NAFTA 10 years After

Darryl McLeod, Economics, Fordham University

March 2004

Initial goals for NAFTA:1. Extract Mexico and its Wall Street creditors

from a long painful debt crisis… while reducing Mexico’s dependence on volatile oil exports.

2. Save the American Auto Industry from Asian imports—(NAFTA was modeled on the 1989 U.S Canada Auto Agreement…)

3. Be a model for “trade not aid” development strategies– reduce poverty, reliance ondebt, increase growth– make Mexico the next Korea or Chile… set the table for the WTO-FTAA

10 years after– two cheers for Nafta initial goals met but,

►NAFTA euphoria contributed to the 1994 peso bubble– devastating Mexico private banks, (financial reform a silver-lining here).

►Slower than expected growth in Mexico, plus fast 1990s growth in the U.S. led to a trade deficit with Mexico– but capital flows into Mexico make this inevitable.

►Real wages stagnate in Mexico– but this is more due to demographics and lack of education than NAFTA – except in Textiles and Apparel.

Nafta’s indirect “integration” vs. trade liberalization effects also important...

► Institutional integration– progress toward a free press and a multi-party democracy in Mexico– thank you Ernesto Zedillio, PhD.

► Intellectual property reform and financial market opening relatively successful, albeit after a few bumps in the road…

► Labor rights and Environment side agreements.. limited success.

►Reduce immigration? perhaps in the future.

Fig MX-1 Mexico Diversifies away from oil..

Mexico Exports ($ billions)

$0$20$40$60$80

$100$120$140$160

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Oil Exports

Manufactures

Figure MX-2 Mexico diversifies, Venezuela and Ecuador do not…

Fuel Exports as a % of Merchandise Exports

0%

20%

40%

60%

80%

100%

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Ecuador

Venezuela

MexicoArgentina

Chart1

1977197719771977

1978197819781978

1979197919791979

1980198019801980

1981198119811981

1982198219821982

1983198319831983

1984198419841984

1985198519851985

1986198619861986

1987198719871987

1988198819881988

1989198919891989

1990199019901990

1991199119911991

1992199219921992

1993199319931993

1994199419941994

1995199519951995

1996199619961996

1997199719971997

1998199819981998

1999199919991999

2000200020002000

2001200120012001

Ecuador

Venezuela

Mexico

Argentina

ARG

ECU

MEX

ARG

Fuel Exports as a % of Merchandise Exports

0.004923385

0.4966656

0.2365779

0.9486477

0.008071525

0.4612793

0.2862873

0.9446786

0.00621536

0.5599368

0.437733

0.9434413

0.03464286

0.6306536

0.6682764

0.940133

0.06780996

0.6188937

0.721018

0.9284708

0.07187939

0.6425393

0.7723843

0.9498701

0.04265831

0.7388847

0.6437024

0.9542701

0.04091021

0.6960136

0.6175628

0.9313003

0.07307021

0.6285765

0.600866

0.7996766

0.02241259

0.417745

0.3247485

0.8406172

0.0134305

0.4043103

0.4166655

0.8713515

0.01524761

0.4450351

0.3208654

0.8105981

0.03387064

0.4875098

0.3388218

0.7664928

0.07800721

0.5191393

0.3758407

0.8009293

0.06256086

0.4040536

0.3002178

0.808825

0.08721501

0.4402711

0.1758935

0.7997894

0.09464923

0.422168

0.1404596

0.785565

0.1048014

0.3458372

0.1190311

0.7720683

0.1037251

0.3586563

0.1027029

0.766507

0.1299692

0.3648095

0.1198841

0.8090897

0.1173512

0.2956424

0.1003857

0.7890042

0.08667457

0.21407

0.0595066

0.7169078

0.1222693

0.3275434

0.07143029

0.814536

0.1782885

0.494304

0.09658737

0.8614038

0.1712851

0.4004838

0.07963151

0.8324371

Exports

COUNTRY_NAMEIND1_DESCCOUNTRY197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002

ARGArgentinaDebt service (PPG and IMF only, % of exports of goods and services)............20.4782817.6230333.619411518182426384466654031353124271820233334394749

CHLChileDebt service (PPG and IMF only, % of exports of goods and services)..........28.3918634.9685439.6666644.9774831233121182628332820201816131510161663455

