Southern Methodist University
Mission Foods Texas-México Center 1st Annual Event
Thursday April 6th, 2017
"US-México trade relationship in the age of NAFTA"
Remarks by Agustín Carstens
Governor, Banco de México
1. Introduction
I would like to start by thanking Mission Foods Texas-México Center at SMU
for having invited me as a keynote speaker at this First Annual Texas-México
Conference. It is a real honor and privilege for me. This event provides a timely
opportunity to discuss the significance and benefits that efforts for regional
integration have had for México and the United States.
In my remarks tonight I will pay special attention to providing an overview
of the benefits that NAFTA and trade in general have brought to the region. In
particular, I will argue that NAFTA has allowed member countries to boost
growth and to attain important productivity and efficiency gains that have led
to welfare improvements for both producers and consumers across the whole
region. Furthermore, to the extent that we live in a very competitive global
economy, NAFTA has meant that the North American region is better prepared
to compete with the rest of the world.
This is important, because recently NAFTA has fallen out of favor among
notable sectors of the US population. NAFTA is twenty three years old, and as
such, it safely can be said that it needs some fine-tuning. In particular, it is key
to bring it up to date to incorporate progress and developments that have
taken place in all the member countries since its signing. But such needed, and
even desired, adjustments should not threaten the essence, nor the existence,
of the agreement. I consider NAFTA - and I say this with full conviction -as one
of the main milestones in the effort of bringing México and the US closer
together, for our mutual benefit.
It is worth recalling that México had sequential financial and fiscal crises in
the 70s, 80s and the first years of the 90s, with severe consequences for the
wellbeing of the population. Therefore México realized that if it wanted to be
considered as a trustworthy and reliable partner in the agreement, it needed
to bring its house in order, and persevere in transforming the Mexican
economy into a resilient, dynamic one. To achieve this, México has enacted
several reforms that seek to strengthen its macroeconomic framework and
improve its microeconomic structure. These efforts should leave no doubt that
México is fully committed to take all the necessary steps to make the economic
integration within the region a lasting success. So before delving deeper into
the benefits that NAFTA has produced, let me highlight some of these reforms
that México has implemented through the years.
2. México as a trusted partner
México has developed a solid macroeconomic framework over the years
through a prolonged effort of reform that has been key to cope with the many
challenges that the international environment has posed. These measures
have contributed to the macroeconomic stability that México has enjoyed
during the last years.
In terms of the monetary policy framework, since 1994 Banco de México
has been autonomous and, by law, it is mandated to keep a low and stable
inflation. In 2001 we adopted an inflation targeting scheme to conduct our
monetary policy. Indeed, a credible commitment by the Central Bank to attain
its inflation target, along with an absence of fiscal dominance, has brought
about a significant reduction of the level, volatility and persistence of inflation;
the anchoring of inflation expectations, and a lower exchange-rate pass
through onto prices. This has helped to keep inflation and its expectations
well-behaved, despite the large and persistent depreciation that the peso has
registered in the past couple of years. Even though there has recently been a
noticeable increase in inflation as a result of the cumulative effect of the
depreciation of the peso and the liberalization of gasoline prices, Banco de
México has taken the appropriate steps to keep inflation expectations well-
anchored and to induce a gradual convergence back to our permanent
inflation target.
The fully flexible exchange rate regime that México has followed since the
90s has been a key element of our macroeconomic policy framework, given
that the exchange rate has worked as an efficient shock absorber for the
Mexican economy. As a result, the room to maneuver and the flexibility of
monetary policy to counteract macroeconomic shocks has also increased.
Moreover, México has also strengthened the regulation and supervision of
the domestic financial system. In particular, all our financial institutions
already comply with Basel III guidelines.
There have also been relevant changes in fiscal policy. In particular, during
the last decade México has improved its public finances along two fronts: first,
by strengthening the Fiscal Responsibility Law, and second, fiscal reforms that
have allowed the Federal Government to increase its revenue from tax
sources, reducing the dependency on oil revenues. The important progress in
the country ́s fiscal framework has allowed for a better implementation of
macroeconomic policy and has reduced the risks associated with volatile and
uncertain sources of revenue.
