Get Started. It's Free
or sign up with your email address
Rocket clouds
NAFTA by Mind Map: NAFTA

1. In 1994, Mexico, the United States and Canada launched the North American Free Trade Agreement (NAFTA) which, if not exactly a free trade initiative, was a path-breaking compromise to drastically reduce bar- riers to intra-regional trade.1 But for the Mexican government at that time, NAFTA represented much more than a trade-boosting venue. It was the culmination of a radical change in the country’s development strategy which had been implemented since the mid-1980s. Pg 1095-1096

2. The first was to set the Mexican economy on a non-inflationary, export- led growth path driven by sales of manufactured goods, mainly to the United States. The underlying assumption was that NAFTA, together with the drastic macroeconomic reforms and rapid, unilateral trade liberalization that had been initiated in the second half of the 1980s, would encourage local and foreign investment in the production of tradable goods to exploit Mexico’s potential as an export platform to the United States.

3. The second — and politically decisive — objective was to guarantee the lock-in of Mexico’s macroeconomic reform process. Indeed, the government of President Salinas (1988–94) claimed that NAFTA imposed international legal and extra-legal constraints that would deter any attempt by subsequent governments in Mexico to return to trade protectionism.

4. ABSTRACT This article examines Mexico’s industrial policy and economic performance, focusing on an analysis of the structural changes in its manufacturing sector associated with NAFTA. The aim of the article is to improve our under- standing of why the post-NAFTA evolution of the Mexican economy has been characterized by lights and shadows, with low inflation, low budget deficits and a surge in non-oil exports on the one hand, and on the other hand a slower than expected expansion of economic activity and employment. The article also presents some policy implications on the need for a new development agenda if Mexico is to finally succeed in its quest for high and sustained economic growth.

5. Moreno-Brid, J. C., Santamaría, J., & Rivas Valdivia, J. C. (2005). Industrialization and Economic Growth in Mexico after NAFTA: The Road Travelled. Development & Change, 36(6), 1095-1119. doi:10.1111/j.0012-155X.2005.00451.x

6. Reference

7. A bstract This article analyzes Mexican trade in manufactured goods at the subsector level for the period 1993-2013. The results show that underlying dynamic manufacturing exports is a high depen­ dency on manufacturing imports, particularly of capital and intermediate goods and high tech­ nology inputs. This has led to important deficits in the trade balance for important manufactur­ ing sectors. In addition, although the Mexican economy has had trade surpluses with both Canada and the United States, it has shown increasing trade deficits vis-à-vis China, Japan, Ko­ rea, and the European Union, particularly in the manufacturing sector. Key words: exports, manufacturing, n a f t a , China, international trade

8. MENDOZA COTA, J. E. (2015). Has Mexican Trade in Manufactured Goods Reached Its Limits under NAFTA? Perspectives after 20 Years. Norteamérica: Revista Académica Del CISAN-UNAM, 10(2), 69-98.

9. The North American Free Trade Agreement (nafta) brought about favorable condi­ tions for the economic growth of Mexico based on manufacturing exports. In partic­ ular, the comparatively low wages and proximity to the U.S. market increased the profitability of foreign direct investment (fdi) and exporting firms. It is worth men­ tioning that the manufacturing sector, and specifically the automobile and electronic subsectors, expanded rapidly during the 1990s. PG 70

10. In spite of the initial rapid growth of manufacturing sector output and exports, several authors have pointed out that there has not been an economic convergence between Mexico and the United States (Blecker, 2003), that liberalization and inte­ gration policies applied in Mexico were not accompanied by development policies to encourage investment in research and development (Zepeda, Wise, and Gallagher, 2009), and that sectoral policies for promoting innovation and manufacturing chains have been lacking (Moreno-Brid, Santamaría, Rivas, 2006).

11. The objective of this article is to analyze the trend and structure of Mexican trade in manufactured goods in the context of nafta, particularly the exports, and discuss the effects of the trade balance on the macroeconomic performance of Mexi­ co's economy. It is organized as follows: the first section analyzes the expansion of trade in North America and the effect of nafta on the economic integration of the re­ gion; the second section describes the characteristics and limitations of the develop­ ment of Mexican trade in manufactured goods; the third section analyzes the impact of the Chinese economy's increasing presence both in the United States and Mexico; and, finally, the last section presents concluding remarks about the probable limita­ tions of Mexico's trade in manufactured goods in the context of nafta.

