Order Code RL32934
CRS Report for Congress
.Received through the CRS Web
U.S.-Mexico Economic Relations:
Trends, Issues, and Implications
Updated July 11, 2005January 24, 2006
M. Angeles Villarreal
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
U.S.-Mexico Economic Relations:
Trends, Issues, and Implications
Summary
Mexico has a population of slightly over 100 million people making it the most
populous Spanish-speaking country in the world and the third most populous country
in the Western Hemisphere. Based on a gross domestic product (GDP) of $677
billion in 2004 (about six percent of U.S. GDP), Mexico has a free market economy
with a strong export sector that is very sensitive to changes in the U.S. economy.
Mexico’s economy is relatively small compared to the U.S. economy. Economic
conditions in Mexico are important to the United States because of the close trade
and investment interactions, and because of other social and political issues that
could be affected by economic conditions, such as immigration.
The bilateral economic relationship with Mexico is among the most important
for the United States. The most significant feature of the relationship is the North
American Free Trade Agreement (NAFTA), which has been in effect since 1994. In
bilateral trade, Mexico is the United States’ second most important trading partner,
while the United States is Mexico’s most important trading partner. In U.S. imports,
Mexico ranks third among U.S. trading partners, after Canada and China, while in
exports Mexico ranks second, after Canada. The United States is the largest source
of foreign direct investment (FDI) in Mexico. These links are critical to many U.S.
industries and border communities.
In 2004, about 13% of total U.S. merchandise exports were destined for Mexico
and 10% of U.S. merchandise imports came from Mexico. In the same year U.S.
exports to Mexico increased almost 14%, while imports from Mexico increased
about 13%. For Mexico, the United States is a much more significant trading
partner. Almost 90% of Mexico’s exports go to the United States and about 60% of
Mexico’s imports come from the United States. FDI forms another part of the
economic relationship between the United States and Mexico. The United States is
the largest source of FDI in Mexico, accounting for 65% of total FDI in 2003. The
overall effect of NAFTA on the U.S. economy has been relatively small, primarily
because two-way trade with Mexico amounts to less than three percent of U.S. GDP.
The most significant trade issues that the United States and Mexico are focusing on
in 2005 include agricultural products, the trucking industry, and rules of origin.
Over the last decade, the economic relationship between the United States and
Mexico has strengthened significantly. The two countries continue to cooperate on
issues of mutual concern. On March 23, 2005, President Bush met with President
Fox and Prime Minister Martin of Canada to discuss issues related to North
American trade, immigration and defense. After the meeting, the three leaders
announced the Security and Prosperity Partnership of North America (SPP) in which
they seek to establish a cooperative approach to advance their common security and
prosperity; develop a common security strategy; and promote economic growth,
competitiveness, and quality of life. This report will be updated as events warrant.
Contents
U.S.-Mexico Economic Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
U.S.-Mexico Merchandise Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Mexico-U.S. Bilateral Foreign Direct Investment . . . . . . . . . . . . . . . . . . . . . 6
Maquiladora Industry Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Worker Remittances to Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Security and Prosperity Partnership of North America . . . . . . . . . . . . . . . . 10
The Mexican Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Economic Reform and the 1995 Currency Crisis . . . . . . . . . . . . . . . . . . . . 13
Current Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mexico’s Regional Free Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . 16
NAFTA and the U.S.-Mexico
Economic Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Effects on the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Effects on the Mexican Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Major Issues in U.S.-Mexico Trade Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Figures
Figure 1. U.S. Merchandise Trade with Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Figure 2. GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Tables
Table 1. Key Economic Indicators for Mexico and the United States . . . . . . . . . 2
Table 2. Trade Flows Between the United States and Mexico: 1994-2004 . . . . . 5
Table 3. U.S.-Mexican Foreign Direct Investment Positions, 1994-2003 . . . . . . 6
U.S.-Mexico Economic Relations:
Trends, Issues, and Implications
Mexico has a population of slightly over 100 million people making it the most
populous Spanish-speaking country in the world and the third most populous country
in the Western Hemisphere (after the United States and Brazil). The bilateral
economic relationship with Mexico is among the most important for the United
States because of Mexico’s proximity and because of the large amount of trade and
investment interactions. The most significant feature of the relationship is the North
American Free Trade Agreement (NAFTA), through which the United States,
Mexico, and Canada form the world’s largest free trade area, with about one-third the
world’s total gross domestic product (GDP).
The United States and Mexico share common interests and are closely tied in
areas not directly related to trade and investment. The two countries share a 2,000
mile border and have extensive interconnections through the Gulf of Mexico. There
are links through migration and tourism, environment and health concerns, and
family and cultural relationships. Mexican President Vicente Fox and President
George W. Bush have held a number of talks over the past few years to strengthen
the relationship.1
The economic relationship with Mexico is important to U.S. national interests
and to the U.S. Congress for many reasons. As the United States considers free trade
initiatives with other Latin American countries, the effects of NAFTA may provide
policymakers some indication of how these initiatives might affect conditions in the
overall U.S. economy. Another important issue for policymakers relates to the issue
of Mexican migrant workers in the United States, which has been a major focal point
in discussions between President Bush and President Fox. In the second session of
the 109th Congress, issues of concern will likely include the Mexican elections and
the possible effect on NAFTA and trade with the United States, as well as oversight
related to the U.S.-Mexico economic relationship. This report provides an overview
This report provides an
overview of U.S.-Mexico economic trends, background information on the Mexican
economy,
the effects of NAFTA on the U.S.-Mexico economic relationship, and
major trade
issues between the United States and Mexico. The last section of the
report analyzes,
to the extent feasible, the policy implications of the economic
relationship with
Mexico. This report will be updated as events warrant.
1
See CRS Report RL32724, Mexico-U.S. Relations: Issues for the 109th Congress, by K.
Larry Storrs.
CRS-2
U.S.-Mexico Economic Trends
The United States and Mexico have strong economic ties. The United States is,
by far, Mexico’s most important partner in trade and investment, while Mexico is
the United States second most important trade partner after Canada. Many
1
See CRS Report RL32724, Mexico-U.S. Relations: Issues for the 109th Congress, March
30, 2005.
CRS-2
economists have focused much attention on the transformation of Mexico into a
manufacturing-for-export nation since the late 1980s and the importance of exports
to its economy. Exports represent 30% of Mexico’s GDP, up from 10% twenty years
ago. Most of these exports are manufactured goods, with almost 90% of them
shipped to the United States. Although its exports to the United States increased in
2004, Mexico’s market share of the U.S. market has lost ground. (China recently
replaced Mexico as the second most important source of U.S. imports.)
Mexico’s economy is relatively small compared to the U.S. economy. Mexico’s
gross domestic product (GDP) in 2004 was $677 billion, about six percent of U.S.
GDP (see Table 1.) The value of Mexico’s exports is 32% of GDP and over 85%
of Mexico’s exports are destined for the United States. Thus, any change in U.S.
demand can have strong economic consequences in Mexican industrial sectors.
Table 1. Key Economic Indicators
for Mexico and the United States
Mexico
1994
Population (millions)
United States
2004*
1994
2004*
91
105
263
293
Nominal GDP ($US billions)
422
677
7,072
11,733
GDP, PPP** Basis
($US billions)
671
1,017
7,072
11,733
Per Capita GDP ($US)
4,617
6,450
26,846
40,040
Per Capita GDP in $PPPs
7,351
9,680
26,846
40,040
71
215
721
1,175
17%
32%
10%
10%
91
216
814
1782
Imports as % of GDP
22%
32%
12%
15%
Public Debt/GDP
32%
23%
67%
64%
Total Merchandise Exports
(US$ billions)
Exports as % of GDP
Total Merchandise Imports
(US$billions)
Source: Economist Intelligence Unit.
*Figures for 2004 are estimates.
**PPP refers to purchasing power parity, which reflect the purchasing power of foreign currencies in
U.S. dollars.
CRS-3
The immigration issue has received much attention by political leaders in recent
years and it is one that can be linked to the economic situation in Mexico, although
it has social and political aspects as well. In March 2004, there were an estimated
10.3 undocumented residents in the United States of which 57%, or 5.9 million, were
CRS-3
undocumented Mexicans.2 Economic conditions in Mexico such as poverty and
unemployment are a principal cause of the migration problem. These workers often
send money to their families in Mexico to help provide food and shelter. Worker
remittances to Mexico, which reached a record $16.6 billion in 2004, are an
important source of income for the Mexican economy.