While macroeconomic stability is a necessary condition for accelerated and
sustainable growth, it is not sufficient. In particular, the underlying
microeconomic structure of the economy also matters, since, to a large extent,
it determines how productive and efficient a country is. Hence, besides
working towards achieving a better macroeconomic management, for a long
time México has also pursued policies aimed at reforming the structure of the
economy. As part of this agenda, during the past few years México has enacted
a series of structural reforms whose aim is to improve human capital, enhance
infrastructure, boost competition in domestic input and products markets, and
strengthen institutions. Preeminent among these are reforms addressing the
labor market, appropriate anti-trust legislation, education, and the financial,
telecommunications, oil and electricity sectors. Many of these reforms are
now being implemented and are expected to improve México ́s
competitiveness and productivity, since many of them deal with sectors that
provide inputs of generalized use. They are also expected to provide additional
efficiency gains via the adequate regulation of sectors that behave like natural
monopolies due to their network structure. This reform effort has been and
will continue to be of paramount importance to the modernization process of
the Mexican economy as it allows México to achieve greater flexibility and
efficiency in the allocation of its productive resources, which, in turn, is key to
attaining greater economic growth.
México ́s solid macroeconomic framework and its ambitious structural
reform agenda have worked in tandem to make the Mexican economy resilient
to the many external shocks that have afflicted it over the last few years. In
particular, the Mexican economy has had to cope with a weak external
demand as a result of the slow recovery in global economic activity and the
stagnation of global trade that followed the global financial crises of 2008-09;
it has also had to deal with the pronounced fall in the price of oil; and it has
had to face high volatility in exchange rate markets, that may be attributed to,
among other factors, the uncertainty regarding the pace of monetary policy
normalization in the US, as well as the US electoral process. It is worth noting
that México is one of the few countries among the G-20 and OECD members
that has been able to register positive growth rates for 30 consecutive
quarters, since mid-2009. So it has been able to contribute continuously to the
growth and prosperity of the region.
3. Trade and its benefits
Let me now turn to the benefits that NAFTA has brought for its members,
concentrating in México and the United States.
The enactment of NAFTA in 1994 transformed the bilateral relationship
between México and the United States. NAFTA has represented much more
than a tariff-reduction scheme. It also involved deep regulatory and
institutional changes that had the goal of promoting a deeper economic
integration among member countries. As such, NAFTA can be more accurately
viewed as a set of institutional rules that govern foreign trade and investment
between Canada, México, and the United States with the aim of promoting
both types of flows across the region in order to attain productivity gains
through production sharing. Indeed, NAFTA has given way to a sustained
growth of intra-industry trade across countries. In that sense, rather than
trade partners, México and the US have become production partners.
Evidence of the development of regional supply chains and of the close-knit
economic relationships that have been formed within the North American
region can be seen in the considerable growth of Mexican non-oil exports to
the US and of México's imports of intermediate goods from the US since
NAFTA went into effect. México is currently the second most important source
for US imports and the second most important destination for US exports.1
Furthermore, México is among the top two export destinations for at least
thirty US states, including Texas.2 In some cases, México buys over ninety
percent of some states' overall export sales of particular goods.3
The integration brought about by NAFTA through the deepening of
commercial and production ties has benefited all its members. The channels
through which these gains have accrued are diverse, but range from
productivity and employment gains on the production side to increased access
to a greater variety of goods at more competitive prices on the consumption
side.
If we look at growth rates for different periods of time since the 1980's,
the highest annual average corresponds to the years immediately after NAFTA
was enacted. This is true for both México and the US (Graphs 1 and 2).
Moreover, for both countries, NAFTA can be associated with a period of
relatively high growth in total factor productivity (TFP). Indeed, México has
shown a lackluster behavior for TFP in general, except for the years
immediately after NAFTA was enacted. In the case of the US, although
productivity has shown a better performance, the period after 1996 was
particularly favorable (Graphs 3 and 4).4 After 2001 growth rates have
diminished in both our countries. That can be attributed to more stringent
competition in international markets with China accession to the WTO, and
more recently to the aftermath of the global financial crisis of 2008-2009. But
without the shared-strength provided by NAFTA, the effect of these two
events on the region could have been much worse.
At Banco de México we have carried out some exercises to estimate the
effect that a higher degree of trade openness has had on aggregate welfare in
both México and the US, and have found that for both countries trade
openness has had a positive effect on living standards. This is intuitive since a
reduction in the barriers to trade can be associated with better terms of trade,
which in turn are usually linked to higher welfare.5 Under a few standard
assumptions from the international trade literature, we estimate that between
1993 and 2015 trade openness resulted in gains for México that could amount
to an 8.2% increase in welfare, while the increase for the US could reach 1.6%.
