U.S.-Mexico Economic Relations: Trends, Issues, and Implications

U.S.-Mexico Economic Relations:
Trends, Issues, and Implications
Updated June 3, 2008
M. Angeles Villarreal
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

U.S.-Mexico Economic Relations:
Trends, Issues, and Implications
Summary
Mexico has a population of about 109 million people making it the most
populous Spanish-speaking country in the world and the third most populous country
in the Western Hemisphere. Based on a gross domestic product (GDP) of $893
billion in 2007 (about 6% of U.S. GDP), Mexico has a free market economy with a
strong export sector. Economic conditions in Mexico are important to the United
States because of the proximity of Mexico to the United States, the close trade and
investment interactions, and other social and political issues that are affected by the
economic relationship between the two countries.
The United States and Mexico have strong economic ties. An important feature
of the relationship is the North American Free Trade Agreement (NAFTA), which
has been in effect since 1994. In terms of total trade, Mexico is the United States’
third largest trading partner, while the United States ranks first among Mexico’s
trading partners. In U.S. imports, Mexico ranks third among U.S. trading partners,
after China and Canada, while in exports Mexico ranks second, after Canada. The
United States is the largest source of foreign direct investment (FDI) in Mexico.
These links are critical to many U.S. industries and border communities.
In 2007, about 11% of total U.S. merchandise exports were destined for Mexico
and 11% of U.S. merchandise imports came from Mexico. In the same year U.S.
exports to Mexico increased almost 4%, while imports from Mexico increased about

7%. For Mexico, the United States is a much more significant trading partner.

About 82% of Mexico’s exports go to the United States and 50% of Mexico’s
imports come from the United States. FDI forms another part of the economic
relationship between the United States and Mexico. The United States is the largest
source of FDI in Mexico. U.S. FDI in Mexico totaled $84.7 billion in 2006. The
overall effect of NAFTA on the U.S. economy has been relatively small, primarily
because two-way trade with Mexico amounts to less than three percent of U.S. GDP.
Major trade issues between Mexico and the United States have involved the access
of Mexican trucks to the United States; the access of Mexican sugar, tuna, and
avocados to the U.S. market; and the access of U.S. sweeteners to the Mexican
market.
Over the last decade, the economic relationship between the United States and
Mexico has strengthened significantly. The two countries continue to cooperate on
issues of mutual concern. On March 23, 2005, President Bush met with the leaders
of Mexico and Canada to discuss issues related to North American trade,
immigration and defense. After the meeting, the three leaders announced the
Security and Prosperity Partnership of North America (SPP), an initiative that is
intended to increase cooperation and information sharing in an effort to increase and
enhance prosperity in the United States, Canada, and Mexico. In April 2008, the
three countries agreed to advance the SPP agenda by focusing on five priority areas.
This report will be updated as events warrant.

Contents
U.S.-Mexico Economic Trends.......................................1
U.S.-Mexico Merchandise Trade..................................2
Mexico-U.S. Bilateral Foreign Direct Investment.....................6
Mexico’s Export-Oriented Assembly Plants.........................8
Worker Remittances to Mexico..................................10
Security and Prosperity Partnership of North America................11
The Mexican Economy............................................13
Economic Reform and the 1995 Currency Crisis....................13
Current Economic Conditions ...................................15
Mexico’s Regional Free Trade Agreements........................17
NAFTA and the U.S.-Mexico Economic Relationship....................18
Effects on the U.S. Economy....................................18
Effects on the Mexican Economy................................20
Major Issues in U.S.-Mexico Trade Relations...........................21
Policy Issues.....................................................23
List of Figures
Figure 1. U.S. Merchandise Trade with Mexico..........................4
Figure 2. GDP Growth............................................15
List of Tables
Table 1. Key Economic Indicators for Mexico and the United States.........3
Table 2. U.S. Imports from Mexico: 1997-2007..........................5
Table 3. U.S. Exports to Mexico: 1997-2007............................6
Table 4. U.S.-Mexican Foreign Direct Investment Positions: 1994-2006......7

U.S.-Mexico Economic Relations:
Trends, Issues, and Implications
Mexico has a population of slightly over 107 million people making it the most
populous Spanish-speaking country in the world and the third most populous country
in the Western Hemisphere (after the United States and Brazil). The bilateral
economic relationship with Mexico is among the most important for the United
States because of Mexico’s proximity and because of the large amount of trade and
investment interactions. The most significant feature of the relationship is the North
American Free Trade Agreement (NAFTA), through which the United States,
Mexico, and Canada form the world’s largest free trade area, with about one-third the
world’s total gross domestic product (GDP).
The United States and Mexico share common interests and are closely tied in
areas not directly related to trade and investment. The two countries share a 2,000
mile border and have extensive interconnections through the Gulf of Mexico. There
are links through migration and tourism, environment and health concerns, and
family and cultural relationships. President George W. Bush and former Mexican
President Vicente Fox made efforts to strengthen the relationship between the two
countries. The Bush Administration anticipates continued strong relations under
President Felipe Calderón.¹
The economic relationship with Mexico is important to U.S. national interests
and to the U.S. Congress for many reasons. As the United States considers free trade
initiatives with other Latin American countries, the effects of NAFTA may provide
policymakers some indication of how these initiatives might affect conditions in the
overall U.S. economy. In the 110^th Congress, issues of concern are related mostly
to the issue of Mexican migrant workers in the United States, but may also include
economic conditions in Mexico and the possible effect of NAFTA on the United
States and Mexico. This report provides an overview of U.S.-Mexico economic
trends, background information on the Mexican economy, the effects of NAFTA on
the U.S.-Mexico economic relationship, and major trade issues between the United
States and Mexico. This report will be updated as events warrant.
U.S.-Mexico Economic Trends
The United States and Mexico have strong economic ties. The United States is,
by far, Mexico’s most important partner in trade and investment, while Mexico is the
United States third largest trade partner after China and Canada. Many economists

¹ See CRS Report RL32724, Mexico-U.S. Relations: Issues for Congress, by Colleen W.
Cook.

have focused much attention on the on-going transformation of Mexico into a
manufacturing-for-export nation since the late 1980s and the importance of exports
to its economy. Exports represent 33% of Mexico’s GDP, up from 10% twenty years
ago. After oil and gas, most of these exports are manufactured goods. Over 80% of
Mexico’s exports are headed to the United States. Mexico’s reliance on the United
States as a trade partner appears to be diminishing, although slightly. Between 2004
and 2007, the U.S. share of Mexico’s total imports decreased from 56% to 50%,
while the share of total Mexican exports going to the United States decreased from

89% to 82%. Although Mexican exports to the United States are steadily increasing,

Mexico’s share of the U.S. market has lost ground since 2002. In 2003, China
surpassed Mexico as a supplier of U.S. imports, and Mexico now ranks third, after
China and Canada, as a source of U.S. imports.
Mexico’s economy is relatively small compared to the U.S. economy. Mexico’s
gross domestic product (GDP) in 2007 was $893 billion, about six percent of U.S.
GDP (see Table 1). Mexico’s exports as a percent of GDP amounted to 33% in
2007. Because over 80% of Mexico’s exports are destined for the United States, any
change in U.S. demand can have strong economic consequences in Mexican
industrial sectors.
The immigration issue has received much attention by political leaders in recent
years and it is one that can be linked to the economic situation in Mexico, although
it has social and political aspects as well. Approximately 11.5 to 12 million
unauthorized immigrants resided in the United States in 2006, with 56% from²
Mexico. Economic conditions in Mexico and other countries, such as poverty and
unemployment, are a major factor related to the migration issue. These workers often
send money to their families in Mexico to help provide food and shelter. Worker
remittances to Mexico, which increased from $13.4 billion in 2003 to $26 billion in³
2006, are an important source of income for the Mexican economy. Remittances to
Mexico rank second after oil as a foreign-exchange generator for Mexico.⁴
U.S.-Mexico Merchandise Trade
Mexico ranks second among U.S. export markets and is the United States’ third
largest trading partner in terms of total trade. In 2007, about 11% of total U.S.
merchandise exports were destined for Mexico and 11% of U.S. merchandise imports
came from Mexico. In the same year U.S. exports to Mexico increased 4% while
imports from Mexico increased about 7%. For Mexico, the United States is a much
more significant trading partner. About 82% of Mexico’s exports go to the United
States and 50% of Mexico’s imports come from the United States. Mexico’s second

² Pew Hispanic Center, The Size and Characteristics of the Unauthorized Migrant
Population in the U.S. Estimates Based on the March 2005 Current Population Survey,
March 7, 2006.
³ Pew Hispanic Center, Fact Sheet, Indicators of Recent Migration Flows from Mexico, May

30, 2007, p. 10.

