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The North American Approach to North-South Integration: Mexico, Canada, and the United States Under NAFTA


The North American Approach to North-South Integration: Mexico, Canada, and the United States Under NAFTA Colloque du R seau Int gration Nord Sud (RINOS) – PowerPoint PPT presentation

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Title: The North American Approach to North-South Integration: Mexico, Canada, and the United States Under NAFTA

The North American Approach to North-South
IntegrationMexico, Canada, and the United
States Under NAFTA
  • Colloque du Réseau Intégration Nord Sud (RINOS)
  • Les relations Nord-Sud dans lEuromed, les
    Amériques et lAsie
  • Université du Québec à Montréal
  • Conférence Spéciale
  • 2 Juin 2005
  • Robert A. Blecker
  • Professor of Economics
  • American University
  • Washington, DC

  • Alternative Title
  • Pobre México!
  • Tan lejos de la Unión Europea, y tan cerca de
    los Estados Unidos!

Distinguishing Characteristics ofNorth American
  1. Large and persistent development gap between
    Northern (US, Canada) and Southern (Mexico)
    economies in a FTA
  2. Asymmetries in economic size and political power,
    US vs. Canada/Mexico
  3. Mostly dual bilateral relations, Canada-US and
    Mexico-US weak trilateral ties
  4. Narrow institutional framework (NAFTA) does not
    cover important aspects of the integration
  5. Legal and institutional framework mostly ignores
    the development dimension and North-South issues

Persistent Income Gaps in North America
No Convergence of Mexico from 1993 to 2003
  Mexico Mexico Canada Canada United States United States
  1993 2003 1993 2003 1993 2003
GDP (current US billions) 403.2 626.1 554.7 834.4 6,582.9 10,881.6
GDP per capita (constant 1995 US) 3,327 3,717 18,726 23,843 26,592 32,514
GNI per capita, Atlas method (current US) 4,230 6,230 20,250 23,930 25,800 37,610
GNI per capita, PPP (current international ) 6,680 8,950 19,480 29,740 25,570 37,500
Hourly compensation of mfrg. workers, in US 2.40 2.48 16.97 19.28 16.28 21.97
  Mexico Mexico Canada Canada United States United States
Percentages of U.S. Levels 1993 2003 1993 2003 1993 2003
GDP (current US billions) 6.1 5.8 8.4 7.7 100.0 100.0
GDP per capita (constant 1995 US) 12.5 11.4 70.4 73.3 100.0 100.0
GNI per capita, Atlas method (current US) 16.4 16.6 78.5 63.6 100.0 100.0
GNI per capita, PPP (current international ) 26.1 23.9 76.2 79.3 100.0 100.0
Hourly compensation of mfrg. workers, in US 14.7 11.3 104.2 87.8 100.0 100.0
Sources World Bank, World Development Indicators, on-line version, and
U.S. Department of Labor, Bureau of Labor Statistics, "International Comparisons of Hourly Compensation Costs for Production Workers in
Manufacturing, 2003" and "Supplementary Tables, 1975-2003," on-line at
Dimensions of North American Economic
Integration Trade
  • Trade Flows the US accounts for
  • nearly 90 percent of Mexicos exports and over 80
    percent of Canadas exports
  • about 60 percent of Mexicos imports and 70
    percent of Canadas imports
  • Canada and Mexico are the United States two
    largest trading partners, but together account
    for only 30 percent of US trade (exports
  • Intra-NAFTA trade grew rapidly in the 1990s, but
    has grown more slowly since 2000
  • Rising imports from China and other Asian
    countries have displaced intra-NAFTA trade since

Source U.S. Department of Commerce, Bureau of
Economic Analysis, International Transactions
Accounts, Release of March 16, 2005
ltwww.bea.govgt. Data for 2004 are preliminary.
Dimensions of North American Economic
Integration Investment
  • N.A. capital markets have been integrated through
    financial market liberalization and the
    liberalization of trade in financial services
  • The US accounts for a majority of the FDI in
    Mexico and Canada
  • But other countries (European, Asian) also
    provide FDI inflows
  • FDI inflows into Mexico have increased in
    financial services as well as in manufacturing
  • Mexico succeeded in replacing hot money inflows
    with FDI after the 1994 crisis and NAFTA
  • But FDI inflows into Mexico have diminished since
  • FDI inflows were surpassed by remittances in

Sources International Monetary Fund, Banco de
Dimensions of North American Economic
Integration Migration
  • Mexican emigration is driven by
  • Rapid growth of the labor force (nearly 1 million
    workers per year)
  • Inadequate domestic job creation
  • Lower wages (roughly 1/10 of US and Canada)
  • An estimated 4-5 million Mexicans migrated to the
    United States in the 1990s
  • roughly half of them were illegal
  • US efforts to enforce migration restrictions have
    not stopped migration, but have increased
    hardships for migrantsand have induced Mexicans
    who reach the US to stay

