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The Effects of NAFTA
on U.S.-Mexican Trade and GDP
  May 2003  


Cover Graphic
© Photodisc/GettyImages



Notes

Unless otherwise indicated or apparent, all time-series values in this paper are quarterly and are seasonally adjusted. Similarly, unless otherwise indicated, all rate series--such as exports in billions of dollars or gross domestic product--are annual rates.

Data series for exports and imports were constructed from three compilations of trade data from the Bureau of the Census: the Interactive Tariff and Trade Data Web on the Web site of the International Trade Commission (www.usitc.gov); Direction of Trade Statistics, published by the International Monetary Fund; and the Haver Analytics database. The export values used are the free alongside ship (f.a.s.) values of total exports. The import values used are the customs values of general imports.





                
Preface

The North American Free Trade Agreement (NAFTA) went into effect on January 1, 1994, creating a free-trade area encompassing the United States, Canada, and Mexico. Since then, agreements have been proposed--and, in some cases, negotiations begun or even completed--for a Free Trade Area of the Americas and free-trade areas with a number of other countries of varying degrees of development. Consequently, assessing the effects of NAFTA is relevant to current debates about trade policy.

This Congressional Budget Office (CBO) paper--prepared at the request of the Chairman of the Senate Committee on Finance--examines aggregate U.S.-Mexican trade in goods in the first eight years after NAFTA went into effect and how it has been affected by the agreement and by other factors. The paper provides quantitative estimates of the effects of NAFTA on that trade and of the resulting effects on U.S. gross domestic product. (The paper focuses on U.S. trade with Mexico because U.S. trade with Canada had already been substantially liberalized in accordance with the Canada-United States Free Trade Agreement before NAFTA went into effect.)

Bruce Arnold of CBO's Microeconomic and Financial Studies Division prepared the paper under the direction of Roger Hitchner and David Moore. Charles Capone, Robert Dennis, Tracy Foertsch, Douglas Hamilton, Juann Hung, Rob McClelland, and Thomas Woodward of CBO provided valuable comments, as did Gary Hufbauer of the Institute for International Economics and David Gould of the Institute of International Finance, Inc.

Christian Spoor edited the paper, and Christine Bogusz proofread it. Kathryn Winstead prepared the paper for publication, Lenny Skutnik produced the printed copies, and Annette Kalicki prepared the electronic versions for CBO's Web site.

Douglas Holtz-Eakin
Director
May 2003




CONTENTS


  Summary
   
1  Introduction
      What Is NAFTA?
      How Should the Success or Failure of a Free-Trade Agreement Be Measured?
      How Has U.S.-Mexican Trade Changed Over Time?
   
2  Other Influences on U.S.-Mexican Trade Besides NAFTA
      Domestic U.S. Factors
      Mexican Economic Development
      Imports of Crude Oil from Mexico
      The Exchange Rate Between the Dollar and the Peso
      The Mexican Business Cycle
   
3  The Effects of NAFTA
      The Effects of NAFTA on U.S.-Mexican Trade
      The Effects of NAFTA on U.S. GDP
      A Few Notes About the Results
      Consistency of CBO's Results with Other Estimates in the Literature
   
  Appendix A
CBO's Model of U.S.-Mexican Trade

Appendix B
Assumptions for the Alternative Scenario in Chapter Three

Appendix C
Results from the Model Estimated Using Only Pre-NAFTA Data

Appendix D
Effects of the Assumption About the Real Exchange Rates and Incomes in the Absence of NAFTA



Tables
   
1.  Effects of NAFTA on U.S. Goods Trade with Mexico
2.  Effects of NAFTA on U.S. Gross Domestic Product
3.  CBO's Estimates of the Effects of NAFTA Compared with Others in the Literature
A-1.  Estimates and Statistics for Long-Term Equilibrium Equations for U.S.-Mexican Trade
A-2.  Estimates and Statistics for Dynamic Error-Correcting Equations for U.S.-Mexican Trade
C-1.  Effects of NAFTA on U.S. Goods Exports to and Imports from Mexico by CBO's Standard and Alternative Methodologies
C-2.  Effects of NAFTA on the U.S. Goods Trade Balance with Mexico by CBO's Standard and Alternative Methodologies
C-3.  Effects of NAFTA on U.S. Gross Domestic Product by CBO's Standard and Alternative Methodologies
   
Figures
   
S-1.  U.S. Trade in Goods with Mexico
S-2.  Real Exchange Rates for U.S. Trade in Goods with Mexico
S-3.  Mexican Industrial Production and Real Gross Domestic Product
S-4.  U.S. Balance of Trade in Goods with Mexico Under Alternative Scenarios
1.  Tariff Rates on U.S.-Mexican Trade Before and After NAFTA
2.  U.S. Goods Trade with Mexico
3.  Mexico's Share of U.S. Goods Trade with the World
4.  U.S. Goods Trade Balance with Mexico
5.  U.S. Goods Trade Balance with Mexico and with the World
6.  U.S. Goods Trade with Mexico as a Share of U.S. Goods Trade with the World
7.  Crude Oil as a Share of U.S. Goods Imports from Mexico
8.  Real Exchange Rates for U.S. Goods Trade with Mexico
9.  Mexican Industrial Production and Real Gross Domestic Product
10.  Net Foreign Investment in Mexico
11.  U.S. Goods Trade with Mexico with and Without NAFTA
12.  U.S. Goods Trade Balance with Mexico Under Alternative Scenarios
B-1.  Real Exchange Rate for U.S. Goods Exports to Mexico Under Alternative Scenarios
B-2.  Mexican Industrial Production Index Under Alternative Scenarios
B-3.  Real U.S. GDP Under Alternative Scenarios
C-1.  U.S. Goods Trade with Mexico by CBO's Alternative Methodology
C-2.  U.S. Goods Trade Balance with Mexico by CBO's Alternative Methodology
C-3.  U.S. Goods Trade Balance with Mexico Under Alternative Scenarios by CBO's Alternative Methodology
C-4.  Actual U.S. Goods Trade Balance with Mexico Under Alternative Scenarios by CBO's Alternative Methodology
   
Boxes
   
1.  NAFTA and Foreign Investment
2.  The Effects of Trade Creation and Trade Diversion
3.  Trade Balances with Individual Countries Versus the Balance with the Entire World
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