NAFTA, Mexican Trade Policy, and
U.S .-Mexico Trade : A LongerTerm Perspective
J. F . Hornbeck
Specialist in International Trade and Finance
March 11, 1996
NAFTA, MEXICAN TRADE POLICY, AND
U.S :MEXICO TRADE : A LONGERTERM PERSPECTIVE
After two years of the North American Free Trade Agreement (NAFTA),
the debate over liberalizing trade with Mexico continues .
congressional interest over the dramatic turnaround in the U .S. balance of trade
with Mexico in 1995, this report considers trends in U .S.-Mexico merchandise
trade in a longer term context . It does not address employment issues, which
are the subject of other CRS reports . What becomes evident is that an open
trade policy can facilitate trade, but macroeconomic problems can destabilize
trade flows independently of trade policy or agreements .
U.S.-Mexico trade has grown and diversified as the two economies have
become increasingly integrated . Yet, trade has not always expanded in a smooth
upward direction . Many economic variables affect trade : economic performance
of trading partners, capital flows, domestic economic policies, exchange rate
policy, and trade policy . In 1982-83 and 1995, Mexico experienced severe
recessions . Both were similar in that they were preceded by an overvalued peso,
balance of payments crises, large capital outflows, and major peso devaluations .
A critical variable that differed between the two setbacks was trade policy, which
caused Mexico to act much differently in 1995 than it did in 1982 .
Mexico was essentially a closed economy in 1982, but the debt crisis led the
way to Mexican trade policy reform. Mexico began serious unilateral reductions
in trade barriers after 1985 and made overt moves to integrate itself more
completely with the world economic system by becoming a member of the
General Agreement on Tariffs and Trade (GATT) in 1986 and the Organization
for Economic Cooperation and Development in 1994 . NAFTA, in this context,
is the continuation of a long-term trade-opening process .
With Mexico's 1995 balance of payments crisis, the United States saw its
bilateral trade balance fall into a large deficit position, as it did in 1982 .
However, U .S. exports to Mexico declined by only 11% in 1995, compared to 35%
in 1982 and 25% in 1983 . Yet, in 1995, Mexico's economy contracted much
more, with GDP falling 6 .9% compared to 0 .6% and 4.3% in 1982 and 1983 .
The difference points to Mexico's open trade policy, including NAFTA,
which kept it from raising barriers to U .S . trade in response to the crisis . The
decline in exports represents the fall in demand that accompanied the recession
and the effects of the peso devaluation . What the decline does not reflect is a
formal policy to restrict the flow of imports from the United States, which was in
place in 1982, but absent in 1995 . NAFTA solidified Mexican commitments to
an open trade policy and actually cushioned U .S . exports from more serious
effects . Although this is scant comfort to those who are concerned with the
1995 trade deficit with Mexico, the deficit is not a major economic problem for
the United States and is smaller than it might have been without NAFTA . Also,
under freer trade economists generally expect U .S. exports to Mexico to recover
more quickly than they did from the 1982 crisis under a closed trade policy .
UNITED STATES-MEXICO TRADE : 1977-1995 2
ECONOMIC FACTORS AFFECTING TRADE 4
TRADE AND ECONOMIC PERFORMANCE 4
EXCHANGE RATES, CAPITAL FLOWS, AND TRADE BALANCES . 6
MEXICAN TRADE POLICY
CLOSED TRADE POLICY AND THE 1982 CRISIS 10
TRADE REFORM IN THE 1980s
OPEN TRADE POLICY AND THE 1995 CRISIS 12
CONCLUSIONS AND OUTLOOK
APPENDIX 1 . U .S . MERCHANDISE TRADE WITH
APPENDIX 2 . TOP 25 U .S . IMPORTS FROM MEXICO 16
APPENDIX 3 . TOP 25 U .S . EXPORTS TO MEXICO 17
NAFTA, MEXICAN TRADE POLICY, AND
U.S :MEXICO TRADE: A LONGERTERM PERSPECTIVE
After two years of the North American Free Trade Agreement (NAFTA),
the debate over liberalizing trade with Mexico continues . Many hold NAFTA
responsible for both Mexico's sudden economic collapse and the resulting
bilateral U.S. trade deficit, concluding that NAFTA was a bad deal for the U .S.
Economists generally dispute this position based on two
fundamental propositions . First, a bilateral trade deficit with Mexico does not
present a major economic problem for the United States, and second, trade
policies and particularly trade agreements do not cause trade deficits . In short,
free trade agreements can affect the long-term level of trade, but not sharp
fluctuations in the balance of trade . Finally, it is worth reiterating that the
benefits of freer trade are not measured by annual trade balances, but by
broader economic changes that unfold over longer periods of time 2
Nonetheless, the public policy debate continues over short-term movements
in U.S: Mexico trade . This report considers trends in U.S: Mexico merchandise
trade over two decades to help place recent events into a historical economic
context. To evaluate the role NAFTA may have had on the current economic
and trade situation in Mexico, it is instructive to revisit the "debt crisis" period
of 1982-83, when Mexico had a closed trade policy, and contrast it with the 1994
peso devaluation, when Mexico operated under an open trade policy . As shall
be seen, rather than trade policy or agreements, politics, macroeconomic
problems, and policy responses proved to be the short-term destabilizing forces
of long-term trade trends in both cases . By contrast, changes in Mexican trade
policy, including adopting NAFTA, may have actually cushioned U .S. exports
from even steeper declines in 1995, given Mexico's worst recession since the
The major criticisms revolve around loss of jobs and U .S . exports . For example see :
Buchanan, Patrick J . Mexico: Who Was Right? The New York Times . August 25, 1995 and
Public Citizen. NAFTA's Broken Promises . September 4, 1995 .
