““Regional Economic Growth in North Regional Economic Growth in North America: the Effects of the Renegotiation America: the Effects of the Renegotiation

of the NAFTA Agreement”of the NAFTA Agreement”

Alejandro Díaz-Bautista, Alejandro Díaz-Bautista, Ph.D.Ph.D.

Professor of Economics and Researcher at Colegio de la Frontera Norte (COLEF)

Visiting Research Fellow , Center for U.S.-Mexican Studies, UCSD.

adiazbau@hotmail.com

March 13, 2009, 11:15 - 11:45Universidad Autonoma Metropolitana, Mexico City.

Introduction to Introduction to NAFTANAFTA

The North American Free Trade Agreement The North American Free Trade Agreement (NAFTA) was signed in 1994. It's known as (NAFTA) was signed in 1994. It's known as TLCAN in Mexico and ALENA in the French-TLCAN in Mexico and ALENA in the French-speaking parts of Canada. NAFTA speaking parts of Canada. NAFTA eliminated most tariffs or import taxes on eliminated most tariffs or import taxes on goods moving from one of the three goods moving from one of the three countries to another. countries to another.

Most economists believe this has been Most economists believe this has been good, overall, for the economies of all 3 good, overall, for the economies of all 3 countries. But like all trade agreements, countries. But like all trade agreements, NAFTA has hurt some industries and NAFTA has hurt some industries and sectors.sectors.

Renegotiation of NAFTARenegotiation of NAFTA

President Barack Obama pledged in the campaign, that if he was elected President, he would rewrite the rules of trade set out in the North American Free Trade Agreement (NAFTA). Contrary to public opinion, since its inception NAFTA has generated significant gains for North America. Canada and Mexico constitute America's largest trade partner, accounting for about 83 percent of all merchandise trade between the U.S. and our FTA partners and 29 percent of all U.S. merchandise trade in 2007. Each day during 2007, NAFTA countries conduct roughly $2.2 billion in trilateral trade. This trade supports North American jobs, bolsters productivity, and promotes investment. If the U.S. demands to reopen NAFTA as a means to pull back from previous market access commitments in North America, then it is fair to expect that America's trade partners, Mexico and Canada will retaliate with protectionist demands of their own.

During the renegotiation, all three countries need to explore alternate economic and trade models, while considering the emerging economic crisis and collapse scenarios which will severely limit and conscribe future economic growth and trade in North America.

Economic Integration: Economic Integration: Classical TheoryClassical Theory

Old trade theory and trade creationOld trade theory and trade creation• Improved allocation of resources Improved allocation of resources

through exploitation of comparative through exploitation of comparative advantage (Ricardo, Heckscher-Ohlin-advantage (Ricardo, Heckscher-Ohlin-Samuelson).Samuelson).

HOS Model: Gains from TradeHOS Model: Gains from Trade

Y

X

AA

B

C

CGE Models: Gains from TradeCGE Models: Gains from Trade

Many single-country and global CGE Many single-country and global CGE trade models.trade models.• Faithful representations of HOS model.Faithful representations of HOS model.• Widely used to evaluate trade reform.Widely used to evaluate trade reform.

ResultsResults• HOS efficiency gains from trade HOS efficiency gains from trade

liberalization.liberalization.• Magnitudes are small, much smaller than Magnitudes are small, much smaller than

gains indicated from historical analysis.gains indicated from historical analysis.

CGE NAFTA Studies CGE NAFTA Studies Comparable studies that attempted to predict NAFTA's Comparable studies that attempted to predict NAFTA's

effects produced widely divergent results because of effects produced widely divergent results because of minor differences in assumptions.minor differences in assumptions.

At that time, a wide variety of computable general At that time, a wide variety of computable general equilibrium (CGE) studies appeared, purporting to equilibrium (CGE) studies appeared, purporting to estimate NAFTA's impact. They shared many of the estimate NAFTA's impact. They shared many of the questionable assumptions found in the Brown-Deardoff-questionable assumptions found in the Brown-Deardoff-Stern model.Stern model.

Brown (1992) surveyed the projections made for income Brown (1992) surveyed the projections made for income and wages in Mexico in four of these NAFTA studies. and wages in Mexico in four of these NAFTA studies.

Every study predicted a rise in Mexico's GDP, ranging Every study predicted a rise in Mexico's GDP, ranging from negligible to almost 7%, attributable to NAFTA. The from negligible to almost 7%, attributable to NAFTA. The most widely circulated of these studies, Hinojosa-Ojeda most widely circulated of these studies, Hinojosa-Ojeda and Robinson, predicted wage gains from about 4.9% to and Robinson, predicted wage gains from about 4.9% to 9% for some sectors of the Mexican Economy.9% for some sectors of the Mexican Economy.

Trade CreationTrade Creation

Krueger (1999), “Trade Creation and Trade Krueger (1999), “Trade Creation and Trade Diversion Under NAFTA”.Diversion Under NAFTA”.

Aggregate and more micro data on trade between Aggregate and more micro data on trade between the U.S., Canada, and Mexico are used to attempt the U.S., Canada, and Mexico are used to attempt to assess the early effects of Mexican entry into to assess the early effects of Mexican entry into NAFTA. Although the fraction of Mexican trade NAFTA. Although the fraction of Mexican trade with the U.S. and Canada has risen sharply, a with the U.S. and Canada has risen sharply, a number of factors have contributed to this result. number of factors have contributed to this result. Mexican reduction of tariffs and quantitative Mexican reduction of tariffs and quantitative restrictions and the Mexican alteration of restrictions and the Mexican alteration of exchange rate policy at the end of l994 were both exchange rate policy at the end of l994 were both important. Based on early returns, the impact of important. Based on early returns, the impact of NAFTA over its first years does not appear to NAFTA over its first years does not appear to have been large relative to the effects of these have been large relative to the effects of these other events.other events.

Introduction to Economic Introduction to Economic IntegrationIntegration

• Theory of customs unions (Viner – Theory of customs unions (Viner – Meade - Balassa).Meade - Balassa).

• Economic integration is best viewed as a Economic integration is best viewed as a spectrum with the various integrative spectrum with the various integrative agreements in effect today lying in the agreements in effect today lying in the middle of this spectrum.middle of this spectrum.

• The level of integration defines the The level of integration defines the nature and degree of economic links nature and degree of economic links among countries.among countries.

Levels of Economic Levels of Economic IntegrationIntegration

Trading bloc: Trading bloc:

preferential preferential economic economic arrangement arrangement among a group among a group of countries.of countries.

Trading blocs Trading blocs may take various may take various forms:forms:

• Free trade areaFree trade area• Customs unionCustoms union• Common marketCommon market• Economic unionEconomic union

Arguments Surrounding Arguments Surrounding Economic IntegrationEconomic Integration

A number of arguments A number of arguments surround economic integration.surround economic integration.

These arguments center on:These arguments center on:• Trade creationTrade creation• The effects of integration on The effects of integration on

import prices, competition, import prices, competition, economies of scale, and factor economies of scale, and factor productivity.productivity.

• Always considering the benefits Always considering the benefits of regionalism versus of regionalism versus nationalism.nationalism.

European IntegrationEuropean Integration

Economic integration from Economic integration from 1948 to the mid 1980s:1948 to the mid 1980s:• Organization for European Economic Organization for European Economic

Cooperation (OEEC)Cooperation (OEEC)• European Steel and Coal CommunityEuropean Steel and Coal Community• Treaty of Rome – ambitious integrationTreaty of Rome – ambitious integration• European CommunityEuropean Community• European Free Trade Association European Free Trade Association

(EFTA)(EFTA)• Common agricultural policy (CAP)Common agricultural policy (CAP)

European IntegrationEuropean Integration The European UnionThe European Union

• Maastricht Treaty Maastricht Treaty and European Union and European Union (EU)(EU)

Monetary Union & Monetary Union & €€ Growth and Stability PactGrowth and Stability Pact Single undertaking in Single undertaking in

security and foreign security and foreign policypolicy

ConsensusConsensus

Economic Integration in EuropeEconomic Integration in Europe

Economic integration has been Economic integration has been reflected in a marked increase in reflected in a marked increase in intra-euro area trade in goods and intra-euro area trade in goods and services. services.

