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Running Head: EFFECTS OF THE NAFTA IN THE MEXICAN SOCIOECONOMIC
SITUATION
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Effects of the NAFTA in the Mexican Socioeconomic Situation
Aline Esperon Godinez
Research Writing I
Prof. Daryl Morris

EFFECTS OF THE NAFTA IN THE MEXICAN SOCIOECONOMIC SITUATION

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Abstract

Free Trade Agreements had been a very important part in Mexicos structure. They were a part
of the reformatting programs that were being held up since the 1980s. These reforms, mainly the
NAFTA, increased the standard of living of the Mexican citizens. It was accomplished by the
growth in the economy, which includes the increase of gains in exports and imports, the effects
of the lower tariff barriers, the programs that were being put in practice in order to help the
producers that were being affected by the trade agreements, such as Procampo, and the
environmental responses towards the effects of globalization and industries to the ecosystem. It
also studies the possible political reasons for signing the agreement and some modifications that
had been done to the original NAFTA document. This paper reflects the positive effects that
NAFTA has had in the economy, politics and the society of Mexico. These positive effects
include, the investment opportunities that had been opened since the NAFTA, the increase in the
percentages of exports and imports, the industrialization of the country as a whole, and the
increase in the amount of jobs and average wages.


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1. Introduction
2. Economy
A. Trade
i. Before
ii. After
B. Industries
i. Before
ii. After
3. Politics
A. Beginnings
B. Renewal
C. International relationships
4. Economy
A. Before
B. After
5. Mexican society
A. Jobs
B. Wages
C. Environment
6. Conclusion


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Effects of the NAFTA in the Mexican socioeconomic situation
In 1994, Mexico, Canada and the United States joined and by a set of agreements they
formed one of the largest free trade zones. It formally established trilateral arrangements for
commercial activities between the countries previously mentioned. This generated an economic
growth and a raise in the standard of living of all the three members of the FTA (Free Trade
Agreement). This research paper focuses mainly on the effects, economic, political and social, in
Mexico. To the Mexican economy the NAFTA (North American Free Trade Agreement) was not
only a way to reduce the tariff barriers, but the last step of a process of an economic
liberalization, which followed several major reforms in the Mexican strategy. The objective of
the NAFTA in Mexico was to encourage local and foreign investment in the production of goods
such as textiles, vehicles, footwear, petrochemicals, among others. Also to cause a country
without inflation by selling manufactured goods to the United States mainly. The information
given in this paper is based on data gathered from several web sources and journals.
Economy
There are two major ways to sustain a national economy, the protectionist trade policy and
the liberalized. The protectionist, as its name shows, tries to protect the economy by being
independent from any foreign country. Opposite to the liberalized trade policy, this allows trade
to be international.
In Mexico, from the 1930s to the 1980s, the government would rather work within a
protectionist trade policy. This was made in order to maintain the economy afloat and to impulse
the growth of small businesses, so that they become industries. As a result of this growth, the
industrialization of the country began. Also, to state that Mexico was not dependent of any other
country, the government preferred to work this way. (Villarreal, 2010)

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Before the NAFTA, and any other trade agreement, Mexican economy was protected by a
policy of import substitution, which major objective, was to guard the industrial sector. To do so,
Mexico controlled the imports by taxing foreign trade (the creation of tariff and non-tariff
barriers). This encouraged Mexican companies to grow or Mexican people to build new
companies. Mexico also nationalized the oil industry during this time. (Villarreal, 2010)
As a result of the closed Mexican economy, by 1985 the external debt increased and the
oil prices fell, causing a crisis. Afterwards, Mexico started to realize that they needed to change
something in order to sustain the economy. They decided to start a liberalization process, which
included several reforms such as the removal of high tariffs. Mexico also stated their intention to
take part in the General Agreement on Tariffs and Trade (GATT). (Esquivel, 2003)
After the GATT, in 1986 the tariffs barriers were incredibly reduced, the highest tariff
rate was 100% in 1988, and came down to 20% by 1988. Also, the average tariff rate was 10% in
1988 and was lowered to 25%. This gave an introduction to what was expected from the
liberalized Mexican economy, so that new economic relationships were formed such as the
NAFTA. (Kose, 2004)
After the NAFTA took place, Mexican imports and exports were dramatically changed.
Talking about gross domestic product (GDP) percentages, in 1985 the total foreign trade was
26% and it grew to 38% in 1994 and to 65% in 2000. However, the import penetration rate in the
manufacturing industry has changed, in 1988 it was 45% and in 2000 it was 150%. (Esquivel
2003)
President Zedillo established the Program for Industrial Policy and Foreign Trade
(PROPICE) in 1996, due to the unbalanced exports and imports. It reached a point where the
imports were clearly higher than the exports, causing a crisis. This program mostly aimed for

