Int’l. Journal of Political Economy, vol. 33, no. 3, Fall 2003, pp. 5–27.

© 2005 M.E. Sharpe, Inc. All rights reserved.

ISSN 0891–1916 / 2005 $9.50 + 0.00.

ROBERT A. BLECKER

The North American Economies

After NAFTA
A Critical Appraisal

The North American Free Trade Agreement (NAFTA) went into effect
on January 1, 1994, amid conflicting predictions that it would either
propel the Mexican economy into the ranks of “first world” developed
nations or create a “giant sucking sound” of jobs leaving the United
States (and, to a lesser extent, Canada). To a large extent, these hyped
predictions by supporters and opponents alike were mirror images of
each other, because they both rested on the presumption that NAFTA
would create large numbers of jobs in Mexico. Ten years later, the
reality has been much more mixed than the more extreme advocates
or critics of NAFTA anticipated. Some of the most important economic
changes among the three member countries, such as the wide swings
in exchange rates and the continued large influx of Mexican immi-
grants into the United States, pertain to issues that were ignored in
NAFTA. In spite of NAFTA, there has been little, if any, net job creation
in the tradable goods-producing sectors of the Mexican economy (agri-
culture and manufacturing).
Fundamentally, what NAFTA did was to accelerate and codify a pro-
cess of economic integration that was already taking place in North
America in a way that maximally promoted the interests of large multi-
national corporations (MNCs) and financial institutions. In spite of its
name, NAFTA was not a pure free trade agreement. On the one hand,

Robert A. Blecker is a professor of economics at American University. He thanks

Jeff Faux, Bob Pastor, and Mario Seccareccia for helpful comments on an earlier
draft.
5
6 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

although it reduced trade barriers and opened up many markets, it also

contained numerous sectoral exclusions and mercantilist “rules of ori-
gin” that benefited various special interests. Contrary to Canadian and
Mexican hopes, it did not abolish antidumping and countervailing du-
ties for member countries, although it did provide for special dispute
resolution procedures. On the other hand, NAFTA contained strong pro-
tections for private investors’ rights (both pecuniary and intellectual)
that, in some respects, went beyond anything in existing law in any
member country and that exceeded the prerequisites for free trade in the
traditional sense. The Mexican government was convinced that it had to
accept such provisions to attract more foreign investment,1 while the
U.S. and Canadian governments were eager to promote the agendas of
their big business and financial interests. When the investors’ rights pro-
visions were combined with the liberalization of financial services, the
result was a “trade agreement” that effectively created a much more
integrated capital market for North America.
NAFTA did not explicitly address labor market issues to any signifi-
cant extent. The agreement did not liberalize U.S. immigration rules for
Mexican workers (except for highly educated professionals) or do any-
thing to ameliorate the situation of the millions of illegal Mexican im-
migrants in the United States. The agreement did not do anything to
increase adherence to internationally accepted labor rights and standards
in the three nations, despite a symbolic and ineffectual “side agreement”
that merely exhorted each country to enforce its own existing labor laws.
Nevertheless, labor markets in North America have continued to be-
come more integrated de facto, even if NAFTA did not integrate them
de jure. As recognized in the Heckscher–Ohlin model of trade, interna-
tional trade in goods substitutes for international movements of “factors
of production” by altering the relative demand for different factor in-
puts and thereby creating both winners and losers, depending on whether
those factors are employed more intensively in export-oriented or im-
port-competing activities. When capital mobility is combined with trade
liberalization, and when production becomes more integrated across
national borders, the employment and earnings prospects for workers in
different countries become increasingly interdependent. The labor mar-
ket effects of trade and capital flows, however, are felt much more on
the side of wages and income distribution, as well as in the sectoral and
regional distribution of employment, rather than in the total number of
jobs.
 FALL 2003 7

NAFTA was only one of the factors that affected North American
economies in the past decade, however, and it was not necessarily the
most important. As Nora Lustig predicted:
In the three countries, however, the extent of labor dislocation and its
effect on unemployment and real wages will be more affected by the
performance of the economies than by the impact of liberalizing their
mutual trade. The evolution of fiscal and monetary policies, and the ex-
change rate in particular, could have a far greater impact on aggregate
employment and wage levels than changes caused by the removal of tar-
iff and nontariff trade barriers. The impact of domestic macroeconomic
policies, particularly those of the United States, is felt well beyond the
border. (Lustig 1992: 139)
On the one hand, as Lustig anticipated, macroeconomic factors and
exchange rate fluctuations have been quantitatively more important than
NAFTA-related reductions in trade barriers in driving the changes in
trade flows and their attendant impact on employment. On the other
hand, NAFTA accelerated and deepened the integration of the three
member economies and, to this extent, has tied their economic futures
more closely together—including by making the two smaller econo-
mies more dependent than ever on U.S. economic growth and their com-
petitiveness in the U.S. market. Thus, the trade and investment liberalizing
provisions of NAFTA interact with other factors, making it difficult to
separate the effects of NAFTA and those other factors.
The difficulties in disentangling how much the North American econo-
mies have been affected by NAFTA’s specific provisions as compared
with other causes are the motive for the word “after” in the title of this
article. That is, the following discussion is concerned with identifying
what has happened since NAFTA went into effect, without necessarily
attributing causality to NAFTA. Nevertheless, the tenth anniversary of
NAFTA in 2004 is a propitious time for assessing how the three member
nations’ economies have fared since they joined together in this eco-
nomic integration effort.