⁴ Federal Reserve Bank of Dallas, Southwest Economy, “Explaining the Increase in
Remittances to Mexico,” by Jesus Cañas, Roberto Coronado and Pia M. Orrenius.

largest trading partner is China, accounting for approximately 6% of Mexico’s
exports and imports.⁵
Table 1. Key Economic Indicators
for Mexico and the United States
MexicoUnited States
1997 2007 1997 2007
Population (millions)96109^a273302
Nominal GDP ($US billions)^b4018938,30413,841
GDP, PPP^c Basis 7841,346^a8,30413,841
($US billions)
Per Capita GDP ($US)4,1878,220^a30,42945,820
Per Capita GDP in $PPPs8,17412,380^a30,42945,820
Total Merchandise Exports1102726891,163
(US$ billions)
Exports as % of GDP^d30%33%12%12%
Total Merchandise Imports1102838701953
(US$billions)
Imports as % of GDP^d30%34%13%17%
Public Debt/GDP37%20%^an.a.n.a.
^Source:^Co^m^p^iled^b^y^{CRS b}^a^sed^oⁿ^d^a^{ta f}^r^o^m^Ecoⁿ^o^m^{ist I}ⁿ^tellig^en^{ce Un}^{it (}^E^I^U⁾^oⁿ^-^lin^{e d}^a^tab^a^se.
^{a. Es}^tim^{ated am}^ouⁿ^t^.
^b^.^{PPP N}^o^mⁱⁿ^a^l^G^D^Pⁱ^s^c^a^l^c^u^l^a^t^e^{d by}^E^I^U^ba^s^e^{d on}^fⁱ^g^u^r^e^s^f^r^om^Wor^l^{d Ba}ⁿ^k^and^W^o^r^l^d
^D^e^v^e^l^opm^en^t^In^di^cat^ors^.
^c^.^{PPP r}^e^f^e^r^s^t^o^pu^r^c^h^a^sⁱⁿ^g^pow^e^r^pa^rⁱ^t^y^,^w^hⁱ^c^h^r^e^f^l^e^c^t^s^t^h^e^pu^r^c^h^a^sⁱⁿ^g^pow^e^r^of^f^o^r^eⁱ^gⁿ^c^u^r^r^eⁿ^cⁱ^e^s
ⁱⁿ^{U.S. d}^o^llar^s^.
^{d. Ex}^port^s^an^{d Im}^port^s^as^%^of^G^D^P^deri^v^e^{d by}^EIU^.
U.S. merchandise trade with Mexico has grown considerably over the last ten
years (see Figure 1). Although some of the increase in trade could be attributable to
NAFTA, there are other variables that affect trade, such as exchange rates and
economic conditions. Mexico’s currency crisis of 1995 limited the purchasing power
of the Mexican people in the following years and also made products from Mexico
less expensive for the U.S. market. Economic factors such as these played a role in
the increasing U.S. trade deficit with Mexico which went from a $1.4 billion surplus
in 1994 to a $90.8 billion deficit in 2007.

⁵ Data compiled by CRS using Global Trade Atlas database.

U.S. imports from Mexico increased from $85.0 billion in 1997 to $210.2
billion in 2007, while U.S. exports to Mexico increased from $68.4 billion in 1997
to $119.4 billion in 2007. The downturn in the U.S. economy in 2001 caused a
slowdown in trade, with a temporary decrease in both U.S. imports from and exports
to Mexico. As a result, Mexico’s economy followed U.S. economic trends and also
experienced a period of slow growth after 2001. In 2004, as economic conditions
improved, trade with Mexico increased. Since 1997, the U.S. trade deficit with
Mexico has increased steadily to $90.8 billion in 2007 (see Table 2).
Several studies between 2003 and 2004 on the effects of NAFTA found that
trade deficits were largely driven by macroeconomic trends, and, in the case of U.S.-
Mexico trade, caused by the respective business cycles in Mexico and the United⁶
States. Strong U.S. growth in the 1990s combined with Mexico’s deep recession in
1995 were the main factors cited for the large deficits. None of the studies attributed
the peso crisis to NAFTA, but to structural misalignments in the Mexican economy
combined with political events.⁷
Figure 1. U.S. Merchandise Trade with Mexico

250
200
150
100
50
0
-50
-100
1 997 1999 2001 2 003 2 005 2 007
^U^.^S^.^E^x^por^t^s^U.^S^.^Im^p^o^r^t^s^U^.^S^.^Tr^ade^B^a^l^anc^e
^Source:^Un^{ited States}^Iⁿ^t^e^rⁿ^ation^a^{l T}^r^{ade C}^o^m^mⁱ^s^sⁱ^on^{, In}^teractiv^{e T}^a^rif^f^an^{d T}^r^{ade Data W}^e^b
^[^h^ttp^://d^ataw^eb^.u^sitc.g^o^v^]^.^Co^m^p^iled^b^y^CRS.
⁶ See CRS Report RS21737, NAFTA at Ten: Lessons from Recent Studies, by J.F. Hornbeck.
⁷ Ibid.

The leading U.S. import item from Mexico in 2007 was oil and gas, which
amounted to $30.27 billion, or 14.4% of U.S. imports from Mexico (see Table 2).
The next leading import items were motor vehicles ($23.08 billion or 11.0% of total);
motor vehicle parts ($22.65 or 10.8% of total); audio and video equipment ($17.06
billion or 8.1% of total); and communications equipment ($13.06 billion or 6.2% of
total). The leading U.S. export item to Mexico in 2007 was motor vehicle parts,
which amounted to $9.40 billion, or 7.9% of total exports to Mexico (see Table 3).
The next leading export items were basic chemicals ($6.50 billion or 5.4% of total);
petroleum & coal products ($5.66 billion or 4.7% of total); resin, synthetic rubber
and products ($5.43 billion or 4.5% of total; and semiconductors and electronic
components ($5.77 billion or 4.8% of total). The U.S. industries with the highest
volume of trade (imports and exports) with Mexico are the automotive, chemical and
allied products, and computer equipment industries.
Table 2. U.S. Imports from Mexico: 1997-2007
($ Billions)^a
Leading Items199719992001200320052007Change
(NAIC 4-digit)
Oil and Gas6.875.528.1613.6722.4830.27341%
Motor Vehicles12.2515.7721.3019.0318.3623.0888%
Motor Vehicle10.1212.5313.2215.9919.3322.65124%
Parts
Audio/V i deo 5.35 7.05 7.71 6.91 9.87 17.06 219%
Equipment
Communication 1.97 4.08 6.27 5.98 7.34 13.06 563%
s Equipment
Other 48.44 64.07 73.85 75.62 91.84 104.04 115%
Total 85.00 109.02 130.51 137.20 169.22 210.16 147%
^Source:^C^o^m^p^{iled by}^C^R^{S u}^sⁱⁿ^g^USIT^C^In^teractiv^{e T}^a^rif^f^an^{d T}^r^{ade DataW}^e^{b at}
^[^h^ttp^://d^ataw^eb^.u^sitc.g^o^v^]^:^NA^I^C⁴^-^dⁱ^g^{it lev}^e^l.
^{a. No}^mⁱⁿ^a^{l U.S. d}^o^llar^s^.