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trade protection measures since the government argued that the productive chains were
incomplete because of the lack of production of the Mexican industry. The priority sectors were
the electronics, the textiles, footwear, automobile, steel and petrochemicals. (Moreno-Brid et. al.,
2005)
Other programs were put in practice so that the national companies could make their
export potential stronger. These programs major objective was take command of the
uncontrolled decrease of certain taxes. Among the programs the ALTEX, which is the reduction
or removal of the tariff barriers only to important exporters; and SIMPLEX (Mexican System for
External Promotion), which helped national industries to grow within marketing ideas and to
make investment in Mexico known. (Moreno-Brid et. al., 2005)
Many reforming programs during the 1900s were focused on the control of external rate,
which at the same time causes a reduction in the inflation. However, during this period of the
Mexican economy the peso lost its value and as a result, the presence of Mexican companies in
foreign countries decreased. The government was spending more money than it produced,
causing a deficit in the current account, the private capital was lowered and the money for credits
was gone. All this, caused a rise in the inflation, which at the same time made that the investors
had a feeling of distrust towards Mexican economy. (Kose et. al.)
Politics
The PRI (Institutional Revolutionary Party) was in power when the liberalization reforms
began, this including the NAFTA. During this time some speculations were made towards the
intentions of both ruling politicians, President Miguel de la Madrid (1982-1988) and President
Carlos Salinas (1988- 1994). It was claimed that they did not have difficulties gaining the
agriculture votes and that the introduction of NAFTA will affect their system because it will

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harm the agricultural sector. Due to the claims, it was expected for the politicians to either, delay
the liberalization or new political forces arose and change the concept of the reforms. (Tronell,
Esquivel 1995)
However, both cases were very unlikely, the first one, because a liberalization had
already started since the 1980s with President Jose Lopez Portillo. The second one was
improbable because by the time NAFTA started, several major investment groups will be well
established already. They will also have found a benefit from the economic sources and will
make sure that the reforms are not changed because if they are, they will suffer losses. (Tornell,
Esquivel, 1995)
In 2009, the NAFTA was modified; the main modifications were on the article 513 which
focused on effectiveness on the application an administration of the tariff barriers on exported
products and the programs of deferral of the same barriers. Also, there were some modifications
in articles 308 and 311; they focused mainly on a fair balance between tariff barriers between the
member countries. On July 2009, these changes entered in order between the United States and
Canada. Besides, on October 2009, the same modifications were put in practice in Mexico and
United States. An association called Group of Work about Origin Rules is the responsible for all
this modifications. (SICE)
The president of the United States, Barack Obama and the Mexican president, Felipe
Calderon, gathered in 2010, as a part of an Obamas campaign, which wanted to rethink and
reorganize the arrangements stipulated in the NAFTA. They both agreed that there was an urge
for more free trade. They also stated that the political and economic relationships between both
countries would remain untouched. (Watt 2010)


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Society
Some people believe that free trade will improve the movement of goods and services
between countries, and this, at the same time will increase the life standard of the citizens on
each member country. The thought is supported by the idea that more people can work together
in order to produce things that are more efficiently used in other parts of the world. As a result,
there will be a growth in the society and the way people live, apart from the economic benefits
such as the gains in the Gross Domestic Product, investment opportunities, and reduction of
producing costs. (Kehoe 1995)
The wage rate and the amount of jobs were not equal in every part of the country. There
were more opportunities of personal and economic growth in the cities, such as Monterrey,
Mexico City and Guadalajara. Moreover, job opportunities are lower in states where the main
economic activities are rural, which is the case of Oaxaca, Michoacn, Zacatecas and Chiapas.
The Mexican process of liberalization, which included several socially based programs,
improved this situation. (Weintraub)
By the time NAFTA negotiations were taking place as a part of the Mexican reformation
program, major changes were made in the social structure in Mexico. The ejidos were altered,
so that landowners had better opportunities of using their lands. This caused a great reaction
within the society because the ejido system had been established since early civilizations in
Mexico. However, this structure promotes rural poverty because of the income support payment
structure. The authorities noticed and changed it to Pro-campo, which is a program that helps the
agricultural community (especially grains, beans, and oilseed growers) by a direct support
system of payment. Government said that the program was put into practice because some
growers were not getting benefits from the reforms, including NAFTA. (Weintraub)

