market; a Common Market
includes a Free Trade Area, but also adds a common external tariff. A Free Trade Area
also is not an Economic Union. An Economic Union includes a common market but
also adds labor mobility between the countries and a common money. In NAFTA, there
is no common external tariff, no agreement about labor mobility, and no common money.)
President George H. W. Bush signed the agreement in December of 1992. President
Clinton supported the agreement after it was enhanced with some side agreements relating
to labor and to the environment (see below). Congress passed the agreement in the fall of
1993. The Free Trade Area began January 1, 1994. The agreement is still a source of
considerable controversy in the United States and in Mexico.
The main purpose of the free trade agreement was to expand trade and foreign
investment in Mexico. We will consider the effect on investment in the next chapter. As a
result of NAFTA, between 1993 and 2000, Mexico lowered its average tariff against
American products from 13.8% to 2.4%. About half of all American goods sold in
Mexico are now completely tariff-free. This has definitely expanded trade, as intended.
Between 1993 and 2000, trade between the United States and Mexico more than
tripled – from $85.3 billion to $263.5 billion. Trade between Mexico and Canada also
tripled in this period. Mexican goods increased their share of all purchases by Americans
from 7% in 1993 to 11% in 2000. In this period, Mexico displaced Japan as the second
leading trade partner of the United States.
Table 2:
Year
1993 1994 1995 1996 1997 1998 1999 2000
American Imports from Mexico 40.0 49.5 62.1 74.3 86.0 94.5 109.7 135.9
American Exports to Mexico
(Billions of Current Dollars)
45.3 54.8 53.8
67.5
82.0
93.5 105.2 127.6
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Agriculture
One area of concern for both countries has been agriculture. For political reasons,
agriculture has been a highly subsidized and protected industry in many countries. The
United States had low tariffs (4% average in 1990, covering 25% of agricultural imports
from Mexico) but many non-tariff barriers on agricultural products. Mexico had higher
tariffs (11%) and import licensing requirements for many agricultural products
(representing over 50% of American agricultural exports to Mexico). Farming provided
the livelihood for 26% of the Mexican labor force. Thus, Mexico had an interest in
slowing the liberalization of agricultural trade. Under the NAFTA, half of American
agricultural goods exported to Mexico immediately became tariff-free. Other tariffs
are to be phased out over 15 years. If imports do cause an enormous burden of
adjustment, tariffs are allowed to rise. In the United States, grain farmers and livestock
producers could gain as the market for their products expand. Grain (especially corn)
farmers in Mexico could lose; these are the small and poor farmers in the south. Other the
other hand, in the United States, fruit and vegetable farmers could lose as imports from
Mexico increase. (Those who grow citrus in Florida are expected to lose more than those
who grow citrus in California because Mexican imports will compete mainly in the winter
months.) Fruit and vegetable farmers in Mexico would correspondingly gain; these are
the richer, commercial farmers in the north. Even though the tariffs have not yet been
fully eliminated, both American agricultural exports to Mexico and Mexican
agricultural exports to the United States approximately doubled between 1993 and
2000.
Automobiles
The NAFTA provisions for automobiles were fully implemented by 2003. Mexico’s
automobile industry has become much more competitive as a direct result of NAFTA. By
2000, Mexico was producing almost 2 million vehicles (up from 600,000 in 1993) and
exporting about 1.5 million of them, as well as 3 million engines (exporting over 2
million). Mexico specializes in small and midsize cars, light trucks, and auto parts. (In
2000, General Motors produced 444,000 vehicles in Mexico, Ford produced 404,000
vehicles, and Daimler Chrysler produced 280,000 vehicles.) Nissan, Volkswagen, Honda,
and BMW also have production plants in Mexico. These plants are considered some of the
most competitive plants in the world. Mexican exports of vehicles and auto parts more
than tripled between 1993 and 2000, with 90% of these exports going to the United States.
(15% of all automobiles imported into the United States, and 25% of all auto parts,
now come from Mexico.) The vehicle and auto parts industry now accounts for 20% of
all of Mexico’s exports and provides job to over 500,000 people.