Financial integration enhances the Financial integration enhances the efficiency of economic mechanisms, efficiency of economic mechanisms, strengthens competition and raises strengthens competition and raises the potential for stronger economic the potential for stronger economic growth in all countries. growth in all countries.

Economic Integration Literature in EuropeEconomic Integration Literature in Europe

Research suggests a currency union may result in gains over the long term (20-Research suggests a currency union may result in gains over the long term (20-30 years).30 years).• Andrew Rose (2003)Andrew Rose (2003)

Tested to see whether a currency union induces trade using 1970-1990 Tested to see whether a currency union induces trade using 1970-1990 data from 186 countries, dependencies, territories, and colonies.data from 186 countries, dependencies, territories, and colonies.

Found that:Found that:• A currency union creates trade, increasing it between members by A currency union creates trade, increasing it between members by

amounts ranging from 10-100%.amounts ranging from 10-100%.• Two countries in a trade union will trade three-times more than Two countries in a trade union will trade three-times more than

countries that do not share a currency.countries that do not share a currency.• These increases in trade also increase incomeThese increases in trade also increase income

Raising GDP anywhere from 10%-25% in Europe.Raising GDP anywhere from 10%-25% in Europe.

• Other recent researchOther recent research Found that even during this short time, it has had positive effects on Found that even during this short time, it has had positive effects on

trade and growth for the existing members.trade and growth for the existing members. The degree of synchronisation between the different cyclical positions The degree of synchronisation between the different cyclical positions

across the euro area countries increased since the beginning of the across the euro area countries increased since the beginning of the 1990s. In other words, a large number of euro area economies now 1990s. In other words, a large number of euro area economies now share similar business cycles. In addition, current inflation and output share similar business cycles. In addition, current inflation and output growth differences among euro countries are relatively limited compared growth differences among euro countries are relatively limited compared with the past.with the past.

European UnionEuropean UnionThe European Union (EU) is a political and economic The European Union (EU) is a political and economic

community of twenty-seven member states, located community of twenty-seven member states, located primarily in Europe. It was established in 1993 by the primarily in Europe. It was established in 1993 by the Maastricht Treaty, adding new areas of policy to the Maastricht Treaty, adding new areas of policy to the existing European Community. With almost 500 million existing European Community. With almost 500 million citizens, the EU combined generates an estimated 30% citizens, the EU combined generates an estimated 30% share of the world's nominal gross domestic product share of the world's nominal gross domestic product (US$16.8 trillion in 2007).(US$16.8 trillion in 2007).

The EU has developed a single market through a The EU has developed a single market through a standardised system of laws which apply in all member standardised system of laws which apply in all member states, guaranteeing the freedom of movement of states, guaranteeing the freedom of movement of people, goods, services and capital. It maintains a people, goods, services and capital. It maintains a common trade policy, agricultural and fisheries policies, common trade policy, agricultural and fisheries policies, and a regional development policy. Fifteen member and a regional development policy. Fifteen member states have adopted a common currency, the euro.states have adopted a common currency, the euro.

North American Economic North American Economic IntegrationIntegration

Although the EU is undoubtedly Although the EU is undoubtedly the most successful and well-the most successful and well-known integrative effort, known integrative effort, economic integration efforts in economic integration efforts in North America have gained North America have gained momentum and attention.momentum and attention.

North American integration has an North American integration has an interest in purely economic issues interest in purely economic issues and there are no constituencies and there are no constituencies for political integration.for political integration.

Economic Integration in North Economic Integration in North AmericaAmerica

The economic relationship between Mexico The economic relationship between Mexico and the U.S. is evident in the evolution of and the U.S. is evident in the evolution of some of their economic indicators since some of their economic indicators since 1993. For example, it is apparent that, 1993. For example, it is apparent that, since 1993, Mexico's GDP shares its trend since 1993, Mexico's GDP shares its trend behavior with the U.S. GDP. behavior with the U.S. GDP.

Nevertheless, during the 1980s and the Nevertheless, during the 1980s and the beginning of the 1990s the beginning of the 1990s the synchronization of the real sectors of both synchronization of the real sectors of both economies was unclear. economies was unclear.

Economic Synchronization Economic Synchronization Between Mexico and the U.S.Between Mexico and the U.S.

Castillo, Fragoso Pastrana and Diaz-Bautista (2004) Castillo, Fragoso Pastrana and Diaz-Bautista (2004) studied the synchronization between the studied the synchronization between the economies of Mexico and the United States with economies of Mexico and the United States with special reference to the manufacturing sector. special reference to the manufacturing sector. The authors examined the dependency between The authors examined the dependency between the assembly plant industry for export in Mexico the assembly plant industry for export in Mexico and the performance of the economy of the and the performance of the economy of the United States. United States.

Herrera (2004) found also synchronization of GDPs Herrera (2004) found also synchronization of GDPs in Mexico and the U.S. became evident with the in Mexico and the U.S. became evident with the implementation of the NAFTA.implementation of the NAFTA.

North American Economic North American Economic Integration and Industry Location Integration and Industry Location

Hanson (1998) discussed the recent academic literature on whether Hanson (1998) discussed the recent academic literature on whether the movement towards free trade in North America has influenced the movement towards free trade in North America has influenced the spatial organization of production in Canada, Mexico, or the the spatial organization of production in Canada, Mexico, or the United States. United States.

In Mexico, closer economic ties with the United States appear to In Mexico, closer economic ties with the United States appear to have contributed to a contraction of employment in the Mexico City have contributed to a contraction of employment in the Mexico City manufacturing belt, a rapid expansion of manufacturing employment manufacturing belt, a rapid expansion of manufacturing employment in northern Mexico, and an increase in the wage premia paid to in northern Mexico, and an increase in the wage premia paid to skilled workers. The effects of economic integration on industry skilled workers. The effects of economic integration on industry location in Canada and the United States seem to have been much location in Canada and the United States seem to have been much weaker. weaker.

Krugman and Livas (1996) examined Mexico through the lenses of Krugman and Livas (1996) examined Mexico through the lenses of the new economic geography, attempting to explain why so much the new economic geography, attempting to explain why so much industry was concentrated in Mexico City. Used the Dixit and Stiglitz industry was concentrated in Mexico City. Used the Dixit and Stiglitz monopolistically competitive market structure.monopolistically competitive market structure.

FDI and Regional Economic Growth FDI and Regional Economic Growth considering the Distance to the Northern considering the Distance to the Northern

Border of MexicoBorder of Mexico

Diaz-Bautista (2006) reviewed different Diaz-Bautista (2006) reviewed different studies to explain the effects of the NAFTA studies to explain the effects of the NAFTA agreement in regional FDI and regional agreement in regional FDI and regional economic growth. An empirical economic growth. An empirical econometric model was used to analyze econometric model was used to analyze the relation between the FDI and economic the relation between the FDI and economic growth at the regional level in Mexico, with growth at the regional level in Mexico, with an approach of the new economic an approach of the new economic geography and endogenous economic geography and endogenous economic growth. growth.

FDI and Regional Economic FDI and Regional Economic Growth Growth

The impulse caused by the opening of the The impulse caused by the opening of the economy and the signing of NAFTA in 1994 had a economy and the signing of NAFTA in 1994 had a positive effect in the growth of regional northern positive effect in the growth of regional northern border economies of Mexico and FDI in the border economies of Mexico and FDI in the northern border, where the maquiladora sector is northern border, where the maquiladora sector is one of the main motors of economic growth on one of the main motors of economic growth on the Northern Mexican Border. the Northern Mexican Border.