Table 3. U.S. Exports to Mexico: 1997-2007
($ Billions)^a
Leading Items199719992001200320052007Change
(NAIC 4-digit)
Motor Vehicle7.596.938.797.117.399.4024%
Parts
Ba s i c 2.40 2.48 2.74 3.35 5.01 6.50 171%
Chemicals
Petroleum &1.531.862.672.314.735.66270%
Coal Products
Resin, Synthetic1.942.182.522.944.515.43180%
Rubber & Other
Products
Semi conductors 7.45 8.86 12.02 7.40 6.56 5.77 -23%
and Other
Electronic
Components
Other 47.48 59.07 61.8 60 73.47 86.62 82%
Total 68.39 81.38 90.54 83.11 101.67 119.38 75%
^Source:^C^o^m^p^{iled by}^C^R^{S u}^sⁱⁿ^g^USIT^C^In^teractiv^{e T}^a^rif^f^an^{d T}^r^{ade DataW}^e^{b at}
^[^h^ttp^://d^ataw^eb^.u^sitc.g^o^v^]^:^NA^I^C⁴^-^dⁱ^g^{it lev}^e^l.
^{a. No}^mⁱⁿ^a^{l U.S. d}^o^llar^s^.
Mexico-U.S. Bilateral Foreign Direct Investment
Foreign direct investment (FDI) forms another part of the economic relationship
between the United States and Mexico. FDI consists of investments in real estate,
manufacturing plants, and retail facilities, in which the foreign investor owns 10%
or more of the entity. The United States is the largest source of FDI in Mexico. U.S.
FDI on a historical cost basis in Mexico increased from $17 billion in 1994 to $84.7
billion in 2006, nearly a 400% increase (see Table 4).
Mexican FDI in the United States is much lower than U.S. investment in
Mexico, with levels of Mexican FDI fluctuating over the last ten years. In 2005,
Mexican FDI in the United States totaled $8.7 billion, representing an increase of
over 300% since 1994, as shown in Table 4.

Table 4. U.S.-Mexican Foreign Direct
Investment Positions: 1994-2006
Historical Cost Basis
(US$Millions)
Mexican FDI inU.S. FDI
the U.S.in Mexico
19942,06916,968
19951,85016,873
19961,64119,351
19973,10024,050
19982,05526,657
19991,99937,151
20007,46239,352
20016,64552,544
20027,48355,724
20036,68061,526
20048,16763,502
20058,65371,423
20066,07584,699
^Source:^U^.^S^.^D^e^part^m^eⁿ^t^of^C^o^m^m^e^{rce, Bu}^reau^of^Econ^omⁱ^c^Aⁿ^al^y^sⁱ^s^.
The sharp rise in U.S. investment in Mexico since NAFTA implementation is
also a result of the liberalization of Mexico’s restrictions on foreign investment in the
late 1980s and the early 1990s. Prior to the mid-1980s, Mexico had a very protective
policy that restricted foreign investment and controlled the exchange rate to
encourage domestic growth, affecting the entire industrial sector. Mexico’s trade
liberalization measures and economic reform in the late 1980s represented a sharp
shift in policy and helped bring in a steady increase of FDI flows into Mexico.
NAFTA provisions on foreign investment helped to lock in the reforms and increase
investor confidence. Under NAFTA, Mexico gave U.S. and Canadian investors
nondiscriminatory treatment of their investments in Mexico as well as investor
protection. NAFTA may have encouraged U.S. FDI in Mexico by increasing investor
confidence, but much of the growth may have occurred anyway because Mexico
likely would have continued to liberalize its foreign investment laws with or without
NAFTA.

Nearly half of total FDI investment in Mexico is in the manufacturing industry
of which the maquiladora industry forms a major part. (See section on Mexico’s
Export-Oriented Assembly Plants below.) Mexico’s maquiladora industry is
important to the economic relationship of the United States and Mexico in several
ways. In Mexico, the industry has helped attract investment from countries such as
the United States that have a relatively large amount of capital. Therefore, Mexico
is able to attract some of the foreign direct investment it was seeking when it
liberalized trade and investment barriers. For the United States, the industry is
important because U.S. companies are able to locate their labor-intensive operations
in Mexico and lower their labor costs in the overall production process. Many
economists believe that maquiladoras are an important part of U.S. corporate strategy
in achieving competitively priced goods in the world marketplace.⁸ Other analysts
are concerned that the industry has caused U.S. companies to move their
manufacturing facilities to Mexico at the expense of U.S. workers.
Mexico’s Export-Oriented Assembly Plants⁹
Mexico’s export-oriented assembly plants are closely linked to U.S.-Mexico
trade in various labor-intensive industries such as auto parts and electronic goods.
These export-oriented plants generate a large amount of trade with the United States
and a majority of the plants have U.S. parent companies. Foreign-owned assembly
plants, commonly called maquiladoras, account for a substantial share of Mexico’s
imports and about half of its exports. The largest maquiladora operation, Delphi
Automotive Systems, headquartered in the United States, has 51 plants with 66,000
employees in Mexico.¹⁰ Most maquiladora plants are located along the U.S.-Mexico
border. The Mexican metropolitan areas with the highest maquiladora activity as of
December 2006 were the Mexican border cities of Tijuana, Baja California, 568

⁸ Federal Reserve Bank of Dallas, “The Binational Importance of the Maquiladora Industry,”
Southwest Economy, Issue 6, November/December 1999.
⁹ Mexico’s export-oriented industries began with the maquiladora program established in
the 1960s by the Mexican government, which allowed foreign-owned businesses to set up
assembly plants in Mexico to produce for export. Maquiladoras could import intermediate
materials duty-free with the condition that 20% of the final product be exported. The
percentage of sales allowed to the domestic market increased over time as Mexico
liberalized its trade regime. U.S. tariff treatment of maquiladora imports played a
significant role in the industry. Under HTS provisions 9802.00.60 and 9802.00.80, the
portion of an imported good that was of U.S.-origin entered the United States duty-free.
Duties were assessed only on the value added abroad. After NAFTA, North American rules
of origin determine duty-free status. Recent changes in Mexican regulations on export-
oriented industries merged the maquiladora industry and Mexican domestic assembly-for-
export plants into one program called the maquiladora Manufacturing Industry and Export
Services (IMMEX).
¹⁰ Data from Mexico’s Instituto Nacional de Estadística Geografía e Informática (INEGI),
provided by Global Insight, Inc, at the LIX Maquiladora Industry Outlook Meeting on June

8, 2007 in El Paso, Texas.

maquiladoras with 164,900 employees, and Cd. Juárez, Chihuahua, 279 maquiladoras
with 283,300 employees.¹¹
Private industry groups have stated that these operations help U.S. companies
remain competitive in the world marketplace by producing goods at competitive
prices. In addition, the proximity of Mexico to the United States allows production
to have a high degree of U.S. content in the final product, which could help sustain
jobs in the United States. Critics of these types of operations argue that they have a
negative effect on the economy because they take jobs from the United States and
help depress the wages of low-skilled U.S. workers.
After NAFTA, Mexico’s regulations governing the maquiladora industry
changed significantly. Beginning in 2001, the North American rules of origin
determined the duty-free status for a given import and replace the previous special
tariff provisions that applied only to maquiladora operations. The initial program
ceased to exist and the same trade rules applied to all assembly operations in Mexico
and not just those in the maquiladora program.¹² NAFTA rules for the maquiladora
industry were implemented in two phases, with the first phase covering the period
1994-2000, and the second phase starting in 2001. During the initial phase, NAFTA
regulations continued to allow the maquiladora industry to import products duty-free
into Mexico, regardless of the country of origin of the products. This phase also
allowed maquiladora operations to increase maquiladora sales into the domestic
market. Phase II made a significant change to the industry in that the new North
American rules of origin determined duty-free status for U.S. and Canadian products
exported to Mexico for maquiladoras. The elimination of duty-free imports by
maquiladoras from non-NAFTA countries under NAFTA caused some initial
uncertainty for the companies with maquiladora operations. Maquiladoras that were
importing from third countries, such as Japan or China, would have to pay applicable
tariffs on those goods under the new rules.
Mexico had another program for export-oriented assembly plants called the
Program for Temporary Imports to Promote Exports (PITEX) that was established
in 1990 to allow qualifying domestic producers to compete with maquiladoras.
PITEX plants are usually in areas located in central and southern Mexico while
maquiladoras are more common in states along the U.S.-Mexico border. In recent
years, the differences in the customs status of maquiladoras and PITEX plants
diminished and the Mexican government decided to merge the two export-oriented
programs. In 2007, the Mexican government announced a new set of regulations on
export-oriented industries. These new rules merge the maquiladora industry and
PITEX plants into the Maquiladora Manufacturing Industry and Export Services, or
IMMEX. In 2008, maquiladora industry data will be included in Mexican
manufacturing reports, without a distinction for maquiladora plants.¹³ Prior to

¹¹ Ibid.
¹² Vargas, Lucinda, “NAFTA, the U.S. Economy, and Maquiladoras,” El Paso Business
Frontier, 2001.
¹³ Federal Reserve Bank of Dallas, Southwest Economy, Issue 3, “Spotlight: Maquiladora
(continued...)