U.S.-Mexico Merchandise Trade
In 2004, about 13% of total U.S. merchandise exports were destined for Mexico
and 10% of U.S. merchandise imports came from Mexico. In the same year U.S.
exports to Mexico increased almost 14% while imports from Mexico increased about
13%. For Mexico, the United States is a much more significant trading partner.
Almost 90% of Mexico’s exports go to the United States and about 60% of Mexico’s
imports come from the United States. Mexico’s second largest trading partner is
Canada, accounting for approximately 2% of Mexico’s exports and imports.3
U.S. merchandise trade with Mexico has grown considerably over the last ten
years (see Figure 1). Much of the increase in trade could be attributable to NAFTA,
but there are other variables that affect trade, such as exchange rates and economic
conditions. Mexico’s currency crisis of 1995 limited the purchasing power of the
Mexican people and also made products from Mexico less expensive for the U.S.
market. Both of these factors played a role in the increasing U.S. trade deficit with
Mexico which went from a $1.4 billion surplus in 1994 to a $45.1 billion deficit in
2004.
Figure 1. U.S. Merchandise Trade with Mexico
200
150
100
50
0
-50
1994
1996
U.S. Exports
1998
2000
2002
2004
U.S. Imports
U.S. Trade Balance
Source: United States International Trade Commission, Interactive Tariff and
Trade Data Web [http://dataweb.usitc.gov]. Compiled by CRS.
2
Pew Hispanic Center, Estimates of the Size and Characteristics of the Undocumented
Population, March 21, 2005.
3
International Monetary Fund, Direction of Trade Statistics Yearbook, 1995 and 2003.
CRS-4
U.S. imports from Mexico increased from $49.5 billion in 1994 to $61.7 billion
in 1995, while U.S. exports to Mexico decreased from $50.8 in 1994 to $46.3 billion.
As economic conditions in Mexico improved in the late 1990s, U.S. imports from
and exports to Mexico both rose steadily until 2001, when trade began to slow down
because of the downturn in the U.S. economy. Mexico’s economy, following U.S.
economic trends, also experienced a period of slow growth after 2001. In 2004, as
economic conditions improved, trade with Mexico increased with U.S. imports
totaling $155.8 billion and U.S. exports totaling $110.8 billion.
Several studies on the effects of NAFTA found that trade deficits are largely
driven by macroeconomic trends, and, in the case of U.S.-Mexico trade, caused by
the respective business cycles in Mexico and the United States. Strong U.S. growth
in the 1990s combined with Mexico’s deep recession in 1995 were the main factors
cited for the large deficits. None of the studies attributed the peso crisis to NAFTA,
but to structural misalignments in the Mexican economy combined with political
events.4
2
Pew Hispanic Center, Estimates of the Size and Characteristics of the Undocumented
Population, March 21, 2005.
3
International Monetary Fund, Direction of Trade Statistics Yearbook, 1995 and 2003.
CRS-4
but to structural misalignments in the Mexican economy combined with political
events.4
Figure 1. U.S. Merchandise Trade with
Mexico
Source: United States International Trade Commission, Interactive Tariff
and Trade Data Web [http://dataweb.usitc.gov]. Compiled by CRS.
Major industry trade between the United States and Mexico from 1994 and 2004
increased considerably (see Table 2). The U.S. industries with the highest volume
of trade (imports and exports) with Mexico are the automotive, computer equipment,
and microelectronics industries. The automotive industry accounts for almost 20%
of total trade with Mexico and had the highest dollar increase ($31.6 billion) in trade
volume with Mexico from 1994 to 2004. The U.S. trade deficit with Mexico in
automotive goods increased from $3.8 billion in 1994 to $24.2 billion in 2004.5 The
second highest dollar increase ($11.8 billion) was in computer equipment.
The textiles and apparel industries were among the industries more sensitive to
the removal of trade barriers. The U.S. trade deficit with Mexico in textiles and
apparel increased from $0.8 billion in 1994 to $4.1 billion in 2002, but then
decreased to $3.5 billion in 2004 (see Table 2). U.S. imports from Mexico in textiles
and apparel increased from $3 billion in 1994 to $10 billion in 2000. In 2001,
imports from Mexico began to decrease, going down to $8 billion by 2004. This may
suggest that U.S. imports from Mexico in textiles and apparel are being replaced by
imports from other countries such as China. U.S. textile and apparel imports from
China rose by 22% in 2003 and by 25% in 2004.6 The elimination of U.S. import
quotas on North American-origin textiles and apparel may have contributed to the
trade deficit in this sector.
4
4
5
See CRS Report RS21737, NAFTA at Ten: Lessons from Recent Studies, February 13,
2004.
5by J.F. Hornbeck.
For more information on the U.S. automotive industry see CRS Report RL32883, U.S.
Automotive Industry: Policy Overview and Recent History, April 25, 2005.
6
See CRS Issue Brief IB91121, China-U.S. Trade Issues, April 25, 2005.
CRS-5by Stephen Cooney and Brent
D. Yacobucci.
CRS-5
quotas on North American-origin textiles and apparel may have contributed to the
trade deficit in this sector.
Table 2. Trade Flows Between the United States
and Mexico: 1994-2004
($ Billions)a
1994
1996
1998
2000
2002
2004
$Change
1994-2004b
Automotive
U.S. Exports
$6.8
$6.5
$10.0
$13.9
$12.8
$12.5
$5.6
$10.6
$18.7
$24.2
$35.0
$36.0
$36.7
$26.0
$17.5
$25.2
$34.3
$48.9
$48.8
$49.1
$31.6
Trade Balance
($3.8)
Computer Equipment
($12.2)
($14.2)
($21.2)
($23.2)
($24.2)
($20.4)
$3.8
$3.9
$3.1
$4.8
$5.7
$8.4
$4.6
$2.6
$4.6
$6.1
$10.6
$10.4
$9.8
$7.2
U.S. Imports
Trade Volume
c
U.S. Exports
U.S. Imports
c
$6.3
$8.5
$9.2
$15.4
$16.1
$18.2
$11.8
$1.2
($0.7)
($3.0)
($5.8)
($4.6)
($1.4)
($2.6)
$4.0
$6.0
$8.1
$15.6
$10.9
$11.2
$7.2
$2.8
$3.2
$3.5
$5.3
$3.5
$3.6
$0.9
$6.7
$9.2
$11.7
$20.9
$14.4
$14.8
$8.1
$2.8
$4.6
$10.2
$7.4
$7.6
$6.4
$3.8
$4.6
$6.4
$8.3
$8.2
$11.3
$7.5
$1.1
$1.4
$1.7
$2.2
$2.3
$3.1
$2.0
$4.9
$6.0
$8.1
$10.5
$10.4
$14.4
$9.5
$2.8
$3.2
$4.7
$6.1
$5.9
$8.2
$5.4
U.S. Exports
$2.2
$3.0
$4.4
$6.0
$4.9
$4.7
$2.4
U.S. Imports
$3.0
$5.2
$7.8
$10.0
$9.1
$8.2
$5.2
$3.0
$5.2
$7.8
$10.0
$9.1
$8.2
$5.2
U.S. Imports
Trade Volume
c
U.S. Exports
U.S. Imports
Trade Volume
c
Trade Balance
Microelectronics
U.S. Exports
U.S. Imports
Trade Volume
c
Trade Balance
$1.2
Chemicals and Allied Products
U.S. Exports
U.S. Imports
Trade Volume
c
Trade Balance
Textiles and Apparel
U.S. Exports
U.S. Imports
Trade Volume
c
Trade Balance
TOTAL
U.S. Exports
U.S. Imports
Trade Volumec
$5.3
$8.2
$12.2
$16.1
$14.0
$12.9
$7.6
Trade Balance
TOTAL
($0.8)
($2.1)
($3.4)
($4.0)
($4.1)
($3.5)
($2.7)
$50.8
$56.8
$79.0
$111.7
$97.5
$110.8
$59.9
Trade Volume
Trade Balance
Microelectronics
U.S. Exports
U.S. Imports
Trade Volume
c
Trade Balance
$1.2
Chemicals and Allied Products
U.S. Exports
U.S. Imports
Trade Volume
c
Trade Balance
Textiles and Apparel
U.S. Exports
U.S. Imports
Trade Volumec
$49.5
$73.0
$94.7
$135.9
$134.7
$155.8
$106.4
$100.3
$129.7
$173.7
$247.6
$232.3
$266.6
$166.3
Trade Balance
$1.4 ($16.2) ($15.7) ($24.2) ($37.2) ($45.1)
($46.4)
Source: United States International Trade Commission, Interactive Tariff and Trade Data Web
[http://dataweb.usitc.gov]. Compiled by CRS.
a. Nominal U.S. dollars.
b. Figures may not add up due to rounding.
c. Trade volume denotes exports plus imports.
