NAFTA narrows Mexican income disparity, giving more workers more to spend
 THERE
is good reason to believe that northern Mexico has developed
into a promising market for affordable Asian goods if
research into the effects of the 1994 North American
Free Trade Agreement (NAFTA) is to be credited.
"I find that men with low incomes get a boost
from NAFTA in their wages while NAFTA has a negative
effect for those with high incomes. Thus, trade liberalisation
appears to have decreased income disparities,"
said Rafael Garduno Rivera, who specialises in agriculture
and economic studies at the University of Illinois.
Dr Rivera's paper, "NAFTA's Distributional Effect
on Mexico", also said that this trade leads to
more migration since the US market appears to be increasing
in importance, whereas the domestic market represented
by Mexico City has become relatively less important.
Overall, there is more money in Mexico than ever
before according to tradingeconomics.com which has the
imprimatur of US mega tycoon Warren Buffet on every
page.
"Exports jumped 11.5 per cent from a year ago
to $35.6 billion while imports increased 9.5 per cent
to $35.5 billion," said the financial portal.
"Exports to Mexico from China averaged $2.71
billion from 2014 until 2017, reaching an all time high
of $3.38 billion in August of 2016 and a record low
of $1.4 billion in February, 2014," it said, indicating
just how far Latin America's second GDP earner behind
Brazil.
Said Dr Rivera: "By analysing trade openness
and distance to the border, I find that workers closer
to the US-Mexico border get a higher wage than their
counterparts far away. But this spread diminishes as
tariffs reduce, after NAFTA."
Clearly, Mexican municipalities close to the US market
have profited from integration, increasing their incomes,
while regions further away from the United States have
become more disconnected from Mexico's integration into
world markets.
The effect of NAFTA since it started in 1994, he
said, is also stronger with low income people than high
income, because low income workers are more inclined
to move, especially those who worked in trading sectors.
"In addition, urban-rural migration has also
increased because most of the low skilled workers are
leaving the rural and arriving to the urban regions.
And places with higher levels of infrastructure attract
more of these workers since this will provide a better
standard of living.
Large trading sector-induced migration, particularly
in poorer regions, produce higher wages overall. But
this results in increased income inequality since it
only benefits workers in these sectors.
The effects of trade liberalisation, such as regional
transportation benefits, have slightly increased migration
towards the US-Mexico border.
"Thus, there is evidence of a “hump” of migration
to the United States, as the large number of Mexicans
displaced by economic restructuring led temporarily
to more migration.
Economists tend to agree that trade has a positive
effect overall on economic growth, but it also affects
the location of economic activity, migration and the
distribution of wages.
Mexico expects to benefit from its lower labour costs,
and the proximity of its border regions gives northern
Mexico a geographic advantage in production for the
US market.
"Empirical evidence testing how NAFTA affected
the north-south disparity has previously shown mixed
results," said Dr Rivera.
"But trade liberalisation has not reduced territorial
disparities, but rather led to a greater regional polarisation.
"NAFTA benefits those regions with poorer infrastructure,
decreasing the gap between regions with higher levels
of drainage and electricity and those without. We have
seen evidence that NAFTA also lowered the gap between
regions with high rates of high school education and
those without," he said.
Another effect is that openness has increased internal
migration, but this effect has diminished over time,
confirming that much of the trade-generated migration
happened after Mexico joined the General Agreement on
Tariffs and Trade (GATT) in 1986.
"The flow of migrants to the United States has
also increased due to the pull caused by the US economy
over the transportation cost to get to the United States,
especially in the years following the NAFTA agreement,"
said Dr Rivera.
Many studies confirm the benefits of free trade,
but opinions vary, bringing doubts about the gains made.
Even though trickle down effects are kicking in, controls
are needed to reduce increased regional disparities,
he said.
"Industrial, educational, and regional development
policies must be quickly developed to set up the foundations
for growth in all regions. This will avoid increasing
inequality among households and regions," he said.
It seems clear that Mexico, at the very least its
northern states, represent a new, largely untapped,
a mass market that is open to Asia exports. Although
today's US rhetoric is fiercely protectionist, a look
at the fine print, or the actual wording of the threats
made against those who wish to export jobs from the
US, tends to apply to those who have plans to do so
and not those who have done so.
That's leaves the vast majority of northern Mexican
plants not only fully functioning with goods flowing
into in to the United States, and increasingly elsewhere,
and a growing amount of foreign currency flowing back
- ready to be spent on Asian imports.
All in all, it seems the northern states of Mexico,
are home to clusters of blooming modest prosperity,
ready, willing and able to absorb an inflow of affordable
wares from the Far East.
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