In almost all the regions of the Northern Border, a In almost all the regions of the Northern Border, a process of economic growth is observed, and the process of economic growth is observed, and the impulse due to the commercial opening is impulse due to the commercial opening is apparent. The exporting sector being one of the apparent. The exporting sector being one of the most dynamic sectors of the Mexican economy. most dynamic sectors of the Mexican economy.

FDI and Economic GrowthFDI and Economic Growth By the year 2000, the companies that exported more By the year 2000, the companies that exported more

than 80% of their production, paid 62% higher wages than 80% of their production, paid 62% higher wages than other types of companies. In that same year, the than other types of companies. In that same year, the maquiladora sector had wages 5 times greater than the maquiladora sector had wages 5 times greater than the average national minimum wage. Similarly, Mexico has average national minimum wage. Similarly, Mexico has diversified its export base. diversified its export base.

By the year 2000, companies producing manufactured By the year 2000, companies producing manufactured goods accounted for 87 % of Mexico’s export sales. goods accounted for 87 % of Mexico’s export sales.

In one decade, the liberalization of trade and the In one decade, the liberalization of trade and the macroeconomic policies in Mexico have increased macroeconomic policies in Mexico have increased exports from 41 trillion USD, in 1990, to 166 trillion USD exports from 41 trillion USD, in 1990, to 166 trillion USD in 2000. Similarly, Mexico increased its imports by 310% in 2000. Similarly, Mexico increased its imports by 310% between 1990 and 2000.between 1990 and 2000.

Puyana Mutis, Alicia (2007), “Mexican Puyana Mutis, Alicia (2007), “Mexican Economic Reforms. The Project, the Economic Reforms. The Project, the

Realities.” FLACSO-México Working Paper Realities.” FLACSO-México Working Paper

Series.Series. The opening of the Mexican economy took

place into two stages: the first (1985-1987) where liberalization was unilateral leading to the entry to GATT. The second (1994-2008), the NAFTA period with rapid growth in exports.

NAFTA increased Trade in North NAFTA increased Trade in North AmericaAmerica

Since 1994, commercial trade between the member Since 1994, commercial trade between the member countries of NAFTA increased at an annual average countries of NAFTA increased at an annual average rate of 11.8%, whereas the worldwide annual rate of 11.8%, whereas the worldwide annual average rate of growth in trade was around 7%. average rate of growth in trade was around 7%. The opportunities of trade for both Mexico and The opportunities of trade for both Mexico and Canada within NAFTA have increased in the last few Canada within NAFTA have increased in the last few years. Mexico became the fourth most important years. Mexico became the fourth most important commercial partner for Canada, whereas the commercial partner for Canada, whereas the bilateral commerce between Mexico and Canada bilateral commerce between Mexico and Canada tripled, reaching 12 trillions USD in 2000. tripled, reaching 12 trillions USD in 2000.

The integration of the intra industry trade is The integration of the intra industry trade is extremely high within NAFTA and shows how the extremely high within NAFTA and shows how the region integrated not only in commercial terms but region integrated not only in commercial terms but also in terms of the region’s productive systems.also in terms of the region’s productive systems.

Source: BANXICO

Billon Dollars

250.3

60.9

+311%

Oil Exports Non Oil Exports

Mexico’s Total Exports (billion Dollars)The leading exporter in Latin America and the third largest exporter to the US

FDI in the NAFTA RegionFDI in the NAFTA Region The NAFTA region has created new opportunities The NAFTA region has created new opportunities

of investment and trade for the companies of all 3 of investment and trade for the companies of all 3 countries, and 50 % of FDI in NAFTA is between countries, and 50 % of FDI in NAFTA is between trade partners. For Mexico, the United States is trade partners. For Mexico, the United States is the main source of FDI. the main source of FDI.

FDI is of great importance the Northern Border FDI is of great importance the Northern Border Mexican Region, and by the year 2004, FDI in the Mexican Region, and by the year 2004, FDI in the Northern Border States of Mexico represented Northern Border States of Mexico represented 18.7% of total FDI at the national level. The 18.7% of total FDI at the national level. The Northern Border States that are considered in this Northern Border States that are considered in this study are Baja California, Sonora, Chihuahua, study are Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas.Coahuila, Nuevo Leon and Tamaulipas.

States 1996 1997 1998 1999 2000 2001 Acumulado

Baja California 425,404.70 675,360.60 721,929.80 1,114,044.30 942,315.50 690,904.20 4,569,959.10

Coahuila 145,107.20 113,570.10 123,657.10 158,966.70 184,326.10 117,200.30 842,827.50

Chihuahua 534,353.80 508,203.80 590,696.30 579,972.70 909,119.20 630,196.00 3,752,541.80

Nuevo León 331,225.50 2,350,819.50 445,226.50 1,222,275.60 1,861,677.50 1,431,523.70 7,642,748.30

Sonora 107,098.30 159,608.00 164,992.60 186,785.00 384,941.10 155,090.20 1,158,515.20

Tamaulipas 334,327.70 283,720.40 344,089.80 460,190.60 480,730.60 333,562.80 2,236,621.90

Total Northern Border 1,877,517.20 4,091,282.40 2,390,592.10 3,722,234.90 4,763,110.00 3,358,477.20 20,203,213.80

Total FDI in México 7,697,336.30 11,955,554.90 7,853,268.10 12,476,028.00 14,190,104.90 23,168,364.00 77,340,656.20

Percentage of Northern Border w ith respect to the Country 24.40% 34.20% 30.40% 29.80% 33.60% 14.50% 26.10%Baja California as a Percentage of the Northern Border 22.70% 16.50% 30.20% 29.90% 19.80% 20.60% 22.60%

Foreign Direct Investment in the Northern Border of Mexico (thousands of dollars)

Sources: SE y INEGI.

In 2006, approximately 38% ($3.9 billion) of U.S. investment in Mexico was directed to the 6 Mexican border states.

Foreign Direct Investment in MexicoForeign Direct Investment in Mexico

3 billions annual USD 10.731 annual billions USD3 billions annual USD 10.731 annual billions USD Before NAFTA (1993) After NAFTA (2003)Before NAFTA (1993) After NAFTA (2003) 25% in the Border25% in the Border FDI Growth of 266%FDI Growth of 266% FIRST FDI RECEPTORS FIRST FDI RECEPTORS DEVELOPING COUNTRIES 2003DEVELOPING COUNTRIES 2003

1ST CHINA 57 BILLION USD1ST CHINA 57 BILLION USD 2ND HONG KONG 14.3 BILLION USD2ND HONG KONG 14.3 BILLION USD 3ER MEXICO 10.731 BILLION USD3ER MEXICO 10.731 BILLION USD SOURCE :SOURCE :World Economic Situation and Prospects 2004 World Economic Situation and Prospects 2004

31Source: BANXICO

Flows of Foreign Direct Investment (FDI) into Mexico. Second largest in the world

amongst developing countries.

PeriodPeriod 95-0095-00 01-0601-06

FDI TotalFDI Total 77.077.0 111.8111.8

FDI FDI AverageAverage

12.812.8 18.918.9

Mexico’s FDI

15.1

9.7 10.1

14.212.4 13.7

17.8

27.5

19.3

15.3

22.319.6 19.0

94 95 96 97 98 99 00 01 02 03 04 05 06

Economic GrowthEconomic Growth The economics of growth in Mexico has come a The economics of growth in Mexico has come a

long way since it regained center stage for long way since it regained center stage for economists in the last few years. The early focus economists in the last few years. The early focus of economic growth in Mexico was based upon of economic growth in Mexico was based upon theoretical models that generated self-sustaining theoretical models that generated self-sustaining growth, but newer models of economic growth growth, but newer models of economic growth have been applied to Mexico, which have have been applied to Mexico, which have increasingly replaced older models, with an increasingly replaced older models, with an attempt to shed light on the factors affecting attempt to shed light on the factors affecting economic growth in Mexico. On the empirical economic growth in Mexico. On the empirical front, the search for determinants of growth has front, the search for determinants of growth has gone from basic economic growth variables (such gone from basic economic growth variables (such as physical and human capital) to newer as physical and human capital) to newer determinants of economic performance such as determinants of economic performance such as trade and institutions. trade and institutions.

