Economic indicators ; Mexico ; Economic conditions - United States ; North American Free Trade Agreement

Lucinda Vargas

English

Research Papers in Economics

The North American Free Trade Agreement turned 5
years old at the end of 1998 and completed a third of
its 15-year implementation schedule. At this juncture it
is appropriate, then, to ask if NAFTA’s primary objec-
tive—increasing trade between the United States,
Mexico and Canada—has been met thus far. This arti-
cle, the first in a three-part series, looks at the North
American economy and evaluates NAFTA’s trilateral
impact on trade during the agreement’s first five years.
THE NORTH AMERICAN ECONOMY
The North American economy is the biggest
regional economy in the world. This is not surprising
since, along with Canada and Mexico, it includes the
United States—the biggest single economy in the
world. In 1998, these three countries had a total of
396.3 million people and a gross domestic product
(GDP) of $9.53 trillion (Table 1). By comparison, the
European Union’s 15 economies represented a region
of 374.6 million people and a GDP of $8.4 trillion. 
More than 68 percent of North America’s popula-
tion in 1998 lived in the United States. Mexico had
more than 24 percent of the region’s population, and
Canada contributed nearly 8 percent. Mexico has a
much younger population than its developed-country
counterparts. In 1998, more than half of the country’s
population—55 percent—was under the age of 25.
The equivalent figures for the United States and Canada
were 35 percent and 33 percent, respectively.
The North American labor force was close to 193
million in 1998. Both the United States and Canada
have very similar labor-force profiles. For example, in
1998, the share between the ages of 15 and 24 in
Canada and between 16 and 24 in the United States
equaled 15.9 percent in each country. The share of
Mexico’s labor force between 15 and 24 was higher, at
When the focus is
trade, NAFTA clearly
has had a positive
impact on the
economies of the
United States, Mexico
and Canada during
the agreement’s 
first five years.
E l      P a   s   o
FEDERAL RESERVE BANK OF DALLAS     EL PASO BRANCH     ISSUE 2 • 1999
NAFTA’s
First Five Years
(Part 1)
BusinessFrontier26.2 percent. The greater availability of a younger
workforce in Mexico is a reflection of its sizable
young population.
Mexico’s developing-country status is graphi-
cally captured by its GDP per capita, which con-
trasts dramatically with those of its North Ameri-
can counterparts. As shown in Table 1, Mexico’s
GDP per capita in 1998 was $4,337, while
Canada’s and the United States’ were $19,925 and
$31,487, respectively. Overall, North American
GDP per capita, on a weighted average basis, was
$24,048.
1 Similarly, on wages, Mexico stands in
sharp contrast to its developed-country regional
partners. According to the latest available data
from the U.S. Bureau of Labor Statistics, Mexico’s
hourly compensation in manufacturing for 1997
was $1.75 per hour. The corresponding figures for
Canada and the United States were $16.55 and
$18.24, respectively.
Certainly, NAFTA is only one of the factors
that have impacted the region’s economies since
the agreement’s inception in January 1994. For
example, in 1995 Mexico experienced a severe
economic crisis as a result of an unexpected peso
devaluation in December 1994.
2 Likewise, a num-
ber of factors have affected the U.S. and Canadian
economies. Yet, when the focus is trade, NAFTA
clearly has had a positive impact on the three
economies during the agreement’s first five years.
1993–98 TRILATERAL TRADE
U.S. Trade with Mexico and Canada
Chart 1 shows U.S. exports to Mexico and
Canada during 1993–98, and Chart 2 shows U.S.
imports from these countries for the same period.
As can be seen, U.S. exports to both Mexico and
Canada grew considerably. However, because the
Table 1
The North American Economy, 1998
North America United States Mexico Canada
Population 396,276,000 270,299,000 95,676,000 30,301,000
Gross domestic product 9,530 8,511 415 604
(billions of U.S. dollars)
Labor force 192,811,000 137,673,000 39,507,000 15,631,000
GDP per capita 24,048 31,487 4,337 19,925
(U.S. dollars)
Manufacturing wage 18.24* 1.75* 16.55*
(hourly compensation rate in U.S. dollars)
* 1997 data.
SOURCES: Canada, Statistics Canada; Mexico, Instituto Nacional de Estadistica Geografía e Informática and Secretaría del Trabajo y Previsión Social; United
States, Bureau of Economic Analysis and Census Bureau. For hourly compensation rates, Bureau of Labor Statistics.
