Volume 46 Number 180,
January - March 2015
Productive Restructuring and Integration: nafta, 20 Years Later
Clemente Ruíz*
Date received: July 1, 2014. Date accepted: October 27, 2014
Abstract

When the North American Free Trade Agreement (NAFTA) entered into force, there were expectations of stronger growth, more jobs and improved living conditions in Mexico, the United States and Canada. Twenty years later, although progressive productive integration has been achieved, its effects have been tremendously disparate, and welfare standards have diverged. This article proposes that the most positive aspect of the relationship between Mexico and other NAFTA members has, undoubtedly, been the development of global value chains, which emerged from enormous growth in trilateral trade. Finally, this work offers some reflections to bear in mind for the future of the agreement, aiming to build more solid and mutually beneficial economic and social relationships among the three countries.

Keywords: Commercial exchange, productive integration, global value chains, foreign investment, jobs.

INTRODUCTION1

In August 1992, negotiations for the Free Trade Agreement between Mexico, the United States and Canada (North American Free Trade Agreement, NAFTA) came to an end. At the time, this was the most ambitious agreement ever signed between a developing country and two fully developed economies. The agreement contained innovative provisions that would serve as the model for a new generation of free trade agreements throughout the 1990s and beginning of the twenty-first century. In light of its transcendence, then-President of Mexico Carlos Salinas de Gortari gave a speech to the nation in which he laid out the challenges and benefits that signing NAFTA would bring: i) Mexico would become the "bridge" between Latin America and the United States, "a global economic hub," ii) the United States market would be guaranteed "broad and permanent access" to national products, with a favorable impact expected for companies as a result of economies of scale, which would create jobs, reduce costs and increase efficiency, iii) greater legal certainty for trade with member countries, iv) specialization in sectors in which Mexico had advantages, with the chance to have greater access to a wider range of technologies, v) benefits for consumers in terms of a broader selection of higher quality products at lower prices, vi) increased investment in Mexico, which would translate into creating more and better paid jobs, all of which would, in the end, generate higher growth rates.2

Eventually, NAFTA was approved by the congresses of the three countries and took effect in January 1994. Assessments of NAFTA after its first decade suggested that many of the foreseen benefits had not materialized, especially those related to increased and sustained economic growth, fixed capital investment and job creation (Moreno-Brid et al., 2006; Blecker, 2005; Calva, 2004). Twenty years have now passed since the agreement entered into force and its effects have been decisive in shaping the productive structures of the three signatory countries. This article ascertains that the reality of the situation reveals a long transition towards the productive integration of the three economies, but with significant asymmetries.



THE ECONOMIC GROWTH PROCESS IN AN ENVIRONMENT OF INTEGRATION

In the 1990s, there were expectations that NAFTA would increase the economic growth rates of the three countries involved. Two decades later, there is clear evidence that this is not the case. Looking at a longer time period, from the 1960s to the present, it emerges that the strongest economic growth phase took place between 1960 and 1981, in keeping with economic growth theory that less-developed countries experience higher growth, and as they develop, the growth rate falls, leveling off at rates observed in industrialized countries (Kuznets, 1956). In 1982, with the onset of the debt crisis, growth in all three countries was curtailed, but especially in Mexico, as shown in Table 1. In the 1990s, when NAFTA took effect, the expectation was that Mexico would grow even faster. However, what we have seen is only a small increase in the growth rate, with a trend towards homogenous rates among the countries in the region. It could be said that growth rates have synchronized at an annual average of around 2.5%.

Low economic growth in a developing country such as Mexico has made it impossible to close the income gap with its major trade partners (Blecker and Esquivel, 2013). Even as the Mexican growth rate has waned, its population has continued to grow significantly. From 1960 to 1981, the economic growth rate was 6.8%, which helped reduce the per capita gross domestic product (GDP) gap between Mexico and the United States and Canada. In the subsequent period, from 1982 to 1993, the Mexican population grew at an annual rate of 2%, that is, above economic growth, which increased inequality with respect to its northern neighbors. From 1994 to 2013, the population growth rate fell to 1.5%, but economic growth was not enough to close the income gap, because the difference between economic growth and population growth was 1.2% in Mexico, but 1.6% in the United States and 1.7% in Canada. That means that, far from decreasing, inequality rather intensified, as shown in Figure 1.

