1 the mexican experience with nafta university of texas lbj school of public affairs francisco j....

The Mexican Experience with NAFTA

University of Texas

LBJ School of Public

Affairs

Francisco J. Alejo

Consul General of Mexico

October 22, 2003

Contents I. Introduction

The Context of NAFTA

1. Accelerated Globalization

2. Mexico/ USA: An Asymmetrical Relationship

3. The Transformations of Mexico

II. Mexican Experience with NAFTA

1. Economic Performance, Trade and Investment

2. The Pending Agenda

3. Lessons and Policy Implications

4. Conclusions

I. Introduction

The Context of NAFTA

I. Highlights of the Globalization 1

1. Along the last several years, until the end of 2001, global trade grew at about three times the rate of OCED economies, surpassing $7 trillion in cross-border movement of goods and services.

2. Foreign direct investment (FDI) grew even faster than international trade and actually surpassed $1 trillion in flows in 2000

1. Based on: Earl H. Fry, “North American Integration. Policy Options”, CSIS, Policy Papers, July 2003

3. The number of multinational corporations (MNC’s) in the World also expanded dramatically, from 7000 in the 1960’s to roughly 65,000 today.

3. The 65,000 MNC’s control 850,000 affiliates, which employ 54 million workers world wide and were responsible for producing $19 trillion in annual sales in 2001, almost three times the aggregate value of global international trade.

5. International currency transactions amount to approximately $1.5 trillion per day. Production sharing systems and stock markets constitute a 24 hour phenomena conducted by continuous, computerized automatic systems.

6. In spite of September 11, 2001 events, international tourism returned to record levels in 2002 with 715 million people spending over $460 billion

7. Immigration and refugee flows are also without parallel, and at least 175 million people currently reside in countries different from their place of birth.

8. The number of transactions through internet-crisscrossing the planet is astronomical and grows at a maddening pace.

I.2. Mexico/US: An Asymmetrical Relationship

1. The US continental land mass is equivalent to roughly 4.5 times to that of Mexico. The population of the former is almost 2.8 times more than the 100 million Mexicans living in Mexico.

2. The Mexican GDP is equivalent to one sixteenth of the US corresponding GPD. A 6.5% annual growth of the US economy aggregates additional production equivalent to the total Mexican GDP, even though the latter ranks between the 9th and 10th largest in the world.

3. After almost 10 years of NAFTA, 85% of total Mexican exports are aimed at the US economy and constitute 20% of the country’s GDP. Nearly half of the 3 million new jobs created in Mexico between 1993 and 2000 were export related. In contrast, 37% of total US exports are destined to the NAFTA partners, and contribute with only 4% of the US aggregate GDP and employment. US commitments as a global superpower increasingly spread out all over the planet.

4. The growing size of the US economy, its global corporations, and the need to keep a large global techno military edge, justifies a gigantic and unbeatable investment in science and technology.

5. In the case of Mexico, in contrast with Canada, there are also very important asymmetries in education, cultural and institutional development.

6. Of special and paramount importance are the asymmetries in physical and telecommunications infrastructure.

7. It was precisely because of the fundamental role of the asymmetries that the European Community assigned a pivotal role in the achievement of European integration to the special funds for balancing the levels of basic development among the member nations.

I.3 The Transformations of Mexico

1.Demographic Transformation: from 20 million inhabitants in 1950 to 100 million 2000.

2. Settlements transformation: from 80% rural population to 75% urban population in only 60 years. With only one city with more than one million inhabitants to one megalopolis with 18 million inhabitants, two cities with more than 3 million and ten cities with more than one million inhabitants in the year 2000.

3. Educational Transformation: from more than 70% illiteracy level to more than 90% literacy, to almost 100% coverage by the elementary school system and to almost two thirds coverage by the high-school system in only two generations.

4. Economic Structure Transformation: from a dominantly agricultural and mining rural economy to an essentially industrial and service urban economy in only 30 years from 1950 to 1980.