2 For an economic discussion of the "gains from trade" see : U.S . Library of Congress .
Congressional Research Service . Trade Policy in an Economic Perspective . Report No . 95-529 E,
by Craig K. Elwell . March 9, 1995 .
3 This report will not delve into employment issues ; for a discussion of the employment effects
see : U .S . Library of Congress . Congressional Research Service . NAFTA. U.S . Job Effects and
Industry Trends After Two Years . Report No . 96-176 E, by Mary Jane Bolls . February 27, 1996
and United States-Mexico Economic Relations : Has NAFTA Made a Difference? Report No . 95398 E, by J . F . Hornbeck . March 15, 1995.
UNITED STATES-MEXICO TRADE : 1977-1995
The United States and Mexico have had a long and sometimes tempestuous
economic relationship . Although freer trade with Mexico raises concerns in the
United States, Mexicans have also expressed reservations about being
overwhelmed by the economic colossus to its north . Because trade occurs
between a comparatively large and small economy, there is a disproportional
aspect to the relationship .
The United States is by far Mexico's most important trading partner,
accounting for approximately 85 percent of Mexico's exports and 72 percent of
its imports in 1995 . Although Mexico is the United States' third largest trading
partner, it accounted for only 10 percent of U .S . exports and 7 .5 percent of
imports in 1995 . This is an important distinction because despite concerns over
U .S . exports to Mexico, the U .S . economy is not greatly affected overall by the
economic fortunes of Mexico . To the contrary, Mexico's economy is much more
vulnerable to U .S . economic trends .
Despite this discrepancy in relative trade importance, bilateral trade
expanded briskly and for the most part evenly over the past two decades .
Between 1977 and 1995, trade turnover (exports plus imports) between the
United States and Mexico grew over ten fold from $9 .5 billion to $107 billion
(see figure 1 and appendix 1 .) The U .S . balance of trade shifted from surplus
to deficit, reflecting changing economic fundamentals in both countries .
At least three distinct periods can be seen in figure 1 . First, the late
seventies show a pattern of balanced trade growth, supported in Mexico by the
oil boom. A second period followed in the 1980s characterized by a decline and
stagnation of trade following the global recession, collapse of world oil prices,
increase in world interest rates that triggered Mexico's 1982 debt crisis .
U .S exports fell substantially after 1981, requiring seven years to recover .
Beginning in 1986, a third period of nearly balanced trade growth resumed
largely, as shall be seen, because of Mexico's trade reforms . Finally, 1995 may
or may not portend the beginning of a fourth period, perhaps similar to 1982,
in which Mexico's balance of payments problems result in a severe decline in
U .S . exports .
In addition to the volatility in U .S .-Mexico trade over the past two decades,
the composition of trade between the two countries changed rather dramatically,
particularly Mexican exports . In the early 1980s, Mexico was, above all else, an
oil exporter, with oil accounting for over two-thirds of total export revenue .
Some 40 percent of exports to the United States consisted of oil at that time .
By 1995, although still an important sector, oil production had not increased
from 1983 levels and accounted for only 12 percent of total Mexican exports and
9 percent of exports to the United States (see appendix 2 .) 4
4 Weintraub, Sidney . A Marriage of Convenience: Relations Between Mexico and the United
States . New York, Oxford University Press, 1990 . pp . 86 and 119 and U.S . Department of State.
U .S . Embassy, Mexico . Mexico, Economic and Financial Report . Fall 1995. p . 80.
. U .S .-Mexico Merchandise Trade (1977-1995)
$ billions (current)
-e- U .S . Exports
-+- U .S . Imports
.. . . . . . . .. .. .. . . . . .. .. .. . . . . . . .
® U .S . Trade Balance
77 78 79 80 81 82 83 84 85 88 87 88 89 90 91 92 93 94 95
Source: U .S. Department of Commerce .
As Mexico diversified its export base away from oil toward manufacturing,
the United States became an even more important trading partner . In the early
1980s, the United States accounted for 55 percent of Mexico's exports . This
ratio rose to 65 percent in 1987 and 85 percent by 1995 . Approximately 80
percent of Mexico's exports are now manufactured goods, 70 percent of which
end up in the United States .
Maquiladoras, through joint production
operations, play an important role in this trade, with half of all manufacturing
exports coming from these firms . Motor vehicles, electrical instruments, and
electrical appliances constitute most of the maquiladora exports .'
