The Impact of NAFTA and USMCA on North American Trade and Economic Growth

The North American Free Trade Agreement (NAFTA), which entered into force in 1994, was extraordinary for at least two reasons. It was the first in which an emerging economy agreed conditions for the liberalization of trade barriers with developed economies.

In addition, the interest it aroused helped trigger a growing number of trade agreements. According to the World Trade Organization (WTO), on August 1, 2023, 360 regional trade agreements were in force, eight times the number recorded 30 years earlier.

The essence of any trade treaty is to agree on rules to facilitate trade between the signatory countries, commonly through the reduction and elimination of tariffs, quotas, and other barriers to the exchange of goods and services.

In mid-2020, NAFTA was replaced by the Agreement between Mexico, the United States, and Canada (USMCA), which modified some aspects of the former, such as automotive rules of origin, and included provisions on topics previously not covered, such as digital trade, labor rights and the environment. Several of the new clauses gave the T-MEC a protectionist character.

Taking into account the objective of boosting trade, NAFTA and its successor can be considered successful. Trade in North America has quadrupled in gross nominal terms since 1994. While it is not possible to know how much regional trade would have grown in the absence of the agreement, this dynamism is substantial.

More importantly, NAFTA does not appear to have caused significant trade diversion, which would induce inefficiencies and welfare losses, a danger commonly associated with trade agreements. This is natural since trade is sustained, to a large extent, by geographical proximity and the contrasting comparative advantages, especially between Mexico and the United States.

The preponderance of trade creation over possible diversion would seem to be reflected in the gradual decline in the region’s share of trade in goods and services in world trade, particularly during this century. This has been due to the increasing presence of alternative sources in imports from member countries.

Specifically, as a result of China’s entry into the WTO at the end of 2001, this country dramatically increased its share of US imports of goods, a trend that has been partially reversed since 2018 with the trade war between the two nations.

Also, since the Great Recession of 2008, other Asian economies and Mexico have increased their share of US purchases. In June 2023, Mexico’s contribution was 15.9 percent, higher than that of any country and more than two percentage points above those of Canada and China.

The relative increases described have occurred at the expense, mainly, of a prolonged decline in Canada’s contribution, which has recently stopped. Apparently, this nation’s loss of commercial ground has resulted from a change in the composition of US demand and, above all, a disadvantage compared to economies with lower labor costs.

The diversification of imports has also been observed in Mexico since the start of NAFTA. While the share of merchandise exports to the United States has remained relatively stable, around an average of 83.0 percent, the corresponding share of Mexican imports from that country fell from 70.0 percent in January 1994 to a average of 43.4 percent during the first half of 2023.

In these years, Mexican purchases from Asia, particularly China, have gained relative weight. The integration of Mexico into US manufacturing production has led to an extension of North American supply chains outside the region.

The main beneficiary of the opening formalized in NAFTA has been the consumer of the three countries, having access to a greater variety of goods and services at lower prices. Similarly, the opening process has boosted the productivity of companies involved in trade, which has been especially noticeable in those located in northern Mexico.

As expected, NAFTA and USMCA have not been a panacea. Contrary to the initial predictions of some enthusiasts, the cumulative increase in Mexico’s GDP during these years has been much lower than that of the United States and Canada. The divergent trajectory of the average income of our country with respect to that of its trading partners reveals the lack of internal reforms to increase potential economic growth.

Former Deputy Governor of the Bank of Mexico and author of Mexican Economy for Disenchanted (FCE 2006)

2023-09-06 08:03:00


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