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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

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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.

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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.

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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.

<Table. 1> Agricultural and forestry GDP of Mexico

Unit: U.S. dollar GDP Agriculture GDP GDP per capita

1980 205,139,086,957 12,962,152,174 3,027

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1990 261,253,582,806 17,418,028,159 3,112 1995 360,073,909,244 15,932,804,935 3,928 2000 707,906,744,575 23,524,352,130 7,157 2005 877,476,221,382 26,966,635,957 8,277 2010 1,057,801,295,584 34,052,257,756 9,271 2015 1,170,564,619,928 37,416,628,156 9,605 2016 1,077,903,618,176 36,102,367,540 8,739 2017 1,157,736,189,998 39,195,052,915 9,278 2018 1,220,699,479,846 41,330,836,819 9,673 2019 1,258,286,717,125 43,647,522,893 9,863

Source: The World Bank

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.

<Table. 2> Total Trade Value of Agriculture products in Mexico

Unit: mil $ 　 Import Export Trade Balance

1991 3,018 2,627 -391 1995 3,569 4,612 1,043 2000 6,611 5,656 -955 2005 9,609 8,591 -1,018 2010 14,760 12,779 -1,981 2015 18,016 18,354 338 2016 18,251 20,312 2,061 2017 19,110 22,939 3,829 2018 19,563 23,106 3,543 2019 19,623 25,574 5,951

Source: USDA

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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> Mexico Import Maize from U.S. and World

Unit: U.S. dollar ($) Statistic N Mean St. Dev. Min Max Trade Value (US) 29 1,350,634,946 990,045,305 68,615,000 3,252,279,686 Trade Value (World) 29 1,406,831,325 1,060,130,061 69,727,000 3,253,328,495

Source: UN Comtrade

<Table. 3> Producer Maize Price

Unit: US dollar ($) Year Producer Price 1991 234.2 1995 170.1 2000 159.5 2005 144.8 2010 222.9 2015 216 2016 189.2 2017 190.7 2018 200.6

Source: FAOstat

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Mexican corn consumption has been on a steady rise since 1980. Increased corn

consumption has grown since 1994 when NAFTA took effect.

<Table. 5> Maize Consumption in Mexico

Year Domestic Consumption (ton)

1980 12800

1990 15239

1995 23200

2000 24000

2005 27900

2010 29500

2015 37300

2016 40400

2017 42500

2018 44100

2019 44500

Source: Index Mundi

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.

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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>

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Production (Mexico) Production (U.S.)

Maize Production in Mexico and U.S.

Year

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du ct

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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,

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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.

𝐼𝑓 𝑦𝑒𝑎𝑟 ≥ 1994, 𝑁𝐴𝐹𝑇𝐴 = 1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 0 𝐼𝑓 𝑦𝑒𝑎𝑟 = 1994, 1995, 𝑜𝑟 1996, 𝐼𝑀𝐹 = 1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 = 0

𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 = 𝛽0 + 𝛽1 ∗ (𝑦𝑒𝑎𝑟) + 𝛽2 ∗ (𝑁𝐴𝐹𝑇𝐴) + 𝛽3 ∗ (𝐼𝑀𝐹) + 𝜀

𝛽1 = 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑦𝑒𝑎𝑟 𝛽2 = 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑁𝐴𝐹𝑇𝐴

𝛽3 = 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦 𝑐𝑟𝑖𝑠𝑖𝑠

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.

𝐼𝑓 𝑦𝑒𝑎𝑟 ≥ 1994, 𝑁𝐴𝐹𝑇𝐴 = 1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 0

𝑃𝑟𝑖𝑐𝑒 = 𝛽0 + 𝛽1 ∗ (𝑦𝑒𝑎𝑟) ― 𝛽2(𝑁𝐴𝐹𝑇𝐴) + 𝜀

𝐼𝑓 𝑦𝑒𝑎𝑟 ≥ 1994, 𝑁𝐴𝐹𝑇𝐴 = 1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 0

𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 = 𝛽0 + 𝛽1 ∗ (𝑦𝑒𝑎𝑟) ― 𝛽2(𝑁𝐴𝐹𝑇𝐴) + 𝜀

Result𝛽1 = 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑦𝑒𝑎𝑟𝛽2 = 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑁𝐴𝐹𝑇𝐴

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

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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.

𝐼𝑓 𝑦𝑒𝑎𝑟 ≥ 1994, 𝑁𝐴𝐹𝑇𝐴 = 1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 0 𝐼𝑓 𝑦𝑒𝑎𝑟 = 1994, 1995, 𝑜𝑟 1996, 𝐼𝑀𝐹 = 1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 = 0

𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 = 𝛽0 + 𝛽1 ∗ (𝑦𝑒𝑎𝑟) + 𝛽2 ∗ (𝑁𝐴𝐹𝑇𝐴) + 𝛽3 ∗ (𝐼𝑀𝐹)

<Table. 4> Regression Result: GDP per capita

Variable GDP per capita

Year 182.93***

NAFTA 1663.75*

IMF -1469.25*

Interaction -360406.32***

N 39

R-squared 0.9074

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

Since our p-vale is very approach to the 0, the model is significant at 𝑃 ― 𝑣𝑎𝑙𝑢𝑒 < 2.2𝑒 ― 16

all level: 1%, 5%, 10%

𝐺𝐷𝑃 𝑐𝑎𝑝𝑖𝑡𝑎

= ― 36406.32 + 182.93 ∗ (𝑦𝑒𝑎𝑟) + 1663.75(𝑁𝐴𝐹𝑇𝐴) ― 1469.25 ∗ (𝐼𝑀𝐹) + 𝜀

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.

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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>

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Mexico GDP per capita

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Source: The World Bank

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<Figure. 3>

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Mexico GDP per capita U.S. GDP per capita

GDP per capita in Mexico and U.S.

Year

G D

P p

er c

ap ita

($ )

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

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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.

𝐼𝑓 𝑦𝑒𝑎𝑟 ≥ 1994, 𝑁𝐴𝐹𝑇𝐴 = 1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 0

𝑃𝑟𝑖𝑐𝑒 = 𝛽0 + 𝛽1 ∗ (𝑦𝑒𝑎𝑟) ― 𝛽2(𝑁𝐴𝐹𝑇𝐴) + 𝜀

<Table. 6> Produce Maize Price Variable Price of Maize (producer) Year 3.514** NAFTA -92.712** Intercept -6757.186** N 28 R-squared 0.3407

** = statistically significant at 1% P-value = 0.0054

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

𝑃𝑟𝑖𝑐𝑒 = ― 6757.186 + 3.514 ∗ (𝑦𝑒𝑎𝑟) ― 92.712(𝑁𝐴𝐹𝑇𝐴) + 𝜀

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.

𝐼𝑓 𝑦𝑒𝑎𝑟 ≥ 1994, 𝑁𝐴𝐹𝑇𝐴 = 1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 0

𝑃𝑟𝑖𝑐𝑒 = 𝛽0 + 𝛽1 ∗ (𝑦𝑒𝑎𝑟) ― 𝛽2(𝑁𝐴𝐹𝑇𝐴) + 𝜀

<Table. 7> Produce Maize Price Variable Price of Maize (producer) Year 8.070e+02*** NAFTA -5.068e+02 Intercept -1.589e+06*** N 40 R-squared 0.9319

*** = 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

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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.

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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.

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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.