NAFTA, a maquiladora was limited to selling up to 50% of the previous year’s
export production to the domestic market. By 2000, maquiladoras were allowed to
sell up to 85% of the previous year’s export production to the Mexican market. Most
maquiladoras, however, continue to export the majority of their production to the
U.S. market.
The maquiladora industry expanded rapidly in the 1990s. The number of plants
grew from 1,920 at the end of 1990 to 3,590 in 2000. After 2000, the number of
maquiladoras fell to 2,860 in 2003. Since 2004, the number of plants has stayed at
approximately the same levels, totaling 2,819 in 2007.¹⁴ Some observers believe that
the correlation in maquiladora growth after 1993 is directly due to NAFTA, but in
reality it is a combination of factors that has contributed to growth in this sector.
Trade liberalization, wages, and economic conditions, both in the United States and
Mexico, have all contributed to the growth of Mexican export-oriented assembly
plants. Although some provisions in NAFTA may have encouraged maquiladora
growth in certain sectors, maquiladora activity is more influenced by the strength of
the U.S. economy and relative wages in Mexico. Maquiladora operations usually
increase during periods of economic expansion in the United States. A drop in
Mexican wages may also be an incentive for U.S. companies to shift production to
Mexico.
Between 1993 and 1996, relative wages in Mexico fell considerably due to the
peso devaluation. Since 1997, however, Mexican labor costs have risen, and some
manufacturers have closed their Mexican plants and shifted production to other low-
wage countries. In 2001, maquiladora employment levels fell for the first time since
1982. Between 2000 and 2004, maquiladora employment levels fell from 1.30
million workers to 1.12 million workers. Approximately 176,000 jobs were lost and
780 plants were shut down nationwide during this time. Since 2004, employment has
risen to about 1.23 million.¹⁵
Worker Remittances to Mexico
Remittances from workers abroad play a strong role in the Mexican economy
and form an important aspect of the U.S.-Mexico economic relationship.¹⁶ Worker
remittances account for about 3% of Mexico’s GDP and are the second-largest source
of foreign currency inflows behind oil exports. Mexico was one of the top three
recipients of remittances worldwide in 2007. After high levels of growth rates since
2002, the rate of growth of remittances to Mexico has dropped markedly in the past
two years. In 2004, Mexico received a record $16.6 billion in remittances,

¹³ (...continued)
Data, Mexican Reform Clouds View of Key Industry,” May/June 2007.
¹⁴ Based on data from INEGI.
¹⁵ Ibid.
¹⁶ For information on remittances to Latin America see CRS Report RL31659, Foreign
Remittances to Latin America, by Walter W. Eubanks and Pauline Smale.

representing a 24% increase over 2003.¹⁷ Remittances from the United States to
Mexico reached a peak of $6.2 billion in mid-2006 and have been decreasing since.
In 2007, remittances grew by only 1%, after years of high growth. In January 2008,
remittances to Mexico were down nearly 6%, the biggest drop in 13 years.¹⁸ The
decline in the level of remittances is due to a combination of factors. The slowdown
in the U.S. economy, the weakening job market in the construction sector, tighter
border controls, and increased anti-immigration sentiment in the United States may
all be factors in the reduced number of seasonal migrants in the United States and
their ability to send remittances to Mexico.¹⁹
Worker remittance flows to Mexico have an important impact on the Mexican
economy, in some regions more than others. Some studies on remittance flows to
Mexico report that in southern Mexican states, remittances mostly or completely
cover general consumption and/or housing. One study estimates that 80% of the
money received by households goes for food, clothing, health care, and other
household expenses. Another study estimates that remittances in Mexico are
responsible for about 27%, and up to 40% in some cases, of the capital invested in
microenterprises throughout urban Mexico.²⁰ The economic impact of remittance
flows is concentrated in the poorer states of Mexico. The government has sponsored
programs to channel the funds directly to infrastructure and investment rather than
consumption.²¹
Security and Prosperity Partnership of North America
The Security and Prosperity Partnership of North America (SPP) is a trilateral
initiative, launched in March 2005, that is intended to increase cooperation and
information sharing in an effort to increase and enhance prosperity in the United
States, Canada, and Mexico. The SPP is a government initiative that was endorsed
by the leaders of the three countries, but it is not a signed agreement or treaty and,
therefore, contains no legally binding commitments or obligations. It can, at best, be
characterized as an endeavor by the three countries to facilitate communication and
cooperation across several key policy areas of mutual interest. Although the SPP
builds upon the existing trade and economic relationship of the three countries, it is
not a free trade agreement and is distinct from the existing North American Free
Trade Agreement (NAFTA). Some key issues for Congress regarding the SPP
concern possible implications related to national sovereignty, transportation

¹⁷ EIU ViewsWire, “Mexico Economy: Remittances Home Hit a Record US$16.6 Billion
in 2004,” February 9, 2005.
¹⁸ The Dallas Morning News, “Remittances to Mexico See Biggest Drop in 13 Years,”
March 7, 2008.
¹⁹ The World Bank, Remittance Trends 2007, by Dilip Ratha, Sanket Mohapatra, K.M.
Vijayalakshmi, and Zhimei Xu, November 29, 2007.
²⁰ The Federal Reserve Bank of Dallas report “Workers’ Remittances to Mexico,” (2004)
evaluated the economic impact of worker remittances to Mexico and cites a number of
reports by the World Bank and the Mexican government.
²¹ Ibid, p. 4.

corridors, cargo security, and border security. These issues are discussed in various
sections of the report.
Since 2005, the SPP working groups have made annual recommendations to the
North American leaders on how to accomplish the goals of the SPP. In 2008, the
working groups agreed to continue to advance the agenda of the SPP by identifying
and focusing on a set of high priority initiatives. They decided to: 1) increase the
competitiveness of North American businesses and economies through more
compatible regulations; 2) make borders smarter and more secure by coordinating
long-term infrastructure plans, enhancing services, and reducing bottlenecks and
congestion at major border crossings; 3) strengthen energy security and protect the
environment by developing a framework for harmonization of energy efficiency
standards and sharing technical information; 4) improve access to safe food, and
health and consumer products by increasing cooperation and information sharing on
the safety of food and products; and 5) improve North American response to
emergencies by updating bilateral agreements to enable government authorities from
the three countries help each other more quickly and efficiently during times of
crisis.²²
Goals of the SPP in the area of prosperity are to increase cooperation and
sharing of information in order to improve productivity, reduce the costs of trade, and
enhance the quality of life. Leaders from the three countries have highlighted the
need to enhance North American competitiveness through compatible regulations and
standards that would help the three countries protect health, safety and the
environment, as well as to facilitate trade in goods and services across their borders.
In the 2008 joint statement, the leaders highlighted the need for the three countries
to implement compatible fuel efficiency regimes and high safety standards to protect
human health and the environment, and to reduce the costs of producing cars and
trucks for the North American market. They also emphasized their efforts to advance
intellectual property rights protection in North America through the Intellectual
Property Action Strategy.
The SPP is not a form of economic integration, and goes only as far as leading
to some measure of regulatory harmonization among the United States, Canada, and
Mexico. The SPP working groups are not contemplating further market integration
in North America. Such a move would require a government approval process within
each of the three countries. In the United States, such an agreement would require
the approval of the U.S. Congress.
Some observers state that the SPP is an important step forward in the
relationship of the United States with Mexico, and also Canada, in view of the
distancing that occurred after the terrorist attacks of September 11, 2001.²³ However,
other analysts believe that the SPP and any subsequent trade-facilitating measures

²² Joint statement by President Bush, President Calderon, Prime Minister Harper, April 22,

2008.