A trade issue of concern to automobile companies involved rules of origin. The
concern was that other countries (especially Japan) could ship goods through Mexico (or
have a small portion of the good produced in Mexico) in order to avoid American and
Canadian tariffs on Japanese automobiles. In the NAFTA, it was agreed that cars and
light trucks must have 62.5% of the value of their parts and labor be North
American in order to qualify for the tariff-free status. These provisions greatly angered
the Japanese. But these rules of origin have been a main reason for non-American
companies (such as BMW and Honda) establishing manufacturing plants in Mexico and
building vehicles using parts made in North America. (A similar rules of origin provision
was adopted for textiles: tariff-free status is granted only to goods made with yarn and
fabric produced in America, Canada, or Mexico. See below.)
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Textiles and Electronics
By 2000, Mexico replaced China as the leading exporter of textile and apparel products
to the United States. United States – Mexico trade in textiles nearly quadrupled from
just over $4 billion in 1993 to $15.3 billion in 2000. This resulted because all textile
products had obtained tariff-free status by 1999. Mexico’s textile industry grew very fast
so that by 2000, it included nearly 1,200 plants and employed almost 286,000 workers.
Since the NAFTA, Mexico has also become the main trading partner of the United
States in electronics. In 1993, American exports of electronics and computer products
faced and average tariff in Mexico of 13% while such Mexican exports faced an average
American tariff of 1.6%. By 2003, both tariff rates were zero. As a result, trade in
electronics and computer products between the two countries has grown greatly. By
2000, there were 570 plants in Mexico in the electronics sector, employing about 350,000
workers. Tijuana has become the leading area for television set production, producing
about 25 million sets each year. Guadalajara is a major area for production of computer
parts, many of which are exported to California. Production has advanced well beyond
the low-wage, labor-intensive assembly that was seen in earlier years.
Arguments Against the NAFTA
The NAFTA has been very controversial. In this section, let us summarize some of
the main arguments used by opponents of the agreement. (1) First, many opponents of
NAFTA focus on the losses of jobs and the decline in wages. There has been great
concern about the effects of a NAFTA on the American labor market. Because the
NAFTA was expected to increase American exports to Mexico more than American
imports from Mexico, it was expected to create between 126,000 and 180,000 more new
jobs than would be lost. With a labor force of over 140,000,000, this change is very small
--- less than 0.1%! If one focuses only on those jobs that would be lost because of
Mexican imports, the estimates ranged from 10,000 as a minimum to 500,000 as a
maximum. This loss of jobs would occur over several years, reducing the burden of
adjustment. But, to those who will lose their jobs, this is no consolation. Job losses cause
considerable pain specifically to those people who are least able to adjust. In a policy
created in the early 1990s, American workers who lost jobs because of NAFTA became
eligible for employment services, training, and income support for up to 78 weeks.
Despite that, those workers displaced by NAFTA probably experience a considerable
period of unemployment that ends when they finally take new jobs at considerably
reduced pay.
As explained earlier, the American industries that lose jobs because of NAFTA are the
labor-intensive manufacturing industries, such as textiles and apparel, and labor-intensive
agricultural goods, such as sugar, fruits, and vegetables. Most job losers are non-collegeeducated workers who tend to be paid relatively low wages. Most job gainers are
more educated workers whose wages are higher. But the striking conclusion of the vast
majority of studies indicated that the effects on the American labor market would be
very small. This should not be too surprising considering that American tariffs against
Mexican products were not very high to begin with.
(2) In a related argument, opponents argued that NAFTA ultimately would
reduce American international competitiveness. NAFTA, they argued, would allow
companies to continue with a strategy of production that relies on low-wage labor. If the
low-wage labor were not available, it is possible that the companies would develop new
machines and new technologies to be able to continue production. These new machines
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and new technologies would make workers more productive and therefore lead to
increasing real wages.
(3) Another argument against NAFTA involved labor practices in Mexico. It was
argued that Mexico allows "sweatshop" conditions and therefore gains its labor market
advantage in an unacceptable way. Mexican labor laws protecting worker rights are about
as strong as the American laws. For example, Mexican workers average 42 - 43 hours per
week. They are also entitled to 6 days of paid vacation and 7 official paid holidays. The
hours requirement does not seem to be abused. But overall the enforcement of Mexican
labor laws has been very weak. For example, small shops and factories ignore the child
labor laws; at least 10 million children work part or full-time. And companies employing
more than 300 workers are required to set up health clinics at company expense. But
many do not do so.
The need for Mexico to increase its inadequate enforcement of labor standards was the
subject of one of the side agreements that President Clinton negotiated. The North
American Agreement on Labor Cooperation (NAALC) was established to monitor
labor issues and address complaints about non-enforcement of labor laws.
