Trade Liberalization and NAFTA

Following the crisis of 1982, the Mexican economy received praise for having “adjusted well”, but failed to achieve any significant momentum due to renewed struggles in 1985-86. Mexico’s response has been to implement a policy of labor “flexibilizacion”, or weakening collective labor bargaining, and widespread trade liberalization to take advantage of newly awakened international competitiveness. Since the 1994 implementation of NAFTA or the North American Free Trade Agreement, Mexico has signed twelve free trade agreements with such diverse nations as Japan, Israel, and Chile.

NAFTA is by far the most important trade agreement Mexico has signed both in the magnitude of reciprocal trade with its partners as well as in its scope. Unlike the rest of the free trade agreements that Mexico has signed, NAFTA is more comprehensive in its scope and was complemented by the North American Agreement for Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). Given the overall size of trade between Mexico and the United States, there are remarkably few trade disputes, and even those few involve relatively small dollar amounts. These disputes are generally settled in World Trade Organization (WTO) or NAFTA panels or through negotiations between the two countries.

While the trade agreement has not synchronized employment or productivity across North America, it has resulted in an enormous interdependence between Mexico and the United States. Even as the United States has been shifting much of its dependence for imports to other nations such as China, Mexico remains firmly dependent on the state of the United States’ economy. Exports now represent 30 percent of Mexico’s GDP, up from 10 percent 20 years ago. The great majority of Mexico’s exports are manufactured goods, and almost 90 percent of them are shipped to the United States.

While Mexico has undoubtedly benefited from trade liberalization, a history of bilateral trade agreements which Mexico has historically been able to join that other nations have been unable to access has resulted in a preferential place in world trade. Unfortunately for Mexico, the entrance of many nations such as China into the WTO and the United States’ aggressive moves to increase free trade worldwide is already working to erode that preferential trade status. While the economic case for free trade suggests that Mexico will ultimately benefit from reduced trade restrictions with other nations, Mexico is already beginning to suffer the early price of dislocation of many of its people. In particular, Mexico’s maquiladora industries face competition from China and Mexico’s rural poor face stiff competition from American agri-business.

One disturbing impact of increased integration into the global economy has been Mexico’s increasing wage inequality. The new economic reality of globalization has resulted in a substantial increase in the wage premium for skilled labor, which when coupled with an unequal distribution of skills has created higher inequality in the distribution of labor incomes that is closely associated to disparities in schooling.

As each of the Asian tigers achieves greater market penetration in the United States, Mexico’s export-dependent growth becomes more threatened. In particular, as tariffs against textiles from China expire, Mexico can expect to suffer financially. Yet Mexico’s real problem with trade liberalization is that it exposes an uncomfortable truth – that Mexico is no longer a relatively “poor” nation, but its institutions and human capital nonetheless remain unable to compete with “wealthy” nations.