Mexico - a rough deal from NAFTA?

The North American Free Trade Area (NAFTA) includes Mexico, the USA and Canada, and was introduced back in 1994. Whilst the USA and Canada are highly developed countries, Mexico is officially classed as a middle-income country (GDP per head is only around a quarter of that in the USA). Comparative advantage suggests that all countries can benefit from free trade. Many Mexicans, however, believe this isn’t true and that they’ve lost out as a result of their NAFTA membership.

Along Mexico’s border with the USA and many of the low-wage areas within the country are ‘maquiladora’ factories, where mainly US employers use cheap Mexican labour to produce goods to ship back to the US. Theoretically, Mexican workers have strong labour rights, and these are included in the country’s Constitution. In practice, though, implementation of these labour rights is up to local government, who in many cases, don’t have the manpower to enforce the rules resulting in poor working conditions and low wages, particularly in the maquiladora industries. With low union densities, Mexican workers have few ways of trying to tackle the problem.

The maquiladora approach initially seemed like a good way of exploiting comparative advantage. However, Mexico faced competition from even lower-wage countries such as Bangladesh, and despite the low wage rates in Mexico, these were still significantly higher than those in low-income countries. Mexico really needed to specialise in medium-skill industry.

Official Mexican economic data shows that the Mexican economy, on the whole, performed rather well following the introduction of NAFTA, with urban unemployment, for example, falling from 6.2% in in 1995 to around 2.4% by 2001. If we take a closer look, however, these data are based on ILO definitions of employment, where people who are paid for one hour or more in a week are counted as employed. So, whilst many Mexicans may officially have a job, many of them are employed very part-time and so are highly underemployed. Furthermore, there is no real welfare state with unemployment benefits in Mexico, so many Mexicans choose to stay in poorly paid jobs rather than try to find another.

Mexico’s agricultural sector was also badly hit by membership of NAFTA; increasing competition from American farmers saw prices falling (which, given that many primary commodities have price inelastic demand is highly damaging for income) and the Mexican government withdrew production subsidies. Rural unemployment significantly increased, and many workers moved to urban areas (just as the Lewis 2-sector model of economic development would suggest). Even worse, many of Mexico’s highly educated workers moved north, to the USA and Canada, leaving fewer skilled workers in Mexico.

Also important when thinking about the labour market is the real wage level (the level of wages taking into account inflation). Mexican real wages suffered a sharp decline following the introduction of NAFTA; the national minimum wage lost 50% of its purchasing power during the 1990s! This isn’t necessarily a direct result of NAFTA membership alone (as Mexico suffered high inflation and devaluation of its currency, the peso) but it certainly worsened the effect.

So, whilst NAFTA has probably contributed to overall economic growth, measured by total GDP, in Mexico, the effects at ground-level have been much more controversial.