12. A number of empirical studies have been carried out, based on a production function including exports, with the aim of corroborating the externalities of exports and spillover effects to the rest of the economy. The argument given to support this positive relationship is based on the effect of exports on the overall productivity of the economy according to the following considerations: All three PG 71

13. a) Exports contribute to economic growth by increasing capacity utilization and economies of scale, and generating competition that promotes incentives for technological improvements and better management. As a result, marginal productivities are higher in export industries (Feder, 1983)

14. . b ) Exports are concentrated in efficient economic sectors and, therefore, export ex­ pansion increases the overall total productivity of the economy (Balassa, 1985).

15. Effect of Exports

16. Trade Expansion

17. Mexican trade has increased very rapidly since the establishment of nafta (Graph 1). As a result, the share of exports in Mexico's gdp increased from 8.56 percent in 1993 to 36.95 percent in 2013 (Table 1). Between 1993 and 2013, exports grew 9.96 percent on average annually, while imports grew 8.82 percent. Both Canada and the United States accounted for 94.56 percent of Mexico's total exports in 1994; in 2013 that share dropped to 91.71 percent (inegi, 2014p). However, even though the share of Mexican exports to both the United States and Canada dropped, the U.S. accounted for 88.66 percent of total trade, while Canada represented only 3.10 percent (Graph 2). Pg72

18. Result of trade expansion

19. As a result of the expansion of Mexican exports, the trade balance with the U.S. became positive and helped offset to a certain extent the Mexican economy's large trade deficit (Graph 3). However, it is important to point out that the increasing trade and flows of fdi to Mexico generated a close correlation between Mexican ex­ ports and the changes in U.S. economic activity. As shown in Graph 4, the logarithm of the indices of growth for both Mexican exports and the U.S. gdp showed that, with the exception of the years 1995, 1996, and 1997, when the Mexican economy went through an economic recession generated by its own macroeconomic disequilibri­ um, the growth of Mexican exports and the growth of the U.S. gdp exhibited the same business-cycle trend, with an expansion from 1998 to 2000, a downturn from 2007 to 2009, and an important recovery in 2010 and 2011. PG 74-76

20. 

21. Limitations of Mexican trade

22. One of the main features of Mexican export expansion under nafta has been the in­ creasing share of manufactured goods within total exports. Therefore, the growing relevance of exports in Mexico's economic activity is mainly related to the dynamics of manufacturing exports. After nafta came into effect, the share of manufactures in Mexico's total exports increased from 79.22 percent in 1993 to 88.66 percent in 2001. As a result of the 2008 international recession, that percentage fell to 79.25 percent and then increased again to 82.78 percent in 2013. It is worth mentioning that in that year, the share of total exports within gdp was 36.95 percent, showing the importance of exports for the Mexican economy's performance (Table 1). Pg77-78

23. Auto Industry

24. The expansion of the maquiladora industry during the 1990s has been well docu­ mented (Moreno-Brid, Santamaría, and Rivas, 2005). The accelerated growth of Mexi­ can manufactures was linked to the development of supply chains and their impor­ tance in the competition in global markets for low-cost intermediate inputs. About 50 percent of the volume of Mexico's manufacturing exports has been produced by the assembly plants (maquiladoras), which import intermediate inputs from abroad and, then, after assembling intermediate and final goods, export them back to the U.S. (Hanson, 2010).

25. Conclusion

26. Mexican foreign trade expanded in the 1980s and 1990s as a result of Mexican eco­ nomic liberalization policies and also due to the positive effect of becoming a mem­ ber of nafta. The dynamics of Mexican foreign trade are characterized by a large concentration of exports and imports to and from the U.S. and, to much lesser ex­ tent, to and from Canada, the other member of the trade agreement. We can conclude that the most distinctive aspect of this trade expansion was the accelerated growth of manufacturing exports, which allowed a sustained trade sur­ plus vis-à-vis the U.S., Mexico's main trade partner. Also, as a result of U.S. American fdi growth in Mexico, combined with the trade expansion, a synchronization of the highly volatile Mexican business cycle to that of the U.S. economy has taken place, making the former dependent on the dynamics of the latter. Pg 90