 

 

 

Figure 1. Analysis of Sigma Convergence Between the United States, Canada and Mexico, 1960-2013

Source: Created by the author based on World Bank Data, World Development Indicators.

 

This situation put the three countries in a serious bind, because the integration process that took off with the signing of NAFTA was to take place between societies that were increasingly unequal (Blecker and Esquivel, 2013). That is, there would be greater commercial exchange and productive integration, with rising inequality,3 which could translate into an unstable political/social environment at the regional level.



THE INITIAL PROPOSAL: INCREASE THE AMOUNT OF TRADE IN THE REGION

In reality, the idea of NAFTA was to reduce the tariff protection scheme to encourage productive creation through trade and build a zone of shared prosperity. With that in mind, the proposal was to progressively eliminate tariffs to increase trade (Villarreal et al., 2013). This was done so gradually and gave rise to spectacular commercial growth. Exports from Mexico to the United States rose from around 39 billion dollars in 1993 to 299 billion dollars in 2013, an almost eight-fold increase. Meanwhile, imports from the United States went from 41 billion dollars to 187 billion in the same time period, generating a growing surplus. In this way, the deficit with which Mexico entered NAFTA became a surplus, which, cumulatively, amounted to a trillion dollars.

Although trade with Canada has increased continuously, as exports rose seven-fold and imports 9.6 times, it was not as homogenous as with the United States. Commercial exchanges with Canada have gone up and down, producing both deficits and surpluses. However, there is a cumulative deficit of 7 billion dollars. In summary, the foreign trade balance of the region is positive for Mexico, but the numbers reveal that integration has mainly taken place with the United States, and to a lesser degree with Canada.

The surplus with the United States has helped Mexico finance its strong deficits with Asian and European countries. Looking at the time period from 1993 to 2013, the trillion-dollar surplus was not enough to cover Mexico's deficit with Asia, Europe and Oceania, which amounted to 1.2 trillion. From that perspective, Mexico is only competitive in terms of exports at the regional level, because this competitiveness dissipates in the global market.

Essentially, Mexico has been transformed from a closed to an open economy, as shown in Figure 2, which reveals that the degree of economic openness measured as the ratio of exports and imports to GDP reached 64%, making Mexico one of the most open economies in the world. If we compare this number to the prevailing situation of other countries, we see that trade liberalization in Mexico is growing, something we do not see even in the United States, where the degree of openness is 30%, or in other countries like Brazil, where this figure is 28%. In that sense, Mexico has gambled on liberalization, paying little mind to the internal basis for accumulation, which is essential to generate economies of scale, and therefore compete in the global economy.

 

 

 

Figure 2. Degree of Trade Openness, 1960-2013


Source: Created by the author based on World Bank Data, World Development Indicators.

 

The impressive performance of Mexican exports has been based on the growth of certain basic products. Just five export sectors accounted for 49% of exports: motor vehicles, motor vehicle parts, oil and gas, computer equipment and audio and video equipment. Despite the fact that the majority are manufactured goods, oil and gas exports are still very important, representing around 11% of Mexican exports to the United States (Villarreal et al., 2013). However, manufactures are still the backbone of NAFTA, one of the major factors that led to the productive transformation of Mexico.

