Mexico’s Growth Problem

PRINCETON – When Mexico’s then-President Carlos Salinas de Gortari and his American counterpart, Bill Clinton, signed the North American Free Trade Agreement (NAFTA) more than 20 years ago, the hope was that the Mexican economy would be swept forward by a rising wave of globalization. By many measures, that hope has been amply fulfilled.

Mexico’s foreign-trade volume (exports plus imports) climbed steadily after NAFTA entered into force, roughly doubling, to more than 60% of GDP. Net foreign investment inflows relative to GDP tripled. Though Mexico is an oil exporter, its manufactured exports have led the way, as the economy has become ever more tightly integrated into North American supply chains. The automotive and steel industries, once inefficient and kept alive by protectionist trade barriers, are now highly productive and thriving.

Like so many other countries, Mexico was initially hit hard by Chinese competition in global markets, particularly after China became a member of the World Trade Organization at the end of 2001. Nonetheless, Mexico’s proximity to the US market and its conservative monetary, fiscal, and labor-market policies have provided significant protection.

Dollar wages, moreover, have grown much more slowly than in China; As a result, labor is now some 20% cheaper in Mexico in relative terms. Taking productivity trends into account, unit labor costs have also risen less than in China and other major competitors, allowing Mexico to recover since the mid-2000s some of the market share it had previously lost.