Trends in Trade and Investment Flows

At first blush, NAFTA appears to be a stunning success in the areas it

was most directly concerned with, namely, international trade and for-
eign investment. As Table 1 shows, the bilateral trade of the United
States with both Canada and Mexico grew rapidly in the 1990s (espe-
8 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

Table 1
U.S. Bilateral Goods Trade with Canada and Mexico, Selected Years
1990–2003 (billions of U.S. dollars)

1990 1993 2000 2003

Exports to Canada 83.4 100.7 178.9 169.9

Imports from Canada 93.1 113.1 233.7 224.2
Balance with Canada –9.8 –12.4 –54.8 –54.3

Exports to Mexico 28.1 41.5 111.2 97.2

Imports from Mexico 30.5 40.4 136.8 139.0
Balance with Mexico –2.4 1.1 –25.6 –41.8

Source: U.S. Department of Commerce, Bureau of Economic Analysis, International

Transactions Accounts, release of June 18, 2004, table 2 (available at www.bea.gov).

cially between 1993 and 2000), although it leveled off after 2000.2 Canada
was already the largest trading partner of the United States (measured
by the sum of exports plus imports) prior to NAFTA, and by the early
2000s, Mexico had surpassed Japan to become the second largest.3
Table 1 also shows that the United States had increasing bilateral
trade deficits with both Canada and Mexico, especially between 1990
and 2000 with the former and between 1993 and 2003 with the latter.
However, these deficits must be viewed in the context of a large and
growing overall U.S. trade deficit with all countries during this period.
To adjust for country size, Table 2 shows the proportional U.S. trade
deficits, measured by the ratios of U.S. imports to exports, for Canada
and Mexico compared with other major U.S. trading partners, and the
average for all countries for 1993 and 2003. The U.S. import–export
ratios with Canada and Mexico were smaller than the averages for all
countries in both 1993 and 2003—although the ratio with Mexico dete-
riorated relatively more than the ratio with Canada over this decade.
Thus, trade within North America (and, indeed, with the entire Western
Hemisphere) is relatively more of a two-way street for the United States
than trade with most other countries and regions, and this has been true
since before NAFTA went into effect.
Net “capital flows” (as measured by the financial account balance)
into Mexico have been strongly positive throughout most of the period
since 1990, except for the crisis and recovery years of 1995–96 (see
Figure 1). Also, there was a notable change in the composition of net
 FALL 2003 9

Table 2
Proportional U.S. Trade Deficits, Canada and Mexico Compared with
Other Major Trading Partners and Regions, 1993 and 2003 (ratios of U.S.
imports to exports)

Country or region 1993 2003

Canada 1.12 1.32

Mexico 0.97 1.43
Other Western Hemisphere 0.94 1.53
European Union 1.10 1.66
Average for all countries 1.29 1.77
Asia (excluding Japan and China) 1.36 1.80
Japan 2.28 2.35
Africa 1.84 3.17
OPEC members 4.49 4.13
China 3.63 5.39

Source: U.S. Department of Commerce, Bureau of Economic Analysis, International

Transactions Accounts, release of June 18, 2004, table 2 (available at www.bea.gov),
and author’s calculations.
Note: Countries and regions are ordered by ascending rank in 2003.

financial inflows after 1994. Most of the inflows Mexico received in the
early 1990s were composed of “hot money” or portfolio capital that
quickly fled the country during the panic of 1994–95. Foreign direct
investment (FDI) inflows were relatively small prior to 1994. Since 1994,
however, FDI has accounted for the bulk of Mexico’s net financial in-
flows.4
In several respects, however, there is less to these impressive-look-
ing statistics than meets the eye. With regard to capital flows, the drop-
off in FDI inflows in 2002–3 demonstrates that, although these inflows
may be more stable than portfolio funds, there is no guarantee of FDI
inflows persisting at the high levels of a few years earlier.5 With regard
to trade, 11.6 percent of total reported U.S. exports to Canada and Mexico
were accounted for by re-exports of goods imported from other coun-
tries and transshipped through the United States as of 2002.6 Thus, ex-
ports of U.S.-produced goods were correspondingly lower than total
reported exports. Also, some of the major growth sectors in North Ameri-
can trade and FDI flows are sectors that received special favors in NAFTA
through a restrictive “rule of origin,” such as automobiles, textiles, and
apparel. In these industries, products are required to have very high pro-
10 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

36

30

24
Billions of U.S. Dollars

18

12

-6

-12
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Net financial inflows Foreign direct investment

Figure 1. Net Financial Inflows and Foreign Direct Investment in Mexico,

1990–2003

Source: International Monetary Fund (IMF), International Financial Statistics,

online version (available at http://ifs.apdi.net).

Note: Net financial inflows are the financial account balance; foreign direct invest-
ment is the inflow into Mexico only.

portions of “North American content” to qualify for NAFTA tariff ex-

emptions. Although trade in these sectors has grown rapidly, it is not
exactly free trade. Furthermore, although U.S. trade with Mexico in-
creased rapidly after NAFTA went into effect in 1994, it is not clear how
much of the increase can be attributed to NAFTA, as opposed to changes
in other variables such as the value of the peso, the growth of U.S. na-
tional income, and Mexico’s prior trade liberalization of the 1980s.7
Most importantly, a significant portion of the apparent increase in
Mexico’s trade is illusory, because the parts and components shipped
into Mexico for assembly in maquiladoras and then re-exported in an
assembled form are double-counted in both imports and exports. In 2003,
out of Mexico’s total exports (to all countries) of $164.9 billion, $77.5
billion consisted of maquiladora exports that were offset by $59.1 bil-
lion of maquiladora imports.8 Thus, the net exports of the maquiladoras
amounted to only $18.4 billion, and true Mexican exports excluding
maquiladora imports were 36 percent lower than the total gross exports
reported in 2003.
The prevalence of this reciprocal trade in semifinished products is an
 FALL 2003 11

