1. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 13 Economic Integration into North America

2. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-2 Chapter Objectives Explore the formation and impact of the Canadian- United States Trade Agreement (CUSTA), the North American Free Trade Agreement (NAFTA), and the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) Understand the sources of political controversy surrounding NAFTA’s negotiations and ratification

3. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-3 TABLE 13.1 Population and GDP for Canada, Mexico, and the United States, 2005

4. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-4 The North American Market in Sum Enormous market: larger than the EU Vast income differences between Mexico on the one hand, and the U.S. and Canada, on the other –However, purchasing power parity gap is smaller –On average, the North American market is very rich The North American market is marked by numerous difficult policy questions on migration and environmental and labor standards, for example

5. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-5 TABLE 13.2 Trade within the NAFTA Region, 2005 (Millions of U.S. dollars)

6. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-6 FIGURE 13.1 Canada–United States Merchandise Trade, 1989–2005

7. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-7 The Canadian–U.S. Trade Agreement (CUSTA) of 1989 Helped Canada overcome growing U.S. protectionism and Asian competitiveness –However, many Canadians feared competition by U.S. firms, erosion of Canada’s social programs, and U.S. cultural influence Rather modest impact –In 1989–1994, U.S. exports to Canada grew by 46.6%, and Canadian exports to the U.S. by 55% –Canadian fears were largely unfounded

8. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-8 Mexico’s Economic History Between the end of World War II and 1980s, Mexico followed inward-oriented import substitution industrialization (ISI) policies—industrial policies targeting the development of manufacturing sectors that can compete against imported goods –ISI succeeded in stimulating GDP growth and a shift toward industrialization –However, ISI created serious problems: reduced export capacity and created conditions for corruption

9. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-9 Mexico’s Economic Turnaround In the late-1970s, Mexico was prospering thanks to high revenues from oil production However, problems emerged in 1981 –World oil prices declined, reducing Mexico´s credit worthiness –Dramatic rise in U.S. interest rates increased the interest charged on Mexico’s debt with commercial banks In August 1982, the debt crisis began: Mexico suspend payments of the principal of its debts

10. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-10 The 1980s: The Lost Decade 1980s was the lost decade in Latin America: GDP growth was nonexistent, foreign capital stopped flowing in, credit became scarce, investment declined The economic crisis stemmed from macroeconomic mismanagement: large government expenditures had increased borrowing and indebtedness

11. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-11 Resolving the Debt Crisis Mexico agreed on budget cuts and peso devaluation in return to restructuring the debt repayments with U.S. government, banks, and the IMF Budget cuts and inflation had a social cost: real wages fell by 40–50% in 1983–1988

12. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-12 Resolving Economic Problems In 1982, Mexico also set out to attack the deep-seated structural problems of the economy –Inflation was curbed –Import restrictions and trade barriers were reduced: average tariffs declined from 27% to 13.1% between 1982 and 1992 –The role of the state in the economy was reduced: state- owned companies were privatized Structural reforms revived growth and attracted foreign investment

13. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-13 The North American Free Trade Agreement (NAFTA) of 1994 Tariffs on about half of goods traded between U.S. and Mexico were eliminated immediately –Most dramatic changes in Mexico: average tariffs on U.S. goods fell from 10% to 2.9% between 1993 and 1996, while U.S. tariffs on Mexican goods fell from 2.07% to 0.65% NAFTA specified content requirements for goods subject to free trade NAFTA established a system of trade dispute resolution

14. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-14 The NAFTA Debate in the U.S.: Labor and Environment NAFTA reignited contention on trade policy in the U.S. –Blue collar labor unions feared that jobs would migrate to south given Mexico’s lower labor costs –Environmental groups feared that (1) polluting U.S. and Canadian firms would move to Mexico, and (2) pollution would increase along U.S.-Mexico border Political opposition forced Canada, Mexico, and the U.S. to attach labor and environmental side agreements to NAFTA

15. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-15 The NAFTA Debate in the U.S.: Immigration Illegal immigration is a contentious issue in U.S.-Mexico relations –Proponents argue illegal immigrants support the U.S. economy buy buying goods and services and help keep prices low by increasing labor supply –Opponents argue the U.S. should not ignore illegal behavior and that the increased labor from illegal immigration suppresses wages for legal workers

16. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-16 The NAFTA Debate in the U.S.: Border Enforcement Attempts at stricter border enforcement have been largely unsuccessful at stopping illegal immigration –The border is too long – 2,000 miles –The economic incentive the enter the U.S. is too high –Nearly half of the illegal immigrants entered legal, but did not return home when their visa’s expired

17. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-17 The Impact of NAFTA on U.S. Economy Local effects of NAFTA on trade and economy are dramatic especially in the U.S.-Mexican border However, Mexico’s economy is 5% of U.S. economy: NAFTA has had a very modest impact on overall U.S. trade balance and current account or on jobs and wages

18. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-18 The Impact of NAFTA on U.S.- Mexico Trade Trade flows between U.S. and Mexico have shot up The growth in trade between all three NAFTA partners indicates increased specialization, economies of scale, and efficiency However, the exact impact of NAFTA is hard to assess –Bilateral trade has expanded already since 1989 thanks to Mexico’s economic reforms –Mexico’s 1994–1995 peso crisis and recession caused U.S. exports to decline momentarily to Mexico

19. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-19 FIGURE 13.2 United States–Mexico Merchandise Trade, 1989–2005

20. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-20 The Economic Impact of NAFTA in Sum Canada: trade with Mexico is growing, but still represents a small part of Canada’s trade The U.S.: NAFTA has had local effects especially along the border, but had a small impact on the overall U.S economy Mexico: NAFTA has had an important impact on trade flows and solidified economic reforms

21. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-21 The Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) In July 2005, the U.S. ratified the Dominican Republic- Central American Free Trade Agreement (DR-CAFTA) –Dominican Republic – Guatemala –Honduras –El Salvador –Nicaragua –Costa Rica

22. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-22 TABLE 13.3 Population and GDP for the DR-CAFTA Countries, 2005

23. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-23 The Future: A North American Community? Relative to the European Union, NAFTA is in an early stage of economic integration. Deeper integration among the members will require: –Increased labor mobility –The establishment of permanent governing bodies –A focus on development to close the economic gap between Mexico and the other members

24. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-24 TABLE 13.4 Doing Business in the NAFTA Countries

25. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 13 Additional Chapter Art

26. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-26 North American Free Trade Agreement Members

27. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 13-27 Canadian Provinces