As important as the maquiladora relationship is to Mexico, the fundamental
changes in Mexico's export composition also reflect shifts in non-maquiladora
production . As seen in table 1, the ratio of manufactured exports to total
manufacturing output tripled from 1982 to 1994 (column 3) and the ratio of
manufactured exports to total non-maquiladora exports quadrupled (column 4) .
Also evident in this table is the growing importance of exports to the economy
(column 2) and the declining relative importance of petroleum (column 5) .
5 Weintraub, Ibid, pp . 73-75 and U .S . Embassy Mexico, Ibid, pp. 80 and 83 . Maquiladoras are
foreign-owned assembly plants in Mexico, which produce for export (mostly to the United States) .
U.S . and Mexican trade laws provided preferential treatment for inputs and finished goods related
to maquiladora production even prior to NAFTA . U .S . Library of Congress . Congressional
Research Service. Mexico's Maquiladora Industry . Report No . 93-1050 E, by M. Angeles
Villarreal . December 14, 1993 .
Table 1 . Structural Changes in Mexican Exports (in percent)
Total exports excluding maquiladora production . # 1985-87
Jorge Mattar, El Indicador Bursatil, in U .S . Department of State .
Economic and Financial Report, Fall 1995. p . 80 .
Between 60 and 70 percent of Mexico's imports tend to be intermediate
goods, or goods that are further processed . Capital goods, used to manufacture
other goods, account for approximately 20-25 percent of Mexico's imports, with
consumer goods ranging from 5 percent during recessions to 15-20 percent
during periods of economic growth . The dominance of intermediate goods again
points to the importance of the maquiladora relationship as partially
manufactured goods are sent across the border for further assembly and then
returned to the United States . Intermediate goods support non-maquiladora
manufacturing as well . The largest categories of imports from the United States
are various types of tractor/automotive and electrical parts . Imports from the
United States are highly diversified with the top 25 import commodity groups
accounting for only one-third of the total (see appendix 3) .
ECONOMIC FACTORS AFFECTING TRADE
As seen above, U .S .-Mexico trade changed considerably over the past two
decades . The long-term trend is one of growth and diversification as the two
economies become increasingly integrated . Yet, trade has not always expanded
in a smooth upward direction, and in an effort to discern NAFTA's possible role
in Mexico's economic problems, it is essential to understand some of the factors
that affect short-term fluctuations in trade including economic performance,
exchange rate policy, and capital flows . Because events causing the collapse of
the 1994 peso are reminiscent of those in 1982, the two periods are contrasted .
TRADE AND ECONOMIC PERFORMANCE
Trade between two countries can fluctuate over the short-term as the
economies move through their respective business cycles, which is particularly
evident among major trading partners where economies are more highly
integrated, such as the United States and Mexico . When economies are growing
demand increases, including the demand for imports . When economies enter
recessions, demand falls, often abruptly, which also diminishes demand for
imports. These short-term swings can affect trade balances irrespective of trade
policy or agreements .
FIGURE 2 . Real Growth in Mexican GDP and
U .S . Exports to Mexico (1978-1995)
. . . . .. .. .. . . . . .. .. .. . . . . . . ... .. . . .
2500 . . . . . . . .....
~I a it
. . ._~I
5-~1 h /,I -/,
. . . . .... .. . . . . . . .. .. .. . . . . .. .. . . . . . . ... .. . . . . .. .. .. .. . . . . .. .. .. . . . . . . ..... . . . . .. .. .. . . . . . . .... . . . . . . . .... .. . . . . ..
-30 - ... .. . . . . .. .. .. . . . . .. .... . . . . . . . ...... . . . . . . .. .. . . . . .. .... . . . . . . . . ..... . . . . . . .... . . . . .. .... . . . . . . . .. .. . . . . . . .... .. . . . . .. ... .
78 79 80 81 82 83 84 86 86 87 88 89 90 91 92 93 94 96
Mexico GDP Growth
U .S . Export Growth
CRS calculations, Dept of Commerce data .
To highlight the relationship between trade and short-term economic
performance, figure 2 contrasts real annual growth of Mexico's gross domestic
product (GDP) with real annual growth of U .S . exports to Mexico from 1978 to
1995 . Figure 2 shows the potential for volatility in annual trade balances based
on the vagaries of the Mexican business cycle . In particular, growth in U .S .
exports to Mexico was highest in the late 1970s during a period of strong
economic growth (8-9 percent annually) and decidedly negative when the
economy fell on hard times in 1982-83, 1986, and 1995 .
The decline in U .S . exports to Mexico is most evident for the 1982-83 and
1995 recessions . In 1982 and 1983, Mexico's GDP dipped by 0 .6 and 4 .2 percent,
respectively, for a total fall in GDP of nearly 5 percent over the two years . At
the same time, U .S . exports to Mexico fell by 35 and 25 percent for a total
decline of approximately 50 percent . In the wake of the 1994 peso devaluation,
Mexican GDP fell 6 .9 percent in 1995 alone, the largest single year decline since
the Great Depression and fully two-thirds more than in 1983 . Yet, U.S . exports
to Mexico fell only 11 percent or only about half the decline witnessed in 1983 .