²³ “U.S., Mexico, Canada Agree to Increase Cooperation,” The Washington Post, March 24,

2005, p. A4.

may fall short of any grander vision of further economic integration.²⁴ Critics of the
SPP contend that it may ultimately lead to a so-called “NAFTA Superhighway” that
would link the United States, Canada, and Mexico with a ‘super-corridor’.²⁵
However, if the United States were to potentially consider the formation of a customs
union or common market with its North American neighbors, it would require
approval by the U.S. Congress.
The Mexican Economy
Mexico has a free market economy with a strong export sector, but this has not
always been the case. The transformation of Mexico into an export-based economy
began in the late 1980s when the government started to liberalize its trade policy and
adopt economic reform measures. One of the more distinctive aspects of the
Mexican economy is its strong ties to the economic cycle of the United States,
making it very sensitive to economic developments in the United States. The state
of the Mexican economy is important to the United States because of the close trade
and investment ties between the two countries, and because of other social and
political issues that could be affected by economic conditions, particularly those
related to immigration.
Economic Reform and the 1995 Currency Crisis
In the late 1980s and early into the 1990s, the Mexican government
implemented a series of measures to restructure the economy that included steps
toward trade liberalization. For many years, Mexico had protectionist trade policies
to encourage industrial growth in the domestic economy. The 1980s were marked
by inflation and a declining standard of living. Repercussions of the 1982 debt crisis
in which the Mexican government was unable to meet its foreign debt obligations
were a primary cause of the economic challenges the country faced in the early to
mid-1980’s. Much of the government’s effort in addressing the challenges was
placed on privatizing state industries and moving toward trade liberalization. Efforts
included privatization of sea ports, railroads, telecommunications, electricity, natural
gas distribution and airports. The negotiation and implementation of NAFTA played
a major role in Mexico’s changing economic policy in the early 1990s.
Mexico’s economic reforms initially attracted a large amount of private foreign
investment, but by 1993 the inflow of foreign capital began to slow down. The
combination of macroeconomic policies at the time, which led to an overvalued
exchange rate, and domestic political uncertainty helped drive down the flow of
capital into the country. The decrease in capital inflows and the low levels of

²⁴ “Neighbors Who Are not Always Friends: Bush’s Summit with Mexican and Canadian
Leaders Will Probably Take Small Steps Toward Bolder Integration,” The Christian Science
Monitor, March 23, 2005, p. 2.
²⁵ See for example, Corsi, Jerome R., The Plan to Replace the Dollar with the ‘Amero’, May
22, 2006; Corsi, Jerome, I-69: Yet Another NAFTA Superhighway, September 12, 2006; or
Schlafly, Phyllis, The NAFTA Superhighway, August 23, 2006.

international reserves held by the Mexican government led to a peso devaluation in
March 1994. Later that year, foreign exchange reserves continued to fall, domestic
government debt increased, and the Mexican central bank had limited dollar reserves
to support the current peso rate.
By the end of 1994, Mexico faced a currency crisis, putting pressure on the
government to abandon its previous fixed exchange rate policy and adopt a floating
exchange rate regime. As a result, Mexico’s currency plunged by around 50% within
six months, sending the country into a deep recession.²⁶ Several factors influenced
the decision to float the peso: overspending in the economy had generated a
significant current account deficit; the Mexican government had accumulated large
levels of debt with insufficient reserves; and the banking system was facing a crisis
due to overexposure.²⁷ Mexico’s finance minister at the time, Guillermo Ortiz, stated
later that Mexico had “no choice” but to float the peso because the government had
run out of reserves.²⁸
In the aftermath of the 1994 devaluation, Mexican President Ernesto Zedillo
took several steps to restructure the economy and lessen the impact of the currency
crisis among the more disadvantaged sectors of the economy. The goal was to create
conditions for economic activity so that the economy could adjust in the shortest time
possible. The United States and the IMF assisted the Mexican government by putting
together an emergency financial support package of up to $50 billion, with most of
the money coming from the U.S. Treasury. The Zedillo Administration wanted to
demonstrate its commitment to fulfill all its financial obligations without a default
on its debt by adopting tight monetary and fiscal policies to reduce inflation and
absorb some of the costs of the banking sector crisis. The austerity plan included an
increase in the value-added tax, budget cuts, increases in electricity and gasoline
prices to decrease demand and government subsidies, and tighter monetary policy.²⁹
Following the lead of former President Ernesto Zedillo, former President
Vicente Fox continued efforts to liberalize trade, privatize government enterprises,
and deregulate the economy. Through tighter monetary and fiscal policies, the Fox
Administration was able to decrease the fiscal deficit, control inflation, and help
economic growth.
The peso steadily depreciated through the end of the 1990s, which led to greater
exports and helped the country’s exporting industries. However, the peso
devaluation also resulted in a decline in real income, hurting the poorest segments of
the population and also the newly emerging middle class. NAFTA and the change

²⁶ EIU, “Mexico Finance: The Peso Crisis, Ten Years On,” January 3, 2005.
²⁷ Banco de Mexico, “Mexico’s Monetary Policy Framework Under a Floating Exchange
Rate Regime,” by Agustín G. Carstens y Alejandro M. Werner, May 1999.
²⁸ EIU, “Mexico Economy: Mexico Begins to See Benefits of Free-Floating Peso,”
December 20, 2004.
²⁹ Joachim Zietz, “Why Did the Peso Collapse? Implications for American Trade,” Global
Commerce, by , Volume 1, No. 1, Summer 1995.

in the Mexican economy to an export-based economy helped to soften the impact of
the currency devaluation.
After a real decline in GDP of 6.22% in 1995, the Mexican economy managed
to grow 5%-6% in each of the three years to 1998. The combination of a stronger
peso and the slowdown in the U.S. economy in 2001, which worsened after the
September 11 terrorist attacks, hit Mexico’s economy hard. Real GDP growth
dropped from 6.2% in 2000 to -0.16% in 2001. Improving economic conditions in
the United States helped Mexico’s economy improve as well. Real GDP growth in
2004 was 4.37%, up from 1.41% in 2003 and 0.81% in 2002 (see Figure 2). In

2006, GDP growth was 4.8% and decreased to 3.3% in 2007.

Figure 2. GDP Growth

8
6
4
2
0
-2
-4
-6
-8
1994 1996 1998 20 00 2002 2004 2 006
United States
Mexico
Source: Economist Intelligence Unit.
Current Economic Conditions
Real GDP growth in Mexico in 2007 was 3.3%, down from 4.8% in 2006.
Major factors contributing to Mexican economic growth since 2004 have been an
increase in exports stimulated by U.S. demand and an increase in private
consumption. Mexico’s dependence on exports and on the economic cycle in the
United States is reflected in the economic cycles of the two countries depicted in
Figure 2. Slower growth is anticipated for 2008 due to declining demand in the
United States, declining oil production, and slow growth in remittances sent by
Mexicans abroad.³⁰ After a weakening by an estimated 5% in 2004 and 13% in 2003,
the Mexican peso strengthened in 2005 and in 2006. In 2007, the peso remained
³⁰ EIU, Country Report: Mexico, May 2008.

relatively stable. Forecasts show that the currency is likely to remain sensitive to
developments in the United States.³¹
Poverty is one of the more serious and pressing economic problems facing
Mexico. Former President Fox considered the problem of poverty one of Mexico’s
principal challenges and stated that the highest priority of his administration was to
combat poverty. He also said that Mexico was a long way from a situation of
economic equality since 41% of the country’s income was concentrated in the hands
of only 10% of the population.³² According to a 2004 World Bank Study,³³ the
Mexican government had made progress in its poverty reduction efforts, but poverty
continues to be a basic challenge for the country’s development. The authors of the
study note that poverty is often associated with social exclusion, especially of
indigenous groups of people who comprise 20% of those who live in extreme
poverty.³⁴ In 2002, over half of the population lived in poverty. According to World
Bank estimates, the percentage of people living in extreme poverty, or on less than
$1 per day, fell from 24.2% of the population in 2000, to 20.3% in 2002, and 18%
in 2005. Those living in moderate poverty, or on about $10 a day, fell from 53.7%
in 2000 to 51.7% of the population in 2002 and 45% in 2005. Mexico’s continuing
problem of poverty is especially widespread in rural areas and remains at the Latin
American average.³⁵
Mexico’s main program to reduce the effects of poverty is the Oportunidades
program (formerly known as Progresa). The program began under former President
Zedillo and expanded under former President Fox to benefit five million families
throughout Mexico. The program seeks to not only alleviate the immediate oeffects
of poverty through cash and in-kind transfers, but to break the cycle of poverty by
improving nutrition and health standards among poor families and increasing
educational attainment. This program provides cash transfers to families in poverty
who demonstrate that they regularly attend medical appointments and can certify that
children are attending school. The government provides educational cash transfers
to participating families. The program also provides nutrition support to pregnant
and nursing woman and malnourished children. Monthly benefits are a minimum of
$15 with a cap of about $150. The majority of households receiving Oportunidades
benefits are in Mexico’s six poorest states: Chiapas, Mexico State, Puebla, Veracruz,
Oaxaca, and Guerrero.³⁶

