Running head: REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 1

Repealing NAFTA and its Effect on Mexicos Economy

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REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 2

Introduction

The creation of the North American Free Trade Agreement (NAFTA), can be traced back

to 1990, when the then Mexican President, Carlos Salinas de Gortari, came up a proposal

associated with establishing a free trade agreement with the United States as well as any other

interested party in the region. Consequently, President Gortari arranged a meeting with the then

American President, President George H.W. Bush with the intention of sharing with him the idea

(Hanson, 2003). The sole intention of coming up with this idea was based on the fact that the

Mexican President knew that his country would benefit significantly economically if such an

agreement was to be ratified. After a series of meetings, deliberations as well as bureaucracies,

which saw the inclusion of Canada, the NAFTA pact was ratified in 1994 hence its implementation

thereafter. With the terms being implemented gradually through until 2008, NAFTA sort to scrap

off trade tariffs on products coming from member countries, Canada, Mexico as well as America.

Evidence from various studies indicates that Mexico, a developing country, considerably benefited

from this pact hence increasing the economic power in the region.

However, during the 2016 American presidential campaigns, President Trump posited that

once he becomes president, he would advocate for the repealing of NAFTA as it was diverting U.S

manufacturing jobs to Mexico hence increasing the unemployment rate in America. Given that

President Trump was successful in clinching power after successful campaigns, it would be

important to carry out a study that would delineate the effects of repealing of NAFTA on the

Mexican economy. Accordingly, this paper seeks to argue that the repealing of the NAFTA will

adversely affect the Mexican Economy as there would be a significant decline in a number of

exports and imports. Moreover, there would increase the rate of illegal immigration as well as the

adverse effects on the economy as it would later be discussed profoundly in this paper. In other
REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 3

words, the paper seeks to explore the research question: How will the proposed repeal of NAFTA

affect Mexico? Before delving into the subject matter, the paper will begin by giving a brief

background of NAFTA.

Brief Background of NAFTA

Before the establishment and ratification of NAFTA, the economy of Mexico had gone

through a series of difficulties, especially in the 1980s, and as such the country experienced a

significant deepening of poverty. Thus, with the profound economic hardships, the Mexican

government was in a dire economic solution that would empower its people. Accordingly, the

Mexican President, Gortari, reached out the U.S government with the intention of convincing its

counterpart to form a free trade agreement, which was later referred to as NAFTA (Kowalik, 2014).

It should be noted that Mexicos sole intention of entering NAFTA was to burgeon its export

diversification through attracting foreign direct investment. With an increase in the rate of foreign

direct investment in the country, Mexico would in turn benefit from increased job opportunities,

increased wages as well as the reduction of poverty (Hanson, 2003). In other words, Mexico sought

to enter NAFTA in order to give its economy a growth stimulus. A considerable number of studies

indicated that Mexicos entrance into NAFTA would have an overall positive impact on the

Mexican economy.

Studies have indicated that since the 1940s through part of the 80s, the Mexican

government had consistently maintained a profound protectionist trade policy. The essence of

enforcing this ideology was to ensure that Mexico became independent of any foreign power. The

country also believed that the protectionist trade policy was a means to industrialization. Under

the protectionists policy, Mexico came up with a myriad of restrictions aimed at containing foreign

direct investment as well as controlling the exchange rate in order to encourage what the Mexican
REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 4

government referred to as domestic industrial growth (Kowalik, 2014). Also during this period the

state came up with a policy of nationalizing the oil industry; this indicated that the government

had a significant say when it came to all matters associated with the production and selling of oil

and natural gas. It should be noted that the profound protectionist trade policy was enforced

throughout the 1970s until the late 80s Mexico started facing a string of economic misfortunes. As

Kowalik, (2014) clearly puts it, the 1980s was characterized by significant inflation rates as well

as deteriorating standards of living. One major drawback that Mexican economy faced was the

