Dominick Salvatore – “Economic Effects of NAFTA on Mexico”

[M]easuring the economic effects of NAFTA on Mexico based on the net number of jobs created or destroyed or by comparing Mexican growth before and after NAFTA is not appropriate… The correct way to measure the effects of a FTA on member nations, instead, is by counterfactual simulation of its effect on intra-FTA trade and growth. That is, by how much intra-FTA trade and growth is higher with the FTA as compared with the situation without the FTA. Performing valid counterfactual simulations are fraught with difficulties, however…

I will begin, however, with a more down-to-earth and less elegant but still legitimate method of estimating the economic effects of NAFTA on Mexico by comparing (1) the growth of intra-Mexico-US trade, on the one hand, to the growth of total Mexican trade, on the other, during the past dozen years of NAFTA’s operation and (2) by comparing the flow foreign direct investment (FDI) from the United States to Mexico to total FDI to Mexico. I will then present the results of a counterfactual simulation of the effect of NAFTA on trade, FDI, growth, inflation, and other economic and financial variables…

[T]he benefits flowing to Mexico seem to have resulted more from the general liberalization of trade and investments than directly from NAFTA, as such. That is, the general liberalization of trade and investments that accompanied NAFTA led to a general increase in Mexican exports and inflows of FDI, which increased specialization, competition, productivity and efficiency in Mexico. But the increase in total Mexican exports and FDI inflows from the rest of the world was as large or larger than that from the United States. Furthermore, most of the (indirect) benefits that Mexico received from NAFTA occurred in the years immediately preceding the creation of NAFTA rather than in the years soon after its creation.