Skip to main content

July/August 1996, 
Vol. 78, No. 4
Posted 1996-07-01

The Giant Sucking Sound: Did NAFTA Devour the Mexican Peso?

Five years of economic reforms had made Mexico a model for other developing nations by the end of 1993, when Mexico was preparing to enter into the North American Free Trade Agreement (NAFTA) with Canada and the United States. But less than a year later, in December 1994, Mexico experienced a severe financial crisis, forcing it to borrow from the IMF and the United States. Some commentators blamed the enactment of NAFTA for the devaluation of the peso and the ensuing economic turmoil in Mexico, with some calling for renegotiation or even repeal of the agreement. The author examines the relationship between NAFTA and the 1994 peso crisis and raises some provocative questions: Did NAFTA cause or exacerbate the devaluation of the peso? Or did NAFTA help alleviate some of the consequences of the crisis?