International TradeNorthAmericanFreeTradeAgreement

By Jason C. Prime

NAFTA Goals & Achievements On January 1, 1994, the North American Free

Trade Agreement between the United States, Canada, and Mexico entered into force.

NAFTA created the world's largest free trade area, which now links 444 million people producing $17 trillion worth of goods and services.

Source: Office of the United States Trade Representative, 2010.

NAFTA

United

States

Canada

Mexico

NAFTA Goals & Achievements From 1992-2007, the value of US agricultural

exports worldwide climbed 65% while US exports to NAFTA partners grew by 156%.

In the years immediately prior to NAFTA, US agricultural products lost market share in Mexico as competition within the Mexican market increased. NAFTA reversed this trend as the United States began to supply more than 72% of Mexico's total agricultural imports in 2007, due in part to the price advantage and preferential access that US products now enjoy.

US Imports from Mexico Exports: US$291 billion (world's

rank: 14th).  Major exports: • Manufactured goods• Consumer electronics• Oil and oil products• Aircrafts, ships and other industrial equipment• Silver, granite and marble• Computers and servers• Agricultural products (fruits, meats, processed foods,

vegetables, coffee) • Biotechnology

US Exports to Mexico Imports: US$309 billion (world's

rank: 13th).     Major imports: • Steel mill products• Agricultural machinery• Electrical equipment• Repair parts for motor vehicles and aircraft parts

Manufacturing (Capital Goods) i.e. Auto industries (Ford, GM), agricultural industries

Kellogg's moved its plants to Canada and Mexico, thus encouraging Foreign Direct Investment

NAFTA Effects on Wages

Mean annual income of Males in USA

Year All Workers

1-3 HS 4 HS 1-3 C AA BA/BS BA/BS +

1990 $29,307 $17,699

$24,553

$31,032 n/a $42,281

$46,961

1991 $29,560 $17,703

$24,314

$29,897 $32,084

$41,808

$47,350

1992 $30,186 $17,319

$24,408

$29,718 $32,046

$42,801

$49,116

1993 $32,496 $17,651

$25,501

$30,799 $32,713

$46,197

$54,682

1994 (NAFTA)

$34,031 $17,924

$26,634

$31,339 $34,966

$49,094

$56,298

1995 $35,232 $19,150

$27,952

$33,600 $35,812

$48,856

$57,018

1996 $36,830 $20,464

$29,218

$35,923 $37,654

$49,147

$58,527

Excerpt from …

Median annual income of Males in USA

Year All Workers

1-3 HS 4 HS 1-3 C AA BA/BS BA/BS +

1990 $23,341 $15,131

$21,713

$27,186 n/a $35,181

$37,860

1991 $23,686 $14,736

$21,546

$26,591 $29,358

$36,067

$39,803

1992 $23,894 $14,218

$21,645

$26,318 $28,791

$36,745

$40,557

1993 $24,605 $14,550

$21,782

$26,323 $29,736

$37,474

$41,649

1994 (NAFTA)

$25,465 $14,584

$22,387

$26,768 $30,643

$38,701

$42,027

1995 $26,346 $15,791

$23,365

$28,004 $31,027

$39,040

$43,322

1996 $27,248 $16,058

$24,814

$29,160 $33,065

$39,624

$44,161

Excerpt from …

Mean annual income of Females in USA

Year All Workers

1-3 HS 4 HS 1-3 C AA BA/BS BA/BS +

1990 $15,124 $9,124 $13,034

$16,843 n/a $22,147

$25,019

1991 $15,636 $9,022 $13,104

$16,426 $19,223

$23,237

$26,224

1992 $16,209 $9,235 $13,300

$16,941 $19,173

$24,400

$27,371

1993 $17,122 $9,661 $13,844

$17,173 $20,486

$25,579

$28,980

1994 (NAFTA)

$17,881 $9,758 $14,236

$17,594 $20,496

$26,466

$30,568

1995 $18,819 $10,263

$15,359

$18,574 $22,496

$26,927

$30,269

1996 $20,005 $10,881

$15,848

$19,828 $22,598

$28,926

$32,844

Excerpt from …

Median annual income of Females in USA

Year All Workers

1-3 HS 4 HS 1-3 C AA BA/BS BA/BS +

1990 $11,272 $7,042 $10,653

$14,748 n/a $20,363

$22,509

1991 $11,580 $7,055 $10,818

$13,963 $17,364

$20,967

$23,627

1992 $11,922 $7,293 $10,901

$14,401 $17,331

$22,383

$25,093

1993 $12,234 $7,187 $11,089

$14,489 $18,346

$22,452

$25,246

1994 (NAFTA)