Chart 1
U.S. Exports to Canada and Mexico, 1993–98
Billions of U.S. dollars
Mexico
Canada
’98 ’97 ’96 ’95 ’94 ’93
0
20
40
60
80
100
120
140
160
180
SOURCE: Bureau of the Census, Foreign Trade Division.
Chart 2
U.S. Imports from Canada and Mexico, 1993–98
Billions of U.S. dollars
Mexico
Canada
0
20
40
60
80
100
120
140
160
180
200
’98 ’97 ’96 ’95 ’94 ’93
SOURCE: Bureau of the Census, Foreign Trade Division.United States and Canada already had a free trade
agreement when NAFTA started in 1994, the rise
in bilateral trade may be attributable to both
agreements. Exports to Canada in 1998 reached
$156.6 billion, up from $100.4 billion in 1993, an
almost 56 percent increase. Exports to Mexico
were $78.8 billion in 1998, up from $41.6 billion
in 1993, an 89.4 percent increase. U.S. imports
from Canada and Mexico were $173.3 billion and
$94.6 billion, respectively, in 1998. These levels
were up 55.8 percent and 137.1 percent, respec-
tively, from 1993. Table 2 gives a breakdown of
the top products traded between the United States
and Mexico and between the United States and
Canada in 1998.
Canada is the United States’ No. 1 trading
partner, a position it held even before NAFTA. Last
year, Canada was the destination of 23 percent of
U.S. exports and the source of 19 percent of U.S.
imports. Before NAFTA, Mexico was already the
United States’ third-largest trading partner. How-
ever, four years into the agreement—in 1997—
Mexico displaced Japan as the second-largest mar-
ket for U.S. exports. Moreover, Mexico’s share in
U.S. total imports grew steadily during NAFTA’s
first five years, allowing the country to retain its
position, behind Japan, as the third-largest source
of U.S. imports. Exports to Mexico represented
11.5 percent of the U.S. total in 1998, up from 8.9
percent in 1993. Imports from Mexico were 10.4
Table 2
1998 U.S. Trade with Canada and Mexico, Top Products
(Millions of U.S. dollars)
Top U.S. Exports
To Canada To Mexico
TOTAL 156,603 TOTAL 78,772
Motor vehicles 31,306 Electrical machinery and appliances 14,341
Electrical machinery and appliances 13,981 Motor vehicles 7,861
General industrial machinery 9,543 General industrial machinery 3,762
Power generating machinery 9,269 Miscellaneous manufactured articles 3,423
Office machines and ADP equipment 7,959 Telecommunications equipment 3,354
Miscellaneous manufactured articles 7,169 Office machines and ADP equipment 3,186
Machinery, specialized 5,456 Manufactures of metals 2,705
Manufactures of metals 5,004 Apparel and clothing 2,647
Telecommunications equipment 4,697 Power generating machinery 2,544
Professional scientific instruments 4,027 Machinery, specialized 2,341
Paper, paperboard 3,058 Textile yarn, fabrics 1,959
Transport equipment 3,057 Plastics in primary form 1,939
Plastics in primary form 2,922 Professional scientific instruments 1,747
Iron and steel 2,796 Paper, paperboard 1,743
Textile yarn, fabrics 2,785 Petroleum, petroleum products 1,481
Top U.S. Imports
From Canada From Mexico
TOTAL 173,256 TOTAL 94,629
Motor vehicles 44,304 Motor vehicles 16,753
Paper, paperboard 8,635 Electrical machinery and appliances 13,540
Petroleum and petroleum products 7,494 Telecommunications equipment 10,882
Cork and wood 6,516 Apparel and clothing 6,813
Nonferrous metals 5,867 Office machines and ADP equipment 5,523
Gas, natural and manufactured 5,853 Petroleum, petroleum products 5,293
Electrical machinery and appliances 5,770 Power generating machinery 3,844
Transport equipment 5,417 General industrial machinery 3,166
Power generating machinery 5,178 Professional scientific instruments 2,717
General industrial machinery 4,856 Vegetables and fruit 2,647
Furniture and bedding 4,014 Miscellaneous manufactured articles  2,408
Miscellaneous manufactured articles 3,838 Furniture and bedding 2,317
Office machines and ADP equipment 3,702 Manufactures of metals 1,811
Manufactures of metals 3,587 Iron and steel 1,253
Telecommunications equipment 3,455 Textile yarn, fabrics 1,196
SOURCE: Bureau of the Census, Foreign Trade Division.percent of U.S. imports, up from 6.9 percent.