To more easily interpret these percentage increases in welfare associated with
trade openness, let us assume that we can use GDP per capita as a proxy for
welfare.6 Using World Bank data, our estimates of the welfare gains from trade
would imply that income for the average citizen in 2015 was $682 higher in the
case of México and $856 higher in the case of the US than what it would have
been without the higher degree of trade openness that these countries
achieved between 1993 and 2015.
An additional very important benefit of NAFTA has been that it has
allowed its member countries to take advantage of recent trends in the
globalization process. The fragmentation of production through global value
chains is the most recent manifestation of the process of economic integration
that the world has been undergoing over the last couple of centuries.
Previously, this process mostly took place through trade in final goods and
services. Today, global value chains imply that this process occurs primarily
through trade in intermediate goods and joint production arrangements.
Global value chains foster specialization, improve efficiency and increase
welfare through the same mechanisms that induce gains from international
trade in final goods. Additionally, the fact that they also improve the allocation
of production stages around the globe implies that they may in fact generate
larger welfare gains that go beyond those implied by traditional mechanisms.
In fact, the World Bank and World Economic Forum estimate that the
elimination of non-tariff barriers, such as inefficient logistic systems or
transportation and administrative costs that inhibit the international
fragmentation of production, could result in an increase in global GDP that
would be six times greater than the direct elimination of the remaining tariff
barriers in international trade.7
It should be noted that in a context in which production takes place
along global value chains and trade is dominated by intermediate goods, the
fact that a country has a trade deficit against another country, overall or in a
given sector, does not necessarily mean that it is losing employment or that it
has a lower welfare level. In fact, this deficit may reflect imports of
intermediate goods that are necessary for domestic production to take place
and which usually contributes to increased domestic employment,
consumption and exports. In this regard, the more efficient organization of the
production process that has been achieved through trade integration has also
resulted in increased employment in the NAFTA region. Studies have shown
that in the case of México NAFTA induced an increase in employment,
particularly in regions with an outward orientation.8 For the case of the United
States, data from the US Department of Commerce indicates that after NAFTA
took effect the number of jobs supported by the export of goods and services
increased significantly, from 7.4 million in 1993 to 9.3 million in 1997 (Graph
5). Moreover, while the share of manufacturing employment in total US
employment has been declining since the 1970s, the speed of the reduction
softened in the years following the enactment of NAFTA (Graph 6).9 In fact, in
the three years after NAFTA was implemented, employment in the US
automotive industry grew by 14.1 percent, worker hourly earnings grew by 5.6
percent, and Ford, Chrysler and GM invested $39.1 billion in new
manufacturing plants and equipment in the US, while only investing $3 billion
in México.10 Furthermore, it is estimated that trade with México, together with
Mexican foreign direct investment in the United States, supports a combined
five million American jobs.11 In the case of Texas, it is estimated that 382
thousand jobs are supported by trade with México.12
Contrary to the evidence just discussed, much has been said about the
negative effects of trade on employment in the US. However, several studies
point toward automation and the adoption of less labor-intensive production
processes as the primary causes of the decline in US manufacturing
employment and to the declining importance of factory jobs around the
world.13 This assessment is consistent with the upward trend shown by
spending on industrial robots in North America over the years, which has been
9
Estimates obtained from Federal Reserve Bank of St. Louis (FRED).
10
De Long (2017).
11
Wilson (2016).
12
Wilson (2016).
13
De Long (2017) argues that technological change rather than trade with México and China had a more
significant impact on US manufacturing employment. Pierce and Schott (2016) find that at the plant level, the
shift towards less labor intensive processes contributed to declining employment in manufacturing. Acemoglu
and Restrepo (2017) estimate large and robust negative effects on employment and wages in local labor
markets from the exposure of workers to competition from robots. Kenny (2014) argues that automation has
decreased the importance of labor as an input in manufacturing production. See also Cocco (2016) and
Schrager (2017).
particularly concentrated in the automotive sector.14 In this respect, economic
integration and the possibilities it affords for the organization of production
may provide NAFTA members with the required flexibility to capitalize on the
new growth and employment opportunities that may arise as a consequence
of trends in automation and technological advancement. Thus, trade
integration could well be the mechanism that allows industrial economies to
boost overall employment in the face of this new challenge.15
Last but not least, another important advantage that results from trade
openness is that consumers gain access to increased varieties of goods for
consumption and that they face lower prices for these goods.16 Prices decline
with trade openness because of increased market competition (or market
discipline) and also due to the incentives that trade openness generates for
the adoption of new technologies that increase productivity and reduce
marginal costs of production. For example, following the enactment of NAFTA
the price of vehicles, relative to average prices, showed an important decline,
particularly in the US (Graph 7).17
In summary, NAFTA has entailed positive gains for both the US and the
Mexican economies. In particular, it has boosted growth and productivity by
exploiting each country's comparative advantages through a complex web of
production sharing arrangements that has led to a more efficient allocation of
resources across the region. This has not only allowed the region to remain
competitive in the face of fierce global competition, but has also led to a large
number of export-related jobs in both countries. It has also meant that
consumers have had greater access, and at a lower cost, to a wider array of
goods.