Economic Growth ModelsEconomic Growth Models A Major weakness of the neoclassical growth A Major weakness of the neoclassical growth

model has been detected by economists around model has been detected by economists around the world and has not been overlooked in Mexico. the world and has not been overlooked in Mexico. Long-run growth in that model is exogenous. Long-run growth in that model is exogenous.

Recent empirical studies have found a correlation Recent empirical studies have found a correlation between the rate of growth of FDI and economic between the rate of growth of FDI and economic growth. The direction of causality between the growth. The direction of causality between the rate of growth of investment and the rate of rate of growth of investment and the rate of economic growth has been analyzed by Carrol economic growth has been analyzed by Carrol and Weil (1994), Blomström, Lipsey and Zedjan and Weil (1994), Blomström, Lipsey and Zedjan (1996) and Barro (1997), and found that the (1996) and Barro (1997), and found that the causality was from FDI to economic growth. causality was from FDI to economic growth.

New Growth TheoryNew Growth Theory In the endogenous growth models the increases in In the endogenous growth models the increases in

investment during a period of time, increases the investment during a period of time, increases the rate of economic growth in the long run. In the rate of economic growth in the long run. In the endogenous growth models, FDI can affect growth endogenous growth models, FDI can affect growth endogenously if it generates increasing returns in endogenously if it generates increasing returns in production via externalities and productivity production via externalities and productivity spillovers. Moreover, policy changes might induce spillovers. Moreover, policy changes might induce permanent increases in output growth by providing permanent increases in output growth by providing incentives to host FDI. Specifically, FDI is thought to incentives to host FDI. Specifically, FDI is thought to be an important source of human capital be an important source of human capital accumulation and technological change. accumulation and technological change.

Helpman (1984) and Helpman and Krugman (1985) Helpman (1984) and Helpman and Krugman (1985) are also an important part of the analysis of FDI in are also an important part of the analysis of FDI in the new growth theory. In those models, distance to the new growth theory. In those models, distance to the export market is an important determinant of the export market is an important determinant of economic growth and FDI. economic growth and FDI.

Center Periphery and distanceCenter Periphery and distance Krugman (1997) uses the model developed by Krugman (1997) uses the model developed by

Dixit and Stiglitz (1977) to have a unified spatial Dixit and Stiglitz (1977) to have a unified spatial economic structure which is described by the new economic structure which is described by the new economic geography. economic geography.

Fujita, Krugman and Venables (1999) assume Fujita, Krugman and Venables (1999) assume that factors of production are less mobile that factors of production are less mobile between countries than between different regions between countries than between different regions of the same country,and analyzed the spatial of the same country,and analyzed the spatial order resulting from differing transport costs. order resulting from differing transport costs.

Derivation of the Model with FDI and Derivation of the Model with FDI and

Regional Economic GrowthRegional Economic Growth We assume a regional production function in the following We assume a regional production function in the following

form:Y = F(K, L, F, X) (1) where Y is the product, K is capital, form:Y = F(K, L, F, X) (1) where Y is the product, K is capital, L is human capital, F is FDI and X denotes the vector of L is human capital, F is FDI and X denotes the vector of observable variables that can affect the regional economic observable variables that can affect the regional economic growth and the FDI.growth and the FDI.

A Cobb Douglas function is used to obtain the logarithms in A Cobb Douglas function is used to obtain the logarithms in time that gives us the following expression:time that gives us the following expression:

gy= ζgk+ ψgf+ γgL+ θgx (2) gy= ζgk+ ψgf+ γgL+ θgx (2) The relation shows the empirical relationship between The relation shows the empirical relationship between

regional economic growth (gy) and the presence of FDI (gf), regional economic growth (gy) and the presence of FDI (gf), with other explicative factors (gx). From the conventional with other explicative factors (gx). From the conventional model of growth, the empirical model is developed using model of growth, the empirical model is developed using the economic growth ∆yjt in region j for time t, with the FDI the economic growth ∆yjt in region j for time t, with the FDI represented by F, human capital represented by L, and represented by F, human capital represented by L, and other variables (X) like distance and urban agglomerations. other variables (X) like distance and urban agglomerations.

The empirical model has the following form:The empirical model has the following form: ∆∆Yjt = β0+ β1Ljt+ β2Fjt+ β3Xjt+ ujt (3)Yjt = β0+ β1Ljt+ β2Fjt+ β3Xjt+ ujt (3)

Sources of InformationSources of Information The sources of information for the study are varied. The sources of information for the study are varied. Distance is measured by the number of kilometers on the road from Distance is measured by the number of kilometers on the road from

the capital of a state to the nearest border crossing with the United the capital of a state to the nearest border crossing with the United States. Another distance variable is included and constructed by the States. Another distance variable is included and constructed by the number of kilometers on the road from the capital of a state to Mexico number of kilometers on the road from the capital of a state to Mexico City.City.

The density per kilometer squared in each state of Mexico measures The density per kilometer squared in each state of Mexico measures the level of cluster agglomeration in the economy.the level of cluster agglomeration in the economy.

Another variable is constructed by the number of businesses in the Another variable is constructed by the number of businesses in the commercial, services or manufacturing sector per state. commercial, services or manufacturing sector per state.

The migration variable is measured by the net balance migration per The migration variable is measured by the net balance migration per state in Mexico provided by INEGI. The human capital variable is an state in Mexico provided by INEGI. The human capital variable is an indicator of the educational characteristics of the population in each indicator of the educational characteristics of the population in each state. It includes the percentage of the population 15 years of age or state. It includes the percentage of the population 15 years of age or older that have more than elementary studies in each state of Mexico. older that have more than elementary studies in each state of Mexico.

The regional economic growth is measured by the percentage annual The regional economic growth is measured by the percentage annual increase in income per capita in the period 1994-2000. The initial level increase in income per capita in the period 1994-2000. The initial level of income used in the study is the one provided by INEGI in 1994. of income used in the study is the one provided by INEGI in 1994. Foreign direct investment is constructed from the data provided by the Foreign direct investment is constructed from the data provided by the Ministry of Economy in Mexico from1994 to 2000. The econometric Ministry of Economy in Mexico from1994 to 2000. The econometric technique must take into account the endogeneity argument. technique must take into account the endogeneity argument.

State 1993 1994 1995 1997 1998 1999 2000

Baja California 32,280,985 34,564,015 32,726,727 39,452,448 41,252,702 43,226,867 48,157,432

Coahuila 33,488,722 34,873,364 34,633,813 40,334,408 42,757,805 44,227,705 45,975,854

Chihuahua 45,225,902 47,869,331 44,789,564 52,109,000 56,263,540 60,398,960 66,008,627

Nuevo León 74,070,652 78,141,213 73,103,840 83,572,386 89,573,370 94,372,681 101,688,958

Sonora 30,146,173 32,277,310 31,499,518 34,647,187 36,792,672 38,918,375 40,457,627

Tamaulipas 32,267,729 34,694,384 32,756,334 36,572,894 39,451,068 41,998,268 44,792,600Percentage contribution of the Northern Border in the National Product 21.40% 21.80% 22.00% 22.60% 22.90% 23.30% 21.50%Baja California

as a percentage

contribution of the Product in the Northern

Border 13.00% 13.20% 13.10% 13.80% 13.50% 13.40% 13.90%

Table 4. Gross National Product in Mexico’s Northern Border by State (1993-2000) (thousand pesos with 1993 prices)

Sources: SE y INEGI.