27. Conclusion to Auto industry Under nafta, the manufacturing sector has been successful in increasing pro­ duction in the automotive industries. Thus, its achievements have been concentrat­ ed and have not reduced the trade deficit, while manufacturing imports have broad­ ened to encompass the majority of manufacturing activities. It has been documented that the dynamics of the exporting manufacturing activities respond to multination­ al corporations' vertical integration strategies. As a result, the structure of imports for Mexican foreign trade is concentrated in intermediate inputs that have been a factor in the manufacturing sector's sustained trade deficit. PG 91

28. NAFTA, and the package of trade liberalization and economic reforms implemented since the mid-1980s, have so far had mixed results for the Mexican economy. On the one hand, the fiscal deficit and inflation were drastically reduced, and have remained at low levels for a number of years. FDI inflows increased and helped to trigger an export boom in manufactur- ing that transformed Mexico’s insertion in the world economy. Within twenty-five years, it went from being essentially an oil-exporting country to becoming a major export platform of manufactured goods, including vehi- cles, auto parts, ready-made clothing and electronic products, to the US. PG 1115

29. Thakkar, B. S., & Sands, S. K. (2011). Influence of NAFTA on Current US Economy. Perspectives On Global Development & Technology, 10(1), 143-155. doi:10.1163/156914911X555161

30. Abstract The current unemployment rate in US is around 10 percent and is significantly lower in Mexico. The regional trade agreements such as the North American Free Trade Agreement (NAFTA) were intended to ease and ultimately reduce barriers to allow businesses to flourish in North America, but current economic conditions are having a negative effect on export, import, and many of the economic indices. This paper describes the relationship between NAFTA's execution and the general health of the current economy. It is suggested that the time is ripe to review and analyze NAFTA's effectiveness in managing the current economy, globalization trends and challenges.

31. The first three objectives of NAFTA are to “eliminate barriers of trade in, and facilitate the cross-border movement of goods and services between the territories of the Parties; promote conditions of fair competition in the free trade area; and increase substantially investment opportunities in the territo- ries of the Parties” (NAFTA Secretariat 2010). In accomplishing these objec- tives, one very important outcome to American businesses is the development of future markets. Because market growth in current developed countries is limited, new markets must be created in current developing countries. There- fore, improving the economic conditions of developing nations becomes a priority. PG 144

32. In conclusion, the data obtained from Government sources shows currently there is a definite economic downturn with higher unemployment, but it does not indicate that the implementation of one of the largest regional trade agree- ments, NAFTA, has any significant effect on current conditions. It does reveal that other economic realities such as the demand for lower-priced consumer goods and political decisions might have a greater effect in managing the cur- rent economy, globalization trends, and challenges. The data does show that the American earning power has not decreased, but slowed. During the same period of time since the implementation of NAFTA, Mexican earning power has increased substantially. This is a positive effect in increasing the develop- ment of the Mexican economy. Because agreements like NAFTA do have an effect on economic growth in developing countries like Mexico, it is difficult to prove that they help create global economic disasters.

33. Another fact to note is that according to the World Fact Book (2010), the distribution of family income as presented through the Gini Index was 53.1 in 1998 and 48.2 in 2008. The United States Gini Index was 45 in 2007. This indicates Mexico is moving toward parity. Pg 154

34. Family income Comparison between Mexico and US

35. The ranks of that middle class, or those making between $7,200 and $50,000 a year, have swelled to record levels of around 10 million families. That’s equal to nearly 40% of all Mexican households, vs. 30% just a few years ago. It helps that for almost a decade now, wages have been rising faster than inflation. In addition, women are having fewer children, and more of them are joining the workforce, giving households more money to spend and save (p. 153

36. The table shows a substantial growth in per capita purchasing power as compared to the United States in 2008 and 2009. Conclusions here could indicate that agreements like NAFTA are working to help developing countries improve their population’s personal income, while not negatively affecting GDP per capita growth in the United States, thus potentially creating new markets in the long-term. PG153

37. Montenegro, C. E., & Soloaga, I. (2006). NAFTA'S TRADE EFFECTS: NEW EVIDENCE WITH A GRAVITY MODEL. Estudios De Economia, 33(1), 45-63.

