1997 | EPI Briefing Paper #66

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NAFTA AND THE PESO COLLAPSE

Not Just a Coincidence

by Robert A. Blecker

Introduction
There is little dispute that, since the North American Free Trade Agreement (NAFTA) went into effect in 1994, Mexico has endured one of the worst economic crises in its history. At the same time, a rising U.S. trade deficit with Mexico has meant a net loss of jobs in the United States, not a net gain, as predicted by NAFTA promoters.

Many NAFTA promoters insist that the peso devaluation and the ensuing depression of the Mexican economy resulted solely from failed Mexican macroeconomic and exchange-rate policies. Furthermore, they argue that the current U.S. trade deficit with Mexico is merely a consequence of the devalued peso and Mexico’s internal economic problems, not NAFTA.

It is certainly true that Mexico’s macro-economic and exchange-rate policies were flawed and the peso devaluation was badly managed. Nevertheless, the peso had to be devalued in order to implement the Mexican strategy for export-led growth that NAFTA was intended to promote — a strategy that was pushed on Mexico by the U.S. government and the U.S. corporate interests that stood to profit from this trade agreement. In other words, Mexico had to devalue the peso in order to attract the direct foreign investment and export-oriented manufacturing that the NAFTA agreement was designed to promote.

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