Edit Paper (Economic Capstone)

Pre-Study on Trade Negotiations with U.S. Through NAFTA in Mexico

Dongsu Kang

Department of Economics, University of Minnesota

Econ 3951: Major Project Seminar

Paul Philips

November 11, 2020

Introduction

Currently, the United States has signed free trade agreements with many countries. This proves that the United States is an economically large country and that many countries want to benefit from the FTA with the United States. Before concluding an FTA with the United States, several related studies are conducted to predict what benefits or economic impacts the agreement will bring. Most of these studies focus on a preliminary analysis of the economic impact (such as falling prices, falling production, and falling production) of the FTA. These studies, however, do not provide specifics on what changes will take place in terms of society and economics after the FTA is signed. This disadvantage is not only because the FTA has yet to be signed, but also because there is not enough data for analysis. As a supplementary measure to overcome these shortcomings, it is useful to examine what has changed socially and economically since the FTA was signed with the U.S. for countries that have already signed an FTA with the U.S. and have accumulated enough data. In other words, analyzing the changes in agriculture in these countries since the conclusion of the FTA, focusing on the cases of countries that have already signed an FTA with the U.S., can be a good reference to predicting the social and economic impact of the FTA with the U.S.

In this respect, the case of Mexico can be a very important source of information. Because Mexico already signed the NAFTA in 1994, and nearly 20 years have passed since the deal was signed, enough data has been accumulated to analyze the changes. Therefore, Mexico's case is likely to suggest much to a country that is in the process of signing an FTA with the United States.

The purpose of this study is to indirectly examine the possible impact of NAFTA on agriculture or rural areas in countries that will sign an FTA with the U.S. in the future by looking at how it has affected Mexican agriculture socially and economically, and to provide the basic data needed to establish strategies and measures for negotiations.

Literature Review

Many researchers analyzed the impact of NAFTA on Mexico in terms of economy and society. Also, there are many studies on the relationship between NAFTA and Mexico that criticize NAFTA's contribution to Mexico's economy, and there are papers that Mexico has made great economic progress through NAFTA. Therefore, this research will help both sides of the research through prior research and refer to the research contents, methods, and results of the research.

Previous studies can be divided into studies that NAFTA has affected the overall Mexican agriculture and economy, and that NAFTA has adversely affected the overall Mexican agriculture and economy.

Salvatore (2010) described the status of Mexico's exports before and after NAFTA, changes in direct investment and financial investment in Mexico, changes in foreign direct investment, and changes in GDP in Mexico, and how NAFTA has brought about changes in Mexico's economy. It also indicated that exports expanded due to increased accessibility to the U.S. market. In addition, the simulation model suggested that Mexico benefited greatly from NAFTA by showing changes in the amount of real GDP increase and the amount of increase in foreign direct investment due to NAFTA.

Susanto et al. (2007) considered the impact of the trade agreement between the United States and Mexico under the NAFTA. They suggested that imports of U.S. agricultural products were in response to a cut in tariffs applied to Mexican products from Mexico. The paper argues that as the tariff rate has been lowered, the trade agreement between the United States and Mexico in general has created trade rather than trade conflict.

While there are claims that Mexico and NAFTA bring economic benefits as above, there are papers criticizing NAFTA and Mexico's domestic reforms.

Taylor and Naude (2006) described NAFTA and Mexico's domestic reforms and took a quantitative approach to evaluate their forecast results. They argued through analysis that NAFTA and Mexico's domestic reforms did not have the expected. In addition, most of Mexico's agricultural policies after major reforms contributed to isolating large commercial producers from foreign competition. In other words, the negative effects of NAFTA have led to deepening poverty in rural communities, and NAFTA advocates have introduced claims that these problems faced by Mexican rural communities are arising from internal limitations that have failed to accommodate restructuring pressures.

Ramirez et al. (2018) suggested that the reason for the large U.S. trade deficit with Mexico was simply an accounting problem that concealed the reality of transactions between the two countries and Canada. They analyzed statistically to show that Mexico did not bring full benefits from NAFTA. It also argued that the competitiveness of Mexico's exports has gradually deteriorated.