Considering total trade though—both exports and
imports combined—Mexico in 1999 replaced
Japan as the United States’ second-largest trading
partner.
Trade with the United States is a more signif-
icant share of total trade for both Canada and
Mexico than what each of these countries repre-
sents in total U.S. trade. Moreover, the United
States gained greater ground in Canada’s and
Mexico’s total trade during NAFTA’s first five
years. In 1998, exports to the United States were
83.6 percent of Canada’s total, up from 78.4 per-
cent in 1993; imports from the United States were
77 percent of Canada’s total, up from 73.5 percent.
Similarly, a considerable majority of Mexico’s
trade is with the United States. Exports to the
United States represented 87.6 percent of Mexico’s
total in 1998, up from 82.7 percent in 1993.
Imports from the United States were 74.3 percent
of the country’s total, up from 69.3 percent.
Canadian–Mexican Trade
Trade between Canada and Mexico was not
significant before NAFTA, but it increased consid-
erably after the agreement’s implementation. In
1998, Canada’s imports from Mexico (Mexico’s
exports to Canada) reached $5.2 billion, up almost
79 percent from their 1993 level of $2.9 billion.
Canada’s exports to Mexico (Mexico’s imports
from Canada) rose to $876 million, an increase of
almost 37 percent from $640 million. Despite
these noteworthy increases, however, Canada 
represented only about 2 percent of Mexico’s
world trade in 1993 and throughout NAFTA’s 
first five years. Similarly, Canada’s imports from
Mexico represented 2.1 percent of the country’s
total imports before NAFTA in 1993; by 1998, 
this share had grown only slightly, to 2.5 per-
cent. Canada’s exports to Mexico remained at 
0.4 percent of the country’s total during NAFTA’s
first five years. Table 3 provides a breakdown of
the top products traded between Mexico and
Canada.
Chart 3
NAFTA Tariff Elimination Schedule for 
U.S.–Mexican Trade
Percent
U.S. imports from Mexico
Mexico’s imports from U.S.
0
20
40
60
80
100
120
2008 2003 1998 1994 Pre-NAFTA
SOURCE: International Trade Commission.
Table 3
1998 Canadian–Mexican Trade, Top Products
(Millions of U.S. dollars)
Canadian exports to Mexico Canadian imports from Mexico
TOTAL 876 TOTAL 5,153
Colza seeds 148 Motor cars and vehicles 654
Wheat and maslin 102 Wire, cable and other electric conductors 527
Steering wheels 56 Television sets 292
Machinery for rubber or plastic molding 33 Automatic data processing machines 281
Motor vehicle parts and accessories 28 Seats and seat parts 206
Powdered milk 25 Petroleum oils and mineral oils 136
Alkylbenzenes, alkylnaphthalenes 24 Motor vehicles for transport 125
Wheels, parts and accessories 23 Seat belts 121
Electrical apparatus for line telephony or telegraphy 17 Stampings 107
Textile fabrics 16 Steering wheels 98
Vehicles with cylinder capacity exceeding 3,000 cc 14 Spark-ignition, wiring sets 87
Sulfur 12 Vehicles with cylinder capacity between 1,500–2,500 cc 77
Reserved for special uses 11 Automatic data processing machines, others 68
Coal briquettes 10 Electrical apparatus for line telephony or telegraphy 66
Semichemical wood pulp 10 Centrifuges for liquids or gases 60
SOURCE: Statistics Canada.Tariff Reductions
Trade among the United States, Canada and
Mexico has grown essentially because of the elimi-
nation of tariffs dictated by NAFTA. The agree-
ment specifies a 15-year tariff-elimination sched-
ule on trilateral trade. Chart 3 shows this schedule
for U.S.–Mexican trade. As can be seen, within
the agreement’s first five years, 76.2 percent of
U.S. imports from Mexico and 66.3 percent of U.S.
exports to Mexico were slated to become duty-
free. The corresponding shares prior to NAFTA
were 13.9 percent and 17.9 percent, respectively.
The actual trade shares that are currently
duty-free are higher, however, than what this orig-
inal tariff-elimination schedule shows. This is
because the NAFTA countries have taken advan-
tage of a provision of the agreement that allows
for tariff reductions ahead of schedule. The first of
these rounds of accelerated tariff eliminations
became effective July 1, 1997; the second round
The NAFTA Secretariat is charged with administering
the dispute settlement provision of the North American
Free Trade Agreement. The secretariat comprises the
Canadian, U.S. and Mexican sections, each with its own
office in Ottawa, Washington, D.C., and Mexico City,
respectively.