 



PRODUCTIVE TRANSFORMATION BASED ON FOREIGN INVESTMENT

Mexico’s transformation into a major export country was supported by foreign investment, mainly from the United States, increasing its investment position in Mexico from 15 billion to 102 billion dollars between 1993 and 2012 (Villarreal et al., 2013), an increase of 6.6 times. However, United States investment in Canada also increased five times during the period, starting at a larger base of 70 billion dollars and reaching 351 billion in 2012. In the same period, the net position of United States investment in Mexico, defined as foreign investment from the United States in Mexico minus Mexican investments in the United States, went from 14 billion to 86 billion dollars, while the same number for Canada went from 29 billion to 126 billion dollars. The fact that net United States investment in Canada was greater reveals that the relationship has not been symmetrical. This behavior is also evident in the fact that trade between the United States and Canada is higher than it is with Mexico, as Canadian exports to the United States are higher than Mexican exports by about 50 billion dollars.4

 



PRODUCTIVE INTEGRATION IN NORTH AMERICA: THE RISE OF VALUE CHAINS

The most positive aspect of Mexico’s relationship with its NAFTA partners has undoubtedly been the development of productive value chains, which currently dominate the international economy. Global value chains have undergone transformations over the past 20 years. In the mid-1990s, global value chains were dominated by Europe and NAFTA members, which is still the case today, but to a lesser extent. By contrast, Southeast Asian countries, China and the emerging economies of Brazil, Russia, India, Indonesia, Australia and Taiwan have gained an increasing share, as seen in Figure 3. From that perspective, NAFTA was signed at an opportune moment to enter these chains, because by reducing tariff barriers, Mexico could join complex and dynamic production processes with a spatially diverse system that allowed it to successfully enter the automobile, electronics and chemical products industries.

 

Figure 3. Regional Participation in Global Value Chains (GVC)
Note: The lines shown correspond to second-order polynomial regressions.
1 BRIIAT: Includes Brazil, Russia, India, Indonesia, Australia and Turkey.
Source: World Input-Output Database (WIOD).

 

The incorporation of this new production dynamic modernized Mexican production plants. However, it would prove difficult to go from being an assembly center to an integral part of value chains. This required local suppliers to gradually develop or foreign providers to set up shop in Mexico to supply the automobile and electronics industries. The process was undeniably heterogeneous, molded by the corporate interventions in each sector. As a result, certain chains became more complex, while others receded.

Figures 4, 5 and 6 show how the signatory countries to the agreement became integrated into value chains, looking at data from 1995 to 2009. It is noteworthy to mention that analysis was carried out for each country and a series of trends was included. First, the growth or contraction of the national contribution to the added value of what was exported for the country in question and, second, the way in which other member countries of the agreement contributed to the added value of exports for the same country. This provides us with a three-dimensional analysis that reveals the disparities between these trends.5

 

Figure 4. Mexico: Variation in Percentage Participation of Value Added Incorporated in Total Exports,
1995-2009 (By Country of Origin and Source of the Industry)


Source: Created by the author using OECD-WTO information from the Trade in Value Added Database (TiVA).

 

 

Figure 5. Canada: Variation in Percentage Participation of Value Added Incorporated in Total Exports,
1995-2009 (By Country of Origin and Source of the Industry)

Source: Created by the author using OECD-WTO information from the Trade in Value Added Database (TiVA).

 

 

Figure 6. United States: Variation in Percentage Participation Value Added Incorporated in Total Exports,
1995-2009 (By Country of Origin and Source of the Industry)

Source: Created by the author using OECD-WTO information from the Trade in Value Added Database (TiVA).

 

For Mexico, the best example of the above would be mining, where Canada6 and the United States have a higher contribution to the added value of Mexican exports, in contrast with the reduction seen in commerce sector exports. There are certain trends in how domestic added value is generated for Mexican exports:

  • Sectors in which added value incorporated into total exports fell for Mexico: agriculture, mining, food products, wood and paper, transportation and storage and other services.
  • Sectors in which added value incorporated into total exports was maintained for Mexico: textile products, chemical products and financial intermediation.
  • Sectors in which added value incorporated into total exports increased for Mexico: basic metals, machinery and equipment, electrical and optical equipment, transport equipment, commerce and services to companies.

