Mexico, NAFTA and the USMCA

How free trade with the United States and Canada transformed Mexico's economy, who gained and lost, and the shift to nearshoring.

Mexico’s economy is closely tied to its northern neighbour, the United States. The key to this relationship has been a free trade agreement that reshaped North American trade.

NAFTA

The North American Free Trade Agreement, or NAFTA, between the United States, Canada and Mexico, took effect on 1 January 1994. It removed most tariffs between the three countries over the following years.

Trade between the three countries grew dramatically. Mexico became a major manufacturing base, especially for cars, auto parts, electronics and appliances, exporting mainly to the United States.

Maquiladoras

Even before NAFTA, Mexico had maquiladoras: factories, many near the U.S. border, that import parts duty-free, assemble them and export the finished products. NAFTA accelerated this model and spread it more widely.

Winners and losers

Economists generally find NAFTA increased trade and integrated supply chains, with modest overall gains for the economies involved. But effects were uneven:

In Mexico, northern industrial regions gained, while many small corn farmers struggled to compete with cheaper U.S. corn.
In the United States, consumers gained from lower prices, while some manufacturing workers in industries facing Mexican competition lost jobs.
Mexico’s overall growth after NAFTA was disappointing to many, and wages rose slowly.

The USMCA

NAFTA was replaced by the United States-Mexico-Canada Agreement, or USMCA, which took effect on 1 July 2020. It kept most of NAFTA’s structure but added stricter rules requiring a larger share of a car’s value to be made in North America, rules on wages for some auto production, and stronger labour protections in Mexico.

A car crossing borders

A single car sold in the United States may have parts that cross the U.S.-Mexico border several times: an engine component made in the United States, assembled into an engine in Mexico, fitted into a car in the United States. Free trade made these integrated supply chains possible, and any new tariffs disrupt them.

Nearshoring

As U.S. companies seek to reduce dependence on China, Mexico has benefited from nearshoring, companies moving production closer to the U.S. market. In 2023, Mexico became the largest source of U.S. goods imports. Trade tensions and tariff threats have added uncertainty.

Thinking NAFTA either destroyed or saved economies

Political debates often portray NAFTA as disastrous or miraculous. Economic research suggests its total effects were modest but real, with significant gains for some regions and workers and losses for others.

Key takeaways

NAFTA took effect in 1994 and dramatically increased North American trade.
Mexico became a major manufacturing and export base, especially for cars.
Gains were uneven, with some Mexican farmers and U.S. factory workers losing out.
The USMCA replaced NAFTA in 2020, and nearshoring has boosted Mexico's role.