important indicator of the degree to which production has become con-

tinentally integrated, but it is also a reminder of the limited degree to
which Mexico’s reported exports actually embody Mexican value added.
Thanks to the prevalence of maquiladora assembly operations and the
high import content of all Mexican manufacturing, value added in Mexi-
can manufacturing has grown relatively little over the past decade, de-
spite the apparently large growth in manufactured exports,9 and many
export industries have weak or nonexistent linkages to the rest of the
Mexican economy. However, some parts of the Mexican manufacturing
export sector are technologically dynamic. Mexico’s automotive indus-
try has been substantially upgraded by FDI, and its electronics sector
increasingly produces “more sophisticated . . . products that go beyond
mere assembly” (Vega and de la Mora 2003: 175–81). Nevertheless, the
gains from these dynamic export activities do not yet appear to have had
sufficient spillover effects to boost the overall growth of the Mexican
domestic economy.

Jobs, Wages, and Income Distribution

From a Mexican perspective, net job creation in tradable goods produc-

tion (i.e., manufacturing and agriculture) since NAFTA went into effect
has been extremely disappointing, and possibly negative.10 Unfortunately,
comprehensive and consistent data for Mexican employment are not
available for all of the relevant sectors and years. Nevertheless, one
important indicator is the trend in employment in Mexico’s export-ori-
ented maquiladora plants. Between 1993 and 2003, such employment
rose by 520,031 workers (from 542,074 to 1,062,105), as an increase of
749,158 from 1993–2000 was followed by a loss of 229,127 from 2000–
2003 (due to the combined effects of the U.S. recession and increased
U.S. imports from other sources, especially China).11 Although the num-
ber of maquiladora workers thus about doubled, this is a relatively small
number of jobs created over a ten-year period in a country that needs to
create nearly 1 million jobs per year just to keep up with the growth of
its labor force.12 The monthly survey of a sample of Mexico’s largest
(non-maquiladora) manufacturing firms shows employment falling by
roughly 7 percent (from about 1.4 to 1.3 million) over the period 1994–
2003, although this survey does not cover all non-maquiladora manu-
facturing employment.13 And, although there is not a consistent survey
across the whole period, the available data indicate a decline in total
12 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

agricultural employment of at least several hundred thousand and possi-

bly as many as a million.14
Although comprehensive statistics are not available, it appears safe
to conclude (following Polaski 2003) that the huge job gains that were
widely expected for Mexican manufacturing workers did not material-
ize, and that the small gains that occurred in the maquiladoras were
offset by losses in domestic manufacturing and agriculture. The small
net job gains in Mexican manufacturing should not be surprising, how-
ever, because they were a direct result of the sluggish growth of value
added (as opposed to gross exports) discussed above. Of course, total
Mexican employment has increased since 1993. But, this increase oc-
curred mostly due to rising employment in nontradable activities, such
as services (including an increasing amount of nonwage “informal”
employment), not because of large job creation in traded goods produc-
tion (see Salas and Zepeda 2003).
At the same time, the job losses in the United States that can be at-
tributed directly to trade with Mexico are similarly small. For example,
Scott (2003) estimates that 879,280 jobs were lost in the United States
as a result of the worsening of the U.S.–Mexican and U.S.–Canadian
trade balances combined between 1993 and 2002, of which 486,190 can
be attributed to the increased U.S. trade deficit with Mexico and 393,090
to the increased deficit with Canada.15 Scott’s precise estimates can be
criticized on various grounds,16 and his methodology estimates only the
employment effects of changes in actual trade flows—it does not ac-
count for the underlying causes of those changes (such as reductions in
trade barriers, fluctuations in exchange rates, or differences in economic
growth). Nevertheless, Scott’s estimate of the number of jobs that were
relocated from the United States to Mexico after 1993 is plausible, be-
cause it is close to the net increase in employment in the Mexican
maquiladoras, that is, about one-half million jobs. Scott’s estimate of
jobs lost to Canada is also plausible given the falling value of the Cana-
dian dollar and its strong effect in reducing Canadian–U.S. relative la-
bor costs during the time period he analyzed (1993–2002), as discussed
below (see also Seccareccia 2005).
How significant are job shifts of this magnitude in the U.S. labor
market? It depends on the perspective one takes. Relative to total U.S.
employment, which was about 138 million in 2003, the estimated job
losses due to trade with Mexico and Canada seem very small. Accord-
ing to Scott’s estimates, less than 0.7 percent of U.S. workers lost jobs
 FALL 2003 13