Dimensions of North American Economic
Integration Migrationcontinued
  • An estimated 8 of all Mexican-born people live
    in the United States
  • Existing networks of immigrants attract more
  • Mexican immigration in Canada is smaller but
    legalized through a guest worker program in
  • By 2003-04, annual inflows of remittances from
    Mexicans abroad exceeded FDI inflows into Mexico
  • Remittances reached nearly 17 billion in 2004

Employment in Mexico Since NAFTAOverview
  • Overall, job creation in export-oriented
    manufactures and agriculture has been offset by
    job losses in domestic/import-competing
    manufactures and agriculture
  • Most net job growth in Mexico has been in
    non-traded services and the informal sector in
    spite of NAFTA and export promotion efforts
  • Trade liberalization has not solved Mexicos
    employment problems

Employment in Mexico Since NAFTADetails
  • No single, comprehensive data source exists
  • We have to rely on partial and incomplete
    surveys, some of which have changed over time
    (Polaski, others)
  • Maquiladoras
  • Increased by approx. 750,000 from 1993-2001
  • Then fell by 180,000 from 2001-2004
  • Net increase of 570,000 from 1993-2004 (more than
  • Decreasing female share (now just over half)
  • Large non-maquiladora manufacturing firms
  • Net decrease of about 100,000 (roughly 7) from
    1994-2004, but with larger cyclical fluctuations
    up and down in-between
  • Agriculture
  • New survey shows decline of 730,000 from
  • Old survey showed decline of 370,000 from
  • Census data show an 8 percentage point drop in
    the share of agriculture in male employment,
    little change in female share (Hanson)
  • Evidence of skill upgrading in the most dynamic
    export industries (Hanson, Verhoogen)

Why NAFTA Didnt Create More Jobs in Mexico (1)
Slow GDP growth
  • Growth rates have been lower since trade
    liberalization than in the import substitution
  • Average for 1951-1980, 6.4 percent per year
  • Post-GATT (1987-2004), 3.0 "
  • Post-NAFTA (1994-2004), 2.8 "
  • Post-peso crisis (1996-2004), 3.7 "
  • Mexico needs a higher GDP growth rate (at least 6
    percent) to keep up with productivity growth,
    raise real wages, and promote convergence to
    US-Canadian income levels and real wages

Macro Factors that Have Affected Mexican
  • Mexican growth is positively correlated with US
    growth since 1996
  • US business cycles late 1990s boom, 2001
    recession, 2002-03 slow recovery
  • Exchange rate fluctuations
  • Peso or tequila crisis of 1994-95
  • Subsequent real appreciation
  • Restrictive macro policies designed to prevent
    another financial crisis since 1995
  • under both Zedillo and Fox
  • Trade surplus with US is outweighed by a larger
    deficit with rest-of-world

Source International Monetary Fund, World
Economic Outlook, on-line databases.
Sources Federal Reserve (USA), International
Monetary Fund (Canada), Banco de Mexico (Mexico).
Why NAFTA Didnt Create More Jobs (2) Rapid
productivity growth
  • Rapid productivity growth allows output to
    increase with proportionally smaller increases in
  • Features of Mexican productivity growth
  • Trade liberalization destroys jobs in
    import-competing industries as less efficient
    plants shut down and surviving plants increase
    efficiency to compete (similar to Canada see
  • Significant inter-industry reallocation to export
    sectors with higher (and faster growing)
    productivity (Lopez-Cordova)
  • Productivity has increased in both maquiladora
    and non-maquiladora manufacturing plants
  • Quality upgrading in non-maquiladora exports
    emphasizes activities with higher capital
    intensity, higher productivity, and greater skill
    requirements (Verhoogen)

Why NAFTA Didnt Create More Jobs(3) Exports
not linked to rest of economy
  • Value added in Mexican manufacturing has not kept
    up with the growth of exports (UNCTAD)
  • Export activities are increasingly integrated
    into regional (North American) and global
    production chains, but not well integrated into
    the Mexican economy
  • Exports accounted for 17.7 of output but only
    10.6 of employment in 1995-2000 less than one
    indirect job is created for each direct export
    job (Ruiz-Napoles)
  • Maquiladora imports account for 76 of
    maquiladora exports and 36 of total exports
  • MNC exporters have higher import coefficients
    than domestic firms
  • Export growth is not generating adequate
    backward linkages

Maquiladora imports
Why NAFTA Didnt Create More Jobs (4) Growing
competition from China
  • Mexico is a victim of the fallacy of
    composition in the export-led growth paradigm.
  • China displaced Mexico as the second largest
    source of US goods imports (after Canada) in
  • China has kept its currency undervalued while
    Mexico has let the peso appreciate (in real
    terms) to hold down inflation
  • China and other Asian countries are also
    increasing their shares of Mexicos imports at
    the expense of imports from the US (and at the
    expense of Mexican domestic production)
  • American big box retailers (Wal-Mart etc.)
    encourage consumption of cheap consumer goods
    from outside N.A.