(4) Another argument used by opponents of NAFTA was that the agreement
would contribute to worsening environmental problems. The argument was that many
American companies would locate in Mexico in order to escape from American
environmental laws. As with worker protection laws, Mexican environmental laws are
not significantly different from those of the United States. However, Mexican
environmental laws are often poorly enforced due to a lack of enforcement personnel
and to corruption. In recent years, Mexico has increased its efforts at environmental
protection. From 1992 to 1995, the Mexican government spent $500 million for sewage
plants, solid waste disposal, and nature preserves along the border. Mexico agreed to halt
production of the CFCs that contribute to global warming by the same deadline as the
United States. All new investments in Mexico that involve dangerous substances must
now have environmental impact statements. The budget for enforcement of
environmental laws was increased nearly 700%. Almost 1000 plants have been shutdown, nearly 100 permanently, because of noncompliance with the environmental laws.
Mexico's environmental enforcement agency (SEDESOL) was absorbed into the
Secretariat for Social Development, giving it greater powers.
It should be stressed, however, that for American companies to locate in Mexico to
take advantage of weak enforcement of environmental laws, three conditions must be met.
First, costs of meeting American environmental laws must be high in relation to the
total cost of production (otherwise, it is not worth the cost of the move). Second, the
industry must already have significant trade protection (otherwise the companies
would already have located plants in Mexico). And third, the company must be able
to relocate production relatively easily. The amount of production that meets these
conditions is likely to be small. Of 442 American industries, only 11 meet the first two
conditions. Of these, industries such as steel, petroleum refining, and chemicals are not
easily relocated. Thus, the cost of American environmental regulations is NOT likely to be
a significant incentive for relocation to Mexico.
(5) Opponents of NAFTA also worried about food safety standards, which are
much higher in the United States. Under the NAFTA, the United States may prohibit
imports of fruits and vegetables from Mexico that do not meet American standards. Some
argue that this raises the possibility of setting the standards so high that environmental
standards are in fact a form of trade protection. In 1996, there was a major dispute over the
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importation of avocados from Mexico. American avocado producers claimed that
Mexican avocados brought with them a disease that could destroy local crops. Mexican
producers believed that their avocados were safe and saw the American claim as a form of
trade protection.
(6) Finally, opponents of NAFTA worried about infrastructure along the border
(roads, railways, airports, and so forth). The increase in trade creates bottlenecks along
the border. A North American Development Bank was created in 1994 with $3 billion in
capital, provided by both the United States and Mexico, to provide financing for border
projects. There was discussion of an international airport along the border (Twinports), but
this idea was rejected. The United States Environmental Protection Agency committed
$177 million in 1996 for border projects. And in the fall of 1996, the Final Border XXI
Program Framework document was released. This identified environment priorities of the
border, divided them geographically, and attempted come up with implementation plans.
There certainly are major environmental issues between the United States and Mexico.
For one, spilled sewage and pollutants from washed streets and yards in Mexico
continually have forced the closing of beaches in San Diego County. In response, an
International Wastewater Treatment Plant was completed in 1996. For another, because
they still use leaded fuel, Mexican automobiles crossing the border into San Diego
County contribute an estimated 12% of all air pollution in San Diego County. While
these issues are important, it is not clear that any of them (except for the increased traffic
at the border) are related specifically to the NAFTA. It is likely that these issues would be
with us whether NAFTA had been passed or not.
Effects of the NAFTA on San Diego
Like all border areas, San Diego had much at stake with the passage of the NAFTA.
San Diego's economy, especially the service industries, was stimulated by the increase
in trade with Mexico. These industries include accounting, advertising, financial
services, engineering, law, and construction. San Diego also benefited from the increase in
tourism in Mexico. And, over the next 25 years, if the NAFTA leads to increased
economic growth in Mexico, it could reduce the number of undocumented immigrants in
San Diego County.
On the other hand, there are problems for San Diego from the agreement. Some
industries will be adversely affected; especially important is San Diego's agricultural
industry, which specializes in fruits and vegetables. Trucking may also be hurt by the
increased ability of Mexican trucking companies to haul in the United States. (Some
people argue in addition that Mexican trucks are less safe on the road than American
trucks.) And many blue-collar workers in manufacturing could face job losses. In addition,
since most new production will be concentrated in the border area (until Mexico's
transportation system in the interior improves substantially), there is a potential for
increased environmental problems in the border area --- sewage, air pollution, hazardous
waste disposal, and so forth. And there are likely to be greater transportation bottlenecks
(on highways, airports, and border crossings) as the amount of traffic rises substantially.