1982 debt crisis, whereby the Mexico was unable to service its foreign debt obligations. The 1982

debt crisis was the main cause of the economic challenges that the Mexican economy faced

throughout the 1980s. In an effort to address the economic challenges, the government decided to

privatize all the state industries as well as move towards trade liberalization. Towards 1988 and

the early 1990s, the Mexican government decided to come up with a proposal that would help

towards the realization of the unilateral trade liberalization. Consequently, as a measure towards

the realization of the unilateral trade liberalization, the Mexican government reached out the U.S

proposing a free trade agree, which eventually foresaw the formation of NAFTA that also brought

Canada on board.

Before highlighting an overview of the NAFTA provisions, it should be noted that Canada

and the United States had a working free trade agreement before the inception as well as the

implementation of NAFTA. In essence, the NAFTA led both the United States and Canada to have

greater access to the Mexican market. Conversely, NAFTA also opened up both the Canadian and

U.S market hence significantly increasing the Mexican export rates to these huge markets. As

Kowalik, (2014) notes, the primary or rather the salient provisions related to the NAFTA pact

incorporated how disputes should be resolved, issues to do with intellectual property rights, matters
REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 5

government procurement as well as services trades. Having delineated a brief background of

NAFTA, the next section will discuss how the proposed repealing of NAFTA would affect

Mexico.

Discussion

As mentioned in the introduction, the repealing of NAFTA would significantly increase

the number of illegal immigrants to the United States. As Waldkirch (2010) and Wise (2006) argue,

one of the main reason of crafting the NAFTA pact was to help in the creation of more job

opportunities in Mexico hence reducing the number of Mexicans intending to cross to America

illegally for the hope securing jobs. Evidence from Villarreals (2017) research indicate that the

Mexican economy is largely dependent upon the United States economy. This is because more

than eighty-one percent of Mexicos exports are often channeled to the U.S. When calculated as

GDP percentage, Villarreal (2017) posits that Mexican exports stood at 31% in 2008, having

increased from 10% twenty years ago before NAFTA came into place. Villarreal (2017) also posit

that even though the Mexican economy largely depends on the U.S, the relationship between the

two states also plays a significant role in the United States, especially when it comes to both

political and social issues such as migration matters. Economists posit that an economic

development of a country can often be reflected by the annual real GDP change and as such, an

increase in the annual GDP growth indicates that the economy is doing well in that the rate of

unemployment declines as well as the purchasing power of the citizens also increases.

Accordingly, statistics indicate that prior to the initiation of NAFTA in 1994, Mexicos GDP

growth rate stood at 2%, however, after the implementation of NAFTA, the GDP growth rate

jumped to 6%. Accordingly, this indicates that the number of jobs increased hence reducing the

illegal migration to the United States (Waldkirch, 2010).

REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 6

As Cuevas et al. (2005) clearly put it, the number of American investments associated with

the electronic and other industries flooded Mexico hence the creation of more jobs. Similarly,

Ayhan et al. (2005) posit that American businesses attached to the manufacturing of automobiles,

apparel, appliances as well as telecommunication gadgets flooded the Mexican market with the

intention of capitalizing on the free trade, increased market share as well as cheap labor.

Furthermore, given that the Mexican economy largely depended on Agriculture, the American

Agricultural firms moved in to empower the farmers with more sophisticated means of production

hence increasing the rate of productivity in the firms (Gallagher, 2004). This, in turn, increased

the number of job opportunities in the Agricultural sector. It should be noted that a significant

number of workers who often move to U.S illegally are often unskilled and as such, the coming of

American Agricultural conglomerates in Mexico was a relieve to unskilled Mexican laborers as

they would be significantly absorbed in this industry. This, therefore, indicates that a repeal of

NAFTA would mean that a significant number of American firms in Mexico would find it

expensive to operate in the country because of the increased tariffs hence moving back to American

or to countries that enjoy free trade agreements with the United States. Consequently, a significant

number of both skilled and unskilled workers would be rendered jobless hence seek to migrate

illegally to the United States where they believe they would secure greener pastures.