4. Concluding remarks
It should be recognized that trade integration does not happen without
undesired side-effects. While there seems to be compelling evidence that
production sharing arrangements play an important part in enhancing
productivity and living standards, this process necessarily entails the
reallocation of resources away from less productive tasks and toward more
productive ones, which is not frictionless and may lead to an unequal
distribution of benefits among different industries and sectors of the
population. Just as the new opportunities and gains from global value chains
need to be emphasized, the new policy challenges that these negative side-
effects entail need to be recognized and addressed to ensure that everyone
shares in these gains from trade.
Policy-makers are confronted with the need of designing and
implementing policies that mitigate adverse effects on sectors of the
population that do not directly benefit from either the process of trade
openness or the process of automation and technological change. This could
be accomplished through compensatory taxes or, as long as there is fiscal
space, an increase in the spending on activities with high social returns, such
as education and health. At the same time, some of the implemented policies
should aim at minimizing the welfare loss associated with the required
reallocation process, for instance, by providing workers with additional
training. But one should be weary of policies that would sacrifice the
substantial welfare gains from trade, and for that matter from automation.
Confronting the redistributive policy challenges is better than simply pushing
back trade or technological advancement.
Hence, in my view, instead of trying to revert decades of economic
integration, the way to move forward is to tap further into the as yet
unexploited gains that can be attained through a deeper economic integration
of the region. For example, the recent structural reform efforts in México have
opened up certain sectors that were previously closed off to foreign investors,
such as the oil and electricity sectors. Strengthening the bilateral relationship
between the US and México would mean more investment and employment
in projects like the two refineries that are being built in Texas to serve the
Mexican market or the wind farms that are being built in Baja California to
supply California with electricity. Additional opportunities for gains from
deeper integration could be attained if NAFTA rules can be simplified so that
more exporters can take advantage of the benefits of belonging to a free-trade
area.
México is willing to work with the US and Canada to build on and extend
NAFTA to the benefit of all parties involved. In fact, México has been working
hard to keep a sound macroeconomic framework and to improve its
microeconomic structure in order to become an even more attractive
destination for investment and to further promote the economic integration
of the region. In this sense, México is committed to proving that it can be a
trusted partner in the quest for growth and prosperity for the whole region.
Appendix
Graph 1. Total GDP: México
Annual % change, s.a
10
GATT China enters WTO
NAFTA Financial Crisis
8
Average = 3.46
6
Average = 2.36
Average = 2.22
Average = 2.13
Average = 2.02 4
2
0
Average (excl. 09-10) = 2.73
Average (excl. 95-96) = 4.91
-2
-4
-6
-8
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
s. a./ Seasonally adjusted figures.
Note: The red line denotes the simple average over the sample period.
Source: Elaborated by Banco de México with data from INEGI.
Graph 2. Total GDP: USA
Annual % change, s.a
10
GATT China enters WTO
NAFTA Financial Crisis
Average = 4.04
8
Average = 3.36
6
Average = 2.88
Average = 2.11
4
Average = 1.48
2
0
Average (excl. 09-10) = 2.01
Average (excl. 95-96) = 4.43
-2
-4
-6
-8
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
s. a./ Seasonally adjusted figures.
Note: The red line denotes the simple average over the sample period.
Source: Elaborated by Banco de México with data from Federal Reserve Economic Data, Federal Reserve Bank of St. Louis.
Graph 3. Total Factor Productivity: USA
Average annual % change
2
Europe (OECD)
NAFTA Financial Crisis
China enters WTO
USA
Europe (Selected
countries)
United States
Canada
1
0
-1
1990-1995 1996-2000 2001-2006 2007-2014
Note: The regions were estimated as a weighted average according to regional population. Regions are conformed by: 1. Europe (OECD):
Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia,
Luxembourg. Netherlands, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland, U.K.; and 2. Europe (Selected countries):
Austria, Belgium, Denmark, Finland, France, Germany, Luxembourg, Netherlands, Norway, Sweden, Switzerland, U.K.