to the two NAFTA partners combined, and only about 0.4 percent lost
jobs to Mexico alone. Relative to manufacturing employment—which
is a more relevant measure of the number of jobs in tradable goods pro-
duction—these job losses appear less trivial, however. The estimated
job losses due to trade with Mexico and Canada combined amount to
about 5 percent of peak U.S. manufacturing employment of about 17.6
million in 1998 and to 31 percent of the 2.9 million jobs lost in U.S.
manufacturing between 1998 and 2003 (the corresponding figures for
Mexico alone are 3 percent of peak employment and 17 percent of jobs
lost).17 Thus, U.S. trade with Canada and Mexico has had a much larger
impact on changes in manufacturing employment “at the margin” than
on total U.S. employment.
Although job gains and losses have received the most attention in
policy debates, the more widespread effects of trade liberalization and
economic integration on the labor force are felt in regard to the distribu-
tion of income. Although it certainly cannot be blamed on NAFTA
alone—indeed it predated NAFTA—there has been a disturbing trend
of rising inequality between labor and capital and among different strata
of the labor force in all three member countries (see Scott et al. 2001).
As Table 3 shows, all three countries have had a widening gap between
the growth of labor productivity and real compensation in manufactur-
ing since 1990.18 This gap has widened the most in Mexico and the least
in Canada, but it has widened persistently in all three countries. In
Mexico, the sharp drop in real compensation between 1994 and 1997
could be blamed on the peso crisis, but the failure of real compensation
to increase over the entire decade 1993–2003 cannot be blamed on a
short-run macroeconomic crisis that ended in 1996. The upshot of these
widening gaps has been a corresponding rise in profit margins for the
MNCs that dominate manufacturing production in all three nations,19
and especially for production located in Mexico.
In addition, inequality has been increasing among different groups of
workers. The United States has had a trend of a rising relative wage for
relatively more-skilled (professional and technical) workers for the past
two decades, which was only partly arrested by small gains for less-
skilled workers during the economic boom of the late 1990s (Mishel et
al. 2001). In Mexico, the skill premium has also increased, and regional
inequality has worsened, as real wages have fallen relatively less in the
northern border region (where the new export industries are concen-
trated) than in the rest of the country (Hanson 2003). Canada has also
14 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

Table 3
Productivity (output per hour) and Real Hourly Compensation for All
Persons Employed in Manufacturing, 1990–2003 (indexes, 1990 = 100)

United States Canada Mexico

Produc- Compen- Produc- Compen- Produc- Compen-
tivity sation tivity sation tivity sation

1990 100.0 100.0 100.0 100.0 100.0 100.0

1991 101.8 102.4 101.8 101.7 104.9 105.7
1992 108.0 104.5 106.8 105.6 113.4 114.7
1993 112.3 104.3 113.2 105.8 122.9 121.3
1994 117.2 105.4 118.5 107.3 132.2 126.8
1995 120.8 105.0 120.3 107.4 139.6 112.2
1996 124.8 104.3 117.4 106.7 149.8 100.1
1997 130.2 104.2 121.4 107.3 155.9 98.8
1998 135.0 108.9 121.0 107.1 161.8 101.6
1999 141.1 111.1 124.2 107.0 166.4 102.5
2000 146.1 117.3 126.7 105.5 176.1 108.7
2001 146.1 116.8 124.2 106.5 177.8 116.4
2002 156.7 119.6 n.a. n.a. 186.3 118.6
2003 164.5 123.8 n.a. n.a. 190.4 120.2

Sources: U.S. Department of Labor, Bureau of Labor Statistics (available at

www.bea.gov); Statistics Canada (available at www.statcan.ca); Instituto Nacional de
Estadística Geográfica e Informática (INEGI), Encuesta Industrial Nacional (available
at www.inegi.gob.mx); and author’s calculations.

experienced widening wage inequality, although this has been more

ameliorated by government transfer programs in Canada than in the other
two countries (Jackson 1999; Scott et al. 2001).
Of course, it remains controversial to what extent these trends are
accounted for by the forces of “globalization,” and regional integration
through NAFTA is only part of those forces (though an especially im-
portant part for Mexico). There has been an extensive debate over the
degree to which changes in income distribution and wage inequality can
be attributed to international trade, capital mobility, labor migration,
technological change, and other factors. A full discussion of these issues
would be beyond the scope of this article. Nevertheless, a few points
may be made briefly here.
The findings that capital is gaining relative to labor and that more-
skilled workers are gaining relative to less-skilled workers in Mexico
 FALL 2003 15

are contrary to the predictions of a standard Heckscher–Ohlin model,

presuming that Mexico is relatively abundant in labor overall and in
less-skilled labor in particular. The rising skill premium in Mexico can
be given a trade-theoretic explanation if one observes that the new, ex-
panding export activities in Mexico, although relatively less skilled com-
pared to the U.S. industrial job structure, are relatively skill-intensive
compared to the rest of the Mexican economy (Hanson 2003).20 The fact
that labor compensation is falling relative to productivity in all three
NAFTA member countries can be explained by Dani Rodrik’s analysis
of globalization. Rodrik (1997) argues that when employers have a more
credible threat of relocating jobs abroad, the labor demand curve be-
comes more elastic, and hence, it is more difficult for workers to win
increases in wages and benefits.21 Although this may be most visible to
Americans or Canadians in threats to move jobs to developing coun-
tries, the same threat is also felt in the latter, where workers fear the loss
of their jobs to other developing nations. Mexico, especially, has been
negatively affected by increased U.S. imports from China, a nation with
much lower wages and an undervalued currency.22

Exchange Rates, Macroeconomic Performance, and

Income Levels

While public attention has focused mainly on NAFTA, real exchange

rate fluctuations for the three North American currencies have been an
order of magnitude larger than the tariff reductions enacted by that trade
agreement. The Mexican peso exhibits the most dramatic swings (see
Figure 2), with a strong appreciation during the pre-NAFTA boom in
financial inflows in 1990–93, followed by a stunning collapse during
the crisis of 1994–95, and then a gradual recovery to a peak in early
2002 followed by a more gradual (and partial) depreciation into early
2004.23 Meanwhile, the U.S. dollar gradually appreciated by a cumula-
tive 43 percent between July 1995 and February 2002, and it subse-
quently depreciated by only 17 percent through March 2004. The
relatively small overall decline of the U.S. dollar since February 2002
masks divergent behavior relative to two different groups of currencies:
a larger decline relative to the euro and a few other floating-rate curren-
cies (including the Canadian dollar), and smaller declines or no change
relative to the manipulated currencies of Japan, China, and certain other
countries (see Blecker 2003). Canada, in contrast, began the 1990s with
16 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

140

130

120
Indexes, 1990 = 100

110

100

90

80

70
Jan 90

Jan 91

Jan 92

Jan 93

Jan 94

Jan 95

Jan 96

Jan 97

Jan 98

Jan 99

Jan 00

Jan 01

Jan 02

Jan 03

Jan 04
U.S. Dollar Canadian Dollar Mexican Peso

Figure 2. Real Exchange Rate Indexes for the United States, Canada, and
Mexico, January 1990–March 2004

Source: IMF, International Financial Statistics, online version (available at http://

ifs.apdi.net), and author’s calculations.