$12,766 $7,618 $11,390

$14,585 $17,954

$23,405

$26,237

1995 $13,821 $8,057 $12,046

$15,552 $19,450

$24,065

$26,843

1996 $14,682 $8,544 $12,702

$16,255 $20,460

$25,192

$27,556

Excerpt from …

Changes in productivity and related data, business and nonfarm business sectors, 1959-2007

Year Business Sector

Nonfarm Sector

Business Sector

Nonfarm Sector

1990 1.5 1.5 1.3 1.0

1991 -.8 -.8 1.3 1.4

1992 4.0 3.9 2.6 2.7

1993 3.1 3.3 -.3 -.5

1994 (NAFTA)

5.0 4.8 -.7 -.4

1995 2.9 3.2 -.3 -.3

Output Real Compensation per Hour

(percent change from preceding period)

Mexican Statistics for High School Enrollment by Sex

Mexican Statistics for University Enrollment by Sex

Government Expenditure allocated to Education, Mexico

Source: UNESCO, United Nations Educational, Scientific and Cultural Organisation

Is this in step with the theories of the Heckscher-Ohlin Model?

The Heckscher-Ohlin Model

The Heckscher-Ohlin Model is a model within the study of international trade which states that a capital-abundant country

will export their capital-intensive good

and a labor-abundant country will export their labor-intensive good.

Assumptions of The Heckscher-Ohlin Model

Assumption 1: Both low-skilled labor and high-skilled labor can move freely between the industries.

NAFTA eliminated trade barriers in goods sectors and nearly all service sectors.

Assumption 2: Production of goods is labor-intensive, production of services is capital-intensive.

Assumptions of The Heckscher-Ohlin Model (continued)

Assumption 3: The amounts of low-skilled and high-skilled workers found in the two countries are different, with Mexico abundant in low-skilled workers and the United States abundant in high-skilled workers.

117,565/120,661 as of December 1993US numbers promotes high-skilled, capital service production

Mexico numbers promotes low-skilled agricultural production

Assumption 4: There is free international trade in output.

Assumptions of The Heckscher-Ohlin Model (continued)

(Assumption 5: The technologies for producing goods and services are the same across countries.)

Assumption 6: Consumer tastes are the same across countries, and preferences for goods and services do not vary with a country’s level of income.

Heckscher-Ohlin Model Analysis

US and Mexico

US Agricultural exports to Mexico have greatly increased;Mexico is the highest importerOf such goods

Mexican industries that export/regions with higher concentration of foreign investment and trade have higher wages.

US Economic Growth during the years of NAFTA has been STRONG

Graph:

United States Exports & Imports of Agricultural Commodities, 1950-2006

Year

Total

Feed G

Food G

Oil, seed

Cotton

Tobacco

Animals

Total

Crops

Animals

Coffee

Cocoa

Agr T Bal

1990

39.5

7.0 4.8 5.7 2.8 1.4 6.6 22.9

4.6 5.6 1.9 1.1 16.6

1991

39.3

5.7 4.2 6.4 2.5 1.4 7.1 22.9

4.6 5.5 1.9 1.1 16.5

1992

43.1

5.7 5.4 7.2 2.0 1.7 8.0 24.8

4.7 5.7 1.9 1.1 18.3

1993

42.9

5.0 5.6 7.3 1.5 1.3 8.0 25.1

5.0 5.9 1.7 1.0 17.7

1994

46.2

4.7 5.3 7.2 2.7 1.3 9.2 27.0

5.3 5.7 1.5 1.0 19.2

1995

56.3

8.2 6.7 9.0 3.7 1.4 10.9

30.3

5.9 6.0 2.5 1.1 26.0

1996

60.3

9.4 7.4 10.8

2.7 1.4 11.1

33.5

6.6 6.1 3.3 1.4 26.8

1997

57.2

6.0 5.2 12.1

2.7 1.6 11.3

36.1

6.9 6.3 2.8 1.5 21.0

1998

51.8

5.0 5.0 9.5 2.5 1.5 10.6

36.9

7.7 6.9 3.9 1.7 14.9

1999

48.4

5.5 4.7 8.1 1.0 1.3 10.4

37.7

8.5 7.3 3.4 1.5 10.7

2000

51.3

5.2 4.3 8.6 1.9 1.2 11.6

39.0

8.6 8.4 2.9 1.4 12.3

2001

53.7

5.2 4.2 9.2 2.2 1.3 12.4

39.4

9.0 9.2 2.7 1.5 14.3

2002

53.1

5.5 4.5 9.6 2.0 1.0 11.1

41.9

9.7 9.0 1.7 1.8 11.2

2003

59.4

5.4 5.0 11.7

3.4 1.0 12.2

47.4

10.8

8.9 1.7 2.4 12.0

2004

61.4

6.4 6.3 10.4

4.3 1.0 10.4

54.0

12.2

10.6

2.0 2.5 7.4

2005

63.2

5.4 5.7 10.2

3.9 1.0 12.2

59.3

13.4

11.5

2.3 2.8 7.4

• Two-way agricultural trade between the United States and Mexico increased more than 125% since NAFTA went into effect, reaching $14.2 billion in 2003 compared to $6.2 billion in 1993.