Data

Mexico's total GDP stood at $1258,286 million as of 2019, and there is 3 percent of total GDP that is the country's agriculture which is forestry and fisheries GDP of $43,647 million. Also, in 1980, the GDP of agriculture, forestry and fisheries reached about 6 percent, but over time the share of agriculture and fisheries GDP gradually decreased. For this chart, data were obtained by selecting overall GDP, agricultural and forestry GDP and per capita GDP as variables in The World Bank's Mexico GDP.

Mexico's agricultural trade with the U.S. has generally increased since 1990. Comparing the trade balance for 1990 and 2019, it can see a huge difference of $6342 million. In other words, until 2010, exports to the U.S. recorded a deficit due to higher growth rates than imports to the U.S., and after 2010, the growth rate of exports to the U.S. increased, resulting in a trade surplus. In addition, to derive this chart, data could be obtained by placing variables in each country's agricultural exports or imports to obtain the trade balance between the U.S. and Mexico in the data sector of the USDA.

Mexico is a country that eats corn as a staple food. Since the signing of the North American Free Trade Agreement (NAFTA), the price of corn producers in Mexico has been gradually decreasing. This is because the supply of corn has increased as tariffs have been lowered.

Table 4 below shows that most of Mexico's corn is imported from the United States. The reason is that the United States is one of the largest producers of corn, and the distance between Mexico and the United States is very close compared to other corn producers. The U.N. Comtrade is a site that sets the time for countries to check what trade has been exchanged and how much it costs. Corn and American corn from around the world were used as variables.

<Table. 4>

Mexican corn consumption has been on a steady rise since 1980. Increased corn consumption has grown since 1994 when NAFTA took effect.

Theory

If you look at the changes in agriculture and rural areas in Mexico after NAFTA, you can see where Mexican agriculture is now. Therefore, the study evaluates the structural impact of the NAFTA agreement on major economic and social factors in Mexico's agricultural sector centered on the agricultural sector. This analysis focuses on changes in the index, price changes in the corn market and consumption.

The change in the index examines the per capita GDP before and after NAFTA in spring how Mexico has changed its national income since NAFTA. In the agricultural sector, corn, Mexico's staple food, is very important in Mexican agriculture, so it compares corn price fluctuations and consumption to analyze the prospects of the FTA.

It also compares the corn output of the two countries to prove that the United States has an overwhelming comparative advantage in corn.

<Figure. 1>

Source: Index Mundi

Method

The first session's analysis was aimed at finding out the impact of NAFTA on Mexico's macroeconomic indicators. By identifying and analyzing changes in per capita GDP since NAFTA, we look at the impact of NAFTA on Mexican agriculture. Also refer to Table. 2 to see what Mexico's trade surplus in the agricultural sector suggests. To accomplish this task, Mexico's foreign exchange crisis and NAFTA were put together as dummy variables to analyze the session. The following is a session analysis of GDP per capita.

Next, we noticed changes in the corn market through the producer price of corn and the consumption of corn. In general, prices rise when demand exceeds supply. But in the case of Mexico, prices have gone down, and there are many opinions for this reason. Typically, farmers are aware that growing corn in Mexico will be more stable than other crops, and growing corn for self-consumption is a big reason. NAFTA was put as a dummy variable to see how it affected agriculture. The following is the analysis of each session on the producer price and consumption of corn.

Result

Per capita GDP has been on a steady rise since this period, except in the early 1980s and late 1990s, the foreign exchange crisis. A simple session formula was estimated using trends and dummy variables to see changes in per capita GDP since NAFTA. The data used in estimates are data from The World Bank, which is per capita GDP from 1980 to 2019. Also, the model has two dummy variables, NAFTA and the IMF. NAFTA refers to the post-NAFTA period, while the IMF refers to the 1994-1996 period when Mexico suffered from the foreign exchange crisis.

<Table. 4> Regression Result: GDP per capita

***, **, * = statistically significant at 1%, 5%, 10%

Since our p-vale is very approach to the 0, the model is significant at all level: 1%, 5%, 10%

Estimates show that per capita GDP growth has accelerated since the signing of NAFTA. NAFTA had previously increased per capita GDP by $182.93 per year, but since the signing of NAFTA, it has increased by about $1700 per capita GDP per year. In addition, it was estimated that the per capita GDP decreased by $1,469.25 between 1994 and 1996 due to the peso crisis in late 1994.

