The article Bringing NAFTA back Home from The Economist issue on October 30th, 2010 discusses the impact of NAFTA (the North American Free Trade Agreement) on Mexico’s economy and how Mexican exports have benefited from the trade agreement in the last 16 years. However, the article also points out Mexican exporting economy’s underlying problems that were exposed during the recent global financial crisis. It is important for Mexico to improve its advantages in exports and fully take advantage of the trade agreement.
NAFTA came into force in 1994 and was formed among the United States, Canada and Mexico. It represented $6 trillion economy with 360 million population. The goal of the agreement is to eliminate trade barriers such as tariffs and quotas on most goods and to create a trilateral trade bloc among the three countries. As the comparative advantage model suggests, a country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries (Krugman & Obstfeld, 29). Because of Mexico’s abundant labor resource at relatively low labor costs, the country has a comparative advantage in producing labor-intensive manufactured goods, which make up the majority of Mexican exports. However, over the last decade, Mexico has been facing increasing competition from manufactured goods in China, where the same export goods are produced at lower prices.
Despite the growing competition from countries with lower labor costs than Mexico’s, NAFTA with its innate advantages has helped Mexico’s exports to the United States. As the article stresses out, geographical proximity is one of the most important factors. According to the gravity model of world trade, the value of trade between two countries diminishes with the distance between the two countries (Krugman & Obstfeld, 14). The increasing oil price has made transportation costs of export higher than before. Mexico has a geographical advantage in exports compared to China.
The elimination of import tariffs under NAFTA has essentially helped Mexican exporters with a price advantage compared to its Chinese counterparts. For example, import tariffs make Chinese tiles and paving stones more expensive than Mexican ones. In general, NAFTA since its formation has greatly benefited Mexico’s exports to the United States. According to the data in the article, “Mexico's share of the American market has grown to 12.2%--its highest level since NAFTA came into force.”
The recent global financial crisis has dismayed Mexico’s exports and pushed its economy into recession. The recession in the United States and the decrease in purchasing power of American consumers have contributed to the slump in Mexican exports since the United States is Mexico’s largest trading partner. However, global economic environment has only partially contributed to Mexico’s recession as an external factor. Internal and structural...