NAFTA after 16 years: How can Mexico benefit more?

The article Bringing NAFTA back Home from The Economist issue on October 30th, 2010 discusses the impact of NAFTA (the North American Free Trade Agreement) on Mexico’s economy and how Mexican exports have benefited from the trade agreement in the last 16 years. However, the article also points out Mexican exporting economy’s underlying problems that were exposed during the recent global financial crisis. It is important for Mexico to improve its advantages in exports and fully take advantage of the trade agreement.

NAFTA came into force in 1994 and was formed among the United States, Canada and Mexico. It represented $6 trillion economy with 360 million population. The goal of the agreement is to eliminate trade barriers such as tariffs and quotas on most goods and to create a trilateral trade bloc among the three countries. As the comparative advantage model suggests, a country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries (Krugman & Obstfeld, 29). Because of Mexico’s abundant labor resource at relatively low labor costs, the country has a comparative advantage in producing labor-intensive manufactured goods, which make up the majority of Mexican exports. However, over the last decade, Mexico has been facing increasing competition from manufactured goods in China, where the same export goods are produced at lower prices.

Despite the growing competition from countries with lower labor costs than Mexico’s, NAFTA with its innate advantages has helped Mexico’s exports to the United States. As the article stresses out, geographical proximity is one of the most important factors. According to the gravity...

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...A the underlying problems in Mexican economy cannot be overlooked. The exogenous growth model suggests that institution and human capital play important roles in a country’s long-term economic growth. According to the article, Mexican workers are highly skilled in some industries. Therefore, it is necessary for the country to take full advantage of its human capital and invest more in education and infrastructure. In addition, efficient fiscal spending, currency stability, and enforcement of competitive market rules should be the central tasks for the government.

After 16 years since its formation, NAFTA has acted as a catalyst and provided stimulus to Mexico’s export-oriented economy. It is now Mexican government’s job to overcome the economic obstacles and create domestic economic momentum during the recession in order to benefit more from the trade agreement.