Poverty has been found to be one of the primary factors that often push Mexicans to be

illegal immigrants. According to Gallagher, (2004) poverty remains one of the significant as well

as pressing economic challenges facing Mexico. Thus, prior to the inception of NAFTA, the then

Mexican President, Calderon strived towards ensuring that he scraps off poverty through the

creation of job opportunities. Similarly, President Fox, who took over from Calderon also made

the issue of addressing poverty a top priority in his administration as he acknowledged that poverty
REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 7

was one of the biggest challenges facing the country (Wise, 2010). Even though the Mexican

president had made significant strides as far coming up with measures of reducing poverty is

concerned, the issue of poverty continued to be a major problem affecting its people hence the

increased illegal migration to U.S. As Esquivel and Rodrguez-Lpez, (2003) posit, poverty in

Mexico is often closely related to the social exclusion of a particular set of economically

disadvantaged individuals in the society. Esquivel and Rodrguez-Lpez (2003) notes that most of

those that fall under poverty group in Mexico are often the indigenous sets of people who comprise

about twenty percent of those that live in abject poverty.

Evidently, statistics indicate that after the inception of NAFTA, the poverty levels dropped

from 26% in 1992 to 17% in 2004 and later to 13% in 2005 (Ayhan et al., 2005). From these

statistics, it is apparent that the ratification of NAFTA significantly decreased the poverty levels

in Mexico. It can, therefore, be argued that the decrease in poverty in Mexico, which was

significantly activated by NAFTA, decreased the rate of illegal immigration to the United States.

As such, a repeal of the NAFTA would increase the poverty levels, which would, in turn, instigate

high rates of illegal immigrants in the United States from Mexico.

The second effect of repealing the NAFTA pact is associated with the sudden decrease in

the number of Mexican imports from the United States hence making the consumer goods

significantly expensive for the Mexican consumers. Studies have indicated that competition often

leads to increased quality as well as reduced pricing (Wise, 2010). In other words, businesses often

try to lower the prices of their products whenever the competitor is offering their products at a

lower price. No business wants to sell its products at higher prices than those of its rivals as

customers would prefer its competitors to the business. This is the same case with the Mexican

business environment. Prior to the inception of NAFTA, the local brands had no significant
REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 8

competitors and as such, they offered their products at significantly high prices to consumers

whose purchasing power was low. This indicates that before the coming of NAFTA, a significant

number of Mexicans found it difficult to purchase local brands or even imported brands due to

their expensive nature. However, the initiation of NAFTA meant that all tariffs were to be scrapped

of hence decreased the cost of production, which in turn led to the coming of cheap or affordable

products.

Research indicates that majority of countries often charge heavy tax on imports. For

instance, the amount of levy charged on an imported car in South Africa is often the same as the

initial purchasing price (DelgadoWise, 2007). Thus, this explains the exorbitant prices charged

on imported products. Accordingly, ratification of NAFTA saw the scrapping of all tariffs on all

imports from member countries hence the significant reduction of the prices of products (Ayhan

et al., 2005). Consequently, the consumers were in a position to acquire goods and services at

lower prices as the competition also forced the local brands to reduce their prices.

It is also important to note that repealing of the pact would mean that Mexico will no longer

enjoy all the tax holidays as well as trade tariffs. Therefore, this indicates that all imports entering

Mexico from the United States will be subjected to taxes hence increasing the prices. This, in turn,

would give the consumer a considerable baggage with regards to purchasing products that were

previously considerably cheaper. It is without doubt that the liberalized trade that came as a result

of forming NAFTA allowed Mexico to import a considerable number of products hence making

goods such as electronic appliances, apparel as well automobiles affordable to a significant number

of Mexicans (DelgadoWise et al., 2007). Recent statistics have indicated that establishment of

NAFTA has increased the imports from the United States by nearly 333.1%, that is between 1993
REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 9

and 2012 (Villarreal, 2017). In essence, the number of merchandise from the United States

increased by 371.1% while that of services increased by 150.1% (Villarreal, 2017).