The secretariat administers the NAFTA dispute resolu-
tion process under Chapter 11 (investment disputes),
Chapter 14 (financial services disputes), Chapter 19
(antidumping [AD], countervailing duty [CVD] and injury
determinations) and Chapter 20 (AD and CVD decision
appeals and law amendment) of the agreement.
Since the start of the agreement in 1994 through
September 16, 1999, 35 Chapter 19 cases and two
Chapter 20 cases have been completed; 17 Chapter 19
cases and two Chapter 20 cases remain active (see
table).
NAFTA Trade Disputes
Responsibility for antidumping and countervailing
duty determinations is as follows:
• Canada. Revenue Canada Customs and Excise
makes final AD and CVD determinations. The
Canadian International Trade Tribunal makes final
injury determinations.
• United States. The Department of Commerce
makes final AD and CVD determinations. The
International Trade Commission makes final injury
determinations.
• Mexico. The Secretaría de Comercio y Fomento
Industrial makes final AD and CVD and injury deter-
minations.
Completed Chapter 19 Trade Disputes
Agency’s
Origin of dispute Product determination Appeal Outcome
United States, 1995 Fresh cut flowers Antidumping duty Mexican Panel unanimously remanded the
from Mexico producers agency’s determination
United States, 1997 Steel wire rod Countervailing duty Canadian Panel review terminated by joint
from Canada producers and consent of participants
government of
Quebec
Canada, 1995 Certain malt Rescinded injury Canadian Panel unanimously affirmed
beverages from finding producers the agency’s determination
United States
Canada, 1997 Concrete panels Injury finding U.S. producer Panel unanimously affirmed
from United States the agency’s determination
Mexico, 1994 Flat coated steel Antidumping duty U.S. producer Panel unanimously remanded the
products from determination to the agency
United States
Mexico, 1995 Seamless line pipe Antidumping duty U.S. producer Panel review automatically terminated
from United States by sole requester
NOTE: For a complete list of all trade dispute cases, see <www.nafta-sec-alena.org/>.
SOURCE: NAFTA Secretariat.took effect August 1, 1998. A third round was ini-
tiated in July 1999 and has yet to conclude.
3
Moreover, as overall duties on U.S.–Mexican
trade have dropped, this has lowered the average
tariff each country applies to goods from the other
country. Thus, the average Mexican tariff on U.S.
products dropped to less than 2 percent (1.68 per-
cent) in 1998, down from 10 percent in 1993. The
average U.S. tariff on Mexican goods—which, at
4 percent, was low even before NAFTA—dropped
to less than 1 percent (0.46 percent) in 1998.
4
Because the reduction in the average Mexican 
tariff on U.S. goods was greater than the reduction
in the average U.S. tariff on Mexican goods, the
United States has especially benefited from
NAFTA.
Trade Disputes
NAFTA has not prevented trade disputes
among the three countries. But the agreement
provides a mechanism to address and resolve any
trade disputes that surface between the NAFTA
parties (see box titled “NAFTA Trade Disputes.”).
Given that trade among all three countries
advanced considerably during the agreement’s
first five years, trade disputes have been the
exception rather than the rule.
CONCLUSION
It is clear that during NAFTA’s first five years,
the agreement’s main objective—of increasing
trade among the United States, Mexico and
Canada—was met since trilateral trade was sub-
stantially higher in 1998 than in 1993 before the
start of the agreement. The next issue of Business
Frontier will explore the U.S.–Mexican trade rela-
tionship further. Part 3 of this series will look at
NAFTA’s impact on maquiladoras.
—Lucinda Vargas
NOTES
Jesus Cañas contributed to this article.
1 North American GDP per capita was derived from the
weighted average of the three countries’ GDP per capita,
using the population of each country as the weights.
2 For a look at the different effects of NAFTA and the peso
devaluation on the Mexican economy, see David Gould,
“Distinguishing NAFTA from the Peso Crisis,” Southwest
Economy, Federal Reserve Bank of Dallas, Issue 5,
September/October 1996, pp. 6–10.
3 See Grace Victoria Chomo, “NAFTA Accelerated Tariff Elimi-
nations,” forthcoming in International Economic Review, U.S.
International Trade Commission.
4 See 1999 Trade Policy Agenda and 1998 Annual Report of
the President of the United States on the Trade Agreements
Program, Office of the U.S. Representative, March 1999, p. 159.
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NAFTA's first five years (part 1)

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NAFTA's first five years (part 1)

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