According to the above results, per capita GDP growth has accelerated since NAFTA. Thus, NAFTA appears to have contributed to Mexico's per capita GDP growth. If this hypothesis is accepted, the next question to be asked is whether Mexico's GDP is converging at the U.S. level due to NAFTA. If Mexico converges its per capita GDP at the U.S. level after signing the NAFTA, it would be a good reason to sign the FTA, but if the gap widens further, it means the FTA was not appropriate.

<Figure. 2>

Source: The World Bank

<Figure. 3>

Source: The World Bank

To analyze the aforementioned topics, the per capita GDP of the United States and Mexico is plotted using The World Bank's per capita GDP data. Mexico's per capita GDP has steadily increased, but as you can see from this graph, the gap between the U.S. and Mexico's per capita GDP has widened over time. An analysis of the case shows that the FTA with the U.S. has succeeded in accelerating the per capita GDP growth, but the gap with the U.S. has widened. In other words, just signing an FTA with the U.S. alone is not enough to narrow the income gap with the U.S.

However, Mexico, which recorded a trade deficit in the agricultural sector until 2010, gradually increased exports through NAFTA since 1994, creating a trade surplus in the agricultural sector since 2010 accordance with Table 2. The results showed that an FTA with the U.S. will not only boost trade but also generate a surplus in trade.

The price of corn producers in Mexico has been on a steady decline. It fell from $234.2 in 1980 to $150 in 2005. In general, signing a free trade agreement will cause tariffs to fall, resulting in a drop in domestic agricultural prices. Despite an annual average increase of about 0.5% before and after NAFTA, the price of corn producers before and after NAFTA has fallen -0.02% since NAFTA. This means that the real price of corn has started to fall since NAFTA.

** = statistically significant at 1%

P-value = 0.0054

Since our p-vale is less than 0.01, the model is significant at 1%

A simple session equation had been estimated to see what changes the consumption of corn, which has been steadily increasing since 1980, will bring about when NAFTA takes effect. Estimates show that consumption has grown faster since NAFTA.

*** = statistically significant at 5%

P-value <2.2e-16

Since our p-vale is less than 0.05, the model is significant at 1%

Consumption = -1.589e+06 + 8.070e+02 * (year) - 5.068e+02 * (NAFTA) + error

Combining the regression analysis of corn producer prices and corn consumption, producer prices have fallen since NAFTA, although demand for corn has grown faster than supply. In general, prices should rise if demand exceeds supply. However, the corn market is showing the opposite movement.

Conclusion

Currently, NAFTA has been scrapped since 2018 and a new agreement called the USMCA has been signed, but NAFTA, which has been maintained from 1994 to 2018, is a good reference when other countries sign FTAs with the United States. Many researchers discussed the impact of NAFTA. In particular, this paper analyzes how the agricultural sector of Mexico has changed due to NAFTA and analyzes the per capita GDP of Mexico and the United States to present the effect that NAFTA brings. In other words, the study analyzed the economic changes following Mexico's signing of NAFTA and the price and demand changes of corn, the staple food of Mexico. Thus, this paper could provide much information for Mexico, for example, to other countries that are set to sign FTAs with the United States.

First, NAFTA certainly contributed to Mexico's per capita GDP growth. But compared to the per capita GDP of the United States, the gap can be seen as gradually increasing as the economy develops. However, Mexico had a trade deficit in the early days after the NAFTA was signed, but exports have increased sharply since then, resulting in a trade surplus.

Among Mexican agricultural products, we looked at the changes in corn producer prices and consumption that Mexicans eat as stocks, and NAFTA combined. Mexican corn has increased production and imports, but the producer maize price had been increased because corn is a staple of Mexicans, making it difficult to turn into alternative crops and a high proportion of self-consumption.

Therefore, Mexico's case analysis shows that FTA with advanced countries increases exports and increases national income. At the same time, however, imports also increased, possibly worsening the trade balance. In addition, the gap between advanced countries' levels and per capita income widened. In other words, the FTA alone cannot raise as the level of advanced countries, although it can promote trade and increase national income through the FTA.