Table 4. FDI and Regional Economic Regression per State of Mexico during the period 1994-2000 Dependent Variable: Growth of regional Income per capita 1994 2000 Method of Estimation: TSLS with instrumental variables Variable Coefficient t-stat. Prob. C 42.993 2.821* 0.010 Distance from the Border -0.0079 2.716* 0.012 Migration 1.9752 3.097* 0.005 R-Squared 0.654 Mean dependent var 25.30 R-Squared Adj. 0.490 S.D. dependent var 9.830 Prob(F-statistic) 0.003 Note: * Statistically Significant.

Econometric ResultsEconometric Results The results of the econometric analysis of the regional The results of the econometric analysis of the regional

economic growth with the new economic geography economic growth with the new economic geography perspective shows that the agglomeration variables are non perspective shows that the agglomeration variables are non significant, while the distance from the border is significant, while the distance from the border is statistically significant, which is evidence in favor of the statistically significant, which is evidence in favor of the agglomeration models and the NEG models.agglomeration models and the NEG models.

The distance from the border shows the importance of The distance from the border shows the importance of transport costs and trade to the United States in explaining transport costs and trade to the United States in explaining regional economic growth in Mexico. regional economic growth in Mexico.

The migration variable is also important, showing the The migration variable is also important, showing the importance of migration in determining regional economic importance of migration in determining regional economic growth, due to repulsion and attraction forces that affect growth, due to repulsion and attraction forces that affect regions and agglomerations in Mexico. regions and agglomerations in Mexico.

On the other hand, the human capital variable, which is one On the other hand, the human capital variable, which is one of the most important variables is the endogenous growth of the most important variables is the endogenous growth models is non significant in the regression.models is non significant in the regression.

Econometric ResultsEconometric Results In the empirical study, the importance of the distance In the empirical study, the importance of the distance

to the Northern Border of Mexico as a determinant of to the Northern Border of Mexico as a determinant of regional economic growth in Mexico is shown. The regional economic growth in Mexico is shown. The commercial trends in the agglomeration of industry in commercial trends in the agglomeration of industry in the Mexican Northern Border and the transportation the Mexican Northern Border and the transportation technology costs to the border region (which are technology costs to the border region (which are proxied by the distance to the border) are an proxied by the distance to the border) are an important factor driving Mexico first to regional important factor driving Mexico first to regional concentration and then to regional dispersion of concentration and then to regional dispersion of economic activity. The production of manufactures is economic activity. The production of manufactures is subject to increasing returns to scale if the subject to increasing returns to scale if the production activities take place in a single site close production activities take place in a single site close to the border and the selling market.to the border and the selling market.

The recent advances in the field of NEG have The recent advances in the field of NEG have increased our understanding of spreading and increased our understanding of spreading and agglomerating forces in the Mexican economy. agglomerating forces in the Mexican economy.

Griswold (2004) “After 10 Years, NAFTA Griswold (2004) “After 10 Years, NAFTA Continues to Pay Dividends”, Cato Institute Continues to Pay Dividends”, Cato Institute

The 10th anniversary of the controversial NAFTA The 10th anniversary of the controversial NAFTA was viewed as a great international public-policy was viewed as a great international public-policy success. success.

For one thing, it has delivered on its principal For one thing, it has delivered on its principal promise of increasing trade. Since 1993, the year promise of increasing trade. Since 1993, the year before the agreement took effect, two-way before the agreement took effect, two-way commerce between the United States and Mexico commerce between the United States and Mexico roughly tripled, from $81 billion to $232 billion. roughly tripled, from $81 billion to $232 billion. For another, NAFTA has helped speed Mexico's For another, NAFTA has helped speed Mexico's dramatic economic and political transformation. dramatic economic and political transformation. The trade agreement marks a major milestone in The trade agreement marks a major milestone in Mexico's turn away from a closed, centrally Mexico's turn away from a closed, centrally directed economic system, to an open and directed economic system, to an open and dynamic market democracy. dynamic market democracy.

Agustín Escobar y Susan Martin (Coords.), Mexico Agustín Escobar y Susan Martin (Coords.), Mexico - U.S. Migration Management: A Binational - U.S. Migration Management: A Binational

Approach (2008). Forthcoming.Approach (2008). Forthcoming.

Contrary to what officials heralded, however, experts Contrary to what officials heralded, however, experts predicted that NAFTA would lead to a migration hump, in predicted that NAFTA would lead to a migration hump, in which migration pressures would increase in the short to which migration pressures would increase in the short to medium term before reducing in the long term. medium term before reducing in the long term.

Ten years after the agreement was implemented, Ten years after the agreement was implemented, Mexican exports have risen very rapidly, and migration Mexican exports have risen very rapidly, and migration has also reached unprecedented levels. As predicted, has also reached unprecedented levels. As predicted, while trade, financial and service integration has while trade, financial and service integration has undoubtedly accelerated, this has not led to sufficient undoubtedly accelerated, this has not led to sufficient economic and social convergence between the U.S. and economic and social convergence between the U.S. and Mexico, and migration has thus far continued at historic Mexico, and migration has thus far continued at historic levels.levels.

10 AÑOS. DEL TLCAN 10 AÑOS. DEL TLCAN

Economists in the Northern Border of Economists in the Northern Border of Mexico at Colef also examined the NAFTA Mexico at Colef also examined the NAFTA agreement in its 10th anniversary. Diaz-agreement in its 10th anniversary. Diaz-Bautista (2003) examined the positive Bautista (2003) examined the positive effects of NAFTA in the Northern Border effects of NAFTA in the Northern Border States of Mexico using an economic States of Mexico using an economic growth model based on the Methodology growth model based on the Methodology developed by Mankiw (1992) and Barro developed by Mankiw (1992) and Barro and Sala i Martin (1995).and Sala i Martin (1995).

While Mendoza and Diaz(2003) analyzed While Mendoza and Diaz(2003) analyzed the case of the transportation sector the case of the transportation sector during the NAFTA era.during the NAFTA era.

NAFTA’s Impact on Mexico at 14NAFTA’s Impact on Mexico at 14

Mexican growth has underperformed expectations. Since 1994, Mexico’s GDP has increased at an average annual rate of 2.7 %, below the average growth rates of 3.3 % and 3.6 % in the United States and Canada, respectively. Mexican exports to the United States have quadrupled since NAFTA’s implementation, from $60 billion to $280 billion per year.

U.S. exports to Mexico have also increased sharply, more than tripling as Mexico’s economy has grown.

Some critics single out Mexico’s farm industry, saying NAFTA has crippled Mexican farming prospects by opening competition to the heavily-subsidized U.S. farm industry.

Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación

Mexico’s Border Market Geography

Geography:

• 10 border states

• 2,000 miles of border

• Population: 92 million

Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación

Market Integration Agrifood Products

Since NAFTA:

• Mexican agrifood exports to US have increased 129%

• US agrifood exports to Mexico have increased 189%

Fuente: DGAFR-SAGARPA with data from the Foreign Agricultural Service (FAS), USDA

US-Mexico trade in agrifood products after NAFTA

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

(mill

ion

US

D)

US exports to Mexico Mexican exports to US

NAFTA’s Impact on Canada at 14NAFTA’s Impact on Canada at 14

Canada is the leading exporter of goods to the Canada is the leading exporter of goods to the United States, and has experienced postive United States, and has experienced postive economic growth since NAFTA’s implementation. economic growth since NAFTA’s implementation. Canada’s GDP has grown at a faster rate than Canada’s GDP has grown at a faster rate than either Mexico’s or the United States’ since 1994. either Mexico’s or the United States’ since 1994. Between 1994 and 2003, Canada’s economy Between 1994 and 2003, Canada’s economy showed average annual growth rates of 3.6 %. showed average annual growth rates of 3.6 %.

