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The Effect of the North American Free Trade Agreement on the Mexican Trade Figure and on Its Economic Growth

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The effect of the North American Free Trade Agreement on the Mexican trade figure and on its economic growth

Economic Development 2

          The Mexican economy was ranked the fifteenth world economy in 2015, with a GDP of 1,161 billion dollars in current prices. [1] Moreover, Mexico is a member of the OECD, and the country became, after Brazil, the second largest economy in Latin America. As the largest exporter in Latin America, the country is one of the three members of the North American Free Trade Agreement. This agreement came into effect in 1994, creating one of the world’s largest free trade zones and thus laying the foundations for strong economic growth for Canada, the United States, and Mexico. Since its creation, the GDP of all three countries has soared and the flow of trade has more than tripled, even when accounting for the temporary decline during the recession of 2008-2009. However, it seems that Mexico is the one who took advantage of the greater magnitude. Undoubtedly, we can attribute much of the Mexican economic growth to the United States and Canada. In fact, over 80% of its exports are destined to its two partners.[2] Altogether, Mexico has experienced a strong transition: its relatively closed economy has turned into one of the most open economies in the world. Furthermore, the increase of bilateral trade and Foreign Direct Investments since the early days of the NAFTA has allowed Mexico to become a major player on the global stage.

          In what ways has NAFTA affected the Mexican trade figure and its economic growth since its creation in 1994?

          First and foremost, we will analyse what have been the impacts of NAFTA on Mexico’s growth concerning trade and financial flows. Secondly, we will analyse the dynamics of this economic growth, examining the effects of trade and financial integration on the Mexican economic growth.

          First of all, NAFTA has enabled Mexico to substantially increase its growth of trade and financial flows, in part by eliminating trade barriers and facilitating cross-border trades, as well as by considerably increasing investment opportunities in Mexico.

          Firstly, at the most basic level, the primary objective of trade liberalization agreements is to increase trade and economic interactions among partner countries. NAFTA has been a great success for Mexico. In fact, Mexican imports and exports have considerably increased since the creation of the agreement. Exports of goods and services in Mexico, in percentage of GDP, have increased from 13,3% in 1994 to 32,4% in 2014 (refers to Figure 1) and imports of goods and services, in percentage of GDP, have increased from 16% to 33,5% during the same period (refers to Figure 2). These increases were largely made possible thanks to the agreement between the three countries, which enabled Mexico to become the largest trading nation in Latin America as well as the eighth largest exporter and seventh largest importer, worldwide.[3] Although Mexico’s trade with the rest of North America already knew a vigorous growth before the ratification of NAFTA, the movement accelerated after 1994. In fact, Mexican exports to the NAFTA market have more than quadrupled since the implementation of the agreement, as they increased from 55,2 billion of dollars in 1993 to 200 billion of dollars in 2011. [4] Today, about three-quarters of Mexico’s exports are destined to the United States and half of its imports come from there. Therefore, the significant increase in the volume of trade is undoubtedly the most positive outcome of NAFTA, with the result that the free trade area has become one of the most intense trade zones in the world. [5]

           Moreover, as well as having increased trade between Mexico and the two other members of NAFTA, this agreement has also enabled changes in the Mexican trade structure. Indeed, the introduction of NAFTA has made Mexico’s export base shift toward manufactured goods. Even if the trade of manufactured goods was already increasing since the 1980s, this increase considerably accelerated after the establishment of NAFTA. In fact, as can be seen in Figures 3 and 4, the share of manufacturing products in percentage of total exports has increased from 54% in 1987 to 79% in 2014. This growth can be explained by the fact that in order to respond to the competitiveness of the Chinese industry, Mexico developed more valuable products, such as automotive products or electronic products. Hence, its automotive exports increased by 152% ($27,9 billion to $70,3 billion) and electronic exports increased by 73% ($43,3 billion to $74,9 billion) between 2002 and 2012. [6] However, the share of agricultural exports (in percentage) of Mexican total exports experienced a small decrease and remains low: its share was 4% in 1987 against 0% in 2013 (refer to Figure 3 and 4). Nonetheless, it is the share of Mexico’s exports of mining products and petroleum that have decreased substantially. In fact, it used to account for 35% of total exports in 1987 versus 16% in 2013 as can be seen in Figure 3 and 4. Today, Mexico’s main exported goods are electrical and electronic equipment, vehicles, mineral fuels, petroleum and machinery. [7] All in all, trade liberalization has transformed and modernized Mexico’s economy, as well as enabled Mexico’s exports to diversify from primarily oil to manufactured products, making Mexico one of the largest exporters in the world.

          Finally, in addition to having increased the growth of Mexican trade flows and the nature of its trade, NAFTA has also generated a significant increase in Mexican financial flows. In fact, NAFTA has fostered an environment of confidence and stability needed to attract long-term investment and encourage partnerships. Ever since, North America has attracted foreign direct investment to unprecedented levels. In 2000, FDI between the three NAFTA partners reached 299,2 billion of dollars against 136,9 billion of dollars in 1993.[8] Furthermore, NAFTA has also stimulated investments from countries that are not NAFTA’s partners. Indeed, recent research suggests that the NAFTA membership significantly affected FDI inflows to Mexico. [9] In fact, the agreement would be the cause of 40% to 70% of the increase in the volume of IDE inflows to Mexico.[10] As a result, the Canadian FDI stock in Mexico was multiplied by 9 and that of the United States by 7 between 1992 and 2008. Referring to Figure 5, we can see that Mexico’s foreign direct investment net inflows have experienced an increasing trend since 1994. In fact, net inflows represented 4,389 million of dollars in 1993 against 44,885 million of dollars in 2013.  With a total of 50% of Mexico’s IDE, The United States represents its first investor, followed by the European Union and Japan. FDI go primarily to the manufacturing industry (44%), followed by financial services (19%), and finally to trade (9%). [11] Among the emerging economies, Mexico is now the third-largest destination for foreign direct investment. [12]

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