A repeal of NAFTA will negatively impact the Mexican economy as its manufacturing

sector will be significantly affected since it largely depends on the American market with regards

to the acquisition of raw materials as well as getting a ready market. According to Waldkirch

(2010), Mexicos automobile aeronautics sectors of the economy, which are located along the

countrys northern border have been said to benefit significantly from NAFTA provisions. As

Waldkirch (2010) puts it, the NAFTA provisions on automobile sector have significantly

institutionalized the current degree of integrations between the three member countries. Moreover,

the pacts provisions associated with the automobile sector has created a more stable as well as

competitive environment as far as the auto production as well as trade is concerned.

The NAFTA provisions allow Mexico to secure raw materials as well as automobile parts

from both the U.S and Canada at significantly reduced prices as considerable amounts of taxes

associated with the automobile accessories have either been reduced by half or scrapped off

completely. This indicates that by repealing NAFTA automobile manufacturers in Mexico will be

negatively impacted as they would lack a level play ground when it comes to competing with other

major manufacturers internationally. This, in turn, means that the Mexican automobile exports will

significantly fall hence adversely affecting the economy. With a more integrated North American

market under the NAFTA pact, a significant amount of investment from the European as well as

Japanese automakers have been attracted so far. Recent statistics have indicated that Volkswagen

has invested heavily in the Mexican automobile sector and currently produces the new Beetle in

the country for the international market (Waldkirch, 2010). Moreover, Volkswagen is also
REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 10

investing more than $100 million in Mexico with the intention of producing a brand known as the

Golf.

The other economic effect on the automobile sector associated with the repealing of the

NAFTA pact, is the reduction of wages as well as the downsizing of the workforce. It should be

noted that before the ratification of NAFTA, the average hourly wages in Mexico was $2.75 in the

automobile industry (Hanson, 2003). This was way low compared with its neighbors such as the

U.S where the average wage per hour was $21.93 while that of Canada stood at $19.23 (Hanson,

2003). Considering that NAFTA allowed both the Canadian and U.S firms to invest in the Mexican

automobile industry with no tariffs, the FDI increased the average hourly wages to $4 hence

making the local manufacturers to also adjust to the new competition (Cuevas et al., 2005).

Consequently, a repeal of NAFTA will adversely affect the automobile sector as it decreases the

average hourly wages hence negatively affecting the purchasing power of the Mexican automobile

workers. With decreased earnings, the livelihoods of a significant number of families would be

jeopardized as they would not be in a position to afford their necessities such food, health,

education as well as humane shelters.

Socioeconomically, the repeal of the NAFTA pact would adversely affect the middle

socioeconomic class. According to Cuevas et al. (2005) part of the reason NAFTA was formed

was to create more middle-class jobs both in Mexico and the United states. Accordingly, the

initiation of the NAFTA pact led to the significant subsidization of the Mexican Agricultural sector

(Cuevas et al., 2005). This has, in turn, increased the stability of the Mexican farmers as well as

those employed in this sector hence increasing the number of middle-class in the country. Even

though the number of middle-class in Mexico cannot be compared to that of Canada and America,

it is evident that the inception of NAFTA has increased the number of individuals characterized as
REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 11

middleclass. This significant change has helped to change the country not only economically but

also socially as the rate of poverty has reduced. Moreover, the living standards of a significant

number of Mexicans has increased. In fact, studies indicate, that the living standards in Mexico

has increased since the inception of NAFTA and this can be supported by the increased disposable

incomes of the middleclass (Wise, 2010). Therefore, a repeal of NAFTA would lead to loss of jobs

hence poor living of standards and eventually a high rate of poverty, which is associated with poor

healthcare and lack of finances to educate children.