This raises an interesting question (to be explored in the next section) of why
U .S . exports to Mexico declined much less in 1995 than might have been
expected given such a sharp contraction in the Mexican economy and the
previous experience of 1982-83 .
EXCHANGE RATES, CAPITAL FLOWS, AND TRADE BALANCES
Exchange rate policy and capital flows can also affect trade balances . Over
the long run, stable and predictable exchange rates promote confidence in the
future value of a country's currency, which in turn encourages trade and
investment and discourages speculation and the potential for sudden large shifts
in the flow of capital . Exchange rate stability, however, is not always easy to
achieve . In a floating exchange rate system, market forces determine the
exchange rate . In a fixed exchange rate system, policy sets the value of a
country's currency in keeping with broader economic goals . Both can generate
stability, but in Mexico's case, its fixed exchange rate policy became suspect
when very large inflows of foreign capital caused the peso to become overvalued
and Mexican economic policy did not make the necessary adjustments .
In 1987, as part of a long-term anti-inflation policy, Mexico pegged the
"nominal" or current market value of the peso to the dollar and then in 1989
adopted a "crawling peg" exchange rate . The "crawling' aspect of this concept
refers to what amounts to a constant nominal mini-devaluation of the currency,
ideally at a rate that would be equal to the inflation differential with the
country to which the peso is pegged (the United States .) In 1991, Mexico
employed a band or defined trading range within which the peso could be traded,
while continuing the regular mini-devaluation by widening the band .'
When a country pegs its currency, exchange rate credibility rests on
adopting macroeconomic policies similar to those of the country to which the
currency is pegged (the United States in this case) to avoid currency
misalignments . Policy coordination is all the more critical in Mexico's case
because the United States is both its primary trading partner and a much larger
economy . Two problems often emerge when a country adopts a fixed exchange
rate, both of which can raise the specter of devaluation . First, when the
difference in inflation rates is not fully closed, the "real value" (adjusted for
inflation) of the pegged currency (the peso in this case) tends to appreciate . As
the real value of the peso appreciates, the "nominal value" becomes increasingly
less credible, raising concerns about a possible devaluation .7
The second and related problem arises when domestic economic policy
diverges from that of the country to which the peso is pegged, which, as
mentioned above, raises questions about the credibility of maintaining the fixed
6 Because of the similarities between 1982 and 1994, only the latter period is discussed . Prior
to 1982, Mexico had a fixed exchange rate compared to a "crawling peg ." For all practical
purposes, the crawling peg became a fixed exchange rate by 1994 so these technical differences did
not affect the final outcome, which was devaluation in both cases .
Not adjusting fully for the inflation difference was a matter of broader and deliberate
Mexican policy involving wage and price controls . On the pitfalls see : Dornbusch, Rudiger and
Alejandro Werner . Mexico : Stabilization, Reform and No Growth . Brookings Papers on
Economic Activity . No . 1, 1994 . p . 271-76 and Dornbusch, Rudiger, Ilan Goldfajn, and Rodrigo
O. Valdes . Currency Crises and Collapses . Brookings Papers on Economic Activity . No . 2, 1995,
p. 250-53 .
nominal exchange rate . In 1982, Mexico's economic policies were overtly
expansionary, contributing to inflation, the peso appreciation, and impending
crisis . Similarly, in mid-1994 the Mexican government adopted looser fiscal and
monetary policies, albeit rather subtly, as a matter of presidential politics . If
macroeconomic policy becomes expansionary and relatively more expansionary
than in the United States, which was actually moving in the opposite direction
with the Federal Reserve raising interest rates throughout 1994, then the
inflationary gap between the United States and Mexico discussed above grows
and the nominal fixed exchange rate becomes suspect . 8
Capital inflows into Mexico were a driving force that led to the overvalued
currency, rising current account deficit, and Mexico's financial problems within
the context of a pegged exchange rate system . As Mexico recovered from the
debt crisis of the 1980s and achieved market-based economic reforms, investors
came to believe that long-term stable growth might once again be possible . With
rising interest in the potential for large returns in so-called "emerging markets,"
investors committed capital accordingly . Capital began to trickle into Mexico in
1989, and as documented in table 2, rushed in thereafter until 1994 .
Table 2 . Net Capital Inflows into Mexico,
1989-95 ($ billions)
Source : IMF, International Financial Statistics, February 1996.
When capital moves into a country that maintains fixed exchange rates, the
domestic money supply increases, prices tend to rise, and the exchange rate
tends to appreciate .' The real appreciation of the peso lowers the price of
imports and raises the price of exports, so Mexico began to run large trade and
current account deficits that matched the capital inflows ." When these capital
Dornbusch, Goldfajn, and Valdes, Ibid, p . 240 . It has been argued that had Mexico been able
to retain international credibility in its anti-inflationary policy, it might have avoided this latest
crisis . See : Obstfeld, Maurice and Kenneth Rogoff . The Mirage of Fixed Exchange Rates .
Journal of Economic Perspectives, v . 9, Fall 1995, p . 84 .