³¹ Global Insight, Global Risk Service: Highlights, Mexico, March 28, 2008.
³² Associated Press, “Poverty Level Down, But Still Big Challenge for Mexico,” July 28,
2004
³³ The World Bank Group, Mexico Makes Progress and Faces Challenges in Poverty
Reduction Efforts, June 2004.
³⁴ The World Bank Group Press Release, “Mexico Makes Progress and Faces Challenges
in Poverty Reduction Efforts,” July 2004.
³⁵ Ibid.
³⁶ Santiago Levy, Progress Against Poverty, Brookings Institution, 2006.

Mexico’s Regional Free Trade Agreements
Since the early 1990s, Mexico has had a growing commitment to trade
liberalization and its trade policy is among the most open in the world. Mexico has
pursued free trade agreements (FTAs) with other countries as a way to bring benefits
to the economy and also to reduce its economic dependence on the United States. By
early 2006, Mexico had entered into a total of 12 FTAs involving 42 countries. The
Mexican government has negotiated bilateral or multilateral trade agreements with
most countries in the Western Hemisphere including the United States and Canada,
Chile, Bolivia, Costa Rica, Nicaragua, Uruguay, Colombia, Guatemala, El Salvador,
and Honduras.³⁷
Mexico has ventured out of the hemisphere in negotiating FTAs, and, in July
2000, entered into agreements with Israel and the European Union. Mexico became
the first Latin American country to have preferred access to these two markets.
Mexico has also completed an FTA with the European Free Trade Association
(EFTA) of Iceland, Liechtenstein, Norway, and Switzerland. The Mexican
government has continued to look for potential free trade partners, and expanded its
outreach to Asia in 2000 by entering into negotiations with Singapore, Korea and
Japan.³⁸ In 2004, Japan and Mexico signed an Economic Partnership Agreement.
It was the first comprehensive trade agreement that Japan signed with any country.³⁹
Mexico’s negotiations on FTAs with Korea and Singapore are stalled.
In addition to the bilateral and multilateral free trade agreements, Mexico is a
member of the WTO,⁴⁰ the Asia-Pacific Economic Cooperation forum, and the
OECD.⁴¹ In September 2003, Mexico hosted the WTO Ministerial Meeting in
Cancun.

³⁷ Organization of American States, Foreign Trade Information System (SICE), see
[ h t t p : / / www.s i c e .oa s .or g] .
³⁸ The Asahi Shimbun, “Mexico: Loving Free Trade Ever Since NAFTA,” March 2002. See
[http://www.facilitycity.com].
³⁹ The Asahi Shimbun, “Japan: Free Trade with Mexico,” The Asahi Shimbun, March 12,

2004.

⁴⁰ The WTO allows member countries to form regional trade agreements, but under strict
rules. The position of the WTO is that regional trade agreements can often support the
WTO’s multilateral trading system by allowing groups of countries to negotiate rules and
commitments that go beyond what was possible at the time under the WTO. The WTO has
a committee on regional trade agreements that examines regional groups and assesses
whether they are consistent with WTO rules. See The World Trade Organization,
“Understanding the WTO: Cross-Cutting and New Issues, Regionalism: Friends or Rivals?”
[ ht t p: / / www.wt o.or g] .
⁴¹ U.S. Commercial Service, Country Commercial Guide: Mexico, August 13, 2004, p. 6.

NAFTA and the U.S.-Mexico
Economic Relationship
The North American Free Trade Agreement (NAFTA) has been in effect since
January 1994. There are numerous indications that NAFTA has achieved many of
the intended trade and economic benefits as well as incurred adjustment costs. This
has been in keeping with what most economists maintain, that trade liberalization
promotes overall economic growth among trading partners, but that there are
significant adjustment costs.
Most of the trade effects in the United States related to NAFTA are due to
changes in U.S. trade and investment patterns with Mexico. At the time of NAFTA
implementation, the U.S.-Canada Free Trade Agreement already had been in effect
for five years, and some industries in the United States and Canada were already
highly integrated. Mexico, on the other hand, had followed an aggressive import-
substitution policy for many years prior to NAFTA in which it had sought to develop
certain domestic industries through trade protection. One example is the Mexican
automotive industry which had been regulated by a series of five decrees issued by
the Mexican government between 1962 and 1989. The decrees established import
tariffs as high as 25% on automotive goods and had high restrictions on foreign auto
production in Mexico. Under NAFTA, Mexico agreed to eliminate these restrictive
trade policies.
Not all changes in trade and investment patterns between the United States and
Mexico since 1994 can be attributed to NAFTA because trade was also affected by
other unrelated economic factors such as economic growth in the United States and
Mexico, and currency fluctuations. Also, trade-related job gains and losses since
NAFTA may have accelerated trends that were ongoing prior to NAFTA and may not
be totally attributable to the trade agreement. Overall, Mexico has experienced a
slight shift in the composition of trade with the United States since the late 1980s
from oil to non-oil exports. In 1987, crude oil and natural gas comprised 17% of
Mexico’s exports to the United States. The percentage of oil and natural gas exports
had declined to 10.6% in 2004, but increased to 14.4% in 2007 due to higher oil
prices.
Effects on the U.S. Economy
The overall effect of NAFTA on the U.S. economy has been relatively small,
primarily because two-way trade with Mexico amounts to less than three percent of
U.S. GDP. Thus, any changes in trade patterns with Mexico would not be expected
to be significant in relation to the overall U.S. economy. In some sectors, however,
trade-related effects could be more significant, especially in those industries that were
more exposed to the removal of tariff and non-tariff trade barriers, such as the textile
and apparel, and automotive industries.
Since NAFTA, the automotive, textile, and apparel industries have experienced
some of the more noteworthy changes in trading patterns, which may also have
affected U.S. employment in these industries. U.S. trade with Mexico has increased
considerably more than U.S. trade with other countries, and Mexico has become a

more significant trading partner with the United States since NAFTA
implementation.
In the automotive industry, the industry comprising the most U.S. trade with
Mexico, NAFTA provisions consisted of a phased elimination of tariffs, the gradual
removal of many non-tariff barriers to trade including rules of origin provisions,
enhanced protection of intellectual property rights, less restrictive government
procurement practices, and the elimination of performance requirements on investors
from other NAFTA countries. These provisions may have accelerated the on-going
trade patterns between the United States and Mexico. Because the United States and
Canada were already highly integrated, most of the trade impacts on the U.S.
automotive industry relate to trade liberalization with Mexico. Prior to NAFTA
Mexico had a series of government decrees protecting the domestic auto sector by
reserving the domestic automobile market for domestically produced parts and
vehicles. NAFTA established the removal of Mexico’s restrictive trade and
investment policies and the elimination of U.S. tariffs on autos and auto parts. By
2006, the automotive industry has had the highest dollar increase ($41 billion) in total
U.S. trade with Mexico since NAFTA passage.
The main NAFTA provisions related to textiles and apparel consisted of
eliminating tariffs and quotas for goods coming from Mexico and eliminating
Mexican tariffs on U.S. textile and apparel products. To benefit from the free trade
provision, goods were required to meet the rules of origin provision which assured
that apparel products that were traded among the three NAFTA partners were made
of yarn and fabric made within the free trade area. The strict rules of origin
provisions were meant to ensure that U.S. textiles producers would continue to
supply U.S. apparel companies that moved to Mexico. Without a rules of origin
provision, apparel companies would have been able to import low-cost fabrics from
countries such as China and export the final product to the United States under the
free trade provision.⁴²
While some U.S. industries may have benefitted from increased demand for
U.S. products in Mexico, creating new jobs, other industries have experienced job
losses. Data on the effects of trade liberalization with Mexico are limited and the
effect on specific sectors of the U.S. economy is difficult to quantify. Trade-related
job gains and losses since NAFTA may have accelerated trends that were ongoing
prior to NAFTA and may not be totally attributable to the trade agreement.⁴³
Quantifying these effects is challenging because of the other economic factors that
influence trade and employment levels. The devaluation of the Mexican peso in

1995 resulted in lower Mexican wages, which likely provided an incentive for U.S.

companies to move to lower their production costs. Trade-related employment
effects following NAFTA could have also resulted from the lowering of trade
barriers, and from the economic conditions in Mexico and the United States
influencing investment decisions and the demand for goods.

