Transcript Document

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 NAFTA’s
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 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
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Mexico’s Economic History
• 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
– 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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Mexico’s 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 Mexico´s
credit worthiness
– 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
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 40–50% in
1983–1988
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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 Mexico’s 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, Mexico’s 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
Mexico’s economic reforms
– Mexico’s 1994–1995 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 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
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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
America’s (FTAA) were pursued, and meet
with much resistance
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