CRS-6
Mexico-U.S. Bilateral Foreign Direct Investment
Foreign direct investment (FDI) forms another part of the economic relationship
between the United States and Mexico. FDI consists of investments in real estate,
manufacturing plants, and retail facilities, in which the foreign investor owns 10%
or more of the entity. The United States is the largest source of FDI in Mexico,
accounting for 65% of total FDI in 2003. U.S. FDI in Mexico increased from $17
billion in 1994 to $61.5 billion in 2003, a 263% increase (see Table 3). In 1995, the
level of U.S. FDI in Mexico decreased somewhat due to the Mexican currency crisis,
but after 1996, the FDI inflows continued. Examining U.S. capital flows to Mexico,
they are much smaller than the FDI position. U.S. capital outflows to Mexico totaled
$5.7 billion in 2003.
Table 3. U.S.-Mexican Foreign Direct Investment Positions,
1994-2003
Historical Cost Basis
(Millions of Dollars)
Mexican FDI in
the U.S.
U.S. FDI
in Mexico
1994
2,069
16,968
1995
1,850
16,873
1996
1,641
19,351
1997
3,100
24,050
1998
2,055
26,657
1999
1,999
37,151
2000
7,462
39,352
2001
6,645
52,544
2002
7,483
55,724
2003
6,680
61,526
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Mexican FDI in the United States is much lower than U.S. investment in
Mexico, with levels of Mexican FDI fluctuating over the last ten years. In 2003,
Mexican FDI in the United States totaled $6.7 billion, representing an increase of
$4.6 billion since 1994, as shown in Table 3. In percentage terms, Mexico’s FDI
position accounted for 5% of total FDI in the United States in 2003. This figure only
increased by one percentage point since 1994.
The sharp rise in U.S. investment in Mexico over the last ten years is largely a
result of the liberalization of Mexico’s restrictions on foreign investment in the late
1980s and the early 1990s. Prior to the mid-1980s, Mexico traditionally had a very
CRS-7
protective policy that restricted foreign investment and controlled the exchange rate
to encourage domestic growth, affecting the entire industrial sector. Mexico’s trade
liberalization measures and economic reform in the late 1980s represented a sharp
shift in policy and helped bring in a steady increase of FDI flows into Mexico.
NAFTA provisions on foreign investment helped to lock in the reforms and increase
investor confidence. Under NAFTA, Mexico gave U.S. and Canadian investors
nondiscriminatory treatment of their investments in Mexico as well as investor
protection. NAFTA may have encouraged U.S. FDI in Mexico by increasing investor
confidence, but much of the growth may have occurred anyway because Mexico
likely would have continued to liberalize its foreign investment laws with or without
NAFTA.
Nearly half of total FDI investment in Mexico is in the manufacturing industry
of which the maquiladora industry7industry6 forms a major part. (See section on Maquiladora
Industry below). Mexico’s maquiladora industry is important to the economic
relationship of the United States and Mexico in several ways. In Mexico, the
industry has helped attract investment from countries such as the United States that
have a relatively large amount of capital. Therefore, Mexico is able to attract some
of the foreign direct investment it was seeking when it liberalized trade and
investment barriers. For the United States, the industry is important because U.S.
companies are able to locate their labor-intensive operations in Mexico and lower
their labor costs in the overall production process. Many economists believe that
maquiladoras are an important part of U.S. corporate strategy in achieving
competitively priced goods in the world marketplace.87 Other analysts believe that the
industry has caused U.S. companies to move their manufacturing facilities to Mexico
at the expense of U.S. workers.
Maquiladora Industry Production
Mexico’s maquiladora industry is closely linked to U.S.-Mexico trade in various
labor-intensive industries such as textiles and apparel, auto parts, and electronic
goods. The maquiladora industry is important to the U.S. economy because of the
amount of trade it generates with the United States and because the majority of the
plants have U.S. parent companies. Maquiladoras account for approximately 35%
of Mexico’s total imports and nearly 50% of total exports.98 Of the top twenty
maquiladora operations in 2004, ten have U.S. parent companies. The largest
76
Mexico’s maquiladora program was established in the 1960s by the Mexican government,
allowing foreign-owned businesses to set up assembly plants in Mexico to produce for
export. Maquiladoras could import intermediate materials duty-free with the condition that
20% of the final product be exported. The percentage of sales allowed to the domestic
market increased over time as Mexico liberalized its trade regime. U.S. tariff treatment of
maquiladora imports played a significant role in the industry. Under HTS provisions
9802.00.60 and 9802.00.80, the portion of an imported good that was of U.S.-origin entered
the United States duty-free. Duties were assessed only on the value added abroad. After
NAFTA, North American rules of origin determine duty-free status.
87
Federal Reserve Bank of Dallas, “The Binational Importance of the Maquiladora Industry,”
Southwest Economy, Issue 6, November/December 1999.
98
Maquila Portal, Mexico Now, Year 2, Number 9, March-April 2004, p. 14.
CRS-8
maquiladora operation, Delphi Automotive Systems, headquartered in the United
States, has 54 plants with 68,000 employees in Mexico.109 The majority of
maquiladora plants are located along the U.S.-Mexico border. The states with the
highest maquiladora activity in 2004 were the Mexican border states of Baja
California, 899 maquiladoras with 242,446 employees, and Chihuahua, 407
maquiladoras with 279,040 employees.1110
Private industry groups have stated that these operations are important to the
United States because they help U.S. companies remain competitive in the world
marketplace by producing goods at competitive prices. In addition, the proximity of
Mexico to the United States allows production to have a high degree of U.S. content
in the final product, which could help sustain jobs in the United States. Critics of
these types of operations, however, argue that they have a negative effect on the
economy because it takes away jobs from the United States to other countries.
After NAFTA, Mexico’s regulations governing the maquiladora industry
changed in a very significant way. Beginning in 2001, the North American rules of
origin determine the duty-free status for a given import and replace the previous
special tariff provisions that applied only to maquiladora operations. The initial
program has ceased to exist and the same trade rules now apply to all assembly
operations in Mexico and not just those in the maquiladora program.1211 NAFTA rules
for the maquiladora industry were implemented in two phases, with the first phase
covering the period 1994-2000, and the second phase starting in 2001. During the
initial phase, NAFTA regulations continued to allow the maquiladora industry to
import products duty-free into Mexico, regardless of the country of origin of the
products. This phase also allowed maquiladora operations to increase maquiladora
sales into the domestic market.
Phase II made a significant change to the industry in that the new North
American rules of origin currently determine duty-free status for maquiladora
imports. As long as the source of maquiladora inputs is either the United States or
Canada, no duties are assessed. The elimination of duty-free imports by maquiladoras
from non-NAFTA countries under NAFTA caused some initial uncertainty for the
companies with maquiladora operations. Maquiladoras that were importing from
third countries, such as Japan or China, would have to pay applicable tariffs on those
goods under the new rules. Some companies were concerned about their ability to
remain competitive because of the possible increase in cost, and raised these concerns
to the Mexican government. In response, the Mexican government passed a decree
in December 2000, creating 20 Sectorial Promotion Programs, one for each industrial
sector with maquiladora operations. The sectorial programs were formed to help
guarantee and enhance the efficiency and competitiveness of manufacturing
operations in Mexico, whether or not they exported their goods. The programs allow
109
Maquila Portal, “100 Top Maquilas,” see [http://www.maquilaportal.com].
10
11
“Maquila Scoreboard,” Twin Plant News, see [http://www.twinplantnews.com].
12
Vargas, Lucinda, “NAFTA, the U.S. Economy, and Maquiladoras,” El Paso Business
Frontier, 2001.
CRS-9
maquiladora and non-maquiladora companies to apply for reduced tariffs of 0% to
5% for the promotion program in which they are registered.