38. This paper estimates econometrically the impact of NAFTA on US-Mexico and US-third countries (groups of countries) trade flows. Using a traditional gravity-equation framework, we try to see to what extent the bilateral trade flows between the US and different countries differ from a gravity-type specification. By incorporating a series of dummy variables into the specification, we interpret the changes in these dummy variables over time as evidence on whether NAFTA affected the trade patterns. The main conclusion is that NAFTA did not have a significant effect on US trade patterns, neither with Mexico nor with other countries in the world (with the exception of CACM).

39. NAFTA is said to have been the first modern trade agreement between the developed world and a developing nation. As such, the agreement started with significant economic asymmetries among partners, ranging from gross domestic product (GDP) per capita to factor en- dowments to institutional development, which increased the likelihood of a deeper impact on Mexico’s economy and institutions than on those of Canada or the United States.Pg 46

40. Although these asymmetries also include tariff rates, the unilateral trade liberalization undertaken by Mexico in the mid- to late 1980s reduced significantly the distances among NAFTA’s partners’ trade regimes.4 When NAFTA was signed (1992), the average applied most-favored-nation (MFN) base rate for Mexico was 10 percent while the average U.S. rate was about 4 percent. At the time of implementation (January 1, 1994) tariffs for about half of all import categories were eliminated immediately while most of the remaining tariffs were set to disappear within five years. PG46

41. Thomas, C. (2010). Globalization and the Border: Trade, Labor, Migration, and Agricultural Production in Mexico. Mcgeorge Law Review, 41(4), 867-889.

42. Hymson, E., Blakenship, D., & Daboub, A. (2009). INCREASING BENEFITS AND REDUCING HARM CAUSED BY THE NORTH AMERICAN FREE TRADE AGREEMENT. Southern Law Journal, 19(1), 219-243.

43. The article presents an analysis on the advantages and disadvantages concerning the implementation of the North American Free Trade Agreement (NAFTA) on January 1, 1994 in the U.S. It explores the theoretical arguments for the pros and cons of free trade under the imposition of NAFTA including provisions, neo-protectionism, and neo-liberalism. It explains the trade relations of the U.S to Mexico, with details on the impact of NAFTA on American trade and Mexican employment, agricultural productivity, and real wages. It examines the labor and environmental provisions applied to NAFTA, North American Agreement on Labor Cooperation (NAALC), and North American Agreement on Environmental Cooperation (NAAEC) for dispute resolution. The author contends the improvement of countries without NAFTA.

44. Argumments for Nafta

45. Arguments Against Nafta

46. The arguments for passing NAFTA were: (1) “comparative advantage” in trade would reduce production costs and increase productivity by permitting increased specialization, improved capital flows, and expanded markets;7 (2) reduced impediments would expand trade between the U.S., Canada, and Mexico;8 (3) free trade would improve the economic well being of residents of the three countries through lower prices and increased economic growth;9 (4) NAFTA would increase Mexican economic and political stability; and (5) NAFTA would slow immigration to the U.S. from Mexico.PG 220

47. Arguments against NAFTA included: (1) Mexico’s low wages would lead to lower wages in the U.S., reduce productivity, and reduce income;11 (2) capital would flow from the U.S. to Mexico, reducing capital available in the U.S. and adversely affecting U.S. productivity; (3) free trade would not increase the wages of Mexican workers; (4) high skill jobs would be pushed toward the U.S. and low skill jobs toward Mexico, causing workers in both countries to lose jobs and be worse off;12 (5) farmers in both countries argued that agricultural jobs would move to the other country;13 (6) in the U.S. labor objected that it would lose U.S. jobs to Mexico;14 in Mexico labor objected that it would lose jobs to the U.S.;15 (7) NAFTA would generate increased migration to the U.S.;16 thus harming Mexico’s economy and contributing to its social problems. PG 220-221

48. NAFTA eliminates tariffs on goods moving between the three member countries; each country’s products are treated the same as the importing country’s products.18 The imposition of taxes on either imports or exports is prohibited.19 In addition, non- tariff restrictions on trade such as quotas or licensing requirements are prohibited.20 There are limited exceptions to these rules governing energy and basic petrochemicals, of which the most extensive are found in Annex 602.3 which limits exploitation of crude oil in Mexico to PEMEX (the Mexican government oil company) and export of natural resources generally to the Mexican government.21 Similarly, a party may deny another party the right to own or build telecommunications transmission networks or transmission services.22 While the general rule is that there can be no discrimination against goods of another NAFTA country, even in government procurement,23 NAFTA does contain an exception for domestic production for national defense purposes.24 Whether these free trade provisions have been beneficial or harmful to the U.S. or to Mexico are subject to testing based on theoretical arguments supported or refuted by empirical evidence.pg 221