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Environmental problems had been a constant concern when talking about growth and
globalization. President Bush and his administration planned a series of agreements (separated
from the NAFTAs original arrangements) which included the necessity for more money from
the United States and Mexico for costing the environmental damages. Also President Bill Clinton
followed Bushs ideologies, and negotiated another side agreement talking about environmental
policies. These policies included specific environmental protection measures, such as the
problem of pollution. (Organ, Williams)
Some of the bylaws included rules or restriction where job opportunities should be put in
practice in a sustainable and friendly way with the environment, meaning that industries are
expected to put into account several rules and regulations that are consistent with the ecologic
thinking. Also, the side agreements protect the health and well-being of not only plants and
animals, but humans. However, each industry is free to put their own level of environmental
restrictions. (Organ, Williams)
NAFTA, as well as other liberalization programs has been beneficial to the Mexican
economy. It has globalized the country by giving a boost to the overall economy, including trade,
industries, agriculture, and investment opportunities. It has increased the annual per capita
income, which not only helps the government, but the social dynamic between Mexicans. It has
also increased the exports and imports, supporting the smaller businesses to grow beyond the
Mexican boundaries. It has also provided a number of citizens a job, this, as a consequence of the
widening of the market. There have also been specific regulations so that the environment does
not get affected by the changes in the industrialization of the country. Such regulations, although
they are not part of the main NAFTA document are stated in side agreements. Moreover, Mexico

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is the country where more free trade agreements have been done, and this, has obviously affected
the countrys stability in a positive way.


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Reference Page
1. Villarreal, A. (2010) NAFTA and the Mexican Economy. Retrieved from:
http://www.fas.org/sgp/crs/row/RL34733.pdf
2. Kehoe, W. (1995). NAFTA: CONCEPT, PROBLEMS, PROMISE. Retrieved from:
http://people.virginia.edu/~wjk/nafta.html
3. Esquivel, G. (2003). Technology, Trade, and Wage Inequality in Mexico before and after
NAFTA. Retrieved from:
http://www.socsci.uci.edu/~jantonio/Papers/naftapaper_jde.pdf
4. Kose, M. Guy, M. and Towe, C. (2004). How Has NAFTA Affected the Mexican
Economy? Review and Evidence. Retrieved from:
http://www.imf.org/external/pubs/ft/wp/2004/wp0459.pdf
5. Tornell, A. Esquivel, G. (1995) Political Economy from Mexicos entry to NAFTA.
Retrieved from: http://www.nber.org/papers/w5322.pdf?new_window=1
6. Rivas, J. Santamaria J. (2005) Mexico: Economic growth exports and industrial
performance after NAFTA. Retrieved from:
http://www.eclac.cl/publicaciones/xml/5/23725/L700.pdf
7. SICE. Retrieved from: http://www.sice.oas.org/tpd/nafta/NAFTA_s.ASP
8. Weintraub, S. NAFTA and Migration. Retrieved from:
http://www.iupui.edu/~anthkb/a104/mexico/naftaimmig.htm
9. Watt, P. (2010) NAFTA 15 Years on: The Strange Fruits of Neoliberalism. Retrieved
from: http://www.stateofnature.org/?p=6369

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10. Organ, L. Williams, J. NAFTA AND THE ENVIRONMENT: THE "GREENING" OF
MEXICO. Retrieved from:
http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1220&context=delpf

1. From the 1930s through part of the 1980s, Mexico maintained a strong protectionist trade policy
in an effort to be independent of any foreign power and as a means to industrialization. Mexico
established a policy of import substitution in the 1930s, consisting of a broad, general protection
of the entire industrial sector. Mexico placed high restrictions on foreign investment and
controlled the exchange rate to encourage domestic industrial growth. Mexico also nationalized
the oil industry during this time. These protectionist economic policies remained in effect until
the country began to experience a series of economic challenges caused by a number of factors.
In 1990, the President of Mexico at the time, Carlos Salinas de Gortari, approached then U.S.
President George H.W. Bush with the idea of forming a free trade agreement (FTA). President
Salinas de Gortaris motivations in pursuing an FTA with the United States were to increase
economic growth by attracting foreign direct investment (FDI); boosting exports; creating
industrial jobs; and giving the Mexican economy a growth stimulus. The Mexican economy had
experienced many difficulties throughout most of the 1980s with a significant deepening of
poverty. Mexicos intention in entering NAFTA was to increase export diversification by
attracting FDI, which would help create jobs, increase wage rates, and reduce poverty. At the
time NAFTA went into effect, many studies predicted that the agreement would cause an overall
positive impact on the Mexican economy.