9 One view argues that an extremely high level of capital inflows, particularly in a small
economy, is simply not a realistic equilibrium level over the long run and should be treated as a
short-term phenomenon at the outset . See : Edwards, Sebastian . Comments and Discussion .
Brookings Papers on Economic Activity . No . 2, 1995 . p. 27710
Another indication of the growing deficit may be seen by comparing table 2 with figure 1 .
Growth in foreign capital investment in Mexico from 1991 to 1994 coincided with Mexico's trade
balance with its major trading partner, the United States, turning from a surplus to a deficit .
flows suddenly slow or reverse themselves, they can present serious problems for
the recipient countries . This occurs because the country then has a large
current account deficit, an overvalued exchange rate, and often insufficient
foreign exchange reserves relative to possible capital outflows . This happened
to Mexico during 1994 .
Rising U .S . interest rates were responsible, in part, for the initial decline
in capital inflows . Mexico would have had to adjust its economic policy in like
manner to continue to attract capital, but Mexico found it difficult during an
election year to change policy in response to the change in capital flows . In
effect, it no longer subordinated domestic monetary and fiscal policy to the
maintenance of a fixed exchange rate with the United States . In fact, as Mexico
lost foreign exchange reserves, they were replaced by central bank purchases of
Mexican government debt so that the economy would not have to deflate or
allow the money supply to contract, which would slow growth and risk
In addition to higher U .S . interest rates, noneconomic factors sparked
capital flight from Mexico . Concern over political stability was a key issue
leading to investor uneasiness . In January 1994, a peasant revolt occurred in
the state of Chiapas . March proved to be an even more unsteady month with
the assassination of a presidential candidate . These events triggered a major
speculative attack on the peso in late March, which Mexico defended by selling
its foreign exchange reserves . Other political disturbances and tighter monetary
policy in the United States continued throughout 1994 and in November Mexico
faced another run on the peso as the fear of devaluation spread ."
Although changing political and external economic events encouraged
investor withdrawal, it was Mexico's economic policy that doomed the peso to
devaluation . In the absence of political and economic uncertainty, Mexico's
impending financial crisis would probably have occurred in any event, although
the timing might have been different . By mid-1994, Mexico loosened both its
fiscal and monetary policies precisely when the United States was tightening its
monetary policy . This decision was tantamount to encouraging higher inflation
relative to the United States, which, with a pegged exchange rate, meant that
the real appreciation of the peso would accelerate to potentially untenable levels,
further exacerbating the current account deficit .
Mexico faced one of three unattractive options : (1) raise interest rates to
match U .S . policy and continue to attract foreign capital ; (2) devalue the peso ;
or (3) do nothing and head toward more serious financial difficulty . Option one
proved unacceptable because it risked almost a sure recession prior to a
presidential election . Option two was apparently debated, but discarded because
Dornbusch, Goldfajn, and Valdes, Currency Crises and Collapses, p . 240-41 .
For a summary of events see : U.S . Library of Congress . Congressional Research Service .
Mexico: Chronology of a Financial Crisis . Report No . 95-1007 E, by Patricia A. Wertman .
September 27, 1995 .
Mexico staked its economic reputation on defending the peso ." Option three
unfolded by default .
Investors, both foreign and domestic, actually realized the tenuous nature
of the peso throughout much of 1994 and abandoned it by moving toward a
dollar-indexed investment instrument known as the tesobono . 14 This amounted
to "currency flight" prior to the final capital flight that occurred in November
and December . When investors finally fled in late 1994, Mexico defended its
currency with foreign reserves as long as it could before devaluing and
eventually floating the peso . Mexico's refusal to face the inconsistency of its
macroeconomic and exchange rate policies ultimately set events into motion .
Mexico could not continue to peg the peso to the dollar and follow divergent
macroeconomic policy from the United States . When an adjustment did not
occur, it was only time before markets forced the peso's devaluation .
The debate over the proper Mexican response continues today ." For this
report, it is sufficient to note that a fixed exchange rate policy combined with
large capital inflows and Mexico's unwillingness to adopt necessary adjustment
policies led to an overvalued peso and large current account deficits . As the peso
lost credibility and capital fled Mexico, a devaluation became inevitable with
dramatic and predictable effects on trade balances : Mexican exports increased,
imports fell, and the balance of trade with the United States went from a
surplus to a deficit . The key points are that the seeds of this problem were
planted years before NAFTA was contemplated and that the final collapse of the
peso occurred irrespective of trade policy ." Mexico faced this problem in 1982
under a closed trade policy and again in 1994 under a highly open trade policy .
MEXICAN TRADE POLICY
The preceding discussion points to many interconnected economic problems
that can disrupt long-term trade patterns . The effect of Mexican trade reform,
by contrast, should be evident over longer periods of time and promote stability
in trade relations. To recap, in 1982-83 and 1995, Mexico experienced severe
recessions (see figure 2 .) Both were similar 17 in that they were preceded by an
Dornbusch, Goldfajn, and Valdes, Currency Crises and Collapses, p . 241 .
Tesobonos grew from 6 percent of total public sector internal debt in April 1994 to 55
percent by the time the peso was devalued in December . They proved to be only a stopgap
measure in the attempt to halt capital flight.