Note: All indexes are CPI-adjusted; the U.S. and Canadian indexes are multilateral
trade-weighted while the Mexican index is bilateral with the U.S.

a significantly overvalued currency. The Canadian dollar then depreci-

ated substantially between 1991 and 1995 and remained low until it
experienced a partial recovery in 2003–4.
These currency gyrations, in turn, have had a major impact on trade
and growth in all three countries. The depreciations of the Canadian
dollar and Mexican peso at different times during the 1990s contributed
significantly to those countries’ increasing bilateral trade surpluses with
the United States, while the appreciation of the U.S. dollar was a major
cause of the rising overall U.S. trade deficit, which is now approaching
5 percent of GDP. The high value of the Canadian dollar in the early
1990s was widely blamed for the country’s poor growth and employ-
ment performance under the Canada–U.S. Free Trade Agreement
(CUFTA) in 1989–93, while its lower value later in the 1990s held down
Canadian labor costs in U.S. dollar terms, thus boosting Canada’s ex-
ports and reducing its unemployment at that time (see Seccareccia 2005).
The depreciated peso helped to spark Mexico’s rapid export-led recov-
ery in 1996–2000, along with other factors discussed below.
Another important aspect of the macroeconomic integration of North
America is the positive correlation of Canada’s and Mexico’s business
 FALL 2003 17

12
U.S.-Canada FTA
NAFTA

4
Percent

-4

-8
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

USA Canada Mexico

Figure 3. Annual Growth Rates of Real GDP, United States, Canada, and
Mexico, 1970–2003

Source: IMF, World Economic Outlook, April 2004 and earlier issues, online database
(available at www.imf.org/external/pubs/ft/weo/weorepts.htm)

cycles with those of the United States. Canadian growth has been strongly
correlated with U.S. growth for a long time (see Figure 3, which gives
annual data for 1970–2003). Studies in the literature are divided on
whether the correlation of Canadian and U.S. growth has been increas-
ing or decreasing, but all studies find high degrees of correlation in these
countries’ growth, especially since about 1980.24 The positive correla-
tion of Mexican and U.S. growth, in contrast, is a much more recent
phenomenon (see Figure 3). Between 1970 and 1995, there were several
major cyclical episodes in Mexico that were uncorrelated with U.S. busi-
ness cycles, including the oil boom of the late 1970s, the crash of 1986,
the “emerging market” boom of the early 1990s (which occurred while
the United States and Canada experienced recessions), and the peso cri-
sis of 1994–95. But since 1996, Mexican growth has followed U.S.
growth much more closely, with a boom in 1996–2000 followed by a
recession in 2001 and a relatively sluggish recovery in the next few
years.25
The relatively high degree of synchronization of growth rates among
the three NAFTA members in recent years is an important indicator of
the extent of macroeconomic integration in North America. Yet, for
Mexico and Canada, this synchronization has been a mixed blessing.
Given the overwhelmingly larger size of the U.S. economy, which ac-
counted for 88 percent of total North American GDP in 2002,26 it is
18 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

clear that the causality runs almost exclusively from U.S. growth to
Mexican and Canadian growth. Although this looked like a good deal
during the “new economy” boom in the United States in the late 1990s,27
it did not look nearly as beneficial when U.S. growth slowed in 2001–3.
Under present circumstances, it is difficult for either Mexico or Canada
to sustain an autonomous growth dynamic with the absence of a strong
pull from U.S. demand for their exports.
These exchange rate and growth data help to explain two mysteries
in Mexico’s economic performance since the peso crisis of 1994–95.
First, why did Mexico’s growth recover so quickly and strongly after
the crisis? Some commentators have attributed the rapid recovery to
NAFTA, which enhanced Mexico’s ability to attract FDI and promote
exports (e.g., Lustig 2001: 98). NAFTA undoubtedly helped, but it would
not have helped nearly as much if the peso had stayed as overvalued as
it was in 1993–94. Although the peso crisis was exacerbated by finan-
cial and macroeconomic mismanagement on the part of the Mexican
government, some devaluation of the overvalued peso was inevitable
by 1994 (see Blecker 1996), and the depreciation of the peso in the mid-
1990s must be counted as another contributing factor in the country’s
rapid (and export-led) recovery. Furthermore, the U.S. market was grow-
ing at the fastest rate in three decades in the late 1990s, just when Mexico
needed a lift from prosperous export demand. The U.S. economic boom
combined with the depressed value of the peso made Mexico recover
far more quickly than would have been expected from the tariff reduc-
tions and other provisions of NAFTA alone.
Second, by 2001–2, the peso had appreciated in real terms to levels
similar to those of the precrisis levels of 1993–94 (see Figure 2), yet
Mexico managed to avoid another currency collapse and financial cri-
sis. There are several reasons for the better outcome in the early 2000s.
Mexico adopted a managed float exchange rate policy in 1995, and when
the peso became overvalued in 2001–2, the government was able to
ease the peso down in value over the next two years without inviting a
speculative attack, as it did when it tried to defend an indefensible peg
in 1994. Also, a conventional measure of the real value of the peso (such
as the index shown in Figure 2, which adjusts the nominal exchange rate
by relative domestic consumer prices) may not be a good reflection of
the country’s export competitiveness. Thanks to the strong productivity
growth and real wage repression noted earlier, Mexico was able to hold
down its unit labor costs and prevent export prices from rising as much
Table 4
Comparative National Income, Per Capita Income, and Real Wage Data, 1993 Versus 2002