Canadian employment levels have also shown Canadian employment levels have also shown steady gains in recent years, with overall steady gains in recent years, with overall employment rising from 14.9 million to 15.7 employment rising from 14.9 million to 15.7 million in the early 2000s. Even Canadian million in the early 2000s. Even Canadian manufacturing employment held steady. manufacturing employment held steady.

Canada is the leading importer of U.S. agricultural Canada is the leading importer of U.S. agricultural products and U.S. agricultural exports to Canada products and U.S. agricultural exports to Canada roughly doubled between 1994 and 2003. roughly doubled between 1994 and 2003.

NAFTA at 14NAFTA at 14

The SPP complements the success of the North The SPP complements the success of the North American Free Trade Agreement (NAFTA), which American Free Trade Agreement (NAFTA), which has helped to triple trade since 1993 among our has helped to triple trade since 1993 among our three countries to a projected $1 trillion in 2008. three countries to a projected $1 trillion in 2008. NAFTA has offered our consumers a greater NAFTA has offered our consumers a greater variety of better and less expensive goods and variety of better and less expensive goods and services, encouraged our businesses to increase services, encouraged our businesses to increase investment throughout North America, and investment throughout North America, and helped to create millions of new jobs in all three helped to create millions of new jobs in all three countries. countries.

NAFTA is key to maintaining North America's NAFTA is key to maintaining North America's competitive edge in an increasingly complex, competitive edge in an increasingly complex, fast-paced and connected global marketplace. fast-paced and connected global marketplace.

Nafta’s Economic Impact at 14Nafta’s Economic Impact at 14

As we have seen it is difficult to quantify As we have seen it is difficult to quantify NAFTA’s economics impacts precisely.NAFTA’s economics impacts precisely.

NAFTA was designed to promote economic NAFTA was designed to promote economic growth by spurring competition in growth by spurring competition in domestic markets and promoting domestic markets and promoting investment from both domestic and investment from both domestic and foreign sources. It worked since North foreign sources. It worked since North American firms are now more efficient and American firms are now more efficient and productive. They have restructured to take productive. They have restructured to take advantage of economies of scale in advantage of economies of scale in production and intra-industry production and intra-industry specialization.specialization.

Nafta’s Economic Impact at 14Nafta’s Economic Impact at 14 In 2003, the CBO attempted a full-scale examination of In 2003, the CBO attempted a full-scale examination of

NAFTA’s economic consequences to date. The report came NAFTA’s economic consequences to date. The report came to three main conclusions: to three main conclusions:

U.S. trade with Mexico was growing before NAFTA’s U.S. trade with Mexico was growing before NAFTA’s implementation, and would likely have continued to grow implementation, and would likely have continued to grow with or without the agreement.with or without the agreement.

The direct effect of NAFTA on U.S.-Mexico trade is fairly The direct effect of NAFTA on U.S.-Mexico trade is fairly small, and thus the direct impact on the U.S. labor market small, and thus the direct impact on the U.S. labor market is also small.is also small.

Overall, the NAFTA deal has expanded U.S. gross domestic Overall, the NAFTA deal has expanded U.S. gross domestic product (GDP) slightly, and has had a similar effect, both product (GDP) slightly, and has had a similar effect, both positive and small, on the Canadian and Mexican positive and small, on the Canadian and Mexican economies. economies.

Nafta’s Economic Impact at 14Nafta’s Economic Impact at 14 In contrast to the advanced economies of In contrast to the advanced economies of

Canada and the U.S., Mexico is anCanada and the U.S., Mexico is an emerging market. emerging market. Mexico's GDP per capita is 27.86 percent Mexico's GDP per capita is 27.86 percent

that of the U.S. and 33.23 % Canada's that of the U.S. and 33.23 % Canada's using the IMF 2007 estimated of the 2008 using the IMF 2007 estimated of the 2008 world economic outlook. On the other world economic outlook. On the other hand, with a population of about 106,000 hand, with a population of about 106,000 million in 2007, with new economic million in 2007, with new economic reforms (like the proposed energy reforms (like the proposed energy reforms), there is a new economic reforms), there is a new economic dynamism in Mexico.dynamism in Mexico.

Economic comparison of output Economic comparison of output (NAFTA and the EU) (NAFTA and the EU)

Levesque (1997) compared the Levesque (1997) compared the economic output of the NAFTA bloc economic output of the NAFTA bloc and the EU.and the EU.

The NAFTA bloc accounted for almost The NAFTA bloc accounted for almost 44 % of the total OECD output in 44 % of the total OECD output in 1995 in real terms, compared to 1995 in real terms, compared to about 37 % for the EU. about 37 % for the EU.

NAFTA at 14 NAFTA at 14 The second largest trade bloc in the World in The second largest trade bloc in the World in

terms of production, behind the European Unionterms of production, behind the European Union

Rank Country GDP (millions of USD / Using PPP / Source: IMF ) Rank Country GDP (millions of USD / Using PPP / Source: IMF ) — — World 54,311,608 World 54,311,608 — — European Union 16,830,100 European Union 16,830,100 _ NAFTA 15,857,000 (behind the European Union in 2007)_ NAFTA 15,857,000 (behind the European Union in 2007)

1 United States 13,843,8251 United States 13,843,825 2 Japan 4,383,762 2 Japan 4,383,762 3 Germany 3,322,147 3 Germany 3,322,147 4 China 3,250,827 4 China 3,250,827 5 United Kingdom 2,772,570 5 United Kingdom 2,772,570 6 France 2,560,255 6 France 2,560,255 7 Italy 2,104,666 7 Italy 2,104,666 8 Spain 1,438,959 8 Spain 1,438,959 9 Canada 1,432,1409 Canada 1,432,140 10 Brazil 1,313,590 10 Brazil 1,313,590 11 Russia 1,289,582 11 Russia 1,289,582 12 India 1,098,945 12 India 1,098,945 13 South Korea 957,053 13 South Korea 957,053 14 Australia 908,826 14 Australia 908,826 15 15 Mexico 893,365Mexico 893,365

NAFTA’s Trade Impact at 14NAFTA’s Trade Impact at 14

In terms of trade, Canada, Mexico, and the In terms of trade, Canada, Mexico, and the United States have broadened United States have broadened substantially since NAFTA’s substantially since NAFTA’s implementation, though researcher and implementation, though researcher and trade experts disagree over the extent to trade experts disagree over the extent to which this expansion is a direct result of which this expansion is a direct result of the deal. the deal.

Trade with NAFTA partners now accounts Trade with NAFTA partners now accounts for more than 80 % of Canadian and for more than 80 % of Canadian and Mexican trade, and more than a third of Mexican trade, and more than a third of U.S. trade.U.S. trade.

NAFTA TradeNAFTA Trade

Since NAFTA was implemented in 1994, Since NAFTA was implemented in 1994, agricultural trade between the U.S. and agricultural trade between the U.S. and Mexico has risen dramatically. Mexico’s Mexico has risen dramatically. Mexico’s agricultural exports to the U.S. have agricultural exports to the U.S. have expanded by nearly 10% per year, expanded by nearly 10% per year, growing twice as fast as they did before growing twice as fast as they did before NAFTA. At the same time, U.S. exports to NAFTA. At the same time, U.S. exports to Mexico have grown by about 8% per year, Mexico have grown by about 8% per year, reflecting the mutually beneficial reflecting the mutually beneficial outcomes NAFTA has provided to the outcomes NAFTA has provided to the agricultural sectors in both countries.agricultural sectors in both countries.

