Chapter 13
The United States in the World Economy
◼ Outline
Introduction: A New World Economy
Background and Context
Case Study: Manufacturing in the United States
The Shifting Focus of U.S. Trade Relations
The NAFTA Model
Demographic and Economic Characteristics of North America
Canada-U.S. Trade Relations
Mexican Economic Reforms
The North American Free Trade Agreement
Two NAFTA-Specific Issues
Case Study: Ejidos, Agriculture, and NAFTA in Mexico
New and Old Agreements
Labor and Environmental Standards
◼ What Students Should Know after Reading Chapter 13
Chapter 13 presents U.S. trade initiatives in a more global context compared toprevious editions. Earlier
editions focused on the NAFTA agreement and U.S. economic relations with Canada and Mexico. That
focus is shifted to a broader view of U.S. trade agreements while maintaining the primacy of NAFTA as
the model for subsequent agreements. Students should be encouraged to see NAFTA in these terms: a
key agreement with two of our three most important trade partners (China is the third, as measured by
value of exports and imports), and the foundation for bilateral and plurilateral agreements with other
countries and regions.
Chapter 13 discusses the continued controversy surrounding NAFTA in the United States. At the time
NAFTA was signed, U.S. barriers to Mexican imports were already low and there was a pre-existing free
trade agreement with Canada. The U.S. market accounts for the vast majority of the nearly $18 trillion
NAFTA market, so any impact on the U.S. would be small. The popular controversy in the United States
over NAFTA’s economic impacts continues to be largely about labor and environmental issues, but
several other issues have become important, particularly as the NAFTA model has been replicated in other
agreements. These include investor-state relations and intellectual property issues. In addition, there is a
74 Gerber • International Economics, Sixth Edition
Chapter 13 discusses Mexico’s reasons for wanting NAFTA, including the desire to attract more foreign
investment and implement an external treaty that would help to institutionalize economic policy reforms.
Canada wanted a free trade agreement with the United States to keep the U.S. committed to free trade and
to put competitive pressure on Canadian firms to be efficient. The chapter gives some background for the
economic history and the changes in economic policy that occurred, especially within Mexico, where
tremendous policy changes have taken place as the country shifted from an inward-looking, import
substitution industrialization strategy to an outward-looking strategy.
Students are always tempted to understand correlation as causation and it is tempting to look at the passage
As NAFTA is presented in the media, it appears to give permission for direct foreign investment and for
outsourcing jobs abroad that was lacking prior to its signing. Students should understand that economic
integration between the three NAFTA countries is as much market driven as it is institutionally driven—
perhaps even more. Canadian-Mexican ties may be an exception, but indicators of economic interaction
Chapter 13 The United States in the World Economy 75
The first case study is designed to challenge the view that the United States does not have a vibrant
manufacturing sector. Ask your students: In what year did the inflation adjusted value of U.S.
manufacturing reach its peak? The answers they give usually range from the 1960s to the 1980s. Few of
◼ Assignment Ideas
1. NAFTA has been controversial, but with almost twenty years experience, there has been the
opportunity for follow-up research on its impacts. Have students research the impact of NAFTA on a
particular industry or analyze NAFTA’s overall impact on the U.S. and Mexican economies, as
described in the chapter. A particularly interesting exercise would be to look at the shift in
manufacturing from northern industrial states such as Ohio to southern Sunbelt states such as Texas.
Is this due to NAFTA? An excellent data source for student papers is the Department of Commerce
2. What are the prospects of NAFTA becoming a customs union? Have students identify the policy
3. The Migration Policy Institute has a wealth of data, much of it in map form, on migrant settlement
4. Chapter 16 has a case study on the World Bank’s Doing Business homepage. You may find it useful
◼ Answers to End-of–Chapter Questions
1. What factors caused the U.S. to shift its focus from a more multilateral approach to a more bilateral
and plurilateral one?
Answer: As membership in the WTO has grown to include more than 150 members (157 in
August, 2012), and as tariffs and quotas have been reduced, trade negotiations have
2. How has the trade-to-GDP ratio changed for the United States over the last several decades?
3. Why is the trade-to-GDP ratio for Canada greater than that for the United States?
4. Explain how an increase in U.S. and Canadian intraindustry trade altered the level of productivity in
the affected Canadian sector.
Answer: The 1965 Auto Pact created nearly free trade in the automotive sector. Prior to the Auto
Pact, strict Canadian content requirements forced manufacturers to make most of the
5. What were Canada’s motives for proposing and signing the Canadian-U.S. Free Trade Agreement?
Answer: Canada worried about the increasingly protectionist tendencies it saw developing during
6. What were the forces at work in the Mexican economy that led to the market reforms and market
opening of the mid-1980s?
Answer: The main force was the debt crisis that began in 1982. The crisis resulted from heavy
Mexican borrowing during the late 1970s when the price of oil was high. The Mexican
7. What were Mexico’s motives for proposing and signing the North American Free Trade Agreement?
8. In what areas are there NAFTA side agreements? Discuss the pros and cons of these agreements.
Answer: The side agreements cover labor and environmental standards. Essentially, they entail
international scrutiny of each country’s rules and inspection to determine whether the
9. Why has Mexican migration to the United States slowed?
Answer: The text gives three reasons: (1) It is harder, more dangerous, and more expensive to
10. What are preferential agreements and why are they used by the United States?
Answer: Preferential agreements are usually unilateral agreements involving an advanced economy
11. Explain why claims about job creation and job destruction due to NAFTA are likely to be misleading
and inaccurate.
Answer: It is extremely difficult to measure the job creation and destruction effects of a trade
12. Explain how NAFTA served as a model for subsequent trade agreements.
Answer: NAFTA provided a framework and starting point for including labor and environmental