Publication Date

11-4-2008

Abstract

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 state of the Mexican economy have important impacts on U.S. economic and political interests. As NAFTA approaches its 15th anniversary, 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 110th Congress, major issues of concern have been related mostly to economic conditions in Mexico, the effect of NAFTA on the United States and Mexico, and Mexican migrant workers in the United States.

In 1990, then Mexican President Carlos Salinas de Gortari 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 by attracting foreign direct investment. The Mexican economy had experienced many difficulties throughout most of the 1980s with a significant deepening of poverty. The intention of Mexico in entering NAFTA was to increase export diversification by attracting foreign direct investment (FDI), which would help create jobs, increase wage rates, and reduce poverty.

At the time that NAFTA went into effect, the expectation among supporters was that the agreement would improve investor confidence in Mexico, attract investment, and narrow the income differentials between Mexico and the United States and Canada. Measuring the effects of NAFTA on the Mexican economy is difficult because the economy was also affected by other factors, 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. Wages and employment tend to be higher in states experiencing higher levels of FDI and trade. The agricultural sector experienced a higher amount of worker displacement after NAFTA because of increased competition from the United States and because of Mexican domestic agricultural reforms. In terms of regional effects, initial conditions in Mexico determined which Mexican states experienced stronger economic growth as a result of NAFTA. States with higher levels of telecommunications and transportation infrastructure gained more benefits than poorer states with lower levels of education, infrastructure, and institutional capacity. 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. This report will be updated as events warrant.

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Suggested Citation
Villarreal, M. A., & Cid, M. (2008). NAFTA and the Mexican economy (RL34733) [Electronic version]. Washington, DC: Congressional Research Service. http://digitalcommons.ilr.cornell.edu/key_workplace/565/

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