NAFTA’s impact on the U.S. labor NAFTA’s impact on the U.S. labor marketmarket

The labor impacts are also not a The labor impacts are also not a straightforward exercise, and researchers straightforward exercise, and researchers and analysts disagree on how to gauge and analysts disagree on how to gauge NAFTA’s effects. The USTR claims a NAFTA’s effects. The USTR claims a broadly positive influence, showing an broadly positive influence, showing an increase in overall U.S. employment of 24 increase in overall U.S. employment of 24 percent since NAFTA’s inception, as well as percent since NAFTA’s inception, as well as declining unemployment rates. declining unemployment rates.

Inflation-adjusted U.S. wages rose 19.3 Inflation-adjusted U.S. wages rose 19.3 percent between 1993 and 2007, as percent between 1993 and 2007, as compared to only 11 percent in the compared to only 11 percent in the fourteen years prior (1979-1993). fourteen years prior (1979-1993).

NAFTA’s impact on the U.S. labor NAFTA’s impact on the U.S. labor marketmarket

The Economic Policy Institute, mentions in a The Economic Policy Institute, mentions in a policy paper on NAFTA that the trade agreement policy paper on NAFTA that the trade agreement agenda has served to widen U.S. trade deficits agenda has served to widen U.S. trade deficits and has indirectly pushed some U.S. workers into and has indirectly pushed some U.S. workers into lower-paying jobs.lower-paying jobs.

Griswold at the Center for Trade Policy Studies at Griswold at the Center for Trade Policy Studies at the Cato Institute mentions that job losses are the Cato Institute mentions that job losses are part of a structural shift of the U.S. economy part of a structural shift of the U.S. economy away from a focus on heavy manufacturing and away from a focus on heavy manufacturing and toward a focus on light manufacturing and high-toward a focus on light manufacturing and high-end services. end services.

Mexico’s Maquila Balance with ChinaMexico’s Maquila Balance with China

Furthermore, since NAFTA, the Mexican total Furthermore, since NAFTA, the Mexican total merchandize trade deficit with China has gone merchandize trade deficit with China has gone from $342 million in 1993, the year NAFTA was from $342 million in 1993, the year NAFTA was passed, to $14 billion in 2004. Over the same passed, to $14 billion in 2004. Over the same time period the U.S. merchandize trade deficit time period the U.S. merchandize trade deficit with China went from $23 billion to $162 billion. with China went from $23 billion to $162 billion. NAFTA has functioned as a back door for Chinese NAFTA has functioned as a back door for Chinese goods to enter the United States, as 98% of goods to enter the United States, as 98% of Mexico’s maquiladora exports go to the U.S., and Mexico’s maquiladora exports go to the U.S., and the maquiladora trade balance with China has the maquiladora trade balance with China has gone from roughly even in 1993 to a $12 billion gone from roughly even in 1993 to a $12 billion deficit in 2005.deficit in 2005.

U.S. Unemployment during NAFTAU.S. Unemployment during NAFTA

In the 14 years before NAFTA, the In the 14 years before NAFTA, the U.S. average unemployment rate was U.S. average unemployment rate was 7.1 percent. From 1994 to 2007, the 7.1 percent. From 1994 to 2007, the average was 5.1 percent. U.S. average was 5.1 percent. U.S. manufacturing has grown at nearly 4 manufacturing has grown at nearly 4 percent annually since NAFTA was percent annually since NAFTA was enacted, nearly double that of the enacted, nearly double that of the previous 14 years. previous 14 years.

Economic Integration in North Economic Integration in North AmericaAmerica

The governments of Mexico, Canada and The governments of Mexico, Canada and the United States must think about the the United States must think about the future of NAFTA. future of NAFTA.

Do they want to keep their trilateral Do they want to keep their trilateral relationship focused on economic matters relationship focused on economic matters or are they interested in integrating more? or are they interested in integrating more? Do we need to start a process to build a Do we need to start a process to build a North American Community similar to the North American Community similar to the European Union?European Union?

Aspe et al. (2005), Aspe et al. (2005), “Building a North “Building a North

American Community” American Community”

Sponsored by the Council on Foreign Relations in Sponsored by the Council on Foreign Relations in association with the Canadian Council of Chief Executives association with the Canadian Council of Chief Executives and the Consejo Mexicano de Asuntos Internacionales.and the Consejo Mexicano de Asuntos Internacionales.

North America is vulnerable on several fronts: the region North America is vulnerable on several fronts: the region faces terrorist and criminal security threats, increased faces terrorist and criminal security threats, increased economic competition from abroad, and uneven economic economic competition from abroad, and uneven economic development at home. In response to these challenges, a development at home. In response to these challenges, a trinational, Independent Task Force on the Future of North trinational, Independent Task Force on the Future of North America has developed a roadmap to promote North America has developed a roadmap to promote North American security and advance the well-being of citizens of American security and advance the well-being of citizens of all three countries.all three countries.

The Council-sponsored Task Force applauds the announced The Council-sponsored Task Force applauds the announced “Security and Prosperity Partnership of North America,” but “Security and Prosperity Partnership of North America,” but proposes a more ambitious vision of a new community by proposes a more ambitious vision of a new community by 2010 and specific recommendations on how to achieve it.2010 and specific recommendations on how to achieve it.

Security and Security and Prosperity Partnership Prosperity Partnership The Security and Prosperity Partnership of North America The Security and Prosperity Partnership of North America

(SPP) was launched in March of 2005 as a trilateral effort to (SPP) was launched in March of 2005 as a trilateral effort to increase security and enhance prosperity among the United increase security and enhance prosperity among the United States, Canada and Mexico through greater cooperation States, Canada and Mexico through greater cooperation and information sharing.and information sharing.

This trilateral initiative is premised on our security and our This trilateral initiative is premised on our security and our economic prosperity being mutually reinforcing. The SPP economic prosperity being mutually reinforcing. The SPP recognizes that our three great nations are bound by a recognizes that our three great nations are bound by a shared belief in freedom, economic opportunity, and strong shared belief in freedom, economic opportunity, and strong democratic institutions.democratic institutions.

The SPP provides the framework to ensure that North The SPP provides the framework to ensure that North America is the safest and best place to live and do America is the safest and best place to live and do business. It includes ambitious security and prosperity business. It includes ambitious security and prosperity programs to keep our borders closed to terrorism yet open programs to keep our borders closed to terrorism yet open to trade.to trade.

SPP TimelineSPP Timeline

The Heads of State launched the SPP on March 23, 2005The Heads of State launched the SPP on March 23, 2005

Commerce hosted a series of private sector roundtables to Commerce hosted a series of private sector roundtables to engage industry and identify deliverablesengage industry and identify deliverables

Working groups and work plans createdWorking groups and work plans created

Ministers reported to Heads of State on progress made and Ministers reported to Heads of State on progress made and released public report on June 27, 2005released public report on June 27, 2005

NAFTA at 15: Requires a New NAFTA at 15: Requires a New North American ModelNorth American Model

The current economic crisis requires that a new The current economic crisis requires that a new economic development model be put in place in economic development model be put in place in North America. The role of deregulation has North America. The role of deregulation has proven to be a failure. In fact, it is one of the proven to be a failure. In fact, it is one of the principal causes of the current economic crisis, as principal causes of the current economic crisis, as admitted by none other than the former president admitted by none other than the former president of the Federal Reserve of the United States. A of the Federal Reserve of the United States. A new role of the state as a regulator of the market new role of the state as a regulator of the market should be put in place. A new trade model should be put in place. A new trade model between the three North American countries is between the three North American countries is needed. The new trade model, must promote needed. The new trade model, must promote economic relations based on human rights, social economic relations based on human rights, social justice and national sovereignty, while focusing justice and national sovereignty, while focusing on sustainable economic development. on sustainable economic development.

