Requiem or Revival?: The Promise of North American Integration

Chapter 2. Unfulfilled Promise: Economic Convergence under NAFTA

It is estimated that around 230 subregional integration schemes have cropped up across Asia, Africa, the Middle East, and the Western Hemisphere since 1990, but this chapter is concerned with one of the more unusual features to have emerged within the current generation of regional trade agreements (RTAs): the sweeping elimination of economic barriers between the less developed countries and the developed countries.1 Ireland, Greece, Spain, and Portugal made this leap when joining the European Economic Community (EEC) between 1973 and 1986, and Mexico, the focus of this analysis, later followed with its entry into the North American Free Trade Agreement (NAFTA) with Canada and the United States in January 1994. By definition, these more recent North-South deals—all of which involve shorter liberalization timelines and much higher levels of asymmetry and heterogeneity —invoke a more development-oriented set of questions and concerns .2 First, today’s underdeveloped RTA members are poorer than their European predecessors were at the time of accession. In the latter cases, all but Portugal registered at least double the levels of per capita income before joining the EEC/European Union (EU) than did Mexico on the eve of NAFTA.3 The EU, moreover, coupled mutual market access for these poorer entrants with development assistance, free movement of labor within the EU 27 Unfulfilled Promise Economic Convergence under NAFTA carol wise 2 02-8201-8 ch2.qxd 7/13/07 4:30 PM Page 27 bloc, and other measures meant to compensate for the steep asymmetries at hand.4 Not so NAFTA, which means that any bridging of the huge gap between Mexico and its NAFTA partners—or for that matter between the United States and any number of its newest RTA partners (for example, the Central Andean or Central American blocs)—has fallen to market forces. Second, along with the laissez-faire ethos that has underpinned this latest wave of North-South integration, the accompanying discourse both within Mexico and among the three NAFTA partners raised expectations for rapid development gains. From the start, neoclassical theories of trade and growth held sway, arguing that a country like Mexico—the least developed and most protected member of the RTA—would be expected to undergo a more painful adjustment but would also reap disproportionate gains in the way of higher growth, productivity, and overall welfare.5 In the short run, it was expected that the elimination of barriers to the free flow of goods, capital, and services within the RTA would enable all three countries—but especially Mexico—to better capture the benefits of regionalism (scale economies related to greater specialization, increased technological capabilities, and a more rapid and efficient deployment of those endowment factors for which Mexico has a comparative advantage) and trigger a dynamic process of income convergence among the three members.6 It was also envisioned that NAFTA’s competitive potential in the long run would rest on the dynamic blending of Mexico’s abundant factors (natural resources, comparatively cheap labor, and proximity to the U.S. market) with the abundance of capital, technology, and know-how that Canada and the United States brought to the table. Yet from the start there were doubters concerned about both NAFTA’s impacts on labor and the environment and the plausibility of this neoclassical economic scenario. For example, because Mexico had already unilaterally liberalized the bulk of its tariff lines before joining the General Agreement on Tariffs and Trade (GATT) in 1986, technical estimates cautioned that the overall impact of North American integration on Mexico would amount at most to 5–8 percent of Mexico’s GDP.7 Experience has borne out some of the predictions. However, none of the forecasters fully captured the essence of what has come to pass: Mexico’s short-lived surge under NAFTA and the uneven pattern of convergence between Mexico and its NAFTA partners and within Mexico itself.8 Whether measured in absolute (growth) or relative (distribution) terms, or by comparing macro- versus microeconomic indicators, the expectations for higher sustainable growth and dynamic gains have yet to fully materialize. In particular, Mexico has struggled to compete with China since its entrance into U.S. 28 Carol Wise 02-8201-8 ch2.qxd 7/13/07 4:30 PM Page 28 markets upon accession to the World Trade Organization (WTO) in 2001.9 Granted, theories of growth and development have yet to fully come to grips with the...