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On the future erosion of the North American Free Trade Agreement

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No. 9208 ON THE FUTURE EROSION OF THE NORTH AMERICAN FREE TRADE AGREEMENT by Yi11iam C. Gruben June 1992 Research Paper Federal Reserve Bank of Dallas This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected]) N o . 9 2 0 8 ON TIIE I'UTURE EROSION OF TitE NORTH ATiTERICAN FREE TRADE AGREEUENT by wlll larn c. Gruben June 19 92 *senior Econornist and Policy Advisor, Research Department, Federal Reserve Bank of Dallas. The views expressed in this article are solely those of the author and should not be attributed to the Federal Reserve Bank of Dallas or to the Federal Reserve Systen. A la rge number o f economis ts have a l ready in f l j c ted the i r attentions upon the attempts of Mexico and the United States to enter into a free trade agreement, but some of i ts short-run and long- run imp l ica t ions have rece ived less cons idera t ion than they deserve,l -Even-when'their research -ful 1y. 'cons-i ders' the -dyn ami c ' imp1 ications of the change from no free trade agreement to free trade agreement, economists tend to assume the effects of the agreement w i l l remain in p lace once i t has been ins ta l led . Over t ime, much pressure may arise to erode the effects of the agreement. l , lhi le most analysts treat the free trade agreement as a cooperative game, the game may become noncooperative in later j te ra t ions . Moreover , most o f the pressure to u l t imate ly e rode the effects of the agreement wjl l probably come from the United States. To apprec ia te the mot iva t ions fo r e ros ion , i t i s use fu l to cons ider what insn i red Mex ico to in i t ia te d iscuss ions and to reca l l dif ferences between what the United States and l ' lexico get out of such an agreemenr. I . The Death o f Hex ican ImDor t Subs t i tu t ion i jexico is the United States' third nost important trading partner, after

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