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Globalization Report 2018: What about the NAFTA Countries?
Interconnectedness of the three countries beyond the FIFA World Cup 2026

My Life Graphic / Shutterstock Images My Life Graphic / Shutterstock Images

 

The FIFA World Cup 2026 will take place in the three member states of the North-American Free Trade Area (NAFTA) – Mexica, Canada and the United States. This was officially announced today (June 13th, 2018). This huge event will certainly enhance the international interconnectedness of the three countries not only in the fields of sports, but also in many other areas. We take this as an occasion to look at the level of globalization the three NAFTA members have reached already and how much they have benefitted so far from increasing international interconnectedness. We base this analysis on our „Globalization Report 2018“ which we published last week (June 8th, 2018).

 

General data on the NAFTA countries

The free trade agreement between Mexico, Canada and the United Statesentered into force on January 1, 1994. The three member states have very different levels of economic development: Canada and the USA are among the most developed economies (G7 countries), as are Germany and the United Kingdom, for example. GDP per capita, which can be regarded as an indicator of a country’s economic prosperity, ranges between $45,000 (Canada) and $60,000 (USA). Mexico’s per capita GDP of $9,300 is less than 25 percent of this per capita wealth (see table 1).

 

 

How strongly are the NAFTA countries globalized?

The degree of globalization is particularly high in advanced economies with a relatively small population. Canada therefore has the highest degree of globalization of the three countries under consideration. In 2016, the country reached a globalization index score of 72 points (ranked 11 out of 42 countries under study). The USA ranks 28th with 61 points. The international interconnectedness of the emerging economy Mexico are below average. The country is therefore in fifth last place with only 41 points.

The increase in globalization between 1990 and 2016 is important for the absolute level of globalization-related GDP increases. Figure 1 shows that the increase in international interconnectedness of all three NAFTA countries is relatively low. The USA increased its index value by only three points. Mexico and Canada are slightly better off with gains of 10.5 and 11 points respectively (see figure 1). For comparison: In Bulgaria and Slovenia, the globalization measured in this way increased by around 35 points each, in Romania even by 39 points.

Judging from the development of the globalization index after the foundation of NAFTA 1994, it can be assumed that the free trade area had a positive impact on the interconnectedness of the United States and Canada: Between 1994 and 2000, the index value increased at unprecedented speed: for the United States by 5 points, that for Canada even by 10 points. Mexico is the only NAFTA member which experienced a decrease by 2 points in this period. However, given the peso crisis 1994/95, this effect may not be contributed to NAFTA. Though highly speculative, Mexico’s membership in the free trade area might even have mitigated to at least some degree the negative effects of this economic crisis on its international interconnectedness.

 

How strongly do the NAFTA countries benefit from increasing globalization?

The average annual gains in real per capita GDP due to globalization are very different among the 42 countries under review: While these increases are at €1,900 and €1,500 respectively for Switzerland and Japan, they only are at €80 and €20 respectively for China and India. The average annual per capita GDP increase of the three NAFTA countries ranges from around €750 in Canada to €120 in Mexico. These differences in absolute amounts can be explained as follows:

  • Canada has the highest per capita GDP gain due to globalization. There are two main reasons for this: Canada’s GDP per capita was already very high at the beginning of the investigation period (1990). This leads to high increase in absolute terms. In addition, of the three countries considered, Canada recorded the largest increase in globalization between 1990 and 2016 (plus 11.2 index points), which also led to high globalization-related increase of GDP per capita.
  • The USA also had a high GDP per capita in 1990. Nevertheless, the average annual increase of €445 due to globalization is much lower than in Canada. The reason for this is the small increase in the globalization index value between 1990 and 2016 (plus 3 index points).So the US has not been able to benefit from advancing globalization because it has barely advanced its level of globalization.
  • Mexico achieves only a relatively small increase of 120 euros on average per year. The reason for this is the low starting level of per capita GDP in 1990.

Mixed attitudes towards globalization in the NAFTA countries

Although Mexico’s GDP increase between 1990 and 2016 was below average due to globalization, its citizens have a relatively positive attitude to globalization. At the beginning of February 2018, YouGov was commissioned by the Bertelsmann Stiftung to survey over 14,000 people in 11 countries about their attitudes towards trade and globalization.

In Mexico, the share of those who consider globalisation to be a good thing is much higher than in the USA and other industrialized countries (above all Germany and Japan, which according to our calculations are among the biggest winners of increasing globalisation). In Canada, the proportion of those who see globalization as a “force for good for the world” lies between the levels of approval in Mexico (73 percent) and that in the USA (42 percent) at 55 percent (see figure 3).

 

 

Implications for economic policy

It is interesting to see that in those countries that have so far been the winners of increasing globalization, attitudes towards this phenomenon also are the most sceptical. Giving it a second thought, though, it is not so surprising at all: people in the industrialized countries, such as the United States, who already enjoy a relatively high living standard might be much more afraid to lose what they got vis-à-vis the rise of emerging markets, such as Mexico, which still have a lot of potential in terms of achieving gains from globalization. We therefore see a twofold responsibility for the industrialized countries:

On the one hand, they should help emerging economies to unleash this potential and integrate themselves further in the global economy. To achieve this, industrialized countries could improve access to their markets for less developed countries, cut their subsidies in sectors important for emerging countries such as Mexico (e.g. agriculture), and provide less developed economies with financing opportunities (e.g. for infrastructure and education).

On the other hand, gains from globalization are currently distributed unequally not only between but also within countries. Industrialized countries must therefore take measures to spread these benefits more widely among their population. Otherwise, social acceptance of an open society will continue to lose ground. There are a range of policy areas to be addressed here: social security systems, structural and regional policy, the entire education system and the tax and transfer system. The goal must be to let all members of society participate in the benefits of globalization.

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