• The North American Free Trade Agreement (NAFTA) is a good place to begin a comprehensive review of U.S. trade agreements, as called for by President Obama. Any U.S. review of NAFTA should, however, go beyond its impact on the United States to assess its effects on Mexico.
• The evidence points overwhelmingly to the conclusion that Mexico’s reforms, backed byNAFTA, have largely been a disappointment for the country. Despite dramatic increases in trade and foreign investment, economic growth has been slow and job creation has been weak. Now, with its economy so closely tied to that of its northern neighbor, Mexico is suffering the most severe economic crisis in the region.
• Reforms to the template for U.S. trade agreements must go deeperthan the incorporation of improved labor, environmental, and intellectual property provisions, as seen in more recent U.S. trade agreements. Such measures are laudable, but they would have had little impact on the negative trends we have seen in Mexico under NAFTA.
• U.S. trade agreements with developing countries should avoid NAFTA’s restrictions on government policies proven topromote dynamic development. They should leave countries such as Mexico the flexibility to deploy effective policies for industrialization, rural development, poverty alleviation, and environmental protection.
• Mexico’s experience under NAFTA shows that U.S. trade agreements must include robust funding for development to create a more level playing field among trading partners.U.S.President Barack Obama’s promise to carry out a comprehensive review of existing and pending trade agreements between the United States and developing countries is welcome, as is his vow to establish a “new template” for such agreements. The time is right to revisit the record on the economic benefits and costs of such agreements and the policies they mandate. A good place to start such a review is theNorth American Free Trade Agreement (NAFTA). NAFTA remains the current template for U.S. trade agreements in the hemisphere—with Chile, the Dominican Republic, Central America, and Peru, and for the pending agreements with Colombia and Panama.
NAFTA may well represent the most any developing country can hope for from such trade agreements. When the treaty took effect in 1994, Mexicowas already a high–middle-income country, with a diversified economy and an economic reform process already well underway. Mexico had a long history of bilateral trade with the United States across a shared 2,000-mile border. Most important, NAFTA gave Mexico meaningful preferential access to the U.S. economy during what turned out to be the longest economic expansion in U.S. history. It istherefore critical to begin the review by evaluating the extent to which the path-breaking trade agreement delivered on its promises, particularly under such favorable conditions.
Any U.S. review of NAFTA should go beyond its impact on the United States to assess its effects on Mexico. While there is contentious debate about whether NAFTA has been good for the United States and Canada, it isoften assumed that Mexico was the undeniable winner from NAFTA. After all, by gaining preferential access to its neighbors’ huge markets, Mexico expanded exports dramatically and drew increasing levels of U.S. investment, particularly in manufacturing. These two results constitute the core of most positive assessments of NAFTA.1 The problem, however, is that Mexico’s growth record since NAFTA hasbeen disappointing and the treaty’s effects on income distribution have been at best neutral.2 After fifteen years, it seems clear that NAFTA’s promise of broad-based dynamic growth did not come true in Mexico.
The NAFTA treaty and its implementation cannot be held entirely responsible for Mexico’s economic performance. The 1995 crisis clearly lowered Mexico’s medium-term growth...