ECUEcuadorDebt service (PPG and IMF only, % of exports of goods and services)............5.6225737.15779112.505063819314020342939303732313124211925192830281822

MEXMexicoDebt service (PPG and IMF only, % of exports of goods and services)..................5833293136313232262724182029191818272614141614

VENVenezuela, RBDebt service (PPG and IMF only, % of exports of goods and services)2.8818213.7733756.2006735.7939574.1886565.3242073.906397.5634336.924404913111616151427222617201413151319153024191221

ARGArgentinaExports of goods and services (BoP, current US$)............4.63E+096.60E+097.49E+099.18E+099.90E+091.09E+109.20E+099.29E+099.61E+091.00E+108.45E+098.15E+091.11E+101.18E+101.48E+101.44E+101.54E+101.63E+101.94E+102.50E+102.84E+103.09E+103.11E+102.79E+103.11E+103.09E+102.87E+10

CHLChileExports of goods and services (BoP, current US$)..........1.84E+092.41E+092.60E+092.94E+094.62E+095.97E+095.01E+094.64E+094.63E+094.31E+094.50E+095.23E+096.35E+098.14E+099.61E+091.02E+101.11E+101.24E+101.17E+101.44E+101.94E+102.02E+102.18E+102.02E+102.08E+102.30E+102.23E+102.30E+10

ECUEcuadorExports of goods and services (BoP, current US$)............1.42E+091.60E+091.70E+092.41E+092.89E+092.93E+092.71E+092.66E+092.91E+093.30E+092.64E+092.44E+092.65E+092.87E+093.26E+093.41E+093.72E+093.77E+094.61E+095.20E+095.61E+096.05E+095.00E+095.35E+095.99E+095.77E+096.17E+09

MEXMexicoExports of goods and services (BoP, current US$)..................1.67E+102.26E+102.83E+102.82E+103.00E+103.39E+103.16E+102.64E+103.30E+103.68E+104.24E+104.88E+105.16E+105.55E+106.14E+107.12E+108.93E+101.07E+111.22E+111.29E+111.48E+111.80E+111.71E+111.73E+11

VENVenezuela, RBExports of goods and services (BoP, current US$)2.78E+093.30E+093.36E+095.05E+091.16E+109.35E+099.68E+091.02E+109.80E+091.50E+102.00E+102.09E+101.76E+101.58E+101.68E+101.53E+109.49E+091.14E+101.11E+101.40E+101.88E+101.64E+101.55E+101.61E+101.77E+102.08E+102.53E+102.52E+101.90E+102.21E+103.42E+102.80E+102.80E+10

ARGArgentinaFuel exports (% of merchandise exports)0.40.50.30.20.30.50.50.00.010.010.030.070.070.040.040.070.020.010.020.030.080.060.090.090.100.100.130.120.090.120.180.17..

CHLChileFuel exports (% of merchandise exports)0.00.10.30.20.80.91.62.71.701.301.301.801.991.581.260.470.060.140.180.320.520.530.350.180.220.260.190.310.400.441.141.48..

ECUEcuadorFuel exports (% of merchandise exports)0.51.018.453.262.060.458.90.50.460.560.630.620.640.740.700.630.420.400.450.490.520.400.440.420.350.360.360.300.210.330.490.40..

MEXMexicoFuel exports (% of merchandise exports)3.22.41.20.94.215.516.00.20.290.440.670.720.770.640.620.600.320.420.320.340.380.300.180.140.120.100.120.100.060.070.100.08..

VENVenezuela, RBFuel exports (% of merchandise exports)91.091.590.693.195.194.693.80.90.940.940.940.930.950.950.930.800.840.870.810.770.800.810.800.790.770.770.810.790.720.810.860.83..

ARGArgentinaManufactures exports (% of merchandise exports)13.8674515.102920.2783822.3546624.3548524.3764524.8429324262423202416182126323235292826323334303435323233..

CHLChileManufactures exports (% of merchandise exports)4.3212955.2484395.3390583.6722344.40528610.0313910.427941110898777799910111314171713151617171618..

ECUEcuadorManufactures exports (% of merchandise exports)1.7551762.0186282.2535792.4462431.9111282.2185491.994832233331111222224788991091012..