Looking at the situation for other NAFTA members, it appears that there was indeed a displacement in intra-regional trade to Mexico’s benefit, because it is precisely for sectors in which the content of added value increased in Mexico that it fell in Canada and the United States, such as in mining, chemical products and electrical and optical equipment. In some cases, the figures reveal that in certain sectors, such as services to companies, the three countries all saw a reduced share, which can be explained by the inclusion of extra-regional value, mainly through European companies that have specialized in this area and are taking advantage of that fact.

In the realm of value chains, the automobile sector represents a paradigm, as Mexico has become extremely competitive, and is the hub behind the automobile renaissance of North America. As Ángeles Villareal and Ian Fergusson (2013) wrote in a report:

NAFTA was instrumental in the integration of the North American auto industry, which experienced some of the most significant changes in trade following the agreement. U.S. auto parts producers may use inputs and components produced by another NAFTA partner to assemble parts, which are then shipped to another NAFTA country where they are assembled into a vehicle that is sold in any of the three NAFTA countries. NAFTA provisions consisted of a phased elimination of tariffs and the gradual removal of many non-tariff barriers to trade. It provided for uniform country of origin provisions, enhanced protection of intellectual property rights, adopted less restrictive government procurement practices and eliminated performance requirements on investors from other NAFTA countries. NAFTA established the removal of Mexico's restrictive trade and investment policies and the elimination of U.S. tariffs on autos and auto parts.

The rapid development of the automobile industry is shown in Table 5, demonstrating how Mexico increased its exports to the United States market by 587%, as imports increased 245%. It should be pointed out that Canada was left behind here, evidence of the important role that Mexico played in the productive transformation of the region.

Unfortunately, these dynamics were not widespread, and in many cases, industries that had been emblematic for the country and had previously created many jobs, such as the textile, clothing and footwear industries, among others, began to decline.

 



THE HYPOTHESIS OF THE GROWTH OF BETTER-PAYING JOBS

The promises outlined in the political discourse surrounding the agreement assumed that the growth of trade and industrial development would produce positive effects for the rest of the economy, increasing employment and wages. However, job growth in Mexico did not develop as expected.7 The average growth of the economically active population since the implementation of the agreement has been 2.2%, meaning that the group rose from 35.4 million people in 1994 to 52.8 million in 2014, an increase of 17 million additional people with all the benefits of the law. However, it was not possible to create enough jobs to keep up with this growth, because the majority of activities have low multiplicative effects, as shown in Table 6, which indicates that the average multiplier was 1.47 per gross production unit value. If we carefully analyze the employment multiplier vector, it becomes clear that activities on which attention was focused to develop value chains for the agreement had multipliers below the average, creating few jobs: the transport equipment manufacturing industry had a multiplier of 1.32, while the computer and electronic accessory manufacturing industry was at 1.05. Because Mexico failed to create enough quality jobs, the country allowed informal employment to burgeon and immigration emerged as a natural adjustment measure.

These employment multipliers created 2.3 million jobs in the manufacturing sector, increasing employment for this activity by 46%. However, this dynamic did not resolve the issue of the strong growth in the supply of labor during this time period, which amounted to 17 million people. It is notable that while Mexico created jobs in the manufacturing sector, the number of jobs in this same sector fell by 4.6 million in the United States, leading some to say that Detroit had moved south of the border. This statement is true to a certain extent, because more jobs were destroyed in the United States than created in Mexico, and many manufacturing centers did indeed migrate to other regions, especially Asia.

 

 

Along with the low number of quality jobs created, real wages in Mexico deteriorated, reflected in the fact that average salaries for manufacturing employees in Mexico are only 17.8% of what is paid in the United States. This is in contrast to what has happened in Canada, where wages have been adjusted throughout the 20 years of the agreement, but are currently higher than in the United States. This wage disparity is why the inequality between the countries has not been mitigated. Because income levels cannot rise to be on par with salaries in the United States and Canada, GDP per capita has lagged behind (Blecker and Esquivel, 2013). This is an issue of productivity and policy based on low salaries in Mexico, where the minimum wage has been frozen since the 1980s, and has continued to fall behind since.

