The Effects of NAFTA on Mexico: A Detailed Overview

The North American Free Trade Agreement (NAFTA) was a historic trade agreement signed in 1994 by the United States, Canada, and Mexico. Its primary goal was to eliminate trade barriers, increase investment, and promote economic cooperation between the three countries. A key example of NAFTA’s ongoing influence is Section 321 de minimis, a provision introduced in 2015. This policy raised the de minimis duty-free threshold for goods entering the U.S. from Mexico, increasing the value from $200 to $800. This change has had a positive effect on Mexico's trade economy, further enhancing its position within the North American trade bloc.

NAFTA generated significant economic benefits for Mexico, but it also introduced several challenges, particularly in terms of income inequality, agriculture, and the environment. Below is an in-depth look at how NAFTA has influenced Mexico in these key areas.

One of the most notable impacts of NAFTA on Mexico was the rapid expansion of its trade with the United States and Canada. Prior to NAFTA, Mexico’s trade was relatively limited, and it relied heavily on tariffs and restrictions. NAFTA helped to eliminate these barriers, making it easier for Mexican products to enter the U.S. and Canadian markets.

After NAFTA, Mexico’s exports surged, particularly in sectors such as automobiles, electronics, and agricultural products. The U.S. became Mexico’s largest trading partner, and in 2018, about 80% of Mexico’s exports went to the U.S. This increase in trade contributed to significant economic growth and development, especially in the manufacturing sector.

In addition to boosting traditional industries like oil and agriculture, NAFTA helped diversify Mexico’s exports. Electronics, auto parts, and machinery became major exports, and Mexico gained a reputation as a global manufacturing hub. This diversification helped Mexico reduce its reliance on a single industry and created a more robust economy.

One of the most significant effects of NAFTA on Mexico was the rapid growth of its manufacturing industry. The agreement encouraged foreign companies, particularly from the U.S., to set up production facilities in Mexico. These companies were attracted by Mexico’s low labor costs, proximity to the U.S. market, and favorable trade terms under NAFTA.

The maquiladora program, which allows foreign companies to establish assembly plants along Mexico’s northern border, expanded significantly under NAFTA. These plants primarily focused on electronics, automotive parts, textiles, and other goods for export. The maquiladora industry provided millions of jobs, particularly for workers in northern Mexico, and helped modernize the country’s industrial base.

The influx of foreign investment brought advanced technology and new business practices to Mexico. Mexican manufacturers gained access to modern equipment, production techniques, and management practices. This technological transfer helped improve productivity and quality in Mexican manufacturing.

Read More: How Has Nafta Affected The Manufacturing Sector In Mexico?

NAFTA led to job creation in Mexico, but the quality of those jobs and the wage disparities became a source of concern. Mexico experienced a significant increase in employment, particularly in export-driven industries such as manufacturing and assembly. However, these jobs were often low-paying and lacked benefits, which led to a growing income disparity in the country.

Although millions of new jobs were created, wages remained low in many sectors. Workers in manufacturing, for instance, often earned minimum wages, which did not keep pace with inflation. While the number of jobs grew, the benefits of this growth were not equally distributed across society, leading to increased income inequality.

The growth of manufacturing jobs was largely concentrated in specific regions, particularly along the U.S.-Mexico border. This led to regional disparities, with some areas experiencing rapid economic growth, while others, particularly in southern Mexico, continued to struggle with poverty and unemployment. The lack of job opportunities in rural and southern regions forced many Mexicans to migrate to cities or even to the U.S. in search of better work prospects.

Mexico’s manufacturing sector benefited significantly from NAFTA, but the agricultural sector faced tough challenges. The agreement led to the removal of tariffs on U.S. agricultural products, allowing cheaper U.S. products to flood the Mexican market. This had a particularly detrimental impact on small-scale Mexican farmers.

Mexican farmers, particularly those in rural areas, struggled to compete with subsidized U.S. agricultural products. Crops like corn, rice, and wheat, which were previously staples in Mexico, were suddenly available at much lower prices. This led to a decline in domestic agricultural production, as Mexican farmers could not compete with the heavily subsidized U.S. imports.

The collapse of small-scale farming led to widespread unemployment in rural Mexico. As a result, many farmers and rural workers were forced to migrate to cities in search of work, exacerbating urbanization and contributing to social unrest. In many cases, farmers were also encouraged to migrate to the U.S., seeking better opportunities.

NAFTA made Mexico a more attractive destination for foreign investment. The agreement provided U.S. and Canadian companies with better access to the Mexican market, and Mexico benefited from increased foreign capital. This led to the creation of new industries and an expansion of infrastructure.

Foreign Direct Investment (FDI) flows into Mexico surged after the implementation of NAFTA. Many companies from the U.S. and other countries invested in the Mexican market, establishing manufacturing plants, distribution centers, and service businesses. This investment helped modernize the Mexican economy and create a more competitive market.

Foreign investment also led to improvements in infrastructure, particularly in transportation and telecommunications. The increased demand for goods and services required better roads, ports, and communication systems. This infrastructure development played a crucial role in supporting Mexico’s growing manufacturing sector.

NAFTA also had environmental consequences for Mexico. The increased industrial activity, particularly in the manufacturing sector, put significant pressure on the country’s natural resources. Water, air, and soil pollution became growing concerns in areas with high levels of industrial production.

Manufacturing plants often lacked adequate environmental regulations, leading to pollution. Additionally, the increased demand for raw materials, such as water and energy, strained Mexico’s natural resources. As the industrial sector grew, so did the environmental impact, leading to long-term sustainability challenges.

Although NAFTA included provisions for environmental protection, the enforcement of these regulations was often weak. Mexico struggled to balance economic growth with environmental protection, and many companies took advantage of lax regulations to minimize costs.

The economic changes brought about by NAFTA also influenced migration patterns in Mexico. The decline in agricultural jobs, coupled with the growth of manufacturing, led to increased migration to urban areas and the United States.

Many rural Mexicans moved to cities in search of jobs, contributing to rapid urbanization. This migration led to the growth of Mexico’s urban population, creating both opportunities and challenges in terms of housing, education, and public services.

As agricultural jobs dwindled in Mexico, many Mexicans sought better economic opportunities in the United States. NAFTA indirectly contributed to the rise in immigration, as workers from rural areas migrated across the border to find employment in the U.S.

In 2020, NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA). The new agreement aimed to address some of the challenges created by NAFTA, particularly in areas like labor rights, environmental protections, and digital trade.

The USMCA includes stronger labor protections, aiming to improve working conditions and wages in Mexico. The agreement also encourages better enforcement of labor laws, which could lead to improved working conditions for Mexican workers.

The USMCA introduces updated environmental standards and more stringent regulations regarding digital trade, which could help Mexico address some of the challenges posed by NAFTA, such as environmental degradation and outdated technology.

NAFTA has had a profound impact on Mexico’s economy, driving growth in trade and manufacturing while presenting challenges in agriculture and the environment. As Mexico continues to adapt and evolve, the future remains full of potential, with new opportunities emerging from evolving trade agreements like the USMCA.

At AMREP Mexico, we are committed to contributing to this growth by upholding the highest standards of quality, innovation, and sustainability in every aspect of our work. As a Top-Rated Procurement Company, we strive to deliver exceptional value and service to our clients and partners. Join us as we continue to navigate this dynamic economic environment and build a brighter, more prosperous future for Mexico and beyond.