• Mexico is the top export destination for beef, rice, soybean meal, corn sweeteners, apples and beans. It is the second largest for corn, soybeans and oils. As a result of NAFTA, the percent of U.S. agricultural exports to Canada and Mexico has grown from 22% in 1993 to 30% in 2007.

• Source: USTR, NAFTA Facts 2008

Mexican Economy – US Economy Effects The Mexican economy is the world’s 13th

largest; Mexico is the United States’ 3rd largest trading partner and the 2nd largest market for U.S. exports.

U.S. exports to Canada and Mexico grew from US$134.3 billion (US$46.5 billion to Mexico and US$87.8 billion to Canada) to US$250.6 billion (US$105.4 and US$145.3 billion respectively).

Mexican exports to the United States reached over US$138 billion, while Mexican exports to Canada grew from US$2.7 billion to US$8.7 billion, an increase of almost 227%.

Value of US Exports to Mexico & Canada

Pre-NAFTA (134.3 billion USD)• Mexico: 46.5

billion USD• Canada: 87.8

billion USD

NAFTA increased exports by...• 126.7%• 65.5%

Post-NAFTA (250.6 billion USD) • Mexico: 105.4

billion USD• Canada: 145.3

billion USD

Value of Mexican Exports to US

39.9 billion USD (1993)

NAFTA

210.8 billion USD (2007)

Exports e Imports de México, 1993-2003 (miles de millones de dólares -mmd)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Exportaciones 51.9 60.9 79.5 96.0 110.4 117.5 136.4 166.5 158.4 160.8 164.9 Importaciones 65.4 79.3 72.4 89.4 109.8 125.2 142.0 174.5 168.3 168.7 170.6 Comercio total 117.3 140.2 151.9 185.4 220.0 242.7 278.4 340.9 326.8 329.4 335.4

Source: Secretaría de Economía, con datos de Banxico

“Our forecast and our idea is to sell a long-term project where we can

move upwards from a trade agreement…more than just facilitating the

transit of merchandises, products, services, and capital. It has to imply

the free flow of citizens, and it has to imply long-term monetary policies.

We have to get beyond the short-term. It [NAFTA] doesn't

resolve the problems of migration, of income, and of improving

income in Mexico's case.”

- former Mexican President Vicente Fox

Business Week, 2000

Mexico's export growth to NAFTA partners, as of 2005

Var. 05/93 Part. (%)

Total Agri-Food 209.1%100.0%

Agricultural 133.2% 52.7% Agroindustrial 519.1% 42.6% Fishing 63.7% 4.7%

Source: Ministry of Economy with data from Banxico, USDOC and Statistics Canada

US Effects Greatest opposition to NAFTA (and free trade

in general) comes from the belief that foreign competition hurts U.S. employment., however:

Employment within the US rose 22% (25 million jobs) from December 1993 – December 2006

Average US unemployment decreased post-NAFTA

1981-1993 7.1% unemployment 1994-2006 5.1% unemployment

US Effects (continued) Moreover, increased openness to trade has

been accompanied by a more rapid rise in wages, especially in the area of United States manufacturing.

Average real compensation increased post-NAFTA

1980-1993 0.9% annual growth 1993-2006 1.6% annual growth

Implicit gains in the area of income gains, due to higher national productivity, up to $930 annually for family of 4

Mexico Effects Mexican employment levels have been more

volatile since the implementation of NAFTA. But, as of 2005, the Mexican affiliates of U.S. companies employed nearly 840,000 people who contributed 3.3 percent to Mexico’s GDP. (Foreign Direct Investment US->Mexico)

Mexico Effects (continued) Mexican wages grew steadily after the 1994

peso crisis, reached pre-crisis levels in 1997, then increased each year since then.

Mexican industries that export/regions with higher concentration of foreign investment and trade have higher wages.

Mexico’s Secretariat of Economy says: exported-related industries wages are 37% higher than those that don’t export.

MANUFACTURING & TRADE Manufacturing within the US rose post-NAFTA 1980-1993 37% increase 1993-2006** 63% increase

Trade among NAFTA nations has risen 198% (an increase of $586 billion)

Source: NAFTA Policy Brief, October 2007

Conclusions Over that period (1993-2007), GDP grew 50

percent in the United States and 46 percent in Mexico.

United States:  38% economic growth Canada:            30.9% economic growth

Mexico:             30% economic growth