Prior to NAFTA, a maquiladora was limited to selling up to 50% of the previous
year’s export production to the domestic market. By 2000, maquiladoras were
allowed to sell up to 85% of the previous year’s export production to the Mexican
market. Most maquiladoras, however, continue to export the majority of their
production to the U.S. market. Part of the reason for this is that sales into Mexico
would require the assessment of duties on imported components because duty-free
status on imported components is allowed only as long as 100% of the production is
exported. Selling directly to the Mexican market would entail additional costs such
as applicable tariffs and administrative costs. For this reason, companies wishing to
sell to the Mexican market usually export their product to the United States, and then
re-export it back to Mexico.
The maquiladora industry expanded rapidly in the 1990s. The number of plants
grew from 1,789 at the end of 1990 to 3,655 in 2000.1312 After 2000, the number of
maquiladoras fell to 2,780 in 2003. In 2004 and 2005, the number of plants began
to increase again and is expected to reach 3,049 by the end of 2005. Some observers
believe that the correlation in maquiladora growth after 1993 is directly due to
NAFTA, but in reality it is unclear whether maquiladora growth is more related to
trade liberalization, or to economic conditions in the United States.
Although some provisions in NAFTA may have encouraged maquiladora
growth in certain sectors, maquiladora activity is also influenced by the strength of
the U.S. economy and relative wages in Mexico. Maquiladora operations usually
increase during periods of economic expansion in the United States. A drop in
Mexican wages may also be an incentive for U.S. companies to shift production to
Mexico.1413
Between 1993 and 1996, relative wages in Mexico fell considerably due to the
peso devaluation. Since 1997, however, Mexican labor costs have risen, and some
manufacturers have closed their Mexican plants and shifted production to Asian
countries. In 2001, maquiladora employment levels fell for the first time since 1982.
Between 2000 and 2003, maquiladora employment levels fell from 1.29 million
workers to 1.07 million workers. Approximately 220,000 jobs were lost and 855
plants were shut down nationwide during this time. In 2004, the employment level
rose to 1.14 million workers and is expected to reach 1.19 million workers by the end
of 2005.1514 The change in the number of plants and jobs could be partially a result of
the relative labor costs in Mexico, but as previously mentioned, it is also tied to the
slowdown and recovery in the U.S. economy.
1312
Gruben, William C. and Sherry L. Kiser, NAFTA and Maquiladoras, Federal Reserve
Bank of Dallas, June 2001.
1413
Ibid.
1514
Maquila Portal, Maquila Overview, see [http://www.maquilaportal.com].
CRS-10
Worker Remittances to Mexico
Remittances from workers abroad play a strong role in the Mexican economy
and form an important aspect of the U.S.-Mexico economic relationship.1615
According to a publication by the Federal Bank of Dallas, Mexico received the most
remittances of any country in the world in 2002, accounting for about 15% of all
remittances received by developing countries.1716 Workers in the United States are the
leading source for worker’s remittances worldwide. In 2004, Mexico received a
record $16.6 billion in remittances, representing a 24% increase over 2003.1817
Workers’ remittances now account for 2% of Mexico’s GDP and produce more
foreign exchange than tourism. The top foreign exchange generators in Mexico are
the maquiladora industry, oil, workers’ remittances, and tourism, respectively.1918
Worker remittance flows to Mexico have an important impact on the Mexican
economy, in some regions more than others. Some studies on remittance flows to
Mexico report that in southern Mexican states, remittances mostly or completely
cover general consumption and/or housing. One study estimates that 80% of the
money received by households goes for food, clothing, health care, and other
household expenses. Another study estimates that remittances in Mexico are
responsible for about 27%, and up to 40% in some cases, of the capital invested in
microenterprises throughout urban Mexico.2019 The economic impact of remittance
flows is concentrated in the poorer states of Mexico. The government has sponsored
programs to channel the funds directly to infrastructure and investment rather than
consumption.2120 Remittances from migrant workers overseas, mainly in the United
States, are expected to remain steady and support moderate growth of private
consumption.2221
Security and Prosperity Partnership of North America
On March 23, 2005, President Bush met with Prime Minister Martin of Canada
and President Fox of Mexico at Baylor University in Waco, Texas to discuss a
number of issues including trade and economic collaboration. A major outcome of
the summit was the announcement of the Security and Prosperity Partnership of
1615
For information on remittances to Latin America see CRS Report RL31659, Foreign
Remittances to Latin America, by Walter W. Eubanks and Pauline Smale.
1716
Federal Reserve Bank of Dallas, “The Binational Importance of the Maquiladora
Industry,” Southwest Economy, Issue 6, November/December 1999.
1817
EIU ViewsWire, “Mexico Economy: Remittances Home Hit a Record US$16.6 Billion
in 2004,” February 9, 2005.
1918
Federal Reserve Bank of Dallas, El Paso Branch, “Workers’ Remittances to Mexico,” El
Paso Business Frontier, Issue 1, 2004.
2019
The Federal Reserve Bank report “Workers’ Remittances to Mexico,” evaluated the
economic impact of worker remittances to Mexico and cites a number of reports by the
World Bank and the Mexican government.
2120
Ibid, p. 4.
2221
EIU, Country Outlook: Mexico, January 2005.
CRS-11
North America (SPP). In the area of economic collaboration, the leaders announced
plans to advance the common prosperity of North America by enhancing
competitiveness and improving the quality of life in the region. They pledged to
improve productivity, reduce the costs of trade, and enhance the quality of life.2322 To
improve productivity, the leaders pledged to strengthen regulatory cooperation and
generate growth by ensuring compatibility of regulations and standards, and
eliminating redundant testing and certification requirements. They also pledged to
promote sectoral collaboration in a number of areas that would include exploring
initiatives such as increasing reliable energy supplies for the region’s needs and
development; improving the safety and efficiency of North America’s transportation
system; working towards the freer flow of capital; agreeing on mutual recognition of
technical requirements for telecommunications equipment; and expanding
partnerships in higher education, science, and technology.2423
To reduce the costs of trade, the leaders pledged to promote more efficient
movement of goods and people in the region by developing standardized rules for
screening people and cargo in North America, regardless of which country is the first
point of entry. Other possible measures would consist of rationalizing differences in
external tariffs consistent with multilateral negotiation strategies; facilitating the
movement of business persons within North America; and discussing ways to reduce
taxes and other charges residents face when returning from other North American
countries.2524
U.S. Commerce Secretary Carlos Gutierrez and Mexican Economy Minister
Fernando Canales met on May 13, 2005 to review the status of the SPP working
groups’ proposals. The Canadian ambassador to Mexico represented Canada at the
meeting. According to press reports, the SPP agenda was to be limited to measures
that could be achieved through executive action rather than measures which would
require new legislation.2625 Some of the issues on the agenda have been previously
discussed in NAFTA working groups where they have been deadlocked, but officials
have expressed hope that there will be more advancement under the SPP.2726
In June 2005, the SPP working groups offered their initial proposals to the North
American leaders. In their report, the working groups announced the completion of
several collaborative initiatives and proposed a number of other initiatives to improve
certain sectors of the economy and develop higher standards of safety and health and
joint stewardship of the environment. The completed initiatives related to trade and
commerce include a signed Framework of Common Principles for Electronic
2322
The White House, Joint Statement by President Bush, President Fox, and Prime Minister
Martin: Security and Prosperity Partnership of North America, March 23, 2005.
2423
The White House, Security and Prosperity Partnership of North America Prosperity
Agenda: Promoting Growth, Competitiveness and Quality of Life, March 23, 2005.
2524
Ibid.
2625
“NAFTA Ministers to Review Proposals for Integrating Economies,” Inside U.S. Trade,
May 13, 2005.
2726
ITR, “Gutierrez, Mexico’s Canales Discuss Improved NAFTA Integration, to Offer
Proposals in June,” May 19, 2005.