5. Trading Transformation: from a tightly closed economy, with more than 90% of the importation code subject to “previous specific permit” by the government and an average customs tariff of more than 80% by 1982 to less than 5% of the code subject to previous prermission and maximun customs tariff of 20% and a weighted average tariff of less than 10% by 1990.

After signing free trade agreements with Chile and the United States in the early 90’s, Mexico has signed such treaties with more than 30 countries. No other country has signed so many.

6. Public/Private sectors roles Transformation: from an economy tightly controlled and dominated by the public sector (the public sector expenditure represented 48% of the GDP in 1982 and there were more the 1200 corporations fully or mostly owned by the federal government) to a highly decentralized economy with only a bundle of state owned corporations and public sector expenditures representing a maximum of 22% of GDP. The process of deregulation has encompassed almost all sectors of economic activity.

7. Democratic Transformation: from a highly centralized and one hegemonic party system that lasted for more than half a century to a multiparty, highly reliable and competitive political system in only 22 years. This comprised new legislation for political parties in 1978, new polling legislation in 1978, 1987 and 1995; a judiciary system for dealing with post polling disputes in 1995 and 1998; a massive transfer of financial resources from federal to state and local governments took place between 1995 and 2002; a new legislation on transparency and accessibility to public records and information as an indisputable right for citizens and the media.

8. Human Rights Transformation: constitutional reforms and new legislation allowed for a new autonomous regime for the 10 million members of the indian communities of the country and the establishment of a fully independent national commission as a watchdog for human rights plus the subscription to the Inter-American and United Nations Human Rights treaties.

II. The Mexican Experience with NAFTA 2

2/ Based on: Aldo Flores Quiroga, “The North American Free Trade Agreement…”, Secretaria de Relaciones Exteriores, Mexico, Agosto, 2003.

1. Substantial increase in trade and investment, with a positive impact on economic growth and job creation

2. Lower vulnerability to foreign shocks, except for those that have originated in the US economy.

3. Productivity increases associated with technology transfers

4. Stable and credible legal framework for the solution of trade controversies

Four favorable outcomes for Mexico stand out during NAFTA’s first 10 years

1. Integration of productive chains

2. Expand physical, financial, and informational infrastructure, especially at the borders

3. Create compensation funds to promote regionally balanced growth

4. Improve existing mechanisms for conflict resolution

5. Develop intelligent borders for the flow of goods, services, knowledge and people

Much more, however, needs to be done:

Contents

I. Economic performance, trade and investment

II. The pending agenda

III. Lessons and policy implications

IV. Conclusions

A. Macroeconomic convergence

1. Inflation rates

2. Interest rates

3. Exchange rate

4. Country risk

5. Production

Mexican inflation is converging toward the US and Canadian rates…

Annual inflation rates, Mexico, United States and Canada

Source: INEGI

101214161820

1999/021999/041999/061999/081999/101999/122000/022000/042000/062000/082000/102000/122001/022001/042001/062001/082001/102001/122002/022002/042002/062002/082002/102002/122003/022003/042003/06

Mexico

United States

2.1%Canada2.6%

…gradually contributing to interest-rate convergence between Mexico and the United States

Interest rates, Mexico and United States (One month certificated deposits)

Source: INEGI

1999/021999/041999/061999/081999/101999/122000/022000/042000/062000/082000/102000/122001/022001/042001/062001/082001/102001/122002/022002/042002/062002/082002/102002/122003/022003/042003/06

Mexico

United States

The Mexican peso has weakened but its volatility is relatively low

Interbank Foreign Exchange Rate

(MXP/USD)

Source: Banco de México

Average daily volatility in the foreign exchange market

(% daily apreciation or depreciation)

Source: SRE with Banxico´s data

Country risk has differentiated from other Latin American markets

Country risk(Emerging Markets Bond Index EMBI+, JP Morgan)