The two main camps are : (1) Mexico should have tightened fiscal and monetary policies
to avoid devaluation, and (2) Mexico should have devalued the peso much earlier .
Anticipation of NAFTA, however, may have contributed to the high expectations that drove
large capital flows into Mexico after 1989.
U.S . Library of Congress . Congressional Research Service . Mexican Financial Crises, 1982
and 1995: Similarities and Differences . Report No . 95-239 E, by Patricia A. Wertman . 6 p.
overvalued peso, balance of payments crises, capital outflows, and major
devaluations, causing U .S. exports to fall . One of the critical variables that
differed between the two setbacks was trade policy . As will be shown, a more
open policy in 1995, solidified by NAFTA (and GATT), kept Mexico from
reverting to import restrictions that were so prevalent in 1982 . This policy
change actually protected U .S . exports from worse declines when faced with a
severe economic setback in Mexico .
CLOSED TRADE POLICY AND THE 1982 CRISIS
In 1982, the Mexican economy was considerably more closed to trade than
it was in 1995 . Mexico had long followed an import substitution approach to
development, which by maintaining high tariffs and other barriers to imports,
protected domestic industry from foreign competition . In 1981, the average
tariff rate was 27 percent, 83 percent of imports required licenses, and domestic
content requirements covered key industries such as automobile and computer
The sole purpose of these policies was to restrict imports in order to
facilitate domestic industrial development in Mexico . Given the wealth effect of
new found oil reserves in the late 1970s, there was little financial or political
pressure to change policies ." As the 1980s approached, Mexico's economy
continued to grow based on heavy external borrowing backed by seemingly
unlimited oil revenues . This trend gave way to large current account deficits .
The 1982 balance of payments crisis occurred because Mexico overborrowed
and could not meet growing international debt service payments given rising
world interest rates and falling world oil prices . Mexico devalued the peso twice
in 1982 and immediately faced economic decline : inflation climbed to nearly 100
percent and economic growth fell by nearly 5 percent over two years . 19
To resume meeting its debt obligations, Mexico increased barriers to
imports in order to earn foreign exchange . The primary tool was the import
license (permiso previo), which in 1982 was extended to 100 percent of imports .
Exchange rate controls were also introduced and tariffs raised, but as one
observer points out, "Under this import structure, it was fatuous to speak of
average tariffs levels in Mexico . Denial of a permiso previo was the equivalent
of an infinite tariff."20 The result for the United States was a dramatic fall in
exports to Mexico, as seen in figure 2 .
Lustig, Nora. Mexico : The Remaking of an Economy. Washington, D .C., The Brookings
Institution, 1992 . pp. 114-15 .
19 The details can be found in chapter 1 of Lustig, Ibid .
20 Weintraub, Sidney .
The Promise of United States-Mexican Free Trade .
Summer 1992 . p. 555 .
International Law Journal, v. 27,
TRADE REFORM IN THE 1980s
Despite the initial raising of import barriers, one outcome of the debt crisis
was reform in Mexican trade policy . Mexico began gradual unilateral reductions
in trade barriers after 1982 . These accelerated after 1985 when Mexico made
overt moves to integrate itself more completely with the world economic system
by becoming a member of the General Agreement on Tariffs and Trade (GATT)
in 1986 and the Organization for Economic Cooperation and Development in
1994 . Becoming a party to NAFTA was a logical step in this progression 21
Mexico's specific trade reform policies included reducing licenses from 100
percent of imports in 1982 to 36 percent in 1985, 27 percent in 1986, and 22
percent by the end of 1988 . Mexico also simplified its tariff schedules, with
maximum tariffs falling from 100 percent in 1982 to 20 percent in 1988 . The
trade-weighted average tariff rate continued downward and today stands at
approximately 10 percent . By 1987, these and other policy changes "transformed
Mexico from an extremely closed economy into one of the most open ones in the
world ."" All this transpired seven years before NAFTA took effect .
Because Mexico instituted major trade policy reform before entry into
NAFTA, the trade agreement may be seen as the continuation of a long-term
process, at least as it affects the United States and Canada . Under NAFTA,
Mexico's few remaining import license requirements were converted to a system
of tariff-rate quotas that will be phased out . Tariff rates remain low and will
also disappear as the free trade agreement is fully implemented . Importantly,
as shall be seen, NAFTA consolidated Mexico's position on free trade with the
United States . The effect of Mexico's trade liberalization on trade volume with
the world is well documented . From 1982 to 1994, Mexican exports grew over
150 percent to $60 .9 billion . Perhaps most telling is that oil, as a percent of
total exports, fell from 77 .6 to 21 .4 percent. Over the same time period non-oil
export revenues (mostly manufactured goods) increased by over 450 percent .
Mexican imports also rose dramatically from 1982 to 1994, rising over 360
percent to $79 .4 billion ."
Lustig, Mexico : The Remaking of an Economy, p . 39 and CRS, United States-Mexico
Economic Relations, p . 4 . It should be noted that trade liberalization affected primarily
manufactured goods ; agriculture, services, and other important areas are still protected and will
be opened up under NAFTA .