2. The premise of free trade is that an increase in the flow of goods and services across national
boundaries will improve the average standard of living of people on both sides of a border. This
belief is based in the law of comparative advantage which posits that, under free trade, people in
each country will concentrate on producing or providing those things that can be produced or
provided most effectively and inexpensively relative to other countries. As a result, gains in
efficiency, in real income, and in Gross Domestic Product are expected in each country; costs are
reduced because investment is spread over a larger market of all the countries in a trade
agreement; and procedures, processes, and operations become more efficient due to international
competition. These results of free trade between nations are posited to raise the standard of living
in nations participating in a trade agreement. Such is the concept of free trade, the concept
underpinning NAFTA, but also a concept debated and, at times, rejected by some economists,
particularly those favoring multilateralism or multilaterally negotiated trade liberalization instead
of free-trade agreements.
3. Sometime around 1940, Mexico adopted an import substitution industrialization strategy. This
strategy consisted in protecting its industrial sector through a set of tariff and non- tariff barriers
in order to promote the creation of new industries and to permit the development of those already
existing. As a result, between 1940 and 1985, Mexico operated basically as a closed economy.11
In 1985, in the midst of the debt crisis and as a result of the collapse of the oil price, Mexico
initiated an important process of trade liberalization.12 In that year, Mexico implemented a
considerable unilateral reduction in trade barriers and announced its intention to participate in the

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General Agreement on Tariffs and Trade (GATT). The immediate effects of the radical change
in Mexican trade policy can be easily perceived in figures 1 and 2. The first figure shows
Mexican imports and exports between 1975 and 2000. The figure shows the explosive growth in
Mexicos external trade that began around 1985 and that has continued ever since. In terms of
percentage of GDP, Mexicos total foreign trade grew from 26% in 1985 to 38% in 1994 and
then to 65% in 2000. Figure 2, on the other hand, shows the import penetration ratios in the
manufacturing industry for the years 1988, 1994, and 2000. This figure shows that the import
penetration rate in the manufacturing industry as a whole has grown from 45% in 1988 to more
than 150% in 2000. Moreover, this increase has occurred at the industry-wide level, and it has
been particularly important in the textile and basic metals industries.

4. Leading up to the introduction of NAFTA in 1994, Mexicos economy was in the latter stages of
a stabilization and reform program that started in the late 1980s.6 This program was similar to
those adopted elsewhere in the region in the 1990s, featuring inflation control in the form of an
exchange rate-based monetary anchor and market liberalization measures, notably in the
financial sector. However, the challenges of sustaining this program in Mexico increased over
time, as the peso became overvalued and external competitiveness declined. In addition,
imprudent fiscal policies and excessive reliance on external borrowing contributed to financial
fragilities. Against this background, by early 1994, Mexico was facing serious macroeconomic
imbalances. These include a widening current account deficit in the face of strong domestic
spending, emerging problems in the financial sector, increasing concerns about the fiscal
outlook, and outflows of private capital.7 The initial response of the authorities to market
pressures was to shift toward increasingly risky financing instruments as other credit channels
dried up. When the crisis eventually hit at end-1994, the impact was amplified by the balance-
sheet effects of exchange rate depreciation, which required extensive government intervention in
support of financial institutions. NAFTA was a continuation of Mexicos comprehensive trade
liberalization and economic reform programs that started in the late 1980s. Mexico joined the
General Agreement on Tariffs and Trade (GATT) in 1986 and undertook a series of reforms
liberalizing its trade regime. In particular, the maximum tariff rate was reduced from 100 percent
in 1982 to 20 percent in 1988 and the average tariff rate was lowered to 10 percent in 1988 from
25 percent in 1985. In addition, a comprehensive privatization and deregulation program was
undertaken in the period 198894. There was an anticipation effect after the member countries
agreed to pursue negotiations for a free trade agreement in 1991.

5. The ability of mexicos ruling party ,the PRI, to capture the agriculture vote has ensured its
ability to pursue reforms in the manufacturing sector without major political obsruction. The
broader liberalization promised by nafta will greatly erode this electoral machine, as it will
alienate the agricultural sector. In principle, one could argue that this imminent erosion will
threaten the reform in two ways. First, uncertainty about the poitical future could tempt
politiicians in the futrure to delay further liberalization indefinitely. Scond, there is danger ththat
when the PRIs power erodes, new political forces will arise and overturn the reforms. In this
paper, howver, we argue that the policies implemented by former Presidents de la Madrid and
Salinas make it very unlikely that such pessimiestic scenarios will unforld. The first scenario is
unlikely because nafta has already set the liberalizaiton agenda; thus, it is not left to political
discretion- this might be the reason Salinas pursued nafta so feverishly. The second scenario is
unlikely because the time total trade liberalization has been implemented and the PRI machine

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eroded the new export and foreign investment groups will have consolidated their power and will
find it optimal to use their economic resources to ensure that the reforms do not get derailed.