The policy implemented in Mexico has squeezed the domestic market, because low wages mean low consumption, which in turns reduces the potential for mass consumption, which is a fundamental aspect of modern capitalist growth models. To determine to what extent consumption in Mexico trailed the other two countries, consumption spending was estimated for families between 1993 and 2012 in all three countries, producing rates of 1.9% in the United States, 2% in Canada and only 1.4% in Mexico.

 

Figure 7. Hourly Wage for Manufacturing Workers as a Percentage of United States Wages, 1995-2012
Source: U.S. Bureau of Labor Statistics



REFLECTIONS FOR THE FUTURE: THE NEED FOR A TWENTY-FIRST CENTURY AGENDA

The 20 years since NAFTA commenced have seen growing integration among the three partner countries. Trans-national construction of this sort requires decades to come about, which is why it is worthwhile to conduct a joint analysis to review the pros and cons of this relationship, beyond the merely commercial aspects, to build a new and progressively integrated society. A society of this type requires greater joint investment to be on par with what has taken place in other integration efforts around the world, such as in the European Union. Over the long term (1960 to 2013), gross capital formation has been the lowest in Mexico, at 19.6% of GDP, followed by the United States at 21% and Canada with 22%. To transform the region into an area of shared prosperity, it will be essential to raise this level of capital accumulation to equalize living conditions in the three countries.

 

Figure 8. A Region with Relatively Low Capital Accumulation, 1960-2013


Source: World Bank, World Development Indicators database.

 

An agenda that aims to jointly increase investment would allow the nations to target strategic areas in which to carry out investment projects to enhance the infrastructure needed to equalize prevailing conditions in the three NAFTA countries, and therefore raise their competitiveness, in light of the challenge of the new Trans-Pacific Strategic Partnership Agreement among Asian countries – such as Korea, China and Taiwan – that maintain investment coefficients above 30% of their GDPs. This proposal would also be linked to sectors in which productive chain integration is a global advantage.

Another key element of any twenty-first agenda would be to engender the conditions in which North America can develop as a creative and innovative society, and this will require across-the-board improvements in the quality of human capital. To do so, there must be some sort of joint planning system to increase average years of education and ease the processes to receive certification from educational programs. This will also involve facilitating the exchange of experiences in research, which should be accompanied by funding mechanisms for joint development. With that said, it would be desirable to merge the agencies that currently drive research and development, leading to, as proposed during the North American Leaders' Summit 2014 (Toluca, Mexico), a Trilateral Research, Development and Innovation Council (Presidency of the Republic, 2014).

Another key point on the twenty-first century NAFTA agenda will be to set up a system to collaborate on energy, aiming for the region to become a renewable energy zone by 2050, with no fuel supply issues and energy self-sufficiency. In that sense, the goal should be to transform NAFTA countries into green economies to reduce the effects of climate change that are currently putting various zones of North America at risk.

Although all of these are key aspects of the twenty-first century NAFTA agenda, they will not be enough to reduce inequality in a reasonable time period. There must be a grand agreement to reduce inequality, and that will require a broad commitment from North American societies to setting up a mechanism to drive development in the most marginalized areas. The region needs to discuss the best way to set up compensatory mechanisms to increase standards of living in these zones, which are not limited only to Mexico, but are also found in the United States and Canada. This will undoubtedly be a difficult topic for societies to face, as there are no systems like this currently in place. The goal would be for per capita income in the region to converge throughout the twenty-first century.



ACKNOWLEDGEMENTS

I would like to thank PAPIIT, specifically project IN304514, “Corporate Development in Different Varieties of Capitalism,” for the support provided in developing this research.