CRS-12
Commerce; liberalization of Rules of Origin that will affect approximately $20
billion of annual trilateral trade; a Memorandum of Understanding between Canada
and the United States to enhance and strengthen the exchange of information and
cooperative activities on consumer product safety and health; harmonization of the
use of care symbols on textiles and apparel labeling requirements to facilitate market
access; and a trilateral document to clarify each country’s domestic procedures for
temporary work entry of professionals that will serve as a mechanism for more
temporary work permits under NAFTA.2827
In addition to the completed initiatives, ten SPP working groups are working on
detailed workplans aimed at improving North American competitiveness. These
initiatives include plans for enhancing and streamlining regulatory processes in North
America; developing a coordinated strategy to combat counterfeiting and piracy;
continuing to liberalize Rules of Origin; developing a North American Steel Strategy
by 2006; establishing an Automotive Partnership Council of North America that
would move towards a fully integrated auto sector; and creating a sustainable energy
economy for North America that would promote the sustainable supply and use of
energy in North America.2928
Some analysts note that the SPP is an important step forward in the relationship
of the United States with Mexico, and also Canada, in view of the distancing that
occurred after the terrorist attacks of September 11, 2001 and the war with Iraq.3029
However, other analysts believe that the SPP and any subsequent trade-facilitating
measures may fall short of any grander vision of further economic integration. They
believe that the political and economic situations among the three neighbors would
not facilitate bold steps toward further integration.3130
The Mexican Economy
Mexico has a free market economy with a strong export sector, but this has not
always been the case. The transformation of Mexico into an export-based economy
began in the late 1980s when the government started to liberalize its trade policy and
adopt economic reform measures. One of the more distinctive aspects of the Mexican
economy is its strong ties to the economic cycle of the United States, making it very
sensitive to economic developments in the United States. The state of the Mexican
economy is important to the United States because of the close trade and investment
ties between the two countries, and because of other social and political issues that
could be affected by economic conditions such as immigration.
2827
Security and Prosperity Partnership of North America (SPP), Report to Leaders, June
2005.
2928
Ibid.
3029
“U.S., Mexico, Canada Agree to Increase Cooperation,” The Washington Post, March 24,
2005, p. A4.
3130
“Neighbors Who are not Always Friends: Bush’s Summit with Mexican and Canadian
Leaders Will Probably Take Small Steps Toward Bolder Integration,” The Christian Science
Monitor, March 23, 2005, p. 2.
CRS-13
Economic Reform and the 1995 Currency Crisis
In the late 1980s and early into the 1990s, the Mexican government
implemented a series of measures to restructure the economy that included steps
toward trade liberalization. For many years, Mexico had protectionist trade policies
to encourage industrial growth in the domestic economy. The 1980s were marked
by inflation and a declining standard of living. Repercussions of the 1982 debt crisis
in which the Mexican government was unable to meet its foreign debt obligations
were a primary cause of the economic challenges the country faced in the early to
mid-1980’s. Much of the government’s effort in addressing the challenges was
placed on privatizing state industries and moving toward trade liberalization. Efforts
included privatization of sea ports, railroad, telecommunications, electricity, natural
gas distribution and airports. The negotiation and implementation of NAFTA played
a major role in Mexico’s changing economic policy in the early 1990s.
Mexico’s economic reforms initially attracted a large amount of private foreign
investment, but by 1993 the inflow of foreign capital began to slow down. The
combination of macroeconomic policies at the time, which led to an overvalued
exchange rate, and domestic political uncertainty helped drive down the flow of
capital into the country. The decrease in capital inflows and the low levels of
international reserves held by the Mexican government led to a peso devaluation in
March 1994. Later that year, foreign exchange reserves continued to fall, domestic
government debt increased, and the Mexican central bank had limited dollar reserves
to support the current peso rate.
By the end of 1994, Mexico faced a currency crisis, putting pressure on the
government to abandon its previous fixed exchange rate policy and adopt a floating
exchange rate regime. As a result, Mexico’s currency plunged by around 50% within
six months, sending the country into a deep recession.3231 Several factors influenced
the decision to float the peso: overspending in the economy had generated a
significant current account deficit; the Mexican government had accumulated large
levels of debt with insufficient reserves; and the banking system was facing a crisis
due to overexposure.3332 Mexico’s finance minister at the time, Guillermo Ortiz, stated
later that Mexico had “no choice” but to float the peso because the government had
run out of reserves.3433
In the aftermath of the 1994 devaluation, Mexican President Ernesto Zedillo
took several steps to restructure the economy and lessen the impact of the currency
crisis among the more disadvantaged sectors of the economy. The goal was to create
conditions for economic activity so that the economy could adjust in the shortest time
possible. The United States and the IMF assisted the Mexican government by putting
together an emergency financial support package of up to $50 billion, with most of
3231
EIU, “Mexico Finance: The Peso Crisis, Ten Years On,” January 3, 2005.
3332
Banco de Mexico, “Mexico’s Monetary Policy Framework Under a Floating Exchange
Rate Regime,” by Agustín G. Carstens y Alejandro M. Werner, May 1999.
3433
EIU, “Mexico Economy: Mexico Begins to See Benefits of Free-Floating Peso,”
December 20, 2004.
CRS-14
the money coming from the U.S. Treasury. The Zedillo Administration wanted to
demonstrate its commitment to fulfill all its financial obligations without a default
on its debt by adopting tight monetary and fiscal policies to reduce inflation and
absorb some of the costs of the banking sector crisis. The austerity plan included an
increase in the value-added tax, budget cuts, increases in electricity and gasoline
prices to decrease demand and government subsidies, and tighter monetary policy.3534
The peso steadily depreciated through the end of the 1990s, which led to greater
exports and helped the country’s exporting industries. However, the peso
devaluation also resulted in a decline in real income, hurting the poorest segments of
the population and also the newly emerging middle class. NAFTA and the change
in the Mexican economy to an export-based economy helped to soften the impact of
the currency devaluation. While Mexico’s economy as a whole has since recovered,
the country has experienced little economic expansion on a per capita basis. Real
wages and per capita GDP fell considerably after the crisis and have only just
recovered to their old level by 2004.3635
After a real decline in GDP of 6.22% in 1995, the Mexican economy managed
to grow 5-6% in each of the three years to 1998. The combination of a stronger peso
and the slowdown in the U.S. economy in 2001, which worsened after the September
11 terrorist attacks, hit Mexico’s economy hard. Real GDP growth dropped from
6.2% in 2000 to -0.16% in 2001. Improving economic conditions in the United
States helped Mexico’s economy improve as well. Real GDP growth in 2004 was
4.37% in 2004, up from 1.41% in 2003 and 0.81% in 2002 (see Figure 2).
Figure 2. GDP Growth
8
6
4
2
0
-2
-4
-6
-8
1994
1996
1998
2000
2002
2004
United States
Mexico
Source: Economist Intelligence Unit.
3534
Joachim Zietz, “Why Did the Peso Collapse? Implications for American Trade,” Global
Commerce, by , Volume 1, No., 1, Summer 1995.
3635
EIU, “Mexico Finance: The Peso Crisis, Ten Years On,” January 3, 2005.
CRS-15
Current Economic Conditions
Following the lead of former President Ernesto Zedillo, President Vicente Fox
has continued efforts to liberalize trade, privatize government enterprises, and
deregulate the economy. Through tighter monetary and fiscal policies, the Fox
Administration has been able to decrease the fiscal deficit, control inflation, and help
economic growth. The major factors contributing to the growth in 2004 were an
increase in exports stimulated by U.S. demand and an increase in private
consumption. Mexico’s dependence on exports and on the economic cycle in the
United States is reflected in the economic cycles of the two countries depicted in
Figure 2. Forecasts for 2005 and 2006 show an expected deceleration in economic
growth to about 3% due to a lower demand for exports as the U.S. economy is
projected to slow.3736
The Mexican peso weakened by an estimated 5% in 2004, following a real
depreciation of around 13% in 2003. Forecasts show that the peso may depreciate
further against the US dollar in 2005 and 2006. However, Mexico’s strong reserves,
higher interest rates than in the United States, firm oil prices, steady inflows of
foreign direct investment and access to foreign financing will likely help the value
of the peso from declining further.3837
Poverty is one of the more serious and pressing economic problems facing
Mexico. President Fox has made public statements saying that the principal
challenge and highest priority of his administration is combating poverty. He also
has said that Mexico is a long way from a situation of economic equality since 41%
of the country’s income was concentrated in the hands of only 10% of the
population.3938 According to a World Bank Study,4039 the government has made progress
in its poverty reduction efforts, but poverty continues to be a basic challenge for the
country’s development. In 2002, over half of the population lived in poverty. The
percentage of people living in extreme poverty, or on less than $1 per day, fell from
24.2% of the population in 2000 to 20.3% in 2002. Those living in moderate
poverty, or on about $10 a day, fell from 53.7% to 51.7% of the population. The
authors of the study note that poverty is often associated with social exclusion,
especially of indigenous groups of people who comprise 20% of those who live in
extreme poverty.4140
The Mexican government program Oportunidades, which provides financial
assistance for the extremely poor, has been noted by the World Bank and other
37studies as a reason for the recent reduction in poverty levels. Other factors that may
36
EIU, Country Outlook: Mexico, January 2005.
