The Effects of the North American Free Trade Agreement and the Devaluation of the Peso on the Mexican Economy

Abstract

On December 17, 1992 the North American Free Trade Agreement was signed by U.S. President Bush, Mexican President Salinas, and Canadian Prime Minister Mulroney. This pact, joining its three members in trading relations, created the world's largest free trade zone. Markets were opened, trade barriers were torn down, and finally, on January 1st of 1994, the trade agreement was officially implemented. Just weeks prior to the implementation of NAFTA, the new Mexican President Zedillo began his presidency with a 15% devaluation of the peso. This devaluation quickly developed into a situation of economic devastation, as the world watched the value of the peso plummet from 3.5 pesos per dollar to 7.5 pesos per dollar in a mere two months. These two monumental events sent shock waves throughout the nation, and left Mexico struggling frantically to escape a severe recession. This Senior Individualized Project provides an analysis of these events which have had such a tremendous impact on the Mexican economy. The effects of NAFT A and the devaluation of the peso are illustrated in this paper through specific case studies. Predictions drawn from economic theory are compared to actual financial data from several Mexican companies. Discrepancies between the predictions and the actual figures are explained and the results discussed. The discussion is geared, not only towards understanding the underlying economic principles, but also learning how to apply those principles to real life situations.