6. In May 1996, after the dramatic balance of payments crisis of the previous year, President
Zedillo (19942000) launched the Program for Industrial Policy and Foreign Trade (PROPICE),
which entailed a reorientation of industrial policies (Ten Kate and Niels, 1996). It was founded
on the argument that trade liberalization had led to an excessive de-linking of some productive
chains in Mexican industry, and that to enhance domestic value added, sector-specific policies
and incentives needed to be implemented, but the program explicitly excluded the notion of trade
protection measures. Textiles, footwear, automobile, electronics, appliances, steel,
petrochemicals, and canned foodstuff production were identified as priority industries, based on
an assessment of their export potential. The machine tools, plastic products and electronic
components industrieswere also noted as having the potential to become indirect (that is,
suppliers of) exporters (Ten Kate and Niels, 1996).

7. El artculo 513 del TLCAN establece el Grupo de Trabajo sobre Reglas de Origen para asegurar
la efectiva aplicacin y administracin de los Artculos 303, "Restricciones a la devolucin de
aranceles aduaneros sobre productos exportados y a los programas de diferimiento de aranceles
aduaneros", 308, "Tasas arancelarias de nacin ms favorecida para bienes determinados", y 311,
"Marcado de pas de origen", del Captulo IV, de este captulo, de las Reglas de Marcado y de las
Reglamentaciones Uniformes, y la efectiva administracin de los asuntos relativos a aduanas del
Captulo III. Este grupo se ha reunido peridicamente para revisar las reglas de origen, proponer
rectificaciones tcnicas a las reglas y modificaciones a las reglas de origen contenidas en el
Anexo 401.Los informes de la Comisin de Libre Comercio del TLCAN proporcionan un
resumen del trabajo realizado a la fecha sobre las reglas de origen en el TLCAN. El 01 de julio
de 2009 entran en vigor modificaciones a las reglas de origen (Apndice 6, Anexo 300-B) entre
Canad y Estados Unidos.El 01 de setiembre del mismo ao, inicia la vigencia de las
modificaciones al Anexo 401 para Canad. Las mismas modificaciones entran en vigor para
Mxico y Estados Unidos el 01 y 02 de octubre, respectivamente.
8. Simultaneously, the Mexican authorities altered the ejido system to permit landholders greater
flexibility in disposing of their land. This change was controversial because of the historical
legacy of this structure, but it is impossible to argue that the ejido system successfully dealt with
rural poverty. In addition, the authorities terminated the old income-support structure and
replaced it with one called Pro-campo designed to benefit growers of grains, beans, and oilseed.
The purpose of Procampo is to provide direct support to subsistence farmers who, in the words
used by the government in setting up the program, "have not benefitted greatly from Mexico's
current system that compensates producers through guaranteed prices for crops that are
marketed" (emphasis in original).

9. Most jobs in Mexico, as in the United States, are created in the service sector. These job
opportunities exist mainly in large urban centers. The most important of them are Mexico City
and the neighboring state of Mexico, Guadalajara, Monterrey, and increasingly in northern cities
abutting the United States. Job opportunities are not abundant in the poorer, largely rural states
like Oaxaca, Michoacan, Zacatecas, and, as we have learned, Chiapas. Other countries have been
successful in decentralizing economic opportunity, including in non-farm rural areas. Mexico

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must use the short term to provide these opportunities if the people leaving farms are to stay in
their own country.

10. For instance, the Bush Administration directed the U.S. EPA to work with Mexico's SEDUE to
develop a separate plan to solve the pollution problems along the U.S.-Mexico border. This
border plan includes an increase in the funds spent by the United States and Mexico on
enforcement of environmental regulations in the border region.72 In 1993, President Bill
Clinton's Administration adopted Bush's conceptual approach, but negotiated more specific
environmental protections through a side agreement to NAFTA. President Clinton also pledged
additional funds to help ease NAFTA's environmental impacts on the border region. A. General
Environmental Guarantees in NAFTA. When President Bush preliminarily approved NAFTA on
December 17 1992, proponents argued that NAFTA's broad textual statements of support for
environmental protection were adequate to safeguard the environment.


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Running Head: EFFECTS OF THE NAFTA IN THE MEXICAN SOCIOECONOMIC

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