MEXMexicoManufactures exports (% of merchandise exports)32.4654638.1213635.0882541.9104337.8120831.0528329.126572827211210923252746384545435171757778788185858385..

VENVenezuela, RBManufactures exports (% of merchandise exports)1.386911.3384721.9275341.3863351.182761.0334041.5049311222222410878121091113141412141912911..

ARGArgentinaTotal debt service (% of exports of goods and services)............3427422337465070636083744436373428312530395058757166..

CHLChileTotal debt service (% of exports of goods and services)..........34.560264046544443657154604841362627262321231925281717222528..

ECUEcuadorTotal debt service (% of exports of goods and services)............1112194534477830383343344036323226232025212830261721..

MEXMexicoTotal debt service (% of exports of goods and services)..................6644465145454444333733212434362627353221223026..

VENVenezuela, RBTotal debt service (% of exports of goods and services)4.2322635.1422587.76777.3252514.8600785.8610784891927233027252545384425231819221923183228231625..

0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%

3%2%1%1%2%2%2%1%0%0%0%0%0%1%1%0%0%0%0%0%0%0%0%1%1%

0%0%1%1%1%1%1%1%1%0%0%0%0%1%0%0%0%0%0%0%0%0%0%0%0%

0%0%0%1%1%1%1%1%1%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%

1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%

Exports

Ecuador

Venezuela

Mexico

Argentina

ARG

ECU

MEX

ARG

Fuel Exports as a % of Merchandise Exports

Fig MX-3 Mexico & Chile head North, as Venezuela and Ecuador succumb to the

“Natural Resource Curse”

Average Income per Person $PPP

$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$10,000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

ChileMexico

Venezuela

Ecuador

Source: Penn World Tables 6.1

Figure MX-4 U.S Auto industry employment and exports rise…

U.S. Auto Industry Employment (thousands)

240

250

260

270

280

290

300

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Fig MX-5 Poverty high Mexico, especially in rural areas, but falling

Source: United Nations, FAO

Fig M-6 2000 Poverty higher in the South where Nafta has less impact…

Mexico’s Poverty lines are less than $2 per day.. even the lowest paying

manufacturing job pays $1-2 per hour

Figure M-7 Employment rose sharply in Textiles & Apparel

Personal ocupado: Textiles y Prendas de vestir

0

50,000

100,000

150,000

200,000

250,000

300,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

But too a large extent, this was quota jumping & trade diversion)

►Low wage apparel industries moving to Mexico to avoid MFA quotas and

►Wages and productivity fell as these new firms entered.

►Then with the Caribbean initiative in 2000 and China entering the WTO in 2001 these jobs began to head South the Central America and East to China.

Personal ocupado: Industria electronica

050000

100000150000200000250000300000350000400000450000500000

1980198

2198

4198

6198

8199

0199

2199

4199

6199

8200

0200

2

Estimated w/ U.S. Industrial Production

Fig M-8 and electronics assembly

Pers. ocupado: Equipo de transporte

0

50000

100000

150000

200000

250000

300000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Fig M-9 And transport equipment,

Fig. M-9 But real wages rose only modestly and not at all in textiles….

Source INEGI $dollar U.S. wage data converted to U.S. prices using World Bank $PPP exchange rates and deflated using the U.S. CPI.

Mexico Hourly Wages in $US and U.S. Prices

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

1995 1996 1997 1998 1999 2000 2001 2002 2003

Textiles & Garments

Average Hourly Manufacturing Wages

Machinery & Equipment

Fig M-10 productivity growth rose but not in Apparel…

-6

-4

-2

0

2

4

6

8

PRENDAS DEVESTIR

EQUIPO DETRANSPORTE

SECTORMANUFACTURERO

EN TOTAL

MEXICO Overall Productivity Growth 1993-2000 (López Córdova)

Garments

Auto-Transport

Elect-Computers

Overall-Manufacturing

Figure M-11 Wage held down by a long baby boom just now ending…

Fertility Rate (births per woman)

0

1

2

3

4

5

6

7

8

1950-55

1955-60

1960-65

1965-70

1970-75

1975-80

1980-85

1985-90

1990-95

1995-00

2000-05

Mexico's long baby Boom

1950s U.S. Baby Boom

Argentina

In 2005 Mexico's supply of 20 year oldsshrinks finally

1970s: High U.S. Crime and Unemployment

Figure M-12 School enrollments started low compared to Asia but should also

boost wages over time..Mexico Gross Secondary Enrollment

35.5

48.6

56.553.3

61.2

75.3

1975 1980 1985 1990 1995 2000

28

42

107

6958

74

118

153

24 25 2517

10 7

24

41

2315 18

10 7 5

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Figure M-13 Finally, Nafta and the 1995 peso crisis led to financial reforms and much lower

interest rates & inflation, despite a floating peso..