⁴² For more information on textile and apparel trade, see CRS Report RL31723, Textile and
Apparel Trade Issues, by Bernard A. Gelb.
⁴³ CRS Report 98-783, NAFTA: Estimates of Job Effects and Industry Trade Trends after

5½ Years, by Mary Jane Bolle.

Effects on the Mexican Economy
At the time that NAFTA went into effect, a number of economic studies
predicted that the trade agreement would have a positive overall effect on the
Mexican economy, narrowing the U.S.-Mexico gap in prices of goods and services,
and the differential in real wages. Most studies after NAFTA have found that the
effects on the Mexican economy tend to be modest at most.⁴⁴ A World Bank
economic study states that there have been periods of positive growth and negative
growth in Mexico after NAFTA, and that some of the benefits Mexico experienced
after NAFTA really began in the late 1980s when Mexico began trade liberalization
measures. Overall the study finds that NAFTA has brought economic and social
benefits to the Mexican economy, but that the agreement does not suffice to ensure
economic convergence in North America.⁴⁵
It is challenging to isolate the economic effects of NAFTA from other economic
or political factors. For example, Mexico has experienced at least two major events
outside of NAFTA that had economic consequences. Mexico’s unilateral trade
liberalization measures between 1985 and 1988 and the currency crisis of 1995 both
affected economic growth, per capita GDP, and real wages in Mexico. Other
challenges in evaluating the effects of NAFTA on the U.S. and Mexican economies
relate to the time element, or being able to compare sufficiently long time-frames to
separate trends before and after the agreement went into effect and across countries
to provide relative measures of any observed effects.⁴⁶
The World Bank study on NAFTA found that the benefits of NAFTA, and of
trade in general, have been unequal across regions and sectors in Mexico. While
trade liberalization may narrow disparities in income levels with other countries, it
may indirectly lead to larger disparities in income levels within a country. The study
estimates that had NAFTA not gone into effect, Mexico’s per capita GDP would
have been about four to five percent lower; Mexican global exports would have been
roughly 25% lower; and foreign direct investment in Mexico would have been
roughly 40% lower. The authors of the study also reported the following: NAFTA
caused Mexican productivity to increase; Mexican wages are higher in sectors
experiencing increases in trade; and poorer states in the south grew more slowly due
to low levels of education, infrastructure, and quality of local institutions. One of the
study’s key findings on the regional effects of NAFTA is that initial conditions in a
region determined which Mexican states experienced stronger economic growth.
Telecommunications infrastructure and human capital were especially important in
determining the economic performance of individual states. States with more

⁴⁴ See CRS Report RS21737, NAFTA at Ten: Lessons from Recent Studies, by J.F.
Hornbeck.
⁴⁵ The World Bank, Lessons from NAFTA for Latin America and the Caribbean, by Daniel
Lederman, William F. Maloney, and Luis Servén, 2005.
⁴⁶ Ibid.

telephone service and a higher skilled labor force experienced more positive
impact s.⁴⁷
Other studies on NAFTA have also found that NAFTA’s investment and trade
liberalization worked together to reduce risk and improve profitability in Mexico, and
observed that NAFTA helped to increase total investment flows to Mexico.⁴⁸ On the
issue of Mexico’s demographic patterns, one study found that NAFTA has had a
minor role in Mexico’s rural-urban migration. The study argues that the observed
trend of migration from rural areas of Mexico to urban centers is directly the result
of agricultural liberalization linked to NAFTA. However, the study also argues that
these migration patterns have been in place since 1960. Some economists have
argued that rural-urban migration trends are common in the development process of
most countries.⁴⁹
Major Issues in U.S.-Mexico Trade Relations⁵⁰
Major trade disputes between Mexico and the United States involve the access
of Mexican trucks to the United States; the access of Mexican sugar, tuna, and
avocados to the U.S. market; and the access of U.S. sweeteners to the Mexican
market.
A major U.S.-Mexico trade issue relates to the implementation of NAFTA
trucking provisions. Under NAFTA, Mexican commercial trucks were to have been
given full access to four U.S. border states in 1995 and full access throughout the
United States in 2000. Citing safety concerns, the United States refused
implementation of NAFTA’s trucking provisions. Congress addressed the safety
concerns in the FY2002 Department of Transportation Appropriations Act (P.L. 107-
87), which set 22 safety-related preconditions for opening the border to long-haul
Mexican trucks. In November 2002, the Secretary of Transportation announced that
all the preconditions had been met and directed the Federal Motor Carrier Safety
Administration (FMCSA) to act on the Mexican applications. In January 2003,
however, the Ninth Circuit Court of Appeals delayed implementation. In June 2004,
the U.S. Supreme Court reversed the decision of the Ninth Circuit Court and ruled
that Mexican trucks could operate in the United States.⁵¹
Since the ruling, the U.S. and Mexican Administrations worked on resolving the
trucking issues, and the two countries engaged in talks regarding a number of safety

⁴⁷ Ibid.
⁴⁸ See CRS Report RS21737, NAFTA at Ten: Lessons from Recent Studies, by J.F.
Hornbeck.
⁴⁹ Ibid.
⁵⁰ See CRS Report RL32724, Mexico-U.S. Relations: Issues for Congress, by Colleen W.
Cook.
⁵¹ See CRS Report RL31738, North American Free Trade Agreement (NAFTA)
Implementation: The Future of Commercial Trucking Across the Mexican Border, by Robert
S. Kirk and John F. Frittelli.

and operational issues that needed to be resolved before Mexican commercial trucks
were granted authority to operate in the United States. In February 2007, the
Administration announced a pilot project to grant Mexican trucks from 100
transportation companies full access to U.S. highways. The Administration
announced a delay in the program in April 2007, likely in response to critics who
contend that Mexican trucks do not meet U.S. standards. In September 2007, the
Department of Transportation launched the pilot program.
The United States and Mexico resolved a long-standing trade dispute in 2006
involving sugar and high fructose corn syrup. Mexico argued that the sugar side
letter negotiated under NAFTA entitled it to ship net sugar surplus to the United
States duty-free under NAFTA, while the United States argued that the sugar side
letter limited Mexican shipments of sugar. Mexico also complained that imports of
high fructose corn syrup (HFCS) sweeteners from the United States constituted
dumping, and it imposed anti-dumping duties for some time, until NAFTA and WTO
dispute resolution panels upheld U.S. claims that the Mexican government colluded
with the Mexican sugar and sweetener industries to restrict HFCS imports from the
United States.
In late 2001, the Mexican Congress imposed a 20% tax on soft drinks made with
corn syrup sweeteners to aid the ailing domestic cane sugar industry, and
subsequently extended the tax annually despite U.S. objections. In 2004, the United
States Trade Representative (USTR) initiated WTO dispute settlement proceedings
against Mexico’s HFCS tax, and following interim decisions, the WTO panel issued
a final decision on October 7, 2005, essentially supporting the U.S. position. Mexico
appealed this decision, and in March 2006, the WTO Appellate Body upheld its
October 2005 ruling. In July 2006, the United States and Mexico agreed that Mexico
would eliminate its tax on soft drinks made with corn sweeteners no later than
January 31, 2007. The tax was repealed, effective January 1, 2007.
The United States and Mexico reached a sweetener agreement in August 2006.
Under the agreement, Mexico can export 500,000 metric tons of sugar duty-free to
the United States from October 1, 2006, to December 31, 2007. The United States
can export the same amount of HFCS duty-free to Mexico during that time. NAFTA
provides for the free trade of sweeteners beginning January 1, 2008. The House and
Senate sugar caucuses expressed objections to the agreement, questioning the Bush
Administration’s determination that Mexico is a net-surplus sugar producer to allow
Mexican sugar duty-free access to the U.S. market.⁵²
On tuna issues, the Clinton Administration lifted the embargo on Mexican tuna
in April 2000 under relaxed standards for a dolphin-safe label in accordance with
internationally agreed procedures, and U.S. legislation passed in 1997 that
encouraged the unharmed release of dolphins from nets. However, a federal judge

