Does NAFTA really Benefit Mexico?

President Trump makes it sound like the Mexicans are growing leaps and bounds thanks to North American Free Trade Agreement (NAFTA). However, a lot of Mexicans feel that this is not the case. The NAFTA agreement seems to have caused as much damage in Mexico as it seems to have caused in the United States. As a result, the Mexican populace is tired of the constant rebuke from Americans and has now started pursuing other markets to achieve economic growth. In this article, we will understand the effects of NAFTA on the Mexican economy.

Statistics Related to NAFTA and Mexican Economy

  • 20 years after the implementation of NAFTA, the wage gap between America and Mexico seems to have widened and not reduced. The wage rates in Mexico today are almost the same as they were 20 years ago. Also, the unemployment rate has seen a 66% increase from 3% to 5% during this 20 year period. Hence Mexicans are not paid higher wages, and fewer of them are paid any wages at all!

  • Mexico has one of the lowest per capita GDP growth rates in South America as well as in the world. South America is not a group of very prosperous countries. Mexico ranks 18th among the 20 Latin American countries in terms of growth rate.

    Had NAFTA indeed benefited Mexicans, they would have had a much better growth rate. Mexico has achieved only 10% per capita GDP growth in the past decade. This is about half of the 18% which is the average for the entire South American continent.

  • Mexico’s poverty rate remains close to 50% even 20 years after the implementation of NAFTA. The population has grown rapidly during this period. This means that there are more Mexicans living in poverty now than there were before the implementation of NAFTA! During the same period, the poverty in other South American countries seems to have come down rapidly.

  • In fact, the immigration problem that United States faces can be directly correlated with the implementation of NAFTA. During the reign of NAFTA, the number of Mexicans illegally immigrating to America increased by 79%

The statistics are very clear. NAFTA has caused economic duress in Mexico as well. President Trump would be doing Mexico a favor if he decided to call off the NAFTA agreement!

Why Has Mexico Not Benefited from NAFTA?

  • Firstly, it would be wrong to say that Mexico has the upper hand in bilateral trade with the United States. In fact, NAFTA seems to have worked the other way round. The United States subsidizes its crop production. Hence, farm produce from the United States sells cheaper in Mexico than Mexican produce itself! As a result, giant corporations from the United States have completely wiped out the family farmers from Mexico. This is what has resulted in massive unemployment in the agricultural sector.

  • Secondly, NAFTA puts Mexico in direct competition to China. Till now China has been winning this game. China accounts for 23% of the goods imported in the United States. On the other hand, Mexico accounts for less than 12% of American imports. This is because China has been and always will be a lower wage country than Mexico. This is the reason that even though the border between the United States and Mexico is open, companies like Apple still set up factories in China and not Mexico! Hence, Mexicans have not been able to export as many products as they thought they would. On the other hand, their domestic industry has been wiped out.

  • Also, Mexico maintains a free market exchange rate. Hence, when they start exporting more products to Americans, the value of the Peso automatically goes up. This acts as a barrier to further exports. On the other hand, China maintains a currency peg with the United States. Hence they have a fixed exchange rate with America. This may or may not be labeled as currency manipulation. However, it gives China the edge over Mexico when it comes to exporting goods to America.

  • China also has a state-controlled banking system. Therefore they can ensure the availability of cheap credit for firms which are engaged in exports. On the other hand, Mexico does not have control over its banking system. Not only is the system completely in private hands, but about two-thirds of the banks in Mexico are foreign owned.

  • Since the creation of NAFTA, drug smuggling has increased rapidly in the border areas. Hence, Mexico has to spend significantly more money trying to secure its borders. Also, entire towns like Nuevo Laredo and Ciudad Juarez have been decimated by the drug cartels. There have been huge losses of life and property in these areas. The GDP of these towns has been virtually reduced to zero thanks to the security concerns. The NAFTA agreement is also responsible for much of this. Before the NAFTA agreement, the drug smuggling from Mexico to the United States was not so rampant. The NAFTA has therefore been a major contributor to the drug war that Mexico is facing today!

To sum it up, Mexico has not really been a beneficiary of NAFTA. If the statistics are considered carefully, the situation becomes clear. The Mexican economy seems to have hit its lowest point twenty years after it started accruing the so-called benefits of NAFTA.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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