North American Free Trade Negotiations:

Abstract

Why has Mexico shifted from a defecting free-rider on the international trading system to a conceding free-trader? An analytical model of bargaining between asymmetric players is developed to show how cooperation can be achieved through the strategic use of side payments. Mexico made concessions beyond the conventional agenda of trade negotiations (liberalizing investment rules, financial services, intellectual property rights, labor and environmental standards) in an effort to alter the payoff for the United States, and thereby create a game with a more optimal solution for both countries. Market liberalization between Mexico and the United States is analyzed over three periods (the 1980 GATT decision, GATT accession in 1986, and NAFTA and supplemental negotiations in 1991-3), and changes are identified leading to different types of games. The model achieves two results — (1) it helps explain the shift in Mexican policy from nationalism to liberalization, and (2) it shows how side payments can be used as part of a strategy of game change.