Impact of the North American Free Trade Agreement (NAFTA) on U.S.-Mexican Trade and Investment Flows

By Espana, Juan R. | Business Economics, July 1993 | Go to article overview

Impact of the North American Free Trade Agreement (NAFTA) on U.S.-Mexican Trade and Investment Flows


Espana, Juan R., Business Economics


IN DECEMBER 1992, the presidents of Canada, the United States and Mexico signed the North American Free Trade Agreement (NAFTA), creating a free trade area in North America that would be the largest of its kind in the world, with a combined GDP in 1992 of $6.9 trillion and 368 million consumers. The treaty is scheduled to take effect in January 1994, subject to ratification by the legislatures of all three countries. A bilateral Canada-U.S. free trade pact has been in place since 1989. With respect to Mexico, the new accord formalizes and cements a growing commercial relation and a series of previous bilateral framework agreements with the United States, such as those signed in 1985 and 1987.

U.S.-MEXICAN TRADE AND INVESTMENT FLOWS

As a matter of fact, trade and investment relations between the U.S. and Mexico have expanded rapidly over the past few years. Mexican economic reforms and the prospect of NAFTA have been essential factors in this evolution. Between 1986 and 1991, U.S. merchandise exports to Mexico rose by 168 percent, from $12.4 billion to $33.3 billion. Mexico is now the third largest U.S. trading partner, and, given the present rate of growth of bilateral trade, Mexico can be expected to surpass Japan to become the second largest buyer of U.S. products by 1995 or earlier.(1) Mexico also is an important destination of U.S. foreign direct investment, accounting in 1990 for approximately 4 percent of total U.S. FDI, a fraction that is likely to increase significantly over the near future. Table 1 gives an overview of the development of bilateral economic relations since 1988.

This dynamic evolution of bilateral trade and investment flows would have been unthinkable without the economic reforms initiated in Mexico in 1982 during the administration of Miguel de la Madrid, subsequently continued and expanded by Carlos Salinas de Gortari.

IMPACT OF MEXICAN ECONOMIC REFORMS ON BILATERAL EXCHANGES

In 1981, the Mexican economy experienced two major shocks: a sharp fall in the price of oil, and a steep rise in interest rates on international capital markets. So began a period marked by high inflation, capital flight, and successive rounds of devaluation. In 1982, Mexico declared that it was no longer able to service its foreign debt. To confront the crisis, the government launched the Plan for Immediate Economic Recovery, containing a series of measures aimed at curbing inflation, reducing public spending, establishing a realistic exchange rate and promoting foreign investment.

Table 1
Evolution of U.S.-Mexico Trade and Investment Flows
in billions of current U.S. dollars
                            1988   1989   1990   1991   1992(2)
U.S. Exports to Mexico(1)   26.2   31.5   37.6   44.3   48.5
U.S. Imports from Mexico    24.0   27.0   31.2   32.7   33.5
U.S. Direct Investment       1.4    1.6    2.3    2.4    2.8
in Mexico
Cumulative U.S. Direct      15.2   16.7   19.1   21.5   24.4
Investment in Mexico
Source: Banco de Mexico, U.S. Department of Commerce, U.S.
Embassy in Mexico City.
1 The figures regarding U.S. exports and imports to/from Mexico
include the value of flows in merchandise and services, as well
as investment income. It has been calculated from total Mexican
trade figures assuming that the U.S. share in Mexican trade is
equal to three-quarters.
2 Estimated

The Economic Solidarity Pact signed between the government, labor and the private sector in December 1987 represented another milestone in the government's efforts to implement economic stabilization and liberalization. An overview of the major economic policy reforms introduced in Mexico since December 1982 can be summarized as follows:

Tariff reductions. Starting in 1984, successive reductions were made in the maximum tariffs. By 1992, the average tariff was approximately 9 percent.

Accession to GATT. Mexico became a member of this organization in 1986.

Realignment of the foreign exchange rate. …

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