BIBLIOGRAPHY

Beatty, Perrin and Andrés Rozental (2012), Forging a new Strategic Partnership between Canada and Mexico Special Report, The Centre for Internatio¬nal Governance Innovation and the Canadian Chamber of Commerce.

Blecker, Robert A. (2005), “The North American Economies after NAFTA: A Critical Appraisal”, International Journal of Political Economy, vol. 33, no. 3.

Blecker, Robert A. and Gerardo Esquivel (2013), “Trade and the Develop¬ment Gap”, in Peter H. Smith and Andrew Selee, Mexico and the United States: The Politics of Partnership, Boulder, CO, Lynne Rienner.

Calva, J. L. (2004), “Ajuste estructural y TLCAN: efectos en la agricultura mexi¬cana y reflexiones sobre el ALCA”, El Cotidiano, vol. 19, no. 124, March-April, pp. 14-22, UAM, Mexico.

Capaldo, Jeronim (2014), “Trade Hallucination: Risks of Trade Facilitation and Suggestions for Implementation”, GDAE Working Paper, pp. 14-02.

Feils, Dorothee J. and Manzur Rahman (2008), “Regional Economic Integra¬tion and Foreign Direct Investment: The Case of NAFTA”, MIR: Manage¬ment International Review, vol. 48, no. 2, pp. 147-163.

Kuznets, Simon (1956), “Quantitative Aspects of the Economic Growth of Nations: Levels and Variability of Rates of Growth”, Economic Develop¬ment and Cultural Change, vol. 5, no. 1 (October), pp. 1, 5-94.

Moreno-Brid, J.C.; Santamaría, J. and Rivas, J.C. (2006), “Manufactura y TLCAN: un camino de luces y sombras”, Economía UNAM, vol. 3, no. 8, UNAM, Mexico.

Presidencia de la República (2014), “América del Norte del siglo XXI: constru¬yendo la región más dinámica y competitiva”, agreements reached at meeting on February 19, 2014, Mexico.

Polasky, Sandra (2004), Mexican Employment, Productivity and Income a De¬cade after NAFTA, brief submitted to the Canadian standing Senate Com¬mittee on Foreign Affairs.

Villarreal, M. Ángeles and Ian F. Fergusson (2013), NAFTA at 20: Overview and Trade Effects, Congressional Research Service.

*Faculty of Economics at the UNAM, Mexico. E-mail address: ruizdc@unam.mx

1 An earlier version was presented at the seminar, "20 Years of the North American Free Trade Agreement: Old Problems, New Challenges,” held at the Post-Graduate Studies Department of the Faculty of Economics at the UNAM, on January 23 and 24, 2014.

2 Carlos Salinas de Gortari, then President of Mexico, gave this speech to the nation following the culmination of NAFTA negotiations on August 12, 1992.

3 In his article, “Trade Hallucinations: Risks of Trade Facilitation and Suggestions for Implementation," Jeronim Capaldo (2014) mentions that trade liberalization is not entirely beneficial when countries fail to implement social policies capable of compensating for the damage that trade increases can bring about, especially in terms of employment.

4 According to Beatty (2012), integration between the United States and Canadian markets dates back to the Free Trade Agreement celebrated between these two countries in 1988. As such, these asymmetrical relationships may be due to the fact that formal integration between the countries has been around for different periods of time.

5 Aiming to determine the role each country plays, the database created by the OECD in conjunction with the WTO, which describes trade relations between countries by type of economic activity, was used. This database allowed the author to break down the added value of exports in a specific country and sector for each country and sector of origin. The period analyzed is from 1995 to 2009, based on the availability of information in this data source.

6 Beatty (2012) argues that the integration of the Mexican and Canadian markets promoted investment in mining exploitation in various regions of the country, as well as the development of other industries such as aeronautics, through the company Bombardier.

7 Polaski (2004) mentions that the trade agreement attracted jobs, especially in the manufacturing sector, to Mexico. However, primary sector jobs were affected due to the growing importation of food coming from the United States.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
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