Canada Mexico United States

1993 2002 1993 2002 1993 2002

GDP (current US$ billions) 554.7 714.3 403.2 637.2 6,582.9 10,383.1
GDP per capita (constant 1995 US$) 18,727 23,621 3,321 3,717 26,592 31,891
GNI per capita (current US$) 20,250 22,390 4,230 5,920 25,800 35,400
GNI per capita (PPP $) 19,480 28,930 6,680 8,800 25,570 36,110
Hourly compensation of manufacturing
production workers, in US$ $16.55 $16.02 $2.41 $2.61 $16.51 $21.37

Percentages of U.S. Levels

GDP (current US$ billions) 8.4 6.9 6.1 6.1 100.0 100.0
GDP per capita (constant 1995 US$) 70.4 74.1 12.5 11.7 100.0 100.0
GNI per capita (current US$) 78.5 63.2 16.4 16.7 100.0 100.0
GNI per capita (PPP $) 76.2 80.1 26.1 24.4 100.0 100.0
Hourly compensation of manufacturing
production workers, in US$ 100.2 75.0 14.6 12.2 100.0 100.0

Sources: World Bank, World Development Indicators, online version (available at www.worldbank.org/data/); and U.S. Department of
Labor, Bureau of Labor Statistics, “International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing,
Revised Data for 2002” and “Supplementary Tables, 1975–2002,” released May 19, 2004 (available at www.bls.gov/fls/home.htm).
FALL 2003 19
20 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

as they would have otherwise.28 In addition, the switch in the dominant

form of financial inflows from “hot money” to FDI helped to stabilize
Mexico’s balance of payments, although it did not prevent a drop-off in
overall financial inflows in 2002–3, as noted earlier.
Finally, Mexico’s slower growth since 2001 has curbed the growth of
import demand and, thereby, has helped to prevent an excessive trade
deficit (in spite of its bilateral surplus with the United States, Mexico
runs an overall deficit with all nations). However, the need to repress
domestic growth in order to prevent growing trade deficits represents a
weakness in Mexico’s current policy paradigm. As a result of the trade
liberalizations of the late 1980s and early 1990s, Mexico’s gains in ex-
port promotion have been offset by greater openness to imports, which
has increased the country’s income elasticity of import demand (see
Moreno-Brid 1999; Pacheco-López 2005). Thus, despite rapid export
growth, Mexico finds itself chronically needing to use contractionary
fiscal and monetary policies to prevent recurring balance of payments
crises. This is an important reason why Mexico’s average growth rate
has remained relatively low in the post-reform, post-NAFTA period com-
pared with the earlier post–World War II decades (see Huerta González
2004; Moreno-Brid and Ros 2004).
The end result of all of these changes is that Mexico has thus far failed
to achieve the convergence of average incomes with the United States and
Canada that it hoped for when it joined NAFTA. Table 4 compares total
GDP, three measures of per capita income, and hourly compensation of
manufacturing production workers in the three NAFTA countries, in the
year before NAFTA took effect (1993) and the most recent year for which
all data were available (2002). By all these measures, Mexico has not
gained any ground relative to the United States since 1993, and by some
(especially manufacturing compensation in U.S. dollars), it has lost ground.
There is no evidence of any catch-up in average Mexican living standards
to U.S. or Canadian levels under NAFTA. Canada fell behind relative to
the United States in all the indicators (total GDP, per capita income, and
hourly compensation) measured in current U.S. dollars, but these indica-
tors are heavily influenced by the lower value of the Canadian dollar in
2002 compared with 1993. When per capita income is measured in real
terms or at purchasing power parity (PPP) exchange rates, Canada im-
proved slightly relative to the United States. Mexico, in contrast, has com-
pletely failed to close the “development gap” with the United States and
Canada in the first ten years of NAFTA.
 FALL 2003 21

Conclusions

If the objective of NAFTA was to promote intra-North American trade

and investment flows and to improve profitability for large multina-
tional corporations, the evidence suggests that it has been successful.
But NAFTA was not sold to the publics of the three countries based on
these narrow objectives. NAFTA’s promoters predicted that it would
give a tremendous stimulus to the growth and development of the Mexi-
can economy and (when not predicting actual job gains) argued that any
sacrifices of U.S. and Canadian workers would be minimal prices to pay
for boosting the economy of their poorer neighbors to the south. In the
prevailing neoliberal ideology of the early 1990s, Mexico could sup-
posedly rescue its economy from the lost decade of the 1980s through
“trade not aid.”
Although the adjustment costs in the United States and Canada have
not been large (except in specific industries and localities), liberalized
trade and investment flows have not brought the promised developmen-
tal benefits to Mexico or led to its convergence with its richer northern
neighbors. Ironically, the most painful adjustment costs have been felt
in Mexico, and there is no single greater indicator of the failure of NAFTA
(and related free-market reforms in Mexico) to solve that country’s eco-
nomic problems than the fact that an estimated 4 to 5 million Mexicans
migrated to the United States during the 1990s.29 NAFTA did not cause
this massive migration, but it also did not boost employment or wages
in Mexico enough to prevent it (as many NAFTA promoters claimed it
would, prior to 1994). As long as income and compensation gaps of the
magnitude shown in Table 4 persist, the more remunerative U.S. and
Canadian job markets will continue to exert an ineluctable pull on Mexi-
can workers.
Fundamentally, the overblown expectations for NAFTA were the re-
sult of an excessive faith in trade policy and foreign investment as en-
gines of growth and development. As two Mexican scholars have written:
In order to achieve balanced and sustained development, Mexico must
find mechanisms to make its domestic productive structure as dynamic
as its export sector. Trade policy can be a powerful instrument to promote
development, but it cannot be the only one. Nor can it be a substitute for
domestic growth. (Vega and de la Mora 2003: 164)
Recognizing the limited ability of trade policy and foreign investment
to stimulate domestic growth and solve development problems is a first
22 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