Bibliography Ramirez Sanchez, Jose Carlos, Calderon, Cuauhtemoc & Leon, Sarahi Sanchez. (2018). Is NAFTA Really Advantageous for Mexico? The International Trade Journal, 32(1), 21-42. Salvatore, D. (2010). Measuring the Economic Effects of NAFTA on Mexico. CESifo Forum, 11(4), 31. Susanto, Dwi, Rosson, C. Parr & Adcock, Flynn J. (2007). Trade Creation and Trade Diversion in the North American Free Trade Agreeement: The Case of the Agricultural Sector. Journal of Agricultural and Applied Economics, 39(1), 121-134. Taylor, J. Edward & Naude, Antonio Yunez. (2006). The Effects of NAFTA and Domestic Reforms in the Agriculturue of Mexico: Predictions and Facts. Region Et Developpement, 23, 161-186.

Maize Production in Mexico and U.S.

Production (Mexico) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 10400 12500 7000 9300 9900 10500 10000 9900 10100 9750 14100 14689 18631 19276 16994 17780 18922 17368 17789 19240 17917 20400 19280 21800 22050 19500 22350 23600 24226 20374 21058 18726 21591 22880 25480 25971 27575 27569 27600 25000 Production (U.S.) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 168648 206223 209181 106031 194881 225447 208944 181143 125194 191320 201534 189868 240719 160986 255295 187970 234518 233864 247882 239549 251854 241377 227767 256229 299876 282263 267503 331177 305911 331921 315618 312789 273192 351316 361136 345506 384778 371096 364262 345894

Year

Production (ton)

Mexico GDP per capita 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 3027.3750501468799 3803.0308707108902 2597.9827566311401 2147.7197653152002 2478.21083598733 2569.2397473145502 1733.91314982481 1862.88620439437 2247.9814970186699 2687.9148123652299 3112.2687059847199 3661.9478793614498 4170.6232867787103 5650.0262859664299 5854.4178574818598 3928.2239256846901 4412.1163448853604 5289.16798819206 5481.1814974496401 6157.1924752655596 7157.8144998573398 7544.5686481364301 7593.1377929362498 7075.3696429997399 7484.4865419302896 8277.6712514960309 9068.2943870123509 9642.6806050491105 10016.571304388401 8002.9721064980704 9271.3982332463893 10203.4208543113 10241.7279153745 10725.183316603599 10922.3760488647 9605.9523510313902 8739.7560428092893 9278.41816833763 9673.4436736061907 9863.0726988756996

Year

GDP per capita ($)

GDP per capita in Mexico and U.S.

Mexico GDP per capita 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 3027.3750501468799 3803.0308707108902 2597.9827566311401 2147.7197653152002 2478.21083598733 2569.2397473145502 1733.91314982481 1862.88620439437 2247.9814970186699 2687.9148123652299 3112.2687059847199 3661.9478793614498 4170.6232867787103 5650.0262859664299 5854.4178574818598 3928.2239256846901 4412.1163448853604 5289.16798819206 5481.1814974496401 6157.1924752655596 7157.8144998573398 7544.5686481364301 7593.1377929362498 7075.3696429997399 7484.4865419302896 8277.6712514960309 9068.2943870123509 9642.6806050491105 10016.571304388401 8002.9721064980704 9271.3982332463893 10203.4208543113 10241.7279153745 10725.183316603599 10922.3760488647 9605.9523510313902 8739.7560428092893 9278.41816833763 9673.4436736061907 9863.0726988756996 U.S. GDP per capita 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 12574.791506216299 13976.1097504641 14433.787727053001 15543.893717492499 17121.225484999501 18236.827726500898 19071.227194929499 20038.941099265801 21417.0119305191 22857.154433005599 23888.600008813301 24342.2589048189 25418.990776331899 26387.2937338171 27694.853416234 28690.875701334699 29967.712718174898 31459.139002483 32853.676984926802 34513.561503727098 36334.908777058903 37133.242808852599 38023.161114402101 39496.485875138103 41712.801067554501 44114.747777670498 46298.7314440927 47975.9676758856 48382.558449055199 47099.980471134302 48467.515776925902 49886.818109492298 51610.605278337898 53117.667830830098 55047.725560454397 56822.518820245597 57927.516851506203 59957.725851303199 62840.020238795398 65118.3583328163

Year

GDP per capita ($)