1. Chapter 13 Economic Integration into North America

2. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-2 Chapter Objectives Explore the formation and impact of the Canadian-United States Trade Agreement (CUSTA) and the North American Free Trade Agreement (NAFTA) Understand the sources of political controversy surrounding NAFTA’s negotiations and ratification

3. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-3 Introduction: Characteristics of the North American Market

4. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-4 The North American Market in Sum Enormous market: larger than the EU Vast income differences between Mexico on the one hand, and the U.S. and Canada, on the other – However, purchasing power parity gap is smaller – On average, the North American market is very rich The North American market is marked by numerous difficult policy questions on migration and environmental and labor standards, for example

5. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-5 Trade Flows in North America

6. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-6 FIGURE 13.1 U.S. Merchandise Trade with Canada

7. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-7 The Canadian–U.S. Trade Agreement (CUSTA) of 1989 Helped Canada overcome growing U.S. protectionism and Asian competitiveness – However, many Canadians feared competition by U.S. firms, erosion of Canada’s social programs, and U.S. cultural influence Rather modest impact – In 1989–1994, U.S. exports to Canada grew by 46.6%, and Canadian exports to the U.S. by 55% – Canadian fears were largely unfounded

8. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-8 Mexico’s Economic History Between the end of World War II and 1980s, Mexico followed inward-oriented import substitution industrialization (ISI) policies—industrial policies targeting the development of manufacturing sectors that can compete against imported goods – ISI succeeded in stimulating GDP growth and a shift toward industrialization – However, ISI created serious problems: reduced export capacity and created conditions for corruption

9. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-9 Mexico’s Economic Turnaround In the late-1970s, Mexico was prospering thanks to high revenues from oil production However, problems emerged in 1981 – World oil prices declined, reducing Mexico´s credit worthiness – Dramatic rise in U.S. interest rates increased the interest charged on Mexico’s debt with commercial banks In August 1982, the debt crisis began: Mexico suspend payments of the principal of its debts

10. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-10 The 1980s: The Lost Decade 1980s was the lost decade in Latin America: GDP growth was nonexistent, foreign capital stopped flowing in, credit became scarce, investment declined The economic crisis stemmed from macroeconomic mismanagement: large government expenditures had increased borrowing and indebtedness

11. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-11 Resolving the Debt Crisis Mexico agreed on budget cuts and peso devaluation in return to restructuring the debt repayments with U.S. government, banks, and the IMF Budget cuts and inflation had a social cost: real wages fell by 40–50% in 1983–1988

12. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-12 Resolving Economic Problems In 1982, Mexico also set out to attack the deep- seated structural problems of the economy – Inflation was curbed – Import restrictions and trade barriers were reduced: average tariffs declined from 27% to 13.1% between 1982 and 1992 – The role of the state in the economy was reduced: state- owned companies were privatized Structural reforms revived growth and attracted foreign investment

13. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-13 The North American Free Trade Agreement (NAFTA) of 1994 Tariffs on about half of goods traded between U.S. and Mexico were eliminated immediately – Most dramatic changes in Mexico: average tariffs on U.S. goods fell from 10% to 2.9% between 1993 and 1996, while U.S. tariffs on Mexican goods fell from 2.07% to 0.65% NAFTA specified content requirements for goods subject to free trade NAFTA established a system of trade dispute resolution

14. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-14 The NAFTA Debate in the U.S.: Labor and Environment NAFTA reignited contention on trade policy in the U.S. – Blue collar labor unions feared that jobs would migrate to south given Mexico’s lower labor costs – Environmental groups feared that (1) polluting U.S. and Canadian firms would move to Mexico, and (2) pollution would increase along U.S.- Mexico border Political opposition forced Canada, Mexico, and the U.S. to attach labor and environmental side agreements to NAFTA

15. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-15 The NAFTA Debate in the U.S.: Immigration Illegal immigration is a contentious issue in U.S.-Mexico relations Three causes of migration flows – Demand-pull factors: attraction of U.S. jobs and low unemployment – Supply-push factors: economic recessions and structural problems in Mexico – Social networks: migrants already in the U.S. provide contacts for newcomers

16. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-16 NAFTA and Immigration Proponents of NAFTA argued that economic growth spurred by free trade would reduce migration from Mexico to the U.S. However, a much bigger impact on migration will come from agricultural reorganization and market opening in Mexico than NAFTA

17. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-17 The Impact of NAFTA on U.S. Economy Local effects of NAFTA on trade and economy are dramatic especially in the U.S.-Mexican border However, Mexico’s economy is 5% of U.S. economy: NAFTA has had a very modest impact on overall U.S. trade balance and current account or on jobs and wages

18. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-18 The Impact of NAFTA on U.S.-Mexico Trade Trade flows between U.S. and Mexico have shot up The growth in trade between all three NAFTA partners indicates increased specialization, economies of scale, and efficiency However, the exact impact of NAFTA is hard to assess – Bilateral trade has expanded already since 1989 thanks to Mexico’s economic reforms – Mexico’s 1994–1995 peso crisis and recession caused U.S. exports to decline momentarily to Mexico

19. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-19 FIGURE 13.2 U.S. Merchandise Trade with Mexico

20. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-20 The Economic Impact of NAFTA in Sum Canada: trade with Mexico is growing, but still represents a small part of Canada’s trade The U.S.: NAFTA has had local effects especially along the border, but had a small impact on the overall U.S economy Mexico: NAFTA has had an important impact on trade flows and solidified economic reforms

21. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 13-21 Other Impacts of NAFTA NAFTA has boosted cooperation in North America on numerous fronts – Tri- and bilateral institutions have been created to address mutual challenges – Cooperation extends beyond labor, environment, and migration issues to the area of business, sports, arts, and education In 2001 and 2002, summits proposing the expansion of NAFTA into the Free Trade Area of the America’s (FTAA) were pursued, and meet with much resistance