It is also certain that a repeal of the NAFTA pact will lead to negative economic effects

hence making the government of the day unpopular. In other words, adverse economic challenges

are bond to adversely Mexican support for the government. A study done on the impacts of

NAFTA on Mexico indicates that the auspicious future that was associated with the coming of

NAFTA made the Mexican to be the optimistic individuals in the region hence applauding as well

as well supporting the government of the day (Wise, 2010). The Mexican believed that the

governments had their interests at heart hence the proposal of the NAFTA formation (Wise, 2010).

Accordingly, the government initiatives were supported fully hence a positive relation between the

government and the citizens. It is certain that all the developed countries in the world have

managed to make great strides economically because of their citizens goodwill. Citizens who

support the government are often committed towards the building of the nation as they associate

themselves with prosperity (Wise, 2010). In retrospect, a repeal of NAFTA will mean that Mexico

will go back to its economic challenges that it faced before the establishment of NAFTA hence

making the government unpopular and unsupported by its people. With an increase in

unemployment and poverty levels, the Mexicans will often castigate the government. Thus, a

repeal of NAFTA would adversely impact the government support from the people.
REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 12

The repeal of NAFTA will not only adversely affect the Mexico alone but also the U.S

economy. It is certain that withdrawing from NAFTA will lead to an adverse effect of the U.S

GDP as a significant number of American manufacturing companies have invested in Mexico

hence contributing significantly to the American economy. Evidence from recent statistics

indicates that the American stock associated with the Foreign Direct Investment in Mexico

increased from $billion in 1993 to more than $107.9 billion in 2015 (Villarreal, 2017). With regard

to job growth, the U.S Chamber of Commerce indicates that more than seven million American

jobs significantly dependent on the U.S trade with Mexico and this flow has been considerably

facilitated by NAFTA (Burfisher, 2001). Thus, from the above discussion, it is evident that a

withdrawal of NAFTA will also hurt the U.S economy significantly.

Even though the repeal of NAFTA would adversely impact Mexico both socially and

economically, there are those who believe that withdrawing from the pact would have no effect on

Mexico. According to Villarreal (2017), a survey done in 2014 indicates that some working-class

Mexicans believe that NAFTA, in general, has failed to deliver the much anticipated economic

and social changes. The interviewed critics posit that since the introduction of NAFTA, the average

hourly wages have been stagnant. This indicates that instead of opportunity, a considerable number

of employees view the NAFTA as holding back the potential expansion. In fact, one worker was

quoted saying that he thought that NAFTA would improve his life as well as create more

opportunities for both countries but that has not been the case since the pact was incepted.

However, even with the above criticism, the general economic, as well as social environment of

Mexico, will be significantly adversely affected if the pact was to be repealed as more than eighty

percent of Mexicos exports end up in the U.S market.

REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 13

Conclusion

From the profound discussion delineated in various sections of this paper, it can be

concluded that a renegotiation with the intention of withdrawing from the NAFTA pact would

direly hurt the Mexican economy. The paper has gathered that a repeal of the pact would increase

the number of Mexican illegal immigrants to the United States, it will decrease the number of

imports hence an increase in the prices of the locally produced as well as imported products.

Moreover, withdrawing from NAFTA would negatively impact the middle-class in Mexico as

there would be loss of jobs hence deteriorated standards of living. It is also evident that

withdrawing from the pact would negatively impact the Mexican government as it will lack

support from its economically deprived citizens. Further, the entire economy will be adversely

affected as eighty percent of its imports are often directed to the U.S market. The paper has also

gathered the negative impacts will also be felt in the U.S economy has more than six million jobs

will be lost. Therefore, in essence, withdrawing from the pact should not be an option to be

considered at any given time. Instead, the renegotiation should be veered towards including other

European countries in the in the pact.

REPEALING NAFTA AND ITS EFFECT ON MEXICOS ECONOMY 14

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