Tornell, Aaron . Are Economic Crises Necessary for Trade Liberalization and Fiscal
Reform? The Mexican Experience . In Dornbusch, Rudiger and Sebastian Edwards, eds . Reform,
Recovery, and Growth: Latin American and the Middle East. Chicago, University of Chicago
Press, 1995. p . 53. See also : U .S . International Trade Commission . Review of Trade and
Investment Liberalization Measures by Mexico and Prospects for Future United States-Mexican
Relations . Publication 2275 . April 1990 . pp . 4-1 to 4-5 and USITC . 1995 National Trade
Estimate Report on Foreign Trade Barriers . pp . 229-236 .
Tornell, Aaron and Gerardo Esquivel . The Political Economy ofMexico's Entry to NAFTA .
Working Paper 5322 . Cambridge, National Bureau of Economic Research, October 1995 . Tables
2-3. International Monetary Fund . International Financial Statistics Yearbook, 1995, p . 541 .
Because the United States is Mexico's most important trading partner,
shifts in trade policy are particularly noticeable . As seen in figure 1, the level
of trade between the United States and Mexico experienced steady growth
between 1983 (the beginning of Mexican trade policy reform) and 1994
(NAFTA) ; both imports and exports rose dramatically, at a time when the
Mexican economy grew at an average annual rate of only 2 percent . In fact, real
GDP per capita did not grow at all ."
Table 3 . U.S: Mexico Trade Turnover and
U.S. Exports To Mexico as a Percent
of Mexican GDP, 1982 and 1994
Trade Turnover/Mexican GDP
U.S. Exports/Mexican GDP
Source : IMF, International Financial Statistics Yearbook, 1995.
The ratios of total bilateral trade and U .S. exports to Mexico's GDP also
provide a indication of trade openness . As seen in table 3, in 1982, U .S.-Mexican
trade turnover (imports plus exports) was 15 .8 percent of GDP and U.S. exports
alone amounted to 6 .8 percent of GDP . By 1994, these ratios rose to 28 .3 and
14.4 percent respectively . Clearly, trade with the United States has become a
more important factor in Mexico's economy . This growth in the level and
importance of trade is what would be expected of freer trade policies and it is no
coincidence that this growth occurred precisely at the same time that Mexican
trade policy reforms were implemented ."
OPEN TRADE POLICY AND THE 1995 CRISIS
The economic crisis in 1995 differed from 1982 in some technical aspects,
but Mexico faced the same fundamental problem : the inability to cover its
international obligations . Political events, higher U .S . interest rates, speculative
attacks on the peso, and Mexico's deteriorating economy eventually eroded
investor confidence . By 1995 the large current account deficit became a liquidity
crisis . Dollars fled north (held by both Mexicans and foreigners), foreign
reserves dwindled, and Mexico was forced to devalue and then float its currency .
As Mexico's largest trading partner, the United States saw its bilateral trade
balance fall into a large deficit position . Mexican imports to the United States
continued to climb as U .S . exports to Mexico fell . However, U .S . exports
declined by only about 11 percent in 1995 . As mentioned above this was a much
24 In 1990 dollars, Mexico's per capita GDP was $3,090 in 1985 and only $3,041 in 1994
Inter-American Development Bank . Economic and Social Progress in Latin America : 1995
Report . Washington, D .C ., The Johns Hopkins University Press, October 1995 . p. 263 .
25 Exchange rate policy and capital flows, as discussed earlier, were contributing factors .
smaller decrease than experienced in 1982 (35 percent) and 1983 (25 percent)
despite a much larger contraction in Mexico's economy .
The difference points to Mexico's more open trade policy, including acceding
to NAFTA, which kept Mexico from raising barriers to U .S . trade in response
to the crisis . Hence, the decline in exports represents the fall in demand that
accompanied the deep recession and the effects of the peso devaluation, as would
be expected. What the decline does not reflect is a formal policy to restrict the
flow of imports from the United States, which was in place in 1982, but absent
in 1995 . NAFTA, for its part, helped solidify Mexican commitments to an open
trade policy and actually cushion United States exports from more serious
In fact, it has been argued that this is one of the more important
achievements of NAFTA . Not only could Mexico not fall back on a protectionist
trade regime, but it is committed to continuing liberalization of trade policies in
agriculture, services, and other areas ." Although this is scant comfort to those
who are concerned with the 1995 trade deficit with Mexico, a bilateral trade
deficit is not a major economic problem for the United States and in any case,
the deficit is smaller than it might have been under a less open trade regime .
Additionally, under freer trade economists generally expect U .S. exports to
Mexico to recover more quickly than they did from the 1982 crisis under a closed
Mexican trade policy .
CONCLUSIONS AND OUTLOOK
Mexico remains a natural, and over the long run, growing market for U .S.
goods, which will become more evident when the Mexican economy recovers and
the long-term trend of trade and investment growth reemerges . This is a trend
that has been evident for decades and one that is dependent on Mexico's
economic stability and its willingness to maintain an open trade policy, an
option for which NAFTA may serve as an insurance policy . The Mexican case
supports the contention that trade liberalization, relative to a closed trade
policy, supports growth in trade and provides greater stability during times of
economic setbacks, other things being equal.