Source: Elaborated by Banco de México with data from the Penn World Tables.
Graph 4. Total Factor Productivity: México
Average annual % change
5
Southeast Asia
NAFTA China enters WTO Financial Crisis
Latin America excl. Mexico
Four Europeans
4
United States
Mexico
3
China
Mexico 2
1
0
-1
-2
-3
1990-1995 1996-2000 2001-2006 2007-2014
Note: The regions were estimated as a weighted average according to regional population. Regions are conformed by: 1. Southeast
Asia: South Korea, Hong Kong, Malaysia, Singapore and Thailand; 2. Four Europeans: Spain, Greece, Ireland and Portugal and 3. Latin
America excl. México: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Guatemala, Nicaragua, Uruguay and Venezuela.
Source: Elaborated by Banco de México with data from the Penn World Tables.
Graph 5. Jobs Supported By Exports of Goods and Services, 1993-2009
Millions of jobs
10.3
NAFTA China enters WTO
10
9.5
9.3
9.2
9.0
8.9
8.8 8.8
8.6
8.5 8.5
8.3
8.0
7.8 7.8
8 7.6
7.4
6
4
2
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Department of Commerce International Trade Administration (2010). International Trade
Research Report no. 1: Exports Support American Jobs
(http://trade.gov/publications/pdfs/exportssupport-american-jobs.pdf)
Graph 6. Percent of Employment in Manufacturing in the United States
18.5
China enters
WTO
17.5
16.5
15.5
14.5
13.5
12.5
11.5
10.5
9.5
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Estimates from Federal Reserve Bank of St. Louis (FRED).
Graph 7. US: Price of Cars and Trucks relative to General Price Level1/
US city average, Index 1994=100
120
NAFTA
110
100
90
New Trucks
80
70
New Cars
60
50
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
1/ Price index for new trucks and new cars relative to CPI. Not seasonally adjusted.
Source: US Bureau of Labor Statistics.
References
Acemoglu, Daron and Pascual Restrepo. (2017). "Robots and Jobs: Evidence from US Labor
Markets." NBER Working paper No. 23285.
Arkolakis, Costas. Arnaud Costinot and Andrés Rodríguez-Clare. (2012). "New Trade Theory, Same
Old Gains?" American Economic Review.
Burstein, Ariel and Javier Cravino. (2015). "Measured Aggregate Gains from International Trade."
American Economic Journal: Macroeconomics.
Chiquiar, Daniel. Enrique Covarrubias and Alejandrina Salcedo. (2017). "Labor market consequences
of trade openness and competition in foreign markets." Banco de México Working Papers No.
201701.
Cocco, Federico. (2016). "Most US manufacturing jobs lost to technology, not trade." Financial
Times. https://www.ft.com/content/dec677c0-b7e6-11e6-ba85-95d1533d9a62
De Long, J. Bradford. (2017). "NAFTA and other trade deals have not gutted American
manufacturing- period." Vox.
http://www.vox.com/the-big-idea/2017/1/24/14363148/tradedeals-nafta-wto-china-job-loss-trump
Feenstra, Robert C. and David E. Weinstein. (2017). "Globalization, Markups, and US Welfare."
Journal of Political Economy (forthcoming).
Ferdman, Roberto A. (2015). "The rise of the avocado, America's new favorite fruit." Wonkblog, The
Washington Post. URL: the-sudden-rise-of-the-avocado-americas-new-favorite-fruit
Kenny, Charles. (2014). "Why Factory Jobs are Shrinking Everywhere." Bloomberg.
https://www.bloomberg.com/news/articles/2014-04-28/why-factory-jobs-are-shrinkingeverywhere
Pierce, Justin R. and Peter K. Schott. (2016). "The Surprisingly Swift Decline of US Manufacturing
Employment." American Economic Review.
Schrager, Allison. (2017). "Technology killed manufacturing jobs; trade is what will bring their
replacement." Quartz. https://qz.com/844284/technology-killed-manufacturing-jobs-trade-is-
what-will-bring-their-replacement/
US Chamber of Commerce. (2016).
https://www.uschamber.com/issue-brief/global-supply-chaincustoms-and-trade-facilitation.
US Department of Commerce. (2010).
http://trade.gov/publications/pdfs/exports-supportamerican-jobs.pdf
Wilson, Charles. (2016). "Growing Together: Economic ties between the United States and México."
Wilson Center, México Institute.