Economic Snapshot | Trade and Globalization

NAFTA and foreign investment

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Snapshot for October 27, 1999

NAFTA and foreign investment

Foreign direct investment (FDI) in Mexico and Canada has surged in the wake of NAFTA and the recent depreciations of the Mexican peso and Canadian dollar. The growth in this sort of investment is shown in the figure below.

In 1994 — the year NAFTA took effect — FDI in Mexico increased by 150%. It has remained strong ever since, despite the economic problems caused by the peso crisis. FDI in Canada has more than doubled since 1993, increasing 44% in 1998 alone. Canada and Mexico have absorbed more than $116 billion in FDI from all sources since 1993.

Inflows of FDI, along with bank loans and other types of foreign financing, have funded the construction of thousands of Mexican and Canadian factories producing goods for export to the United States. The growth of U.S. imports from these factories is a major factor contributing to the United States’ growing trade deficit, resulting in the loss of 440,172 high-paying U.S. jobs in the manufacturing, hi-tech, automotive, and apparel sectors since 1994.

Moreover, the recent growth of the U.S. trade deficit with its North American neighbors shows no sign of slowing. Whereas the total U.S. trade deficit with the world increased by 39% in the first half of 1999 (relative to the same period in 1998), the U.S. deficit with Mexico increased by 72% and the deficit with Canada more than doubled (121%) in this same period.

Source: EPI analysis of U.S. Census trade data.

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