One problem is that other things are not always equal and it is these other
things that often cause short-term disruptions to long-term trade trends .
Mexico periodically experiences macroeconomic problems that are common
among developing economies, and in 1994 Mexico repeated many mistakes made
in 1982, except for trade policy . Its primary economic policies focus on resolving
such basic problems as tempering runaway inflation, maintaining a stable
exchange rate, managing current account balances, and attempting to achieve
long-term savings rates necessary for development . Mexico, like most developing
countries, looks abroad for resources to take up any slack in domestic savings .
Given Mexico's tendencies toward exchange-rate and indebtedness problems,
Tornell and Esquivel, The Political Economy of Mexico's Entry to NAFTA, p . 27.
often induced by policy decisions, balance of payment or liquidity problems can
arise periodically that eventually disrupt trade and investment flows .
Importantly, these problems can exist under either an open or closed trade
Although trade policy can encourage trade growth over the long run, it is
only one economic policy tool and not the most influential in managing
macroeconomic problems . In this case, trade agreements such as NAFTA are not
the cause of Mexico's current recession . Additionally, long-run policy goals
might consider the fact that Mexico's recovery and the continuation of U .S .
export growth to Mexico would be complementary events .
Finally, it is worth reiterating the limitations of trade agreements . They
are intended to reduce barriers to trade . They cannot guarantee any particular
level of trade flows among countries, nor can they guarantee that all businesses
will prosper . They do hold out the promise that business and trade success or
failure will be less affected by deliberate policies to block imports, as was evident
in Mexico in 1982, but not 1995 . Despite the unhappiness voiced by many over
NAFTA, moving back to a more closed trade posture with Mexico not only would
risk losing broader gains from freer trade, but also would not guarantee the
United States of being insulated from Mexican economic problems, as a
comparison of the 1982 and 1994 crises demonstrates .
APPENDIX 1 . U.S . MERCHANDISE TRADE WITH
% Growth in
% Growth in
Turnover U.S. Exports
Source: U.S. Department of Commerce . Exports measured F .a.s ; Imports measured on customs
Note: Figures are in current dollars so growth rate calculations vary slightly from those adjusted
for inflation in figures 2.
APPENDIX 2. TOP 25 U.S. IMPORTS FROM MEXICO
Total all commodities
78120--Motor vehicles, transport of persons, nes
33300--Crude oil from petroleum/bituminous
77313--Ignition wirng sts, used in vehicle, etc
76110--Televisio eceivers, color
93100--Special transactions & commod
71322--Recip pist engs, cyl cap exceedng 1000 cc
78439--Pts, access : tractor, mtr veh, spec purpse
76211--Radiobroadcast receivers com sound,
78432--Brakes, servo-brakes, pts for motor
75997--Parts :auto data proc mach/opticalreaders
78219--Motor vehicles for the transport of gds
76431--Transmission apparatus, tv, radio etc
82119--Parts of seats nes
84140--Trousers, overalls, shorts etc, men/boys
75260--Input/output units : data processing sys
00119--Bov animals not pb breeding animals,live
71631--Electric motors exceeding 37 .5 w, ac
87325--Speedometers, tachometers, stroboscopes
07111--Coffee, not roasted, not decaffeinated
77259--Electrcl app for switch or protect
98400--Est of low valued import transactions
87465--Regulating & controlling inst & appts nes
05440--Tomatoes, fresh or chilled
77641--Digital monolithic integrated units
Total of items shown
U .S . Department of Commerce. Tradenet . Imports reported customs value. SITC 5 digit level .
APPENDIX 3. TOP 25 U .S. EXPORTS TO MEXICO
Total all commodities
78439--Pts&access : tractor and motor vehicle
99400--Est . low value shp ; canadian low value
78432--Brakes & pts for motor vehicles
75997--Parts : auto data proc mach & optical
89399--Articles of plastics
76493--Pts of tv rec, radiobroad rec, sound
77611--Television picture tubes, color
g sets, for vehicles, etc
77129--Pts of elec pwr machry (not rotating
33411--Gasoline ind aviation (except jet) fuel
77649--Elec integratd circts & microassemblies
77259--Electrcl app for switch or protect nes
at ex 1000
77282--Pts of elec a fo s
h g, protec g
64211--C o s,
es &cases o uga ed
paper or board
82119--Parts of seats nes
71322--Reciprocatng pist engs, cyl cap
exceedng 1000 cc
77643--Nondigital monolithic integrated units
69969--Articles of iron or steel, n .e .s.
04490--Maize (not including sweet corn)
unmilled, no seed
77867--Fixed capacitors, n.e .s.
71391--Parts, for use wt spk-ig int com eng
89319--Articles for conveyance/packing of
goods nes, plat
75260--Input or output units for data
Total of items shown
Source : U .S. Department of Commerce . Tradenet. Exports reported F .a.s . SITC 5 digit level