How Has NAFTA Affected The Manufacturing Sector In Mexico Since Its Inception In 1994?

NAFTA brought forth the first trade agreement between two developed countries and an emerging market in North America. The reasons behind the three nations signing the free trade agreement were multifaceted. One of them was that it allowed the US and Canada to compete with other upcoming markets such as China and the European Union. 

On the other hand, Mexico’s reasons for signing NAFTA were a bit different. For that country, it served as an ideal opportunity to modernize its economy. NAFTA was also able to build on the trans-pacific partnership and share various key goals among member states, including free trade.

The implementation of the United States-Mexico-Canada Agreement (USMCA) has marked a significant milestone in the evolution of Mexican manufacturing, building upon the foundation laid by its predecessor, NAFTA. This trilateral trade deal has introduced several new provisions aimed at further enhancing the competitiveness of Mexican manufacturing on the global stage. Among the notable impacts of USMCA on Mexican manufacturing is the bolstering of labor rights and environmental protections, aiming to level the playing field among the three signatory countries.

Additionally, USMCA has facilitated increased access to the vast North American market for Mexican manufacturers, particularly benefiting the automotive, electronics, and textiles industries. The agreement also encourages higher regional content in manufacturing, which has spurred further investments in Mexico's manufacturing sector, fostering innovation and technological advancement. 

This strategic alignment under USMCA has not only solidified Mexico's position as a key player in North American manufacturing but also attracted significant foreign investment, contributing to economic growth and job creation within the country. Through USMCA, Mexican manufacturing continues to thrive, offering a more integrated and competitive framework for trade and cooperation in North America.

How Has NAFTA Affected The Manufacturing Sector In Mexico?

After numerous conversations and intense negotiations between the three signatory countries to the pact—the US, Mexico, and Canada, NAFTA finally went into effect in 1994. 

During the talking phase that took place before the implementation of the agreement, the Mexican public was guaranteed that the impact of NAFTA on the country would be better economic growth and increased prosperity. The people were promised that these would eventually lead to more job opportunities for the working class. 

Today, years after the three countries signed the agreement, results from the Mexican perspective have been somewhat mixed.

The main goal of the North American Free Trade Agreement was to do away with trade tariffs between member countries. Ten years after its signing, all such levies have been scrapped. From a macroeconomic standpoint, the pact was a success, using the criteria of trading volumes between Mexico, the US, and Canada.

Since 1994, trade between the member states has increased by as much as 400%. From where Mexico stands, the accord changed the country from having an extremely closed and protected economy, to the world’s most open one. This has had both positive and negative effects on the Mexican economy.

The Manufacturing Sector

From a manufacturing standpoint, the effects of NAFTA seen in Mexico can be considered positive in general terms. Following the signing of the agreement, many foreign manufacturing companies set up shop within the country’s borders. 

As a result, manufacturing exports, which stood at 8.5% of the country’s gross domestic product, rose to 36.95% by 2013. Even though NAFTA was touted as being the reason behind the loss of 44,000 domestic manufacturing jobs since its signing, Mexico has actually seen the creation of more than 500,000 jobs due to substantial foreign investment activities.

On the other hand, even with the influx of manufacturing jobs, the pay rate for direct factory workers has remained stagnant since NAFTA’s inception in 1994. It is the upper and middle-level management positions that were once usually filled by foreigners and are now occupied by Mexicans that have seen the highest wage increases. 

Compensation for such workers is now close to those with similar jobs in the US. It is also important to note that in 2016, the automotive industry in Mexico made up 3.1% of the country’s GDP.

To Conclude

Despite experiencing an overall economic growth of 2% annually since the signing of NAFTA, one manufacturing sector in Mexico that has been significantly impacted by the agreement is the automotive industry. This is because the country has been the recipient of substantial foreign investment by global car manufacturers. 

Such initiatives have made it the fourth most profitable exporter of vehicles in the world. Currently, only South Korea, Japan, and Germany ship more cars to foreign buyers.

To learn more about how NAFTA affected the economies of it’s participating members, click here.