Reforming NAFTA May Not Be Enough to Fix Mexico’s Growth

Though renegotiation of the North American Free Trade Agreement (NAFTA) is scheduled to begin next week, it may not solve the factors hampering Mexico’s growth. Wage and productivity gaps with the United States have widened since the agreement’s inception, according to a new report from Moody’s Investors Service.

“NAFTA has not remedied Mexico’s low growth, low productivity and low wages,” said Madhavi Bokil, vice president and senior analyst at Moody’s.

NAFTA has continued to boost Mexico’s export competitiveness through a shift toward more complex production and integration with the U.S. economy, but the liberalization of its economy with its growth model focused on exports and access to the U.S. market has not resulted in the anticipated growth rates. The income gap with the U.S. will widen over time if productivity does not improve, Moody’s said. The country’s low productivity and wage growth is connected to uneven regional growth opportunities and a high degree of informality in its economy. Reduction in regional disparity is one objective of the structural reforms agenda.

Changes to the agreement may be more reserved than radical, however. “The talks on what the future of NAFTA will look like have started and the position of the Mexican government has emerged,” said Chris Kuehl, Ph.D., economist to NACM. “In the beginning, it appeared that Mexico would be in a defensive position, but times have changed and the advantage seems to lie with Mexico to some degree. The government of Enrique Peńa Nieto has refused to bend on some of the high-profile issues pushed by Trump, while those U.S. interests that have benefited from NAFTA have become more focused and organized. The modifications are likely to be far less drastic than was originally assumed.”

– Adam Fusco, associate editor

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