49. Mexico shifted from a closed economy characterized by substantial government intervention in economic affairs to a free market neo-liberal economic regime.25 Neo-protectionists want to reverse the shift to a global market economy, arguing that because some businesses contracted and laid off workers as a result of increased competition while others expanded and hired workers as a result of removal of trade barriers, the result was “ruinous” competition.26 They claim the economy should be closed because free trade (i.e. “neo-liberal” policies or “economic liberalism”)27 is to blame for Mexico’s economic ills.28 The more thoughtful objection to eliminating trade barriers is made by those who argue removing trade barriers reduced the government’s ability to redistribute resources within the country so as to ameliorate poverty and encourage economic growth and employment.PG 222

50. Some have argued that NAFTA has been harmful to one or all of the trading partners.49 Robert Scott and his colleagues at the Economic Policy Institute (EPI)50assert that because of NAFTA “over a million jobs that would otherwise have been created were lost, and wages were pressured downward for workers with less than a college education.”51 According to Scott, “growing [U.S.] trade deficits with Mexico and Canada have displaced production that supported roughly 660,000 (manufacturing only) and 1.0 million (total) U.S. jobs . . . while imports displaced domestic production that would support 2 million jobs.”52 Scott claims NAFTA is “part of a long-term campaign by conservative business interests in all three countries to rip up their respective domestic social contracts.” 53 He continues: “The reality is that the denial of social protections in the rules of an internationally integrated market inevitably undermines the protections established in the previously separate domestic economies after decades of political struggle.”54 His real complaint is with neo-liberal laissez faire capitalism, “the ‘vision’ of NAFTA is profoundly reactionary: it pushes nations back toward a 19th century ideology in which government’s economic function is to protect the interests of investors, while working people—the overwhelming majority in each nation—are left to fend for themselves.”PG 225

51. UNempylomnet

52. More fundamentally, Scott does not show that employment fell—only that employees lost jobs in some industries; the evidence shows employment did not fall.61 The Carnegie Report found that employment stayed the same or increased slightly as a result of NAFTA.62 The World Bank’s analysts found that the U.S. had a net gain in employment of 270,000.63 Hufbauer and Schott estimated that employment was probably neutral.64 The U.S. Trade Representative estimated that NAFTA created 914,000 jobs.65 Before NAFTA, U.S. unemployment was higher than after. Unemployment in the United States in 1991 was 6.8%; in 1992 it was 7.5%; and in 1993 it was 6.9%.66 From 1997 through 2007 unemployment generally was below 5%, exceeding that level only in 2002 (5.8%), 2003 (6%), 2004 (5.5%) and 2005 (5.1%).67 It is therefore difficult to argue that NAFTA generated unemployment. Pg226

53. From the Mexican perspective jobs were generated by increased U.S. investment in Mexico that increased Mexican employment.68 By 2003, Mexican employment related to NAFTA increased by 500,000 while overall employment in Mexico was falling.69 In both countries increased trade was accompanied by a decline in the rate of increase in prices caused by increased productivity.70 The governments of both countries believed that NAFTA would increase the rate of economic growth in both the United States and Mexico by increasing access to the other country’s markets so as to increase stability and demand for goods.71 The U.S. trade representative shows that NAFTA expanded the Mexican economy by expanding exports, increasing wages, increasing foreign investment, and strengthening the agricultural industry by encouraging export of agricultural products.PG 226-227

54. Arguments against NAFTA are neo-protectionist arguments made by those opposed to “economic liberalism”73 that run counter to contemporary economic analysis of both U.S. and Mexican economists.74 As Dornbusch, who trained the current generation of Mexican economists, points out, making the country attractive to investors, producing products that can be sold in other countries, expanding the economy, and reducing costs of production coupled with a sound monetary policy are the tools with which to grow an economy. Failure to implement such plans properly imposes costs on the society, just as much as failing to implement any economic plan will.Pg227