Container Traffic IncreaseContainer Traffic Increase

The flow of container traffic through The flow of container traffic through the Mexican land bridge under the Mexican land bridge under NAFTA has increased. The data from NAFTA has increased. The data from the Mexican Secretary of the Mexican Secretary of Communication (SCT) and Transport, Communication (SCT) and Transport, reflects the dramatic increase of reflects the dramatic increase of container units through the Pacific container units through the Pacific ports of Mexico after the treaty went ports of Mexico after the treaty went into effect. More than 450 %.into effect. More than 450 %.

President Obama President Obama on NAFTAon NAFTA

President Obama supports the existence of President Obama supports the existence of NAFTA, but call for its reform and renegotiation.NAFTA, but call for its reform and renegotiation.

Clinton and Obama have been insistent that Clinton and Obama have been insistent that North America Free Trade Agreement (NAFTA) will North America Free Trade Agreement (NAFTA) will be renegotiated around labor and environmental be renegotiated around labor and environmental concerns. concerns.

More Dialogue on the Future of More Dialogue on the Future of NAFTANAFTA

Pastor, Rozenthal, and Beatty Pastor, Rozenthal, and Beatty encourage greater dialogue among encourage greater dialogue among the three governments and their the three governments and their citizens, as well as more systematic citizens, as well as more systematic thinking among policymakers and thinking among policymakers and citizens about the promise and citizens about the promise and challenges of further North American challenges of further North American integration.integration.

ConclusionsConclusions

On its 15 anniversary, NAFTA is facing trouble in terms of trade, On its 15 anniversary, NAFTA is facing trouble in terms of trade, economic growth and employment. economic growth and employment.

Dramatic decreases in trade and investment have been seen in Dramatic decreases in trade and investment have been seen in Mexico since 2008.Mexico since 2008.

The global economic crisis had a great impact in all 3 NAFTA The global economic crisis had a great impact in all 3 NAFTA countries. countries.

The tragedy of September 11, 2001, and the Global Economic The tragedy of September 11, 2001, and the Global Economic Crisis created new security challenges for North America. Crisis created new security challenges for North America.

To achieve greater economic integration, new ideas have to be To achieve greater economic integration, new ideas have to be turned into achievable goals for a fresh initiative that will give North turned into achievable goals for a fresh initiative that will give North American integration renewed momentum. American integration renewed momentum.

The U.S. withdrawal from the North American Free Trade The U.S. withdrawal from the North American Free Trade Agreement after 15 years would affect the North American Agreement after 15 years would affect the North American communities in the next few years. communities in the next few years.

Conclusions: Mexico and Canada’s Conclusions: Mexico and Canada’s PositionPosition

Mexican President Felipe Calderon has mentioned that Mexican President Felipe Calderon has mentioned that changes in the North American Free Trade Agreement changes in the North American Free Trade Agreement would cause considerable damage on the economy and would cause considerable damage on the economy and would condemn North America as a region to compete from would condemn North America as a region to compete from a position of backwardness in today's world. President a position of backwardness in today's world. President Calderon also said that NAFTA was creating jobs and Calderon also said that NAFTA was creating jobs and economic growth and "decreasing the flow of immigration."economic growth and "decreasing the flow of immigration."

Calderon and Canadian Prime Minister Stephen Harper Calderon and Canadian Prime Minister Stephen Harper responded in defense of NAFTA in 2008. responded in defense of NAFTA in 2008.

When asked if Canada would consider renegotiating HAFTA, When asked if Canada would consider renegotiating HAFTA, Prime Minister Harper said, "We would be ready to do Prime Minister Harper said, "We would be ready to do anything that one of our partners wants to do. If one of our anything that one of our partners wants to do. If one of our partners wants to renegotiate NAFTA, we'll renegotiate”.partners wants to renegotiate NAFTA, we'll renegotiate”.

ConclusionsConclusions

Quitting NAFTA would send economic signals Quitting NAFTA would send economic signals throughout the world. The North American model throughout the world. The North American model is increasingly economic integrated as seen by is increasingly economic integrated as seen by the current economic crisis. the current economic crisis.

An economic downfall in the U.S. has a An economic downfall in the U.S. has a contemporary economic impact in Mexico.contemporary economic impact in Mexico.

Withdrawing from NAFTA would affect the Withdrawing from NAFTA would affect the economies in the U.S. border communities, and economies in the U.S. border communities, and rip apart North American supply chains and rip apart North American supply chains and information systems, and devastate North information systems, and devastate North American exporters. In short, it would cause American exporters. In short, it would cause incredible damage to the economies of North incredible damage to the economies of North America in the long run.America in the long run.

ConclusionsConclusions With the current economic crisis, national With the current economic crisis, national

governments should include more governments should include more development and social policy tools, many development and social policy tools, many of which are prohibited under the of which are prohibited under the competition and privatization terms of competition and privatization terms of NAFTA. Some of the most important areas NAFTA. Some of the most important areas that should be included in the that should be included in the renegotiation are energy, agriculture, role renegotiation are energy, agriculture, role of the state, financial services, foreign of the state, financial services, foreign investment, employment, migrants, investment, employment, migrants, environment, intellectual property, and environment, intellectual property, and dispute settlement.dispute settlement.

““Regional Economic Growth in North Regional Economic Growth in North America: the Effects of the Renegotiation America: the Effects of the Renegotiation

of the NAFTA Agreement”of the NAFTA Agreement”

Alejandro Díaz-Bautista, Alejandro Díaz-Bautista, Ph.D.Ph.D.

Professor of Economics and Researcher at Colegio de la Frontera Norte (COLEF)

Visiting Research Fellow , Center for U.S.-Mexican Studies, UCSD.

adiazbau@hotmail.com

March 13, 2009, 11:15 - 11:45Universidad Autonoma Metropolitana, Mexico City.

ReferencesReferences Castillo, Ramon, Díaz-Bautista, Alejandro y Edna Fragoso (2004), "Sincronización entre las Castillo, Ramon, Díaz-Bautista, Alejandro y Edna Fragoso (2004), "Sincronización entre las

Economías de México y Estados Unidos: El Caso del Sector Manufacturero", en Revista Economías de México y Estados Unidos: El Caso del Sector Manufacturero", en Revista Comercio Exterior de Bancomext, Vol. 54, paginas 620-627.Comercio Exterior de Bancomext, Vol. 54, paginas 620-627.

Díaz-Bautista, Alejandro (2003), “ El TLCAN y el Crecimiento Economico de la Frontera Norte de Díaz-Bautista, Alejandro (2003), “ El TLCAN y el Crecimiento Economico de la Frontera Norte de Mexico ”, en “10 años del TLCAN”, Revista Comercio Exterior de Bancomext, Diciembre.Mexico ”, en “10 años del TLCAN”, Revista Comercio Exterior de Bancomext, Diciembre.

Díaz-Bautista, Alejandro (2003), “The Determinants of Economic Growth: Convergence, Trade Díaz-Bautista, Alejandro (2003), “The Determinants of Economic Growth: Convergence, Trade and Institutions” (“Los Determinantes del Crecimiento: Convergencia, Instituciones y Comercio and Institutions” (“Los Determinantes del Crecimiento: Convergencia, Instituciones y Comercio Internacional”) 164 pages, june. El Colegio de la Frontera Norte, México y Editorial Plaza y Internacional”) 164 pages, june. El Colegio de la Frontera Norte, México y Editorial Plaza y Valdes.Valdes.

Díaz-Bautista, Alejandro (2006) “Foreign Direct Investment and Regional Economic Growth Díaz-Bautista, Alejandro (2006) “Foreign Direct Investment and Regional Economic Growth considering the Distance to the Northern Border of Mexico” in Analisis Economico, UAM, considering the Distance to the Northern Border of Mexico” in Analisis Economico, UAM, Number 46, Vol. XXI, 2006.Number 46, Vol. XXI, 2006.

NAFTA Website NAFTA Website http://www.nafta-sec-alena.orghttp://www.nafta-sec-alena.org

http://www.spp.gov/http://www.spp.gov/