Source: JP Morgan

28/05/1999

28/08/1999

28/11/1999

28/02/2000

28/05/2000

28/08/2000

28/11/2000

28/02/2001

28/05/2001

28/08/2001

28/11/2001

28/02/2002

28/05/2002

28/08/2002

28/11/2002

28/02/2003

28/05/2003

Latin America

EMBI+Mexico

1998/01

1998/02

1998/03

1998/04

1999/01

1999/02

1999/03

1999/04

2000/01

2000/02

2000/03

2000/04

2001/01

2001/02

2001/03

2001/04

2002/01

2002/02

2002/03

2002/04

Mexico’s GDP performance is closely associated with variations in US GDP

Quarterly GDP, Mexico* and USA**(seasonally adjusted series)

Source: INEGI

Mexico(left scale)

United States(right scale)

* Billions of pesos of 1993** Billions of dollars of 1996

Correlation coefficient: Correlation coefficient: 97%97%

This close correlation is due to the deepening integration of US and Mexican industrial sectors

Industrial production (annual % variation, three month moving average)

Source: INEGI

1998/03

1998/06

1998/09

1998/12

1999/03

1999/06

1999/09

1999/12

2000/03

2000/06

2000/09

2000/12

2001/03

2001/06

2001/09

2001/12

2002/03

2002/06

2002/09

2002/12

2003/03

2003/06

Canada

USAMexico

Correlation coefficient: Correlation coefficient: 97.2%97.2%

B. Trade and investment

1. Trajectory and reallocation of trade flows in the North American area

2. Mexican participation in the US market

3. Long and short term capital flows into Mexico

3%7%0%0%

82%2%5%

United States

Source: INEGI

Performance

Period % var

1999-00

2001-02

Total trade (MD)

Period Level

1999 273,915.8

2000 339,415.2

2001 325,506.5

2002 329,360.5

Seventy-six percent of Mexico’s total trade is oriented toward the United States

Africa and the Middle EastEaster

n Europe

Western Europe

Latin America and the Caribbean

Canada

3%0%0%

4%0%0%

4%4%0%0%

89%2%1%

4%4%0%0%

89%2%1%

Exports shipped to United States represent 90% of the Mexico’s total sales abroad

Source: INEGI

United StatesMexican total exports (MD)

Period Level

1999135,75

2000166,06

2001158,26

2002160,68

2Performance

Period % var

1999-00

2001-02

Africa and the Middle EastEaster

n Europe

Western Europe

AsiaCanada

9%0%1%

2%10%0%1%

Sixty three percent of the Mexican imports come from the United States

Western Europe

Canada

Eastern Europe

Africa and the Middle East

United States

Performance

Period % var

1999-00 25.47

2001-02 0.75

Mexican total imports (MD)

Period Level

1999138,318

2000173,552

2001167,425

2002168,678.7

Source: INEGI

Since 1994 Mexican exports have expanded notably and are more concentrated in the manufacturing sector

Manufactures

Mining

Agriculture

Petroleum

Total Mexican exports (billions of dollars of 2002)

Source: SRE with INEGI data

NAFTAGATT Accession $160.7

Growth 1993-2002:149%

Growth 1985-1993:80%

Imports have also increased, driven primarily by the demand of intermediate goods

Consumptiongoods

Intermediategoods

Capital goods

Total Mexican imports (billions of dollars of 2002)

NAFTAGATT Accession $168.

12%61%

Growth1993-2001:107%

Growth 1985-1993:237%

Intra-regional trade(billions of dollars)

NAFTA has thus produced a significant trade expansion for the US, Mexico and Canada

289339

375418

475512

659615 604

Source: SRE with USDOC, Statistics Canada and INEGI data

North American trade integration 1993-2002:

1. Trilateral trade increased 109%

2. Mexico’s participation in intra-regional increased from 15% to 20%

3. Last year’s trade decline is due to the sluggish performance of the US economy

Mexico is the second trade partner of the United States...