step toward constructing a more adequate policy paradigm for North

America. In the coming years, the continent needs to move in two direc-
tions: greater cooperation in policy areas beyond trade and greater focus
on domestic development policies inside Mexico.
There are many areas in which more continent-wide cooperation is
needed. Exchange rates should be managed to stabilize real currency
values and prevent excessive trade imbalances from arising (an objec-
tive that would not be served by fixed nominal exchange rates, formal
dollarization, or a monetary union). A trade-off of increased rights and
protections for Mexican migrants in the United States for increased la-
bor rights and standards inside Mexico would do much to benefit Mexi-
can workers and improve their living standards on both sides of the
border. Most importantly, all three countries need to escape from the
zero-sum game of competing over job opportunities through lower wages
or exchange rates. This has to be accomplished by pursuing full-em-
ployment policies, instead of repressing domestic demand to placate
financial investors.30 Given the larger size of the U.S. economy and the
importance of its market for Mexico and Canada, expansionary U.S.
macroeconomic policies are especially important for allowing the latter
two countries to achieve full employment and rapid growth without run-
ning into balance of payments constraints. To address all these issues
and other social concerns (e.g., environmental protection), and to counter
the otherwise excessive emphasis on private property rights in NAFTA,
the three countries need to create a set of democratic governance insti-
tutions to oversee the continental integration process (see Pastor 2001).
It is also time to abandon the free-market ideology that pretends that
trade and investment liberalization alone can propel Mexico’s long-run
economic development and enable it to converge to the United States.
Mexico desperately needs more public investment in infrastructure and
education, along with internal reforms to combat corruption, strengthen
financial regulation, and enhance open, democratic institutions. A more
efficient tax system would help Mexico pay for its needs in these areas
without running large budget deficits (and without so much reliance on
oil revenue). But given Mexico’s lower per capita income level, a U.S.–
Canadian development assistance fund for Mexico (on the model of the
European Union’s regional policy) is also essential to pay for the needed
public expenditures (see Pastor 2004). Aside from the obvious benefits
to Mexico, such a fund would be in the self-interest of the United States
and Canada insofar as it would help to ameliorate the social pressures
 FALL 2003 23

that lead so many Mexicans to migrate northward and to create a more

prosperous trading partner south of the border.
Finally, Mexico needs to move further up the “industrial ladder” to
avoid becoming stuck in low-skill, low-wage assembly activities that
offer few long-term developmental benefits. Mexico’s labor costs may
look low relative to those of the United States or Canada, but they are
not low relative to most other developing countries, and Mexico will
not win in the long run by trying to play the game of offering cheap
wages to attract labor-intensive FDI. By investing more in education,
training, and infrastructure, Mexico can attract more skill-intensive in-
dustries with greater spillover benefits for the domestic economy—and
a greater potential to raise Mexican families’ incomes toward U.S. and
Canadian levels.

Notes

1. According to Lustig, Mexico’s primary objective in seeking the NAFTA agree-

ment was “to entice the capital inflows required for economic recovery and sus-
tained growth” that “did not respond with the expected vigor to the Brady-type debt
agreement and the far-reaching [domestic] economic reforms” in Mexico in the early
1990s (1992: 134).
2. Bilateral Canadian–Mexican trade remains relatively small, accounting for
only about 2 percent of Mexico’s trade.
3. See U.S. Department of Commerce, Bureau of Economic Analysis, Interna-
tional Transactions Accounts, Release of June 18, 2004, table 2 (available at www
.bea.gov).
4. This point has also been noted by Pastor and Wise (2003: 186–87).
5. See Máttar et al. (2003) on the limited benefits of Mexico’s FDI boom in the
1990s.
6. See Scott (2003: 3), who cites U.S. Census Bureau data.
7. Krueger (1999), Pacheco-López and Thirlwall (2004), and Pacheco-López
(2005) find no statistically significant effects of NAFTA on Mexican exports, after
controlling for other factors. Lederman et al. (2003: 231–40) claim to show that
NAFTA increased Mexico’s global exports by 25–30 percent, but they use a model
that does not control for the value of the peso (which depreciated significantly right
after NAFTA went into effect, as discussed below).
8. These data are from the table, “Comercio exterior de maquiladoras y no
maquiladoras, FOB/FOB,” obtained from the Mexican government’s statistical
agency, Instituto Nacional de Estadística, Geografía e Informática (INEGI) (avail-
able at www.inegi.gob.mx).
9. See United Nations Conference on Trade and Development (2002: 77–81).
10. The following discussion covers the same data presented by Polaski (2003:
14–20), but this discussion is based on the original data series and qualifies some
aspects of her presentation.
24 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

