Mexico: Loving Free Trade Ever Since NAFTA

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By Miguel Diaz

North American Free Trade Agreement. Mexico is the most prolific signer of free trade agreements (FTAs) in the world, having negotiated a total of 10 agreements in the last seven years. The agreements encompass 32 countries with a combined 850 million people and more than 60% of the world’s GDP.

Mexico has reached FTAs on a bilateral as well as on a multilateral basis. It has signed bilateral agreements with Chile, Bolivia, Costa Rica, and Nicaragua, while concluding multilateral accords with Canada and the U.S. under the North American Free Trade Agreement (NAFTA); with Venezuela and Colombia; and with Guatemala, Honduras, and El Salvador (these three accords came into effect on January 1, 2001).

Having already negotiated FTAs with most of the countries in its own hemisphere, Mexico has begun to venture out of the hemisphere for its most recent FTAs. In July 2000, Mexico implemented FTAs with Israel and the European Union, becoming the first Latin American country to have preferred access to these two markets. Several months later”in November 2000″Mexico completed an FTA with the EFTA countries of Iceland, Liechtenstein, Norway, and Switzerland. consequently Mexico and Israel are now the only two countries in the world to have preferential trade access to the two most coveted export markets in the world, North America (the U.S. and Canada) and Western Europe. The Mexican government is now looking to Asia for potential FTA partners, as talks are underway with Singapore. In addition, Korea and Japan have expressed an interest in an FTA with Mexico.

Drivers for the Agreements

Many factors compelled Mexico to pursue its FTAs. On the economic front, there was the imperative to continue with the process of transforming Mexico into an export-based economy. In this regard, FTAs provide Mexican exporters with additional market access and help attract foreign direct investment into Mexico, especially in the industrial export sector. Mexico is also counting on its FTA network to help reduce its reliance on the U.S., which now takes in close to 85% of Mexico’s exports. With exports as a percentage of GDP having risen to 30% from the high teens just a decade ago, it has become more of a priority for the Mexican government to diversify its export markets. Mexico is also counting on its FTAs to help diversify its exports. The government’s ultimate economic objective, of course, is to put in place a development framework capable of providing for faster economic growth, and consequently a better standard of living for the Mexican people.

In addition to the economic and political motivations for the FTAs, it appears that the FTAs have generated their own momentum. This occurs because as Mexico signs more FTAs, it becomes a more attractive FTA partner for other countries. FTAs also became easier to finish as Mexican negotiators gain more expertise after negotiating each one. For example, the recently signed FTA with the EFTA countries took just four months to complete. FTAs have continually gained in popularity in Mexico; this stands in stark contrast to the situation in the U.S. where FTAs continue to be politically controversial.

Mexico has not been alone in entering into FTAs. However, what has separated Mexico from other countries in the hemisphere is the zeal with which it has pursued these agreements. Having found NAFTA to be good for Mexico, the government simply concluded “the more FTAs, the better.” In essence, the negotiation of FTAs was the mechanism that Mexico chose at the start of the era of globalization to assert that it would not turn back on its decision to open itself to the world.

The Results: Export Growth

Mexico has achieved many of its aims for the FTAs. Many of the results are obvious, some are not so obvious, and others have yet to materialize. There should be no mistaking, however, the fact that Mexicans have judged their FTAs to be an unmitigated success. For starters, the FTAs have met their principal objective of furthering Mexico’s transformation to an export powerhouse. At the end of 1999, Mexico was the eighth largest export economy in the world, with $280 billion in exports. Just a decade ago, Mexico was ranked 26th in the world in export dollar value. By the end of 2000, Mexico ranked fifth in the world with over U.S.$300 billion in exports. It should be noted that global trade growth was healthy during this period, but even by world standards, Mexico’s trade accomplishments have been remarkable.

The FTAs made this export growth possible by giving Mexico preferential access to markets that had not been fully exploited. It is no wonder, therefore, that the fastest increase in export growth has been with those countries with whom Mexico has signed FTAs. Between 1993 and 1999, for example, Mexico’s exports to the U.S. rose an astonishing 160%. Export growth to Chile and Costa Rica have been even more dramatic at approximately 600% and 200% respectively, although in the case of these last two countries, Mexico started with a low base of exports. Government data show that nearly 90% of Mexico’s exports get FTA privileged trade access.

Mexico has been able to diversify the kind of goods that it exports, thanks to its FTAs. Over the last decade, the share of primary goods in total exports has decreased from 80% to 15%. This shift makes Mexico stand apart from the rest of the region, where reliance on primary goods exports continues even as primary goods prices have declined. The FTAs contributed to this turnaround in Mexico by enabling Mexico to export greater amounts of industrial goods to these countries, many times at the expense of Brazil, which is the region’s other major exporter of industrial goods.

FTAs Encourage Investment

The FTAs have also proven their worth in attracting investment, a major engine of export growth and of economic activity, generally, in recent years. Since 1994, Mexico has drawn an average of U.S.$11.8 billion a year in foreign direct investment, making Mexico the third largest emerging market recipient of private investment. Mexico’s government trade agency, the Secretary of the Economy (formerly known as Secofi) enthusiastically points out that there are not just large quantities of investment that are coming in, but also that they are of increasingly good quality. Foreign auto companies, for example, are now designing cars in Mexico, whereas in the past they limited themselves to assembly work.

Due to the assured export access that they provide, FTAs encourage investment by strengthening the government’s claim that Mexico makes a logical production hub for multinational companies. FTAs also confirm to investors the government’s commitment to free market policies. Not-withstanding these benefits, there is increasing frustration among both foreign and Mexican investors about the confusion created by the web of separate agreements. To some, a Tower of Babel of agreements has been built that baffles businesses looking for clear, consistent, and simple rules for trade. The hope is that the proposed Free Trade Area of the Americas (FTAA) will bring all these agreements under one umbrella, but until that day arrives, the numerous agreements will probably continue to consternate, but hopefully not dissuade, investors.

Open borders have also contributed to bringing down inflation, a long time weakness of the Mexican economy. Since the mid-1990’s, annual inflation has come down steadily from double-digit rates to about 8.5% currently. The economics of how the FTAs have made this possible are simple”lower import barriers enable Mexico to import goods more cheaply and forces Mexican producers to compete with these lower-priced imports. This trade impact permitted the slower growth of money to impact prices much more efficiently without slowing the economy. This, and other macroeconomic accomplishments, including increases in the level of foreign exchange reserves and a narrowing of the current account deficit, made possible Moody’s decision in 2000 to upgrade Mexico to investment grade. Other rating agencies have signaled that they may follow suit.

This report was excerpted from a paper written by Miguel Diaz for the United States-Mexico Chamber of Commerce’s NAFTA Forum series. Contact the Business Development Center at the Chamber at (202) 371-8680 ext. 815. The NAFTA series is online at www.usmcoc.org/nafta.html.

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Mexico has reached FTAs on a bilateral as well as on a multilateral basis. It has signed bilateral agreements with Chile, Bolivia, Costa Rica, and Nicaragua, while concluding multilateral accords with Canada and the U.S. under NAFTA; with Venezuela and Colombia; and with Guatemala, Honduras, and El Salvador (these three accords came into effect on January 1, 2001).
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