3837
Ibid.
3938
Associated Press, “Poverty Level Down, But Still Big Challenge for Mexico,” July 28,
2004
4039
The World Bank Group, Mexico Makes Progress and Faces Challenges in Poverty
Reduction Efforts, June 2004.
4140
The World Bank Group Press Release, “Mexico Makes Progress and Faces Challenges
in Poverty Reduction Efforts,” July 2004.
CRS-16
studies as a reason for the recent reduction in poverty levels. Other factors that may
have helped with the recent decline in poverty include a growing amount of
remittances from workers abroad, economic growth, and social programs for housing
and assistance for small and medium businesses. Poverty continues to remain a
problem, however. It is especially widespread in rural areas and remains at the Latin
American average and pre-crisis levels.4241
Mexico’s Regional Free Trade Agreements
Since the early 1990s, Mexico has had a growing commitment to trade
liberalization and its trade policy is among the most open in the world. Mexico has
been actively pursuing free trade agreements (FTAs) with other countries as a way
to bring benefits to the economy and also to reduce its economic dependence on the
United States. Since 1995, Mexico has entered into a total of 11 FTAs involving 42
countries. Mexico also is an active participant in the Free Trade Area of the
Americas (FTAA) negotiations. The Mexican government has negotiated bilateral
or multilateral trade agreements with most countries in the Western Hemisphere
including the United States and Canada, Chile, Bolivia, Costa Rica, Nicaragua,
Uruguay, Colombia, Venezuela, Guatemala, El Salvador, and Honduras.
Mexico has ventured out of the hemisphere in negotiating FTAs, and, in July
2000, entered into agreements with Israel and the European Union. Mexico became
the first Latin American country to have preferred access to these two markets.
Mexico has also completed an FTA with the European Free Trade Association
(EFTA) of Iceland, Liechtenstein, Norway, and Switzerland. The Mexican
government has continued to look for potential free trade partners, and expanded its
outreach to Asia in 2000 by entering into negotiations with Singapore, Korea and
Japan.4342 In 2004, Japan and Mexico signed an Economic Partnership Agreement.
It was the first comprehensive trade agreement that Japan signed with any country.4443
In addition to the bilateral and multilateral free trade agreements, Mexico is a
member of the WTO,4544 the Asia-Pacific Economic Cooperation forum, and the
42
Ibid.
43
OECD.45 Mexico is an active and constructive participant in the WTO. In
September 2003, Mexico hosted the WTO Ministerial Meeting In Cancun.
41
Ibid.
42
The Asahi Shimbun,, “Mexico: Loving Free Trade Ever Since NAFTA,” March 2002. See
[http:\\//www.facilitycity.com].
44
43
The Asahi Shimbun, “Japan: Free Trade with Mexico,” The Asahi Shimbun, March 12,
2004.
4544
The WTO allows member countries to form regional trade agreements, but under strict
rules. The position of the WTO is that regional trade agreements can often support the
WTO’s multilateral trading system by allowing groups of countries to negotiate rules and
commitments that go beyond what was possible at the time under the WTO. The WTO has
a committee on regional trade agreements that examines regional groups and assesses
whether they are consistent with WTO rules. See The World Trade Organization,
“Understanding the WTO: Cross-Cutting and New Issues, Regionalism: Friends or Rivals?,”
[http://www.wto.org].
CRS-17
OECD.46 Mexico is an active and constructive participant in the WTO. In
September 2003, Mexico hosted the WTO Ministerial Meeting In Cancun.
45
U.S. Commercial Service, Country Commercial Guide: Mexico, August 13, 2004, p. 6.
CRS-17
NAFTA and the U.S.-Mexico
Economic Relationship
The North American Free Trade Agreement (NAFTA) has been in effect since
January 1994. After eleven years of implementation, the full effects of NAFTA on
the U.S. and Mexican economies are still unfolding. There are numerous indications
that NAFTA has achieved many of the intended trade and economic benefits as well
as incurred adjustment costs. This has been in keeping with what most economists
understand, that trade liberalization promotes overall economic growth among
trading partners, but that there are significant adjustment costs.
Most of the trade effects in the United States related to NAFTA are due to
changes in U.S. trade and investment patterns with Mexico. At the time of NAFTA
implementation, the U.S.-Canada Free Trade Agreement already had been in effect
for five years, and some industries in the United States and Canada were already
highly integrated. Mexico, on the other hand, had followed an aggressive importsubstitution policy for many years prior to NAFTA in which it had sought to develop
certain domestic industries through trade protection. One example is the Mexican
automotive industry which had been regulated by a series of five decrees issued by
the Mexican government between 1962 and 1989. The decrees established import
tariffs as high as 25% on automotive goods and had high restrictions on foreign auto
production in Mexico. Under NAFTA, Mexico agreed to eliminate these restrictive
trade policies.
Not all changes in trade and investment patterns between the United States and
Mexico since 1994 can be attributed to NAFTA because trade was also affected by
other unrelated economic factors such as economic growth in the United States and
Mexico, and currency fluctuations. Also, trade-related job gains and losses since
NAFTA may have accelerated trends that were ongoing prior to NAFTA and may not
be totally attributable to the trade agreement. Overall, Mexico has experienced a
notable shift in the composition of trade with the United States since the late 1980s
from oil to non-oil exports. In 1987, crude oil and natural gas comprised 17% of
Mexico’s exports to the United States. By 2004, the percentage of oil exports had
declined to 10.6% of all exports to the United States.
Effects on the U.S. Economy
The overall effect of NAFTA on the U.S. economy has been relatively small,
primarily because two-way trade with Mexico amounts to less than three percent of
U.S. GDP. Thus, any changes in trade patterns with Mexico would not be expected
to be significant in relation to the overall U.S. economy. In some sectors, however,
trade-related effects could be more significant, especially in those industries that were
46
U.S. Commercial Service, Country Commercial Guide: Mexico, August 13, 2004, p. 6.
CRS-18
more exposed to the removal of tariff and non-tariff trade barriers, such as the textile
and apparel, and automotive industries.
Since NAFTA, the automotive, textile, and apparel industries have experienced
some of the more noteworthy changes in trading patterns, which may also have
affected U.S. employment in these industries. U.S. trade with Mexico has increased
considerably more than U.S. trade with other countries, and Mexico has become a
CRS-18
more significant trading partner with the United States since NAFTA
implementation.
In the automotive industry, the industry comprising the most U.S. trade with
Mexico, NAFTA provisions consisted of a phased elimination of tariffs, the gradual
removal of many non-tariff barriers to trade including rules of origin provisions,
enhanced protection of intellectual property rights, less restrictive government
procurement practices, and the elimination of performance requirements on investors
from other NAFTA countries. These provisions may have accelerated the on-going
trade patterns between the United States and Mexico. Because the United States and
Canada were already highly integrated, most of the trade impacts on the U.S.
automotive industry relate to trade liberalization with Mexico. Prior to NAFTA
Mexico had a series of government decrees protecting the domestic auto sector by
reserving the domestic automobile market for domestically produced parts and
vehicles. NAFTA established the removal of Mexico’s restrictive trade and
investment policies and the elimination of U.S. tariffs on autos and auto parts. The
automotive industry has had the highest dollar increase ($31.6 billion) in total U.S.
trade with Mexico since NAFTA passage.
The main NAFTA provisions related to textiles and apparel consisted of
eliminating tariffs and quotas for goods coming from Mexico and eliminating
Mexican tariffs on U.S. textile and apparel products. To benefit from the free trade
provision, goods were required to meet the rules of origin provision which assured
that apparel products that were traded among the three NAFTA partners were made
of yarn and fabric made within the free trade area. The strict rules of origin
provisions were meant to ensure that U.S. textiles producers would continue to
supply U.S. apparel companies that moved to Mexico. Without a rules of origin
provision, apparel companies would have been able to import low-cost fabrics from
countries such as China and export the final product to the United States under the
free trade provision.4746
While some U.S. industries may have benefitted from increased demand for
U.S. products in Mexico, creating new jobs, other industries have experienced job
losses. Data on the effects of trade liberalization with Mexico are limited and the
effect on specific sectors of the U.S. economy is difficult to quantify. Trade-related
job gains and losses since NAFTA may have accelerated trends that were ongoing
prior to NAFTA and may not be totally attributable to the trade agreement.48
47
For more information on textile and apparel trade, see CRS Report RL31723, Textile and
Apparel Trade Issues, by Bernard A. Gelb.
