Chapter 13

Economic
Integration
into North
America

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 NAFTAs
negotiations and ratification
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Introduction: Characteristics
of the North American Market

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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

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Trade Flows in North America

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FIGURE 13.1 U.S. Merchandise

Trade with Canada

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The CanadianU.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 Canadas social programs,
and U.S. cultural influence

Rather modest impact

In 19891994, U.S. exports to Canada grew by
46.6%, and Canadian exports to the U.S. by 55%
Canadian fears were largely unfounded
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Mexicos Economic History

Between the end of World War II and 1980s, Mexico
followed inward-oriented import substitution
industrialization (ISI) policiesindustrial 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

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Mexicos 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 Mexicos
credit worthiness
Dramatic rise in U.S. interest rates increased the
interest charged on Mexicos debt with
commercial banks

In August 1982, the debt crisis began: Mexico

suspend payments of the principal of its debts
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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
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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 4050% in
19831988
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Resolving Economic Problems

In 1982, Mexico also set out to attack the deepseated 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: stateowned companies were privatized

Structural reforms revived growth and attracted

foreign investment

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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
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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 Mexicos 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
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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
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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
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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, Mexicos 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
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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
Mexicos economic reforms
Mexicos 19941995 peso crisis and recession caused U.S.
exports to decline momentarily to Mexico

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FIGURE 13.2
U.S. Merchandise Trade with Mexico

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The Economic Impact

of NAFTA in Sum
Canada: trade with Mexico is growing, but still
represents a small part of Canadas 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
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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
Americas (FTAA) were pursued, and meet
with much resistance
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