June 20, 2024
As we enter the fourth decade of the North American Free Trade Agreement (NAFTA), and now its successor, the United States-Mexico-Canada Agreement (USMCA), it is worth taking a quick look at the track record. Folks who can remember back to the debate around the agreement might recall that it was supposed to spur growth in Mexico and allow it to close the income gap with the United States. It hasn’t turned out that way.
The graph below shows the ratio of per capita GDP in Mexico to per capita GDP in the United States going back to 1980.
Source: International Monetary Fund.
At the start of this period, Mexico’s per capita GDP was well over half of the per capita GDP in the United States. It then fell sharply over the course of the decade, bottoming out at 38.6 percent in 1989.
There is a simple story here. The price of oil collapsed. Mexico’s economy was booming in the late 1970s as the Iranian revolution sent world oil prices soaring. As oil producing nations sought to ramp up production and the world economy went into recession, oil prices plummeted. Countries like Mexico, which were heavily dependent on oil exports, took a huge hit.
By 1990 the economy had turned the corner and was making at least moderate progress relative to the US, but that ended with a currency crisis at the start of 1994. While the crisis was at most indirectly related to NAFTA, Mexico never recovered the lost ground and continued on a downward relative course.
The ratio of Mexico’s GDP to US GDP had fallen to 35.9 percent by the 10th anniversary of NAFTA in 2004. It dropped further to 34.4 percent by 2014 on the 20th anniversary. The IMF’s projection for 2024 puts Mexico’s per capita GDP at just 30.4 percent of US GDP. Its per capita income grew by 20.3 percent over the last 30 years, an average annual rate of just over 0.6 percent.
GDP growth is not everything. If income is more evenly distributed or the government has prioritized meeting social needs like education and health care, then income gains may understate the benefits to society. But that story does not seem likely with Mexico. In any case, the promise of NAFTA that it would lead to convergence between Mexico and the two richer countries in the pact clearly has not been fulfilled.
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