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More Unequal Income Distribution
  • Overall, real wages in manufacturing still had
    not recovered to their 1994 level by 2004 in
    spite of rapid productivity growth (in both
    maquiladoras and non-maquiladoras)
  • Wages for more skilled (educated) workers have
    risen relative to less skilled (educated)
    workers in Mexico as well as the US (Hanson)
  • Real wages have fallen more in the center/south
    compared with the border/north regions
    (increasing regional disparities) (Hanson)
  • Adjustment costs have been severe in both
    expanding and contracting regions
  • Less skilled workers have to compete with
    lower-wage workers in other developing countries,
    including China

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Political and Institutional Framework NAFTA
  • North American Free Trade Agreement (NAFTA)
  • Not completely free trade, many exceptions
  • Includes strong protections for property rights
    and liberalization of capital flows
  • No significant institutions or governance
    mechanisms (except for dispute resolution
  • Side Agreements
  • Labor and Environmental Commissions small
    budgets, no enforcement powers
  • N.A. Development Bank very limited mandate and
    funding for projects in the Mexican-US border
  • NAFTA restricts industrial development policies
    and government regulation of foreign investment
  • Expropriation clause used to overturn social
    and environmental regulations at state/provincial

Whats NOT Included in NAFTA
  • No common external tariffs or harmonization of
    other trade barriers
  • Not a customs union
  • No coordination of monetary, fiscal, and exchange
    rate policies
  • No common currency/monetary union
  • No significant development assistance for Mexico
    (infrastructure, education, etc.)
  • No parallel to the EUs regional and social
    cohesion funds
  • Exception the NADBank in border areas only (very
    limited funds and mandate)
  • No provisions for free migration, labor mobility,
    or rights of migrant workers
  • Except for highly educated professional and
    technical workers

Whats NOT Included in NAFTA continued
  • No harmonization of social standards and policies
  • Labor rights/standards, environmental protection,
    consumer health safety, occupational safety
    health, etc. are all left up to individual
  • Some progress in phytosanitary standards and a
    few other technical areas
  • No integration of security, borders, customs,
  • Businesses complain this creates barriers to
    trade (increases costs of border crossings)
  • Politically difficult because of US post-9/11
    security concerns and desire to limit Mexican
  • No continental governance mechanisms
  • Few international (trinational) institutions
  • Nothing like the European Commission, European
    Parliament, etc.

Political Obstacles to Further North American
  • Asymmetrical economic weight and power relations
  • US has greater bargaining leverage, imposes its
  • US sees itself as a global power, tends to ignore
    Canada and Mexico
  • Intra-N.A. relations are relatively more
    important for Canada and Mexico than for US
  • Canadians and Mexicans resent/fear US domination

Political Obstacles to Further North American
  • Lack of North American identity or consciousness
  • Citizens identify with their individual
    nationalities and regional/ethnic groups
  • Governments often prefer to address issues on a
    bilateral basis, not trilaterally
  • Very different political cultures no sense of
    shared history
  • Deep political/partisan divisions within each
  • George Bushs unilateralist foreign policy has
    lessened Canadian and Mexican interest in deeper
    ties with the US

Political Obstacles to Further North American
  • Free-market views enshrined in NAFTA
    (ideological lock-in)
  • Lasting influence of Mulroney/Salinas/Bush
  • Ideological belief in relying on markets (trade
    not aid)
  • Resistance to public policy solutions to
    development problems
  • Official integration agenda is limited to trade
    and investment issues (business perspectives
  • Now augmented by US security concerns

NAFTA Plus Expanding the Institutional
  • Certain business interests, governmental actors,
    political activists (NGOs), international
    agencies, and intellectual elites are promoting
    various types of additional trilateral
    integration efforts
  • Proposals vary according to interests and
  • Various proposals include
  • customs union
  • monetary union
  • labor rights/environmental standards
  • migration reform
  • framework for intergovernmental policy
  • development assistance funds
  • For example

