Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 13 Economic Integration in North America

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Chapter 13

Economic Integration in North America

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 13-2

Chapter Objectives

• Explore the formation and impact of the Canadian-United States Trade Agreement (CUSTA), the North American Free Trade Agreement (NAFTA), and the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA)

• Understand the sources of political controversy surrounding NAFTA’s negotiations and ratification

Introduction: Expanding Economic Relations

• The North American Free Trade Agreement (NAFTA) came into effect on January 1, 1994

• For many U.S. economists, it seemed odd that a relatively dry and straightforward agreement would turn into one of the most contentious economic issues of the 1990s

• However, there were many aspects of the agreement that were controversial



Economic and Demographic Characteristics of North America

• Enormous market: larger than the EU

• Vast income differences exist between Mexico on the one hand, and the U.S. and Canada, on the other – However, the 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


TABLE 13.1 Population and GDP for NAFTA Countries, 2007


TABLE 13.2 Merchandise Trade Within the NAFTA

Region, 2007 (Millions of U.S. $)


FIGURE 13.1 Canada–United States Total Trade,

1985-2008


The Canada-U.S. Trade Relationship: 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


Recent Mexican Economic History

• The decision to seek closer economic ties to the United States was one of many major policy changes that Mexico made between the late 1980s and early 1990s

• Mexico’s shift from a closed and inward economic orientation to an open and outward set of policies began in the mid-1980s after a long period of crisis caused by international trends and a series of domestic policy mistakes


The Slowdown in Economic Growth

• In the late-1970s, Mexico was prospering due to high revenues from oil production

• However, problems emerged in 1981– World oil prices declined, reducing Mexico´s credit

worthiness– A 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 suspended payments of the principal of its debts


The Lost Decade of the 1980s

• The 1980s was considered the “Lost Decade” in Latin America: GDP growth was nonexistent, foreign capital stopped flowing in, credit became scarce, investment declined

• 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


Economic Policy Reforms in the Mexican Economy

• The economic crisis stemmed from macroeconomic mismanagement: large government expenditures had increased borrowing and indebtedness

• Budget cuts and inflation had a social cost: real wages fell by 40–50% in 1983–1988


The North American Free Trade Agreement (NAFTA) of 1994

• As a result of the agreement, tariffs on about half of the goods traded between U.S. and Mexico were eliminated immediately– Most dramatic changes in Mexico were: 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


The NAFTA Debate in the United States: Labor Issues

• NAFTA reignited contention on trade policy in the U.S.– Blue collar labor unions feared jobs would migrate

to the South given Mexico’s lower labor costs

• Political opposition forced Canada, Mexico, and the U.S. to attach a labor-side agreement to NAFTA, which was the North American Agreement on Labor Cooperation

The NAFTA Debate in the United States: Environmental Issues

• Environmental groups feared that (1) polluting U.S. and Canadian firms would move to Mexico, and (2) pollution would increase along the U.S.-Mexico border

• Environmental-side agreements to NAFTA were the North American Agreement on Environmental Cooperation and the North American Development Bank (NADBank) to help finance border cleanup costs



The NAFTA Debate in the United States: Immigration

• Illegal immigration is a contentious issue in U.S.-Mexico relations

– Proponents argue that illegal immigrants support the U.S. economy by buying goods and services and help keep prices low by increasing labor supply

– Opponents argue that the U.S. should not ignore illegal behavior and that the increased labor from illegal immigration suppresses wages for legal workers


The NAFTA Debate in the U.S.: Immigration (cont.)

• Attempts at stricter border enforcement have been largely unsuccessful at stopping illegal immigration

– The border is too long – 2,000 miles

– The economic incentive the enter the U.S. is too high

– Nearly half of the illegal immigrants entered legal, but did not return home when their visa’s expired

Figure 13.2 Real Value Added and Employment in Manufacturing, 1960-2008



The Impact of NAFTA on the U.S. Economy

• The local effects of NAFTA on trade and economy are dramatic especially in the U.S.-Mexican border

• However, Mexico’s economy is 5% of the U.S. economy: NAFTA has had a very modest impact on the overall U.S. trade balance and current account or on jobs and wages


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


FIGURE 13.3 United States–Mexico Merchandise

Trade, 1989-2005


The Economic Impact of NAFTA in Summary

• 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


The Expansion of NAFTA

• In July 2005, the U.S. ratified the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) between:– Dominican Republic– Guatemala– Honduras– El Salvador– Nicaragua– Costa Rica


TABLE 13.3 Population and GDP for the DR-CAFTA

Countries, 2007


The Future of NAFTA: A North American Community?

• Relative to the European Union, NAFTA is in an early stage of economic integration.

• Deeper integration among the members will require:– Increased labor mobility – The establishment of permanent governing bodies– A focus on development to close the economic gap

between Mexico and the other members


TABLE 13.4 Doing Business in the NAFTA

Countries, 2009


TABLE 13.4 (continued) Doing Business in the NAFTA

Countries, 2009


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Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 13 Economic Integration in North America