Wage Convergence Between the United States and Mexico Post-NAFTA

Abstract

Few observers deny that we live in a global economy. Much more contentious, however, is whether globalization is a positive or negative development. Along that vein, there is much debate as to what extent countries prosper through open markets. And although the debate continues, the growing consensus is that the global economy is a fact and the only way to benefit from it is to participate. Therefore we are witnessing the developing economies of the world, the last enclaves of protectionism, open their markets. They are doing so both unilaterally and bilaterally or multilaterally with so-called free trade agreements. In 1992, the North American Free Trade Agreement (NAFTA) was signed by two developed nations - the United States and Canada - and an emerging market country Mexico. The trend to integrate developed and developing markets continues with the CAFTA agreement signed between the United States and several emerging market Central American countries. There have been further discussions about pursuing a broad free trade area of the Americas for all of North, South, and Central America. This paper investigates the case between the United States and Mexico in an attempt to determine the benefits of open markets in the global economy. It models the difference between the countries' GDP per capita to test if incomes in the two countries converged after trade was significantly liberalized in the early 1980s. Using time-series analysis, there is statistically significant evidence that incomes have, indeed, converged in the subsequent period. Further, it tests what affect these much-coveted and much-maligned trade agreements have on income-level disparities between developed and emerging market countries. In other words, has NAFTA had a significant affect - beyond the affect of just trade liberalization - on income disparities? The research presented here suggests that NAFTA has had no meaningful affect on income convergence beyond the affect of liberalization. The conclusion of this paper is that nations may reach a point of openness where the marginal cost of trade liberalization exceeds the marginal returns. If nations have taken significant strides to liberalize their trade policies, additional liberalization through comprehensive trade agreements may not provide any additional benefits.