Independent Task Force ReportBuilding a North
American Community(May 2005)
  • Sponsored (but not endorsed) by
  • US Council on Foreign Relations
  • Consejo Mexicano de Asuntos Internacionales
  • Canadian Council of Chief Executives
  • Members consisted of ex-government officials,
    corporate financial leaders, think-tank
    scholars, academic experts, etc.
  • Mostly center-right leaning with a few exceptions
  • Proposes to create a North American security and
    economic community by 2010
  • Much less ambitious than the EU
  • Less bureaucracy and institutions compared with

  • These proposals are presented as an important
    example, for information and discussion only
  • I do not endorse all of these proposals, although
    I think some have merit
  • The report contains the task forces majority or
    consensus views
  • The task force also had many dissenting views
    from various perspectives (left/right, national)
  • Warning this sort of elite opinion can be very

Specific Recommendations of Task Force for N.A.
  • Security issues
  • Common security perimeter and harmonized border
    policies (emphasis on anti-terrorism)
  • N.A. border pass for expedited passage of
    individuals with security clearances
  • Move toward freer flows of people in the long run
    (deliberately vague what this means)
  • Military and intelligence cooperation
  • This is a reaction to post-9/11 US political/
    military concerns, but also linked to trade and
    migration issues

Specific Recommendations of Task Force for N.A.
  • Economic development
  • Mexico to rely primarily on domestic reforms and
  • US and Canada to fund a North American
    Investment Fund for Mexican development
  • Focused on infrastructure and technical education
    to attract private capital
  • Conditioned on Mexican reforms and financial
  • Enhanced capacity for the NADBank
  • Further opening of the energy sector especially
    in Mexico
  • But no commitment to privatization of PEMEX
  • Emissions controls and conservation efforts (weak

Specific Recommendations of Task Force for N.A.
  • Deeper economic integration efforts
  • Common external tariffs on individual goods (but
    not a complete customs union?)
  • Review NAFTA exclusions
  • Permanent N.A. tribunal for dispute resolution
  • Joint approach to unfair trade practices (very
  • Trinational competition (anti-trust) policies
  • Greater harmonization of domestic regulations
  • Increased labor mobility, including temporary
    migrant worker programs, eventual North American
    preferences in employment, full labor mobility
    between US and Canada (but delayed with Mexico)
  • Greater educational cooperation

Specific Recommendations of Task Force for N.A.
  • Political framework
  • Regular trinational summits and intergovernmental
  • A permanent North American Advisory Council (with
    members appointed by the 3 governments)
  • No politically representative or democratic
    bodies (e.g., no elected N.A. parliament or
  • All of this seems to represent a consensus view
    of what is considered politically feasible in
    North America in the near future (post-Bush and

  • The official N.A. integration process (NAFTA) has
    largely ignored North-South issues, lacks a
    developmental agenda
  • Also neglects labor migrationor allows it to be
    regulated by unilateral US border policies
  • Undemocratic process largely geared to business
    interests and US priorities
  • There has been no convergence of Mexico with the
    US and Canada in the 11 years since NAFTA went
    into effect
  • Some indicators show a slight divergence

Conclusions (continued)
  • Limited gains to Mexico in trade and FDI have not
    fostered rapid enough growth to solve the
    countrys employment problem
  • Both structural obstacles and macroeconomic
    constraints have impeded rapid growth
  • Result is continued out-migration and increased
    reliance on remittances
  • Mexican society is also becoming more unequal
  • There is a growing North-South divide and a
    rising skill premium within Mexico
  • Sectors, regions, and interests positioned to
    benefit from the global/regional economy have
    prospered (relatively) while other parts of the
    domestic economy have suffered dislocations and

Conclusions (continued)
  • North America is sufficiently integrated that
    regional cooperation is essential to solving
    continental problems
  • Yet political obstacles have prevented a
    European-style approach to promoting convergence
    of less-developed regions
  • Mexico does need more domestic reforms
    (strengthen democracy, rule of law, transparency,
    justice system, anti-corruption efforts)
  • Global developments (e.g., WTO, China, other
    FTAs) are undermining Mexicos special
    preferences in the US market and US preeminence
    in Mexico
  • Yet NAFTA commitments restrict Mexican policy
    makers ability to manage trade and investment in
    the national interest

The Road ForwardNAFTA Plus What?
  • Status Quo free trade and investment, no social
    integration or development aid
  • Deeper Economic Integration improve borders and
    infrastructure, move toward a customs union,
    common market, and/or monetary union
  • Social NAFTA migration reform, development
    assistance, labor/environmental cooperation
  • US Strategic Interests energy, security
  • A North American political community
  • what kind of community, and whose interests will
    be served?