Background:

The performance of Mexico’s economic structure, especially in manufacturing sector, is highly dependent on the North American market. The complications in the North American Free Trade Agreement (NAFTA) negotiation process have created a sense of uncertainty regarding the future of commercial relationship between the partners. In these circumstances, it is essential to evaluate the economic impacts of different trade policy scenarios in Mexico.

Methodology:

An applied general equilibrium (AGE) model is used as the basis for the estimates. The model uses a Mexico social accounting matrix (SAM), valued at market prices (2008), which is the first SAM with this feature that is constructed for Mexico.

Results:

In the short-term model, tariff variations have a reduced impact on aggregate gross domestic product (GDP), although a greater impact was observed for some export sectors. In the long-term model, besides the variation in tariffs, it is considered a contraction of foreign direct investment (FDI) flows. In this model, the consequences would be greater, both in aggregate GDP, decreasing by 3.5 percent, as a significant contraction of exports and significant sectoral impacts in external market orientation activities. These adverse impacts are stronger when Mexico retaliate with most favored nations (MFN) tariffs on the imports from United States of America (USA).

Conclusions:

Considering only tariff variations, the eventual cancellation of NAFTA would have moderate economic impacts on the Mexican economy, since the MFN tariff rates, agreed by the WTO (World Trade Organization) members, are, for the most part, small. Unfortunately, an event of this importance could result in a contraction of FDI flows, in which case the impact would be of greater magnitude.