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In Mexico Growth Starts With NAFTA
Subject NAFTA
Topic International Trade
Key Words Economic Growth, Investment, Exports
News Story

Some think that a trade agreement between a more developed and a less developed economy amounts to exploitation of the less developed economy's workers. That argument was advanced many times when the United States debated entering the North American Free Trade Agreement (NAFTA) with Mexico in 1994. An alternate view is that NAFTA would create more exports and more jobs for Mexico, raising wages and working conditions. Looking at the NAFTA's results, we find that exports have grown to nearly a third of Mexico's $500 billion economy and export growth is responsible for at least half of the 3 million jobs created since 1994.

NAFTA was an agreement between Mexico, the United States and Canada to allow tax-free flow between the countries. It worked very well. Mexico is likely to replace Japan and the U.S.'s second-largest supplier of imports - only Canada is larger. Mexico moved from fifth to second place, and Mexican exports to the U.S. are expected to be more than $120 billion. Mexican exports have risen from $61 billion in 1994 to approximately $165 billion this year.

What has happened to the Mexican worker? Mexican wages are still very low. The average Mexican worker earns in a day what his or her Texan counterpart earns in an hour. But things are changing. Wages in the export sector are now 30 percent above rates in the domestic sector. In geographic areas where export industries are concentrated, unemployment is close to zero. Mexican export industries generally require higher skilled workers and are willing to pay for these skills.

President-elect Vicente Fox has said that he plans to improve public education in order to create a more capable workforce and will take steps to encourage the development of small business. He has also asked his NAFTA trading partners for funds to create jobs to encourage this development.

(Updated October 1, 2000)

Questions

1. Why do countries trade with one another? What are the potential benefits of this trade?
2. Assuming that countries tax imports of goods, show the consequences in terms of price and quantity sold of a policy to eliminate these taxes.
3. What happens to a worker's wages when demand for the product that he/she is producing increases?

Source Mary Jordan, "Mexicans Reap NAFTA's Benefits," The Washington Post, September 17, 2000.

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