Inflation has fallen to under 5% even with the peso weakening from 9 to 11

Figure M-14 Interest rates have fallen dramatically making credit much more widely

available in Mexico (mortgages!!)

Summary…►Nafta delivered on its major goals, without living up

to its full potential.►Outside of a few sectors, such as apparel and

agriculture there few negative side effects (trade diversion or rising inequality…)

► Liberalization and competition always create adjustment costs and hardship for some groups–even as they benefit the nation as a whole

►What about compensation programs? Mexico & the WB implemented Progesa (now Oportunidades)

NAFTA Compensation schemes

►Mexico implemented Progresa, one reason rural poverty has fallen.. Pays poor rural families to keep their children in school and take them to health clinics.

►The U.S. has a trade adjustment assistance program, but its benefits are inadequate. Wage and medical insurance schemes are need (see Kletzer & Litan).

NAFTA Scorecard: a mixed pictureMexico

► Trade growth & diversification A+

► Economic and employment growth C+

► Poverty reduction B► Political reform A- (became a

democracy)► legal reforms/ property

rights/ barriers to entry C► Compensation schemes for

farmers & rural poor A-► Education, environment B-

United States► Regional efficiency gains A-► Trade-not-aid model growth

strategy: B+► Environmental and labor

standards C+► Model for Chile, COL Jordan,

CAFTA, etc. B+► Trade Adjustment Assistance

C- major failure

References► DeJanvry, A., E. Sadolet and B. Davis (1997) Nafta and

Agriculture an Early Assessment (U.C. Berkeley, ARE working paper #87)

► Gruben, William (2003) México, el Tratado de Libre Comercio, y las Maquiladoras, El Paso TX.

► Lopez-Cordova (2003) NAFTA and Manufacturing Productivity in Mexico, Economia, Vol 4 #1, Fall Brookings Institute Press.

► Lederman, Daniel, W. Maloney, Lois Serven (2003) Lessonsfrom Nafta, World Bank, advanced copy.

► United Nations, FAO (2003) Poverty in Mexico Module, Agriculture and Development Division (ESA)

NAFTA 10 years After Initial goals for NAFTA:10 years after– two cheers for Nafta �initial goals met but,Nafta’s indirect “integration” vs. trade liberalization effects also important...Fig MX-1 Mexico Diversifies away from oil..Figure MX-2 Mexico diversifies, Venezuela and Ecuador do not…Fig MX-3 Mexico & Chile head North, �as Venezuela and Ecuador succumb to the �“Natural Resource Curse”Figure MX-4 U.S Auto industry employment and exports rise…Fig MX-5 Poverty high Mexico, especially in rural areas, but fallingFig M-6 2000 Poverty higher in the South where Nafta has less impact… Mexico’s Poverty lines are less than $2 per day.. even the lowest paying manufacturing job pays $1-2 per hourFigure M-7 Employment rose sharply in Textiles & ApparelBut too a large extent, this was quota jumping & trade diversion)Fig M-8 and electronics assemblyFig M-9 And transport equipment,Fig. M-9 But real wages rose only modestly and not at all in textiles….Fig M-10 productivity growth rose but not in Apparel…Figure M-11 Wage held down by a long baby boom just now ending…Figure M-12 School enrollments started low compared to Asia but should also boost wages over time..Figure M-13 Finally, Nafta and the 1995 peso crisis led to financial reforms and much lower interest rates & inflation, despite a floating peso..Figure M-14 Interest rates have fallen dramatically making credit much more widely available in Mexico (mortgages!!)Summary…NAFTA Compensation schemesNAFTA Scorecard: a mixed pictureReferences