48
CRS Report 98-783 E. NAFTA: Estimates of Job Effects and Industry Trade Trends after
(continued...)
CRS-1947
Quantifying these effects is not easy because of the other economic factors that
influence trade and employment levels. The devaluation of the Mexican peso in
1995 resulted in lower Mexican wages, which may have provided an incentive for
U.S. companies to move to lower their production costs. Trade-related employment
effects following NAFTA could have also resulted from the lowering of trade
barriers, and from the economic conditions in Mexico and the United States
influencing investment decisions and the demand for goods.
46
For more information on textile and apparel trade, see CRS Report RL31723, Textile and
Apparel Trade Issues, by Bernard A. Gelb.
47
CRS Report 98-783, NAFTA: Estimates of Job Effects and Industry Trade Trends after
5½ Years, by Mary Jane Bolle.
CRS-19
Effects on the Mexican Economy
At the time that NAFTA went into effect, a number of economic studies
predicted that the trade agreement would have a positive overall effect on the
Mexican economy, narrowing the U.S.-Mexico gap in prices of goods and services,
and the differential in real wages. Most studies after NAFTA have found that the
effects on the Mexican economy tend to be modest at most.4948 A World Bank
economic study states that there have been periods of positive growth and negative
growth in Mexico after NAFTA, and that some of the benefits Mexico experienced
after NAFTA really began in the late 1980s when Mexico began trade liberalization
measures. Overall the study finds that NAFTA has brought economic and social
benefits to the Mexican economy, but that the agreement does not suffice to ensure
economic convergence in North America.5049
It is challenging to isolate the economic effects of NAFTA from other economic
or political factors. For example, Mexico has experienced at least two major events
outside of NAFTA that had economic consequences. Mexico’s unilateral trade
liberalization measures between 1985 and 1988 and the currency crisis of 1995 both
affected economic growth, per capita GDP, and real wages in Mexico. Other
challenges in evaluating the effects of NAFTA on the U.S. and Mexican economies
relate to the time element, or being able to compare sufficiently long time-frames to
separate trends before and after the agreement went into effect and across countries
to provide relative measures of any observed effects.5150
The World Bank study on NAFTA found that the benefits of NAFTA, and of
trade in general, have been unequal across regions and sectors in Mexico. While
trade liberalization may narrow disparities in income levels with other countries, it
may indirectly lead to larger disparities in income levels within a country. The study
estimates that had NAFTA not gone into effect, Mexico’s per capita GDP would
have been about four to five percent lower; Mexican global exports would have been
roughly 25% lower; and foreign direct investment in Mexico would have been
roughly 40% lower. The authors of the study also reported the following: NAFTA
48
(...continued)
5 ½ Years.
49
See CRS Report RS21737, NAFTA at Ten: Lessons from Recent Studies, February 13,
2004.
50
The World Bank, Lessons from NAFTA for Latin America and the Caribbean, by Daniel
Lederman, William F. Maloney, and Luis Servén, 2005.
51
Ibid.
CRS-20
caused Mexican productivity to increase; Mexican wages are higher in sectors
experiencing increases in trade; and poorer states in the south grew more slowly due
to low levels of education, infrastructure, and quality of local institutions. One of the
study’s key findings on the regional effects of NAFTA is that initial conditions in a
region determined which Mexican states experienced stronger economic growth.
Telecommunications infrastructure and human capital were especially important in
determining the economic performance of individual states. States with more
48
See CRS Report RS21737, NAFTA at Ten: Lessons from Recent Studies, by J.F.
Hornbeck.
49
The World Bank, Lessons from NAFTA for Latin America and the Caribbean, by Daniel
Lederman, William F. Maloney, and Luis Servén, 2005.
50
Ibid.
CRS-20
telephone service and a higher skilled labor force experienced more positive
impacts.5251
Other studies on NAFTA have also found that NAFTA’s investment and trade
liberalization worked together to reduce risk and improve profitability in Mexico, and
observed that NAFTA helped to increase total investment flows to Mexico.5352 On the
issue of Mexico’s demographic patterns, one study found that NAFTA has had a
minor role in Mexico’s rural-urban migration. The study argues that the observed
trend of migration from rural areas of Mexico to urban centers is directly the result
of agricultural liberalization linked to NAFTA. However, the study also argues that
these migration patterns have been in place since 1960. Some economists have
argued that rural-urban migration trends are common in the development process of
most countries.5453
Major Issues in U.S.-Mexico Trade Relations
The most significant trade issues that the United States and Mexico are focusing
on in 2005 are trade in agricultural products, the trucking industry, and rules of
origin. In agriculture, the major trade issue relates to sugar and high fructose corn
syrup. This issue has been at the top of U.S.-Mexico trade disputes since the late
1990s, when Mexico argued that NAFTA provisions allowed Mexico to export all
of its surplus sugar to the United States beginning in October 2000. The United
States does not agree with this position and argues under a side letter that there is a
limit (250,000 metric tons) to the amount of sugar Mexico can ship before complete
liberalization in 2008. Mexico argues that the letter has no validity and that there is
no such limit as long as it meets provisions defining a “surplus producer” set out in
Section 703.2 of NAFTA.5554 Trade disputes between the United States and Mexico
are generally settled in WTO or NAFTA panels or through negotiations between the
two countries.56
52
Ibid.
53
See CRS Report RS21737, NAFTA at Ten: Lessons from Recent Studies, February 13,
2004.
54
Ibid.
55
International Trade Reporter (ITR), “Mexico Holds Out for New Proposal,”, April 14,
2005.
56
See CRS Issue Brief IB95117, Sugar Policy Issues, by Remy Jurenas.
CRS-2155
In response to the sugar dispute with the United States, the Mexican Congress
imposed a 20% tax on soft drinks sweetened with high fructose corn syrup (HFCS).
The United States claims the tax is inconsistent with Mexico’s international trade
obligations. U.S. and Mexican industry efforts to settle the sweetener dispute have
not been successful. U.S. industry groups insist that Mexico send only raw sugar to
the U.S. market while Mexican groups argue that Mexico would not accept the
51
Ibid.
52
See CRS Report RS21737, NAFTA at Ten: Lessons from Recent Studies, by J.F.
Hornbeck.
53
Ibid.
54
International Trade Reporter (ITR), “Mexico Holds Out for New Proposal,” April 14,
2005.
55
See CRS Issue Brief IB95117, Sugar Policy Issues, by Remy Jurenas.
CRS-21
limitation to only ship raw sugar because there are no such restrictions under
NAFTA.5756
U.S. industries estimate that the cost of this trade barrier to the United States is
roughly $200 million in U.S. corn and HFCS exports and $800 million in U.S.
investment in Mexico since NAFTA’s implementation in 1994. After Mexico
imposed the tax, bottling companies in Mexico switched to cane sugar, and HFCS
sales fell dramatically. President Vicente Fox’s administration temporarily suspended
the tax, but the Mexican Supreme Court ruled the action unconstitutional and
reinstated the tax. The Mexican Congress has renewed the tax every year, including
2005. In March 2004, the United States requested consultations under the dispute
settlement procedures of the WTO, and in July 2004, the WTO established a panel
to review the dispute.5857 A final decision by the WTO is expected later this year.
In other agricultural products, Mexico’s Secretariat of Economy (SECON)
continued antidumping duties in 2004 on beef, rice, and apples; modified existing
duties on beef; and eliminated antidumping duties on live hogs. SECON had
terminated an antidumping investigation of U.S. pork, finding no cause for
continuing the investigation, but subsequently self-initiated an antidumping
investigation of U.S. hams. The United States challenged Mexico’s antidumping
measures at the WTO because of concerns about Mexico’s methodology for
determining injury to the Mexican domestic industry. WTO rulings on these cases
are expected later this year. With respect to the antidumping investigation on beef,
a NAFTA Chapter 19591958 panel ruled that SECON did not sufficiently demonstrate that
U.S. beef imports had damaged Mexico’s beef industry.