11. Annual averages were calculated by the author based on data from the table,
“Industria Maquiladora de Exportación: Total Personal Ocupado,” Monthly Indus-
trial Survey (Encuesta Industrial Mensual), from INEGI (available at www.inegi.gob
.mx).
12. World Bank, World Development Indicators, online database (available at
www.worldbank.org/data/).
13. Data from before 1994 are from a smaller survey and are not comparable.
Smaller firms, possibly including new start-up companies, are not included in this
survey. The 1999 Mexican Census showed 4.2 million total employed persons in
manufacturing, but the census is not conducted on an annual basis, and the annual
Survey of National Employment (Encuesta Nacional de Empleo) includes manufac-
turing in a broader category of “industries of transformation.” All Mexican employ-
ment data are from INEGI.
14. Mexico’s new Survey of National Employment (Encuesta Nacional de
Empleo) shows a decrease of 728,630 from 1998–2003, while its previous Survey
showed a decrease of 372,390 between 1991 and 1998 (both surveys include fishing
and related primary activities along with agriculture, but exclude mining). Because
the two surveys are not consistent, however, it is not possible to compute an exact
change over the entire period.
15. Scott’s estimate includes a correction for goods re-exported by the United
States to Mexico and Canada, which he subtracts from reported U.S. exports, and is
based on the employment multipliers associated with the types of goods traded be-
tween the United States and Canada and Mexico. The job losses attributed to the two
countries separately were calculated by this author using the percentages of each
country in the increased total trade deficit with both countries as reported by Scott.
16. One problem is the implicit assumption that all increases in U.S. imports
from its NAFTA partners come at the expense of domestic production instead of at
the expense of imports from other countries. However, Scott’s methodology con-
trols for the fact that Canada and Mexico are better customers for U.S. exports than
other countries, as noted above, because the jobs associated with increased U.S.
exports to Mexico are subtracted from the jobs lost due to increased imports.
17. Based on U.S. Department of Labor, Bureau of Labor Statistics data, as
reported in Economic Report of the President, 2004, table B-46 (available at
www.gpoaccess.gov/eop/tables04.html). “Peak” manufacturing employment here
means the highest level reached during the late 1990s economic boom.
18. Canadian data ending in 2001 are on a SIC basis, and newer data for 2002–
3 based on the NAICS are not yet available. The U.S. data are all on a NAICS basis;
the Mexican data are spliced together from two different monthly industrial sur-
veys, pre- and post-1993. Similar figures are presented in Jackson (1999) for Canada
and the United States and in Polaski (2003) for Mexico and Canada.
19. Although part of the increasing productivity–compensation gap in the United
States can be attributed to a rise in consumer prices relative to output prices, there
has, nevertheless, been a rising trend of the profit share in the U.S. economy that
dates back to the early 1980s (Wolff 2003).
20. Alternatively, the Heckscher–Ohlin model can be used to explain the falling
real wages of (unskilled) workers in Mexico if there is a factor intensity reversal, as
suggested by Larudee (1998): if agriculture is (unskilled) labor-intensive in Mexico
but capital-intensive in the United States, and if Mexico imports agricultural prod-
 FALL 2003 25

ucts (e.g., corn) under free trade, then free trade hurts (unskilled) labor in both coun-
tries. Another trade-theoretic explanation, suggested to this author by David Shirk,
is that the large supply of unskilled labor in China could be depressing wages of
such workers globally, including in Mexico.
21. This argument of Rodrik can be viewed as a simple expression, in supply-
and-demand terms, of the idea that heightened capital mobility and liberalized for-
eign trade reduce the bargaining power of labor.
22. See Thompson (2001) and Shatz and López-Calva (2004) on Mexican losses
of FDI and jobs to China.
23. Although the real exchange rate shown for Mexico in Figure 2 is a bilateral
index with the U.S. dollar only, because the vast majority of Mexico’s trade is with
the United States, this index reflects the predominant direction of change in the
peso’s value. Because the peso and U.S. dollar were both appreciating between
1996 and 2002, a real effective (trade-weighted) exchange rate index for the peso
would show an even greater appreciation in the late 1990s and early 2000s than this
bilateral real exchange rate with the U.S. dollar.
24. Chen and Curtis (2004) find that the correlation of U.S. and Canadian growth
rates of real GDP increased between 1950–79 and 1980–99, while Lederman et al.
(2003: 46) find that this correlation was lower in 1994–2001 than in the longer
period 1981–2001. However, both of these studies find the correlation to be consis-
tently over 60 percent in the years after 1980. The reasons for variations between
Canadian and U.S. economic performance, such as exchange rate fluctuations, are
discussed elsewhere in this paper.
25. Authers (2004) demonstrates a strong correlation of the U.S. and Mexican
monthly indexes of industrial production from December 1997 through May 2004.
26. See the data in Table 4.
27. For an analysis of why the U.S. boom in the late 1990s was not sustainable,
see Pollin (2003).
28. The Banco de México’s index of export prices in U.S. dollars (available at
www.banxico.gob.mx) was much more stable in the 1990s than one would expect
from the large swings in the value of the peso. Although to some extent this prob-
ably reflects pricing-to-market and transfer-pricing behaviors, it also suggests that a
conventional real exchange rate measure may exaggerate the harm to Mexico’s ex-
port competitiveness caused by domestic consumer price inflation.
29. For a range of estimates, see Martin (2003) and Papademetriou (2003).
30. See Stanford (1999) and Seccareccia (2005) on repressive domestic demand
policies in the Canadian economy and Huerta González (2004) on the Mexican
economy.

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