Effects of NAFTA on Mexico
The NAFTA has increased the importance of trade for Mexico greatly. With NAFTA,
Mexican businesses gained a secure access to the American and Canadian markets. In
1980, trade accounted for about 11% of Mexican GDP. By 2000, this had risen to
32%.
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Trade was a major factor in the recovery Mexico experienced from the very
severe recession of 1995. In that recession, Real GDP fell 6.2% and over one million jobs
were lost. Yet, Mexico recovered quickly, with Real GDP rising 5.2% in 1996, 7% in
1997, 4.8% in 1998, 3.8% in 1999, and 6.9% in 2000. Half of Mexico’s growth of Real
GDP is attributed to exports. Between August of 1995 and August of 1999, Mexico
generated about two million new jobs. Half of these were related directly or indirectly
to exporting. And real wages rose much faster in those Mexican industries that produced
for export.
According to one estimate of the early 1990s, the NAFTA would lead to the creation of
more than 600,000 jobs in Mexico over ten years (an increase of 2% in the number of
jobs). It was estimated that real wages of Mexican workers might rise as a result of
NAFTA, but that this would be very small at best. Low-skilled workers were expected to
benefit in Mexico, either from more jobs being available or from higher wages. It was
expected that higher-skilled workers in Mexico would be hurt by the competition with the
United States. However, it seems that the reverse has occurred. The increased foreign
direct investment has increased the demand for skilled labor and therefore has
increased the relative wages of skilled Mexican workers. (Foreign-owned maquiladoras
pay unskilled workers 3% less than domestically-owned firms but pay their skilled
workers 21% more.) The wages of urban Mexican workers who have completed no
more than six years of school have fallen considerably compared to the wages of
urban Mexican workers who have continued education beyond high school. So the
opening to the international economy has widened wage inequality in Mexico as it has in
the United States. In Mexico, as in the United States, certain industries used to pay wages
to their less skilled workers that exceeded the productivity of those workers (these extra
wages are called “rents”.). They could do so because those companies were shielded
from competition and were therefore extracting excess profits (that is, some of the excess
profits were shared with workers). But tariff reductions were greatest for those Mexican
industries that used less skilled labor. So the opening of international trade seems to
have increased competition and lessened the ability of companies to pay wages that
exceed the productivity of the less skilled workers. The same phenomenon has
occurred in the United States.
The opening of international trade also seems to have shifted the location of
industrial activity in Mexico. In 1980, 46% of Mexico’s manufacturing labor force was
located in and around Mexico City. Only 21% was located along the Mexico – United
States border. By 1998, the share in Mexico City had fallen to 23% while the share along
the border had risen to 34%. Wages have risen most in those areas of Mexico near the
border and have not risen much in those areas of Mexico far from the border.
Besides less skilled workers, there are other Mexican "losers" from NAFTA. Many
businesses are not able to compete with the American imports or with the Americanowned companies in Mexico. This is especially so for Mexican bankers. And when
agriculture is fully liberalized, many small farmers will not be able to compete with the
American grain producers. The NAFTA requires considerable adjustment within Mexico
as well as within the United States. In addition, there is fear within Mexico for Mexican
cultural identity. The official position is that Mexican culture and national identity are
solidly embedded in the population; they will not be threatened by greater interaction with
the United States. Many Mexicans question this official position.
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Summary
If one believes the majority of studies, it does appear that there have been net
benefits to the United States and to Mexico from the NAFTA (i.e., the benefits exceed
the costs for the nation as a whole). The NAFTA contributed slightly to an increase
economic growth and probably created more jobs than were lost. But there are problems
with the NAFTA as well. The burden of adjustment is substantial and falls
disproportionately on low-wage, unskilled workers in both countries. And there is
potential for greater environmental problems. Despite the problems, Mexico has attempted
to expand its international trade. By 2000, Mexico had free trade agreements with nine
Latin American countries. In the 1990s, trade between Mexico and Chile rose 661% and
trade between Mexico and Costa Rica rose 381%. A Mexico – European Free Trade
Agreement has been agreed upon. Mexican tariffs against European Union products are
to be eliminated by 2007. Mexico has also established free trade agreements with the
European Free Trade Area (Iceland, Liechtenstein, Norway, and Switzerland) and with
Israel. So it seems clear that the globalization of the Mexican economy is likely to
continue.
Footnotes for the data are available upon request.