Twenty Years Later: Accounting for NAFTA’s Wins and Losses

By Timothy Wilson The North America Free Trade Agreement (NAFTA) between Mexico, the United States and Canada, just entered its 20th year. In that time investments in information and …

By Timothy Wilson

The North America Free Trade Agreement (NAFTA) between Mexico, the United States and Canada, just entered its 20th year. In that time investments in information and computing technology (ICT) have certainly increased in Mexico – as they have everywhere in the world. Tracking specific investments to NAFTA is more art than science, though it is true that the shift from being a distribution economy, in which global ICT firms simply set up franchise shops, to one where real investment and development takes place, can likely be attributed to the trade deal.

For example, according to research firm MarketLine, Mexico enjoyed the fastest growing rate of software investment among the three NAFTA countries, with a CAGR of 3 percent over the 2007-11 time period.  Mexican software revenues were not insignificant, at $2.7 billion, in 2011. And on the mobile phone front, Mexico was also the fastest growing in the NAFTA bloc, with a cumulative growth rate of 11.5 percent over the 2007-11 period.

When NAFTA was implemented in January 1994 almost 70 percent of U.S. imports from Mexico, and 50 percent of U.S. exports, suddenly became duty free. Then, over the next 15 years, all remaining duties were eliminated. There were also provisions for service sector market access, as well as for both the protection of U.S. foreign direct investment, and the intellectual property rights of U.S. companies.

With NAFTA then providing a secure legal framework, global ICT players felt more comfortable setting up shop in Mexico, and investment followed. It is in this context that analysts are more comfortable making predictions. MarketLine, for example, is looking out to 2016, saying that Mexico will then have $3.3 billion in software spending. But the trade deal is by no means the answer to all of Mexico’s problems.

NAFTA Not a Magic Wand

Despite the fact that there appear to have been significant macro-economic benefits, including increased technology investment, NAFTA certainly hasn’t been a magic wand – particularly with regard to rural poverty and income disparity in Mexico.

“A number of studies have found that NAFTA has brought economic and social benefits to the Mexican economy as a whole,” wrote M. Angeles Villarreal, specialist in International Trade and Finance, in a 2010 report to the United States Congress, “but the benefits have not been evenly distributed throughout the country.”

In fact, in Villarreal’s opinion “the effects on the Mexican economy tended to be modest at most.”

North America’s Integrated Economies

Of course, not everyone is in agreement. One booster is Stephen Zamora, director of the Center for U.S. and Mexican Law. Speaking to the Metropolitan Corporate Council, a law journal, Zamora contended recently that NAFTA has had a net positive effect on all three participating countries.

“While unskilled U.S. workers in certain industries experienced a negative impact, many U.S. companies profited from being able to maximize operations and enjoy cost efficiencies by strategically placing parts of their business in each country,” he said.

For many that might not sound like a benefit, but Zamora says that NAFTA has created a degree of economic integration with the United States that has helped keep higher value jobs at home – with home meaning the North American continent.

Sign up for our Nearshore Americas newsletter:

“The increasingly integrated economies of the NAFTA countries helps keep jobs in North America that might otherwise have migrated to Asia or other regions.”

NAFTA’s Tech Connection

At the end of February the New York Times syndicated columnist Thomas L. Friedman wrote an article in which he suggested that Mexico could be a dominant economic power in the 21st century. What struck Friedman most was “the number of tech startups emerging from Mexico’s young population – 50 percent of the country is under 29 – thanks to cheap, open-source innovation tools and cloud computing.”

Thanks to what NAFTA has spawned, too.  Mexico has now inked 44 free-trade agreements, more than any nation in the world, the result being a solid boost to a manufacturing sector that is increasingly reliant on high technology.

But, as we know, Mexico faces some real challenges that trade deals alone can’t solve. When it comes to income disparities, for example, Mexico’s public sector is still struggling to solve the problem. In his report to the US Congress, Villarreal said that “most studies suggest that for Mexico to narrow these income disparities, the government needs to invest more in education, innovation and infrastructure, as well as improve the quality of national institutions.”

And Rodrigo Aguilera, an economist who acts as the Latin America editor for The Economist Intelligence Unit, has expressed concern that foreign direct investment in Mexico is at its lowest level relative to GDP since 1993 – the year before NAFTA was signed. The silver lining is that Mexico accounts for almost two-thirds of Latin America’s total exports of manufactured goods, meaning that the domestic economy has traded its way to high levels of internal investment, and used that to boost trade.

Consequently, the biggest story with NAFTA may not been direct foreign investment in technology. Instead, it could be how the trade deal has increased domestic wealth, and how that in turn has resulted in more investment in ICT, such as in the recent example  Mexico’s Televisa media conglomerate announcing $1 billion in capex in 2013, with most of that going directly to ICT.

Tags