⁵² “Bush Administration Defends Sugar Deal to Congress,” Inside U.S. Trade, November

3, 2006; “Grassley, U.S. Industry Welcome Agreement with Mexico on Sugar, HFCS,”

International Trade Reporter, August 3, 2006; and, “U.S., Mexico Reach Agreement on
WTO Soft Drink Dispute Compliance Deadline,” International Trade Reporter, July 13,

2006.

in San Francisco ruled that the standards of the law had not been met, and the Federal
Appeals Court in San Francisco sustained the ruling in July 2001. Under the Bush
Administration, the Commerce Department ruled on December 31, 2002, that the
dolphin-safe label may be applied if qualified observers certify that no dolphins were
killed or seriously injured in the netting process, but Earth Island Institute and other
environmental groups filed suit to block the modification. On April 10, 2003, the
U.S. District Court for the Northern District of California enjoined the Commerce
Department from modifying the standards for the dolphin-safe label. On August 9,
2004, the federal district court ruled against the Bush Administration’s modification
of the dolphin-safe standards and reinstated the original standards in the 1990
Dolphin Protection Consumer Information Act. That decision was appealed to the
U.S. Ninth Circuit Court of Appeals, which ruled against the Administration in April
2007, finding that the Department of Commerce did not base its determination on
scientific studies of the effects of Mexican tuna fishing on dolphins.
In February 2007, the U.S. Department of Agriculture (USDA) authorized the
importation of Mexican avocados. The California Avocado Commission (CAC)
disagrees with this decision. In April 2007, the California Avocado Commission
(CAC) sued the U.S. Department of Agriculture for allowing the importation of
Mexican avocados containing armored scaled insects. The CAC is reportedly
preparing a motion to request a preliminary injunction on imports of Mexican
avocados. The lawsuit has reportedly deterred shipment of avocados from Mexico
because growers there are concerned about future market access.
On other issues, in early October 2002, the U.S.-Mexico working group on
agriculture dealt with major agricultural issues, including Mexico’s anti-dumping
decisions on apples, rice, swine, and beef, and safeguard actions on potatoes. In
January 2003, the countries agreed to permit Mexican safeguard measures against
U.S. imports of chicken legs and thighs, and in July 2003, these safeguard measures
were extended until 2008, with tariffs declining each year. In September 2006,
Mexico revoked anti-dumping duties imposed on U.S. rice imports in 2002 following
rulings by the WTO and WTO Appellate Body in 2005, which found that the duties
were contrary to WTO rules. Mexico banned beef imports from the United States in
December 2003 following the discovery of one cow infected with mad cow disease
in Washington State. Mexico resumed importation of boneless beef in early March
2004, and bone-in beef in February 2006, in response to improved beef cattle
screening.
Policy Issues
The United States economic relationship with Mexico has strengthened
significantly over the last decade and is of mutual importance. Up to this point, the
discussion in the report has focused on the background and surrounding issues of the
economic relationship, which leads to the issue of policy considerations. First, there
is the question of whether to further economic integration with Mexico in view of the
increasing trends in regional trade agreements throughout the world. The close
economic relationship between the United States and Mexico that was strengthened
by NAFTA is likely to continue but there may be challenges in coming years as the

influence of China and other low-wage countries increases. According to a recent
study on economic integration in North America, a major shift is under way in trade
patterns among NAFTA partners with exports among NAFTA economies growing
more slowly than their exports with the rest of the world, reversing the previous 10-
year trend. The report finds that lower-cost suppliers, primarily China and India, are
displacing North American imports and could weaken North American integration.
The report states that furthering continental integration would require “renewed
efforts at resolving long-standing trade disputes, new liberalization initiatives, or
greater policy harmonization in areas such as border security, labor mobility, or
corporate taxation.”⁵³
If the United States continues to deepen economic integration with Mexico, one
area that may need more attention is the issue of the difference in income levels
between the two countries. The economic relationship with Mexico is unique
because of Mexico’s proximity to the United States, but also because of the wide
differences in levels of economic development between the two countries. Mexico
is the first developing country with which the United States entered into a free trade
agreement. In Mexico, NAFTA has had an uneven effect in different parts of the
country and it has not been a solution to the problem of poverty and unemployment.
Mexico’s problem with poverty cannot be attributed directly to NAFTA because it
was in existence prior to the agreement. At the time of NAFTA there was hope that
Mexico’s economy would grow sufficiently to create jobs in urban areas and help
alleviate poverty in rural areas. However, the economy did not expand as expected
and the problem of poverty continues.
Another issue is whether trade agreements are enough, or are the appropriate
policy instrument, to resolve income disparities among trading partners or even
within a developing country. The World Bank study on the effects of NAFTA on
Mexico concludes that NAFTA has helped to improve economic conditions in
Mexico but it has not been enough to narrow the economic disparities with the
United States. The authors of the study state, among other things, that Mexico needs
to invest more in education, infrastructure, and institutional strengthening to benefit
more fully from freer trade.⁵⁴ A possible consideration for policymakers is whether
to help Mexico improve the quality of education and strengthen its national
institutions through foreign aid programs or other mechanisms.
The economic hardship in certain sectors and regions of Mexico has been a
major reason behind unauthorized Mexican migration to the United States. Mexican
President Felipe Calderón made his first official visit to the United States as
President-elect in early November 2006, after first visiting Canada and several Latin
American countries. During his visit, Calderón criticized the recent authorization of
700 miles of fencing along the U.S.-Mexico border and noted that it complicated
U.S.-Mexico relations. He asserted that job-creation and increased investment in
Mexico would be more effective in reducing illegal migration from Mexico than a

⁵³ ITR, “North American Integration Slipping Due to China’s Strong Growth, Report Says,”
Volume 22, Number 8, February 24, 2005.
⁵⁴ The World Bank, Lessons from NAFTA for Latin America and the Caribbean, by Daniel
Lederman, William F. Maloney, and Luis Servén, 2005.

border fence. Calderón signaled a shift in Mexican foreign policy when he noted that
while immigration is an important issue in the bilateral relationship, it is not the only
issue, as trade and economic development are also important.
Under the Fox Administration, Mexico voiced concern about alleged abuses
suffered by Mexican workers in the United States and for the loss of life and
hardships suffered by Mexican migrants as they use increasingly dangerous methods
to cross into the United States. The Fox Administration held the view that the
migrants are “undocumented workers” and that because the U.S. market attracts and
provides employment for the migrants, it bears some responsibility. During his
administration, former Mexican President Vicente Fox pressed proposals for
legalizing undocumented Mexican workers in the United States through amnesty or
guest worker arrangements as a way of protecting their human rights. In 2004,
President Bush proposed an overhaul of the U.S. immigration system to permit the
matching of willing foreign workers with willing U.S. employers when no U.S.
documented workers could be found to fill the jobs.
The U.S. Senate began consideration of comprehensive immigration reform in
May 2007. Mexico had long lobbied for immigration reform in the United States and
cautiously watched the debate in 2007 on this measure. Legal immigration reform
has stalled in the 110th Congress. A bipartisan compromise proposal for
comprehensive immigration reform negotiated with the Bush Administration was
introduced in the Senate on May 21, 2007, as S.Amdt. 1150 to S. 1348. A modified
version of that compromise (S. 1639) came to the Senate floor the week of June 26,
2007, but a key cloture vote did not pass.⁵⁵ It is unclear whether the 110^th Congress
will again tackle comprehensive immigration reform. It may, however, consider
legislation on selected immigration reform issues, such as foreign workers.
Additional border security measures may also be considered.

⁵⁵ For more details, see CRS Report RL32235, U.S. Immigration Policy on Permanent
Admissions, by Ruth Ellen Wasem.