Another major U.S.-Mexico trade issue relates to the implementation of
NAFTA trucking provisions. Under NAFTA, Mexican commercial trucks were to
have been given full access to four U.S. border states in 1995 and full access
throughout the United States in 2000. Citing safety concerns, the United States has
stalled implementation of NAFTA’s trucking provisions. Congress addressed the
safety concerns in the FY2002 Department of Transportation Appropriations Act
(P.L. 107-87), which set 22 safety-related preconditions for opening the border to
long-haul Mexican trucks. In November 2002, the Secretary of Transportation
announced that all the preconditions had been met and directed the Federal Motor
57
Ibid, p. 2.
58Carrier Safety Administration (FMCSA) to act on the Mexican applications. In
January 2003, however, the Ninth Circuit Court of Appeals delayed implementation.
56
Ibid, p. 2.
57
United States Trade Representative, 2005 National Trade Estimate Report on Foreign
Trade Barriers, p. 414.
5958
NAFTA Chapter 19 relates to review and dispute settlement in antidumping and
countervailing duty matters. Chapter 19 permits parties to appeal actions brought by one
NAFTA member against imports from another to a special binational panel rather than to
the domestic courts of the country bringing the action.
CRS-22
Carrier Safety Administration (FMCSA) to act on the Mexican applications. In
January 2003, however, the Ninth Circuit Court of Appeals delayed implementation.
In June 2004, the U.S. Supreme Court reversed the decision of the Ninth Circuit
Court and ruled that Mexican trucks could operate in the United States.6059
Since the ruling, the U.S. and Mexican Administrations have been working on
resolving the trucking issues. The two countries are engaged in talks regarding a
number of safety and operational issues that need to be resolved before Mexican
commercial trucks are granted authority to operate in the United States.6160
In trade issues related to NAFTA’s rules of origin, the United States, Mexico,
and Canada recently agreed to a broad package of more flexible NAFTA rules of
origin for spices, carrageenan, seasonings, precious metals, some electronics and
other products. The United States and Canada are expected to implement the new
rules, while Mexico is not expected to implement the rules until they are ratified by
the Mexican Senate, possibly later in 2005. The NAFTA partners are also
negotiating a new package of less restrictive origin rules for chemicals,
pharmaceuticals, plastics, rubber, motor vehicles and their parts, footwear and
copper. This second package is not expected to go into effect until 2006.6261
Policy Issues
The United States economic relationship with Mexico has strengthened
significantly over the last decade and is of mutual importance. Up to this point, the
discussion in the report has focused on the background and surrounding issues of the
economic relationship, which leads to the issue of policy considerations. First, there
is the question of whether to further economic integration with Mexico in view of the
increasing trends in regional trade agreements throughout the world. The close
economic relationship between the United States and Mexico that was strengthened
by NAFTA is likely to continue but there may be challenges in coming years as the
influence of China and other low-wage countries increases. According to a recent
study on economic integration in North America, a major shift is under way in trade
patterns among NAFTA partners with exports among NAFTA economies growing
more slowly than their exports with the rest of the world, reversing the previous 10year trend. The report finds that lower-cost suppliers, primarily China and India, are
displacing North American imports and could weaken North American integration.
The report states that furthering continental integration would require “renewed
efforts at resolving long-standing trade disputes, new liberalization initiatives, or
60
greater policy harmonization in areas such as border security, labor mobility, or
corporate taxation.”62
59
See CRS Report RL31738, North American Free Trade Agreement (NAFTA)
Implementation: The Future
of Commercial Trucking Across the Mexican Border, by Robert
S. Kirk and John F. Frittelli.
6160
ITR, “U.S.-Mexico Trade Disputes Center Once More on Agriculture, Trucking,” January
20, 2005, p. 2.
62
Ibid.
CRS-23
greater policy harmonization in areas such as border security, labor mobility, or
corporate taxation.”6361
Ibid.
62
ITR, “North American Integration Slipping Due to China’s Strong Growth, Report Says,”
(continued...)
CRS-23
Through the SPP, the leaders of the three North American countries are hoping
to move toward further economic integration. During the March 2005 unveiling of
the SPP, Canadian Prime Minister Paul Martin made statements regarding the
competitiveness of countries such as China and India, saying that NAFTA partners
should not be complacent in view of these rising powerhouses.6463 It is not clear
whether the SPP will lead to further economic integration in North America or
whether there will be any proposals that would require legislation. Much depends
on the working group proposals on June 23 and how they would affect industry and
commerce.
If the United States continues to deepen economic integration with Mexico, one
area that may need more attention is the issue of the difference in income levels
between the two countries. The economic relationship with Mexico is unique
because of Mexico’s proximity to the United States, but also because of the wide
differences in levels of economic development between the two countries. Mexico
is the first developing country with which the United States entered into a free trade
agreement. In Mexico, NAFTA has had an uneven effect in different parts of the
country and it has not yet been a solution to the problem of poverty and
unemployment. Mexico’s problem with poverty cannot be attributed directly to
NAFTA because it was already in existence prior to the agreement. At the time of
NAFTA there was hope that Mexico’s economy would grow sufficiently to create
jobs in urban areas and help alleviate poverty in rural areas. However, the economy
did not expand as expected and the problem of poverty continues.
Another issue to consider is whether trade agreements are enough, or are the
appropriate policy instrument, to resolve income disparities among trading partners
or even within a developing country. The World Bank study on the effects of
NAFTA on Mexico concludes that NAFTA has helped to improve economic
conditions in Mexico but it has not been enough to narrow the economic disparities
with the United States. The authors of the study state that, among other things,
Mexico needs to invest more in education, infrastructure, and institutional
strengthening to benefit more fully from freer trade.6564 A possible consideration for
policymakers is whether to help Mexico improve the quality of education and
strengthen its national institutions through foreign aid programs or other
mechanisms.
The economic hardship in certain economic sectors and regions of Mexico has
been part of the reason behind unauthorized Mexican migration to the United States.
President Fox and President Bush have often discussed the issue of undocumented
63
ITR, “North American Integration Slipping Due to China’s Strong Growth, Report Says,”Mexican migrant workers in the United States. Mexico has voiced concern about
alleged abuses suffered by Mexican workers in the United States and for the loss of
62
(...continued)
Volume 22, Number 8, February 24, 2005.
6463
ITR, “NAFTA Leaders Unveil Plan to Improve Region’s Security and Economic
Cooperation,” Volume 22, Number 12, March 24, 2005.
6564
The World Bank, Lessons from NAFTA for Latin America and the Caribbean, by Daniel
Lederman, William F. Maloney, and Luis Servén, 2005.
CRS-24
Mexican migrant workers in the United States. Mexico has voiced concern about
alleged abuses suffered by Mexican workers in the United States and for the loss of
life and hardships suffered by Mexican migrants as they use increasingly dangerous
methods to cross into the United States. Mexico holds the position that the migrants
are “undocumented workers” and that because the U.S. market attracts and provides
employment for the migrants, it bears some responsibility. Since 2001, Mexican
President Vicente Fox has been pressing proposals for legalizing undocumented
Mexican workers in the United States through amnesty or guest worker arrangements
as a way of protecting their human rights.
In 2004, President Bush proposed an overhaul of the U.S. immigration system
to permit the matching of willing foreign workers with willing U.S. employers when
no U.S. documented workers could be found to fill the jobs. President Fox
welcomed the Bush proposal as a very important step forward. In the 108th Congress,
a number of legislative initiatives were proposed to address the issue of temporary
foreign worker programs.6665 In the 109th Congress, proposed legislation was introduced on May
12, 2005 (S. 1033/H.R. 2330) to improve border security and immigration. The
proposed legislation would allow foreign workers to legally enter the country on a
temporary basis to work in jobs not wanted by U.S. documented workers and to
strengthen border security.
66
introduced to overhaul existing guest worker programs and/or establish new
programs (S. 1033/H.R. 2330, S. 1438, and H.R. 3333). Other related bills have been
introduced to revise guest worker programs (including S. 359/H.R. 884) and
permanent admissions (including H.R. 1219 and H.R. 3700). The 109th Congress has
held a number of hearings on immigration reform.66
65
For more information, see CRS Report RL32735, Mexico-U.S.United States Dialogue on
Migration and
Border Issues, 2001-2005, by K. Larry Storrs.
66
For more information, see CRS Report RL33125, Immigration Legislation and Issues in
the 109th Congress, coordinated by Andorra Bruno.