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Going backwards: Assessing the impact of NAFTA dissolution on Mexico

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  • Estrades, Carmen

Abstract

In August 2017, Mexico, United States and Canada, the three members of the North America Free Trade Agreement (NAFTA), engaged in the renegotiation of the agreement for the first time in 23 years. To the moment, little progress has been achieved, and the turnout of NAFTA renegotiation remains highly uncertain. The lack of agreement in sensitive issues suggests that one possible turnout is the end of NAFTA. A termination of NAFTA would have a strong impact on Mexico economy and the labor market. The objective of this paper is to assess the impact of NAFTA dissolution on Mexico economy in a general equilibrium framework. To do so, we apply two different general equilibrium models. First, we apply a multicountry model, MIRAGE, to assess the impact of NAFTA dissolution on all NAFTA members. Then, we take results from the global model as inputs to a single country, dynamic general equilibrium model, Linkage, calibrated for Mexico, with the aim of estimating the sectoral impact on Mexico, as well as the changes in labor market variables. We simulate the termination of NAFTA by assuming that the U.S., Canada and Mexico apply most favored nation (MFN) tariffs to imports from current NAFTA partners. We also simulate an increase in non-tariff barriers and a reduction in FDI flows among NAFTA members. Preliminary results show that the elimination of NAFTA would have a negative impact on growth, trade, and welfare among all NAFTA members. Mexico would be the most harmed, with a fall in GDP of 0.9% with respect to the baseline scenario in 2025. The negative results would be accentuated if, besides the increase in tariffs, NAFTA dissolution also brings about an increase in NTB and a reduction in FDI flows.

Suggested Citation

  • Estrades, Carmen, 2018. "Going backwards: Assessing the impact of NAFTA dissolution on Mexico," Conference papers 332956, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332956
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