55. Employment

56. Mexico’s real economic growth between 1994 and 2003 was 1.8% per capita.76 During the same period there was an increase in the workforce of 2.8% per year.77 TheMexican labor force grew from 32.3 million in 1994 to 43.4 million in 2005,78 and to 45 million in 2008.79 While there is more unemployment now than there was before NAFTA went into effect, the evidence suggests that without NAFTA the unemployment problem would be worse.80 Mexico’s declining economic growth rate after the 1960’s and 1970’s81 is explained by increased competition from low labor cost countries.82 Mexico’s manufacturing and raw materials exports have grown both as a share of the world’s trade and in absolute terms. NAFTA was not the problem. PG 228

57. Chavez, M. (2002). The Transformation of Mexican Retailing with NAFTA. Development Policy Review, 20(4), 503-513.

58. ABSTRACT In this paper, I examine the impacts of trade and investment liberalization on the wage structure of Mexico. Part one of the paper surveys recent literature on the labor-market consequences of Mexico’s economic reforms in the 1980?s. Mexico’s policy reforms appear to have raised the demand for skill in the country, reduced rents in industries that prior to reform paid their workers high wages, and raised the premium paid to workers in states along the U.S. border. These changes have resulted in an increase in wage dispersion in the country. Part two of the paper examines changes in Mexico’s wage structure during the 1990's. In the last decade, Mexico has experienced rising returns to skill, which mirror closely wage movements in the United States. There is, however, little evidence of wage convergence between the two countries. Regional wage differentials in Mexico have widened and appear to be explained largely by variation in regional access to foreign trade and investment and in regional opportunities for migration to the United States. I discuss implications of Mexico’s experience for the rest of Latin America in the event a Free Trade Agreement of the Americas is enacted.

59. It unilaterally liberalized foreign trade and investment policies in the 1980’s and then enacted NAFTA in 1994, which further reduced trade barriers and helped lock in reform by enshrining it in a multilateral treaty. Mexico is now as closely tied to the North American economy as at any point in its history. In 2000, it sent 88.7% of its exports to and bought 73.1% of its imports from the United States. Greater openness has helped increase the share of trade in Mexico’s GDP from 11.2% in 1980 to 32.2% in 2000. PG 1

60. Hanson, Gordon H. WHAT HAS HAPPENED TO WAGES IN MEXICO SINCE NAFTA? IMPLICATIONS FOR HEMISPHERIC FREE TRADE http://www.nber.org/papers/w9563.pdf

61. One is by equalizing the price of traded goods between economies. Trade theory predicts that convergence in goods’ prices between countries creates pressure for convergence in factor prices. In Mexico, this would affect both wage levels and the relative wages of low- and high-skilled labor. Pg 2

62. An additional channel through which trade reform may shock labor demand is through its impact on capital flows. Given that capital appears to complement skilled labor, capital inflows may increase the demand for skill. In Mexico, NAFTA appears to have raised capital inflows in part by raising investor confidence in the country’s commitment to free trade. PG 2

63. In Mexico’s export assembly sector, capital inflows expand trade directly. The creation of export assembly plants, or maquiladoras, by U.S. firms in Mexico has increased trade in intermediate inputs. In 2000, maquiladoras accounted for 47.7% of Mexico’s exports and 35.4% of Mexico’s imports.

64. In particular, Mexico shares a land border with the United States that creates opportunities for migration abroad that other countries do not enjoy. During the 1990’s, net immigration from Mexico in the United States was about 400,000 individuals per year. In the absence of migration flows, trade reform in Mexico might have generated even more trade and FDI than has occurred. Any estimate of the impact of regional free trade on Mexico, then, may understate the impact an FTAA would have on the rest of the region

65. Since 1980, the country has had three currency crises, bouts of high inflation, and severe macroeconomic contractions. The reform of the country’s trade and investment policies has been, in part, a response to this turmoil. Following a balance of payments crisis in 1982, the country eased restrictions on maquiladoras. In 1985, Mexico joined the General Agreement on Trade and Tariffs (GATT), which entailed cutting tariffs and eliminating many non-tariff barriers. In 1989, Mexico eased restrictions on the rights of foreigners to own assets in the country. Pg 3-4

