Is Mexico Richer after NAFTA?
In November a year will have passed since the renegotiation of NAFTA. Although this version has new guidelines, for the most part its main principle prevails: free trade is beneficial for both parties. This is true with or without free trade agreements or the existence of "fair" trade. However, as a Parametria survey published in 2016 shows, most Mexicans still don't understand the multiple benefits that these opening policies entail.
Those benefits include:
- A greater diversification of brands and categories of consumer goods (According to IMCO)
- An increase of 21.154 billion dollars on foreign direct investment and of 339.244 billion dollars on Mexico's annual exports of goods and services since 1994 (According to the World Bank)
- Indirectly strengthening libertarian principles such as globalization (the free movement of ideas, people, capital and consumer goods) and property rights. As the liberal economist Frédéic Bastiat explained in his essay titled "Communism and Protection":
Every citizen who has produced or acquired a product should have the option of applying it immediately to his own use or of transferring it to whoever on the face of the earth agrees to give him in exchange the object of his desires. To deprive him of this option when he has committed no act contrary to public order and good morals, and solely to satisfy the convenience of another citizen, is to legitimize an act of plunder and to violate the law of justice .
- A possible contribution to the reduction of extreme poverty (measured as an income interval and not as inequality — less than half of the average national income — or access to specific consumer goods and services)
In "The Role of Trade in Ending Poverty," the World Bank estimates that between 1990 and 2010 the global percentage of people living under extreme poverty fell by half. In this report they use as a reference Kraay and Dollar's article titled "Growth is good for the poor" (in which they concluded that growth benefits the poor as much as it does the typical household) in order to explain the correlation, and possible causal relationship, of multiple economic variables. Their interpretation of the data establishes that GDP growth increases both the demand for labor and real wages for low skilled jobs:
It is the strong growth of the global economy over the past 10 years that has enabled the majority of the world’s working-age population to find employment. Real wages for low-skilled jobs have increased with GDP growth worldwide
In "The macroeconomy after tariffs," after studying the economic behavior of 151 countries from 1963 to 1914, its authors concluded that each increase of 3.6% on effective tariff rate produces a productivity reduction of 0.9% in 5 years. In some cases, this increase in average productivity is not only the result of the exit of less efficient companies from the market. As Nina Pavcinik shows in "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," companies that survive this trade opening also experience an increase in productivity.
A little known fact is that the percentage of people in Mexico who lived below the international line of extreme poverty in 2016 (income less than $1.90 dollars per day) is lower than in 1994: 4.1% less. In absolute numbers a similar scenario also occurs: 2.9 million people less. If the poverty line is used as a measure below $3.2 per day, we observe a reduction of 4.6 million people and of 9.3 in percentage points.
Due to the particular circumstances of the Mexican case (e.g., the 1994 financial crisis, social programs such as Oportunidades, among others), it is not possible to accurately determine if this commercial treaty contributed to the reduction of extreme poverty by only using global aggregates. Nevertheless, because of or despite trade liberalization, Mexico's extreme poverty has decreased since NAFTA.