66. Since the mid 1980’s, Mexico has experienced widening wage inequality associated with rising returns to skill. Cragg and Epelbaum (1996) show that between 1987 and 1993, though average real wages rose by 30%, the wages of urban workers with a primary education (grade six completed) fell relative to the wages of urban workers with secondary education (completed grade nine) by 15% and relative to the wages of urban workers with post-secondary education by 60%. The returns to labor-market experience also rose markedly over this time period. Skill premia continued to rise in the 1990’s. Robertson (2001) finds that the annual return to schooling for urban workers rose from 0.035 in 1987 to 0.05 in 1994 and to 0.07 in 1998. Consistent with evidence that skill premia and average educational attainment among workers have increased simultaneously, Cragg and Epelbaum (1995) suggest that Mexico’s rising skill premium is due mostly to increases in the relative demand for skill. PG 5

67. Higher Education In Mexico

68. Reasons For Higher education

69. Why has the relative demand for skilled labor in Mexico risen? The literature proposes a several answers to this question. The one that has attracted the most attention is that rising skill premia are due to trade and investment liberalization. Attributing rising skill premia to trade reform may seem counterintuitive, given Mexico’s presumed comparative advantage in low-skill activities (Leamer, 1993). The natural expectation might be that skill premia in Mexico would fall, not rise, after liberalization. Pg 5

70. Wage changes in Mexico are positively correlated with wage changes in the United States. This suggests that there is at least partial labor-market integration between the two countries. A shock that raises U.S. wages by 10% would raise wages in Mexican interior cities by 1.8% and wages in Mexican border cities by 2.5%. Wage changes in Mexico are negatively correlated with the lagged U.S.-Mexico wage difference, which suggests that over time wages in the two economies tend to converge. The estimated convergence rates are very rapid, with equilibrium U.S.-Mexico wage differentials being reached within one to two quarters. PG 10

71. Wages comparison

72. http://www.nber.org/papers/w9563.pdf

73. Abstract: The NAFTA Preference and U.S.-Mexico Trade* Laurie-Ann Agama Christine A. McDaniel October 2002 Draft - Please comment This paper focuses on the U.S. tariff preference afforded to Mexico vis-à-vis non-NAFTA trading partners, and allows us to evaluate the impact of NAFTA in a manner consistent with the idea behind a preferential trading agreement. The estimation technique exploits the time-varying dimension of the tariff preference, over 1983 to 2001. We find that a higher tariff preference corresponds to increased U.S. import demand for goods, and that import demand was more responsive to changes in the tariff preference once NAFTA was in place than it was on average.

74. Agama, L. A., & McDaniel, C. A. (2002). The NAFTA Preference and US-Mexico Trade. USITC, Office of Economics Working Paper.

75. We regard the non-NAFTA rate better than the often-used MFN rate, particularly at the HTS-6 level, given the various arrangements and trading agreements that the U.S. has with particular countries, e.g., developing countries (Generalized System of Preferences), Andean region, and Caribbean countries. Using the MFN rate will tend to over-state the actual preference. Pg 4

76. Another implication from our results is the impact on trade. Since NAFTA was implemented, the cumulative impact of NAFTA-related tariff preferences on U.S.-Mexico trade amounts to approximately $11.2 billion. The econometric results from which this estimate is calculated were statistically significant at the five percent level and a 95 percent confidence interval suggests a range of the cumulate trade impact from $9.9 to $12.5 billion. This figure reflects only the tariff preference aspect of NAFTA. It is interesting to compare it to the trade effects from NAFTA of $20.5 billion found by Gould. Note that Gould’s figure reflects the trade effects of all aspects of NAFTA as well as all other trade-related events and so the disparity between our figure and Gould’s is not surprising. PG16

77. The econometric results for Mexican demand for U.S. exports are reported in table 5. Because our calculated tariff preference series is only from 1994 through 2001 we can only consider the responsiveness to the NAFTA tariff preference. On the other hand, the export demand specification was a somewhat cleaner exercise in that our pricing series match the theoretical specification. The results on the control variables were generally as expected. Increases in the Mexican domestic price correspond to increases in U.S. export demand, as expected. Mexico’s per capita GDP is positively and significantly related to export demand, also as expected. The U.S. export price appears not to be a significant determinant of export demand. The peso crisis was not significant, again, probably captured in the nominal exchange rate, which was negative and significant as expected. Mexico’s domestic reform period appears not to have had a significant affect on export demand in this model.

78. In this paper we examine the trade effects of NAFTA and focus on the U.S. tariff preference afforded to Mexico vis-à-vis non-NAFTA trading partners. This allows us to observe the policy change in a manner consistent with the idea behind a preferential trading agreement. Prior to NAFTA, Mexico was receiving U.S. tariff preferences under the U.S. under the Generalized System of Preferences (GSP) and a sizable share of Mexican exports entered under GSP or at low rates under production-sharing arrangements. Benefits from these programs, particularly GSP, are granted with a certain degree of uncertainty, whereas NAFTA tariffs locked in the tariff cuts. Thus, it is informative to exploit the time variation in the tariff preference to consider the responsiveness of imports to the tariff preference, both in general and under the FTA. We find that U.S. import demand for Mexican goods is responsive to tariff preferences, and that responsiveness is greater during the NAFTA years. We also find that Mexico’s demand for U.S. exports was responsive to the NAFTA preference. The increased import demand responsiveness to the tariff preference was NAFTA was in place could reflect the confidence and certainty that accompanied the NAFTA-related tariff cuts; it may also reflect the corresponding removal of nontariff barriers and investment-related provision in NAFTA that indirectly affected trade. pg 17

79. https://www.usitc.gov/publications/332/ec200210a.pdf

80. Between 1986 and 1990, the Mexican government reduced tariffs and import license coverage by more than 50%. The author, using micro-level data, analyzes the impact of trade reform on Mexican wages and employment. Industries that had greater reductions in protection levels, she finds, had a larger percentage of low-skill workers. Wage dispersion increased in both the non-tradables sector and, to a much greater degree, the tradables sector. This pattern suggests that trade reform increased wage inequality. The decline in import license coverage appears to have reduced relative wages of workers in reformed industries by 2%, but did not affect relative employment. Reductions in tariffs had no statistically significant effect on relative wages or relative employment.

81. Feliciano, Z. M. (2001). Workers and trade liberalization: the impact of trade reforms in Mexico on wages and employment. Industrial & Labor Relations Review, 55(1), 95-115.

82. Changes in thewage structurein Mexico during this period are consistent with a storyof decreasing relative demand for low-skilledworkers. Wage dispersion in- creased in Mexico from1986 to 1990. The differencebetweenthe90thand 10thper- centiles increased by .09 log wage points (see Table 5). Most of the increase in dispersion was due to an increase in the wage gap between the 90th and 50th per- centiles. The differencebetweenthe90th and 50th percentiles increased by .11 log wage points,while the differencebetween the50thand the10thpercentilesdecreased by.02logwagepoints Pg101

83. Wage dispersionalso increased between workerswithcollege education (13 or more yearsofschooling) and thosewithlessthan a high school diploma (O to 11 years of schooling). The differencein log wages between these groups increased by .08 points. The wage gap betweenworkerswith high and low levels of experience also in- creased.Thedifferentiabletweenwagesof workerswith6 or more yearsof experience and those with0 to 5 yearsof experience increased by .06 log wage points. pg101-102

84. Evidence in thispaper suggeststhattrade liberalizationhad onlya modestimpactin the Mexican labor market. Trade reform had theeffectofdecreasingrelativewages ofworkersin industriesthatlostprotection throughdecreasing license coverage. On average, relative wages of these workers decreased by 2%. Trade reformwas also associated withgreaterwage dispersion and adecreaseintherelativewageoflessskilled workers.Relativeemploymentand average weeklyhours of full-timeworkerswere not affectedby the loweringof trade barriers.The increasesinwagedispersionbetween 1986and 1990maynotbe entirelyattribut- able totradereform.Policychangessuch as the decline in the real minimumwage and concessions made byunions mayhave contributed to the increase in wage in- equality. However,thesetwochangesin the Mexican labor market must have af- fectedworkersin all sectorsoftheeconomy, whiletradereformmusthave had a greater impact on workersin the tradables sector, at least in the shortrun. Evidence shows that the increase in wage inequality was muchlargerin thetradablessectorthanin the non-tradables sector. This suggests thattradereformhad theeffectofincreas- ing wage inequality. Pg111-112