40 48 48

Canadá

Main US trade partners(total trade, billons of dollars)

Source: Ministry of the Economy with USDOC data

Participation of Mexican products in the US market (%)

6.36.6

10.410.7

11.211.5 11.6

NAFTA start date

0 50 100 150 200

China, Singapurand Hong Kong

France andUnited Kingdom

Mexico*

Canada

…and it is the second largest export market for the US

US exports(billions of dollars)

United States is the main investor in Mexico

* Excludes the Banamex-Citigroup transactionSource: Ministry of the Economy

Foreign Direct Investment(billions of dollars, cumulative 1994-2002: 112.4 bd)

TOTAL USA

C. NAFTA’s impact by sector

1. Agriculture

2. Manufacturing

Reciprocal tariff eliminations helped Mexican exporters increase their participation in the US market…

* Includes the January-October

Mexican agricultural exports to the United States

Product

Millions of dollars

Berries 0.22 21.24

Beans (dehydrated)

0.02 1.07 66.5%

Tamarind 0.15 4.57 44.5%

Avocado 3.63 39.45

Vegetable (mix) 3.75 32.77 27.6%

Papaya 5.38 40.74

Mango 0.76 5.74 25.3%

Oranges 0.67 4.79 30.9%

Turnip 0.03 0.19 18.2%

Leek 0.75 4.25 18.4%

Product

Millions of dollars

19932001

1993-2002*

Broccoli 6.68 35.95

18.70%

Pineapple 1.46 6.89 20.28%

Esqueje 1.80 8.01 15.93%

Corn (sweet) 2.94 12.62

16.89%

Pepper 4.77 19.97

16.38%

Fresh Flowers 4.92 19.49

16.07%

Artichokes 0.21 0.75 15.85%

Cabbage 2.08 7.39 15.41%

Chickpea 7.07 25.08

11.33%

Spinach 1.48 5.23 11.96%

Source: Ministry of the Economy

…placing them among the main suppliers of a diverse set of goods in the US market

* January-October

Mexican agricultural goods in the US market

ProductParticipation in the US market

1993 2001 2002*

Avocado 3.6 21.6 32.7

Garlic 48.1 43.2 28.4

Onion 81.2 74.0 73.3

Chickpea 61.8 75.0 44.5

Corn (sweet) 0.0 94.1 93.0

Mango 25.0 90.3 89.0

Turnip (fresh) 11.7 52.9 88.7

Okras 0.0 96.9 98.3

Papaya 70.6 74.0 68.4

Pepper 0.0 99.2 99.6

Tomato 91.7 67.2 67.7

Carrot 13.5 23.8 29.4

NAFTA has benefited Mexican consumers by fostering competition among suppliers, thereby lowering the prices of many goods

Prices of staples in the

average Mexican diet

has declined

ProductRelative prices change 1994-

2001 (%)

Pineapple 6.4

Lettuce -0.5

Chickpea -8.5

Grape -11.0

Garlic -14.8

Carrot -15.1

Papaya -16.4

Melon -20.4

Mango -21.5

Corn (sweet) -25.0

Tomato -34.0

Onion -34.8

Oranges -36.4

Grapefruit -41.5Source: Ministry of the Economy

Mexico’s manufacturing sector has also been a beneficiary of NAFTA, through greater exports and lower consumer prices

Exports to the USA and

Canada of manufactured

products

ProductsTCPA1994-2001

Electrical and electronic devices, machinery and equipment

Textiles and cloths 21.2%

Auto-motors 21.0%

Auto-parts 12.8%

Steel Industry 12.4%

ProductsRelative price

change*1994-2001

Electrical devices -14.9%

Electronic devices -19.9%

Automotives -16.0%

Auto-parts -3.3%

Real price change of

manufactured products

Positive export

performance due to NAFTAReal price decrease

NAFTA success stories

Output in sectors with significant backward and forward linkages has increased

Sector

Annual exports (million dollars)

Mexican total

exports (share, %)

Jobs created

since NAFTA

Market share in USA (%)

Automotive sector

33,000 21% 200,000 15%

Electrical and electronic sector

56,000 36% 351,000 19%

Textile and cloths sector

11,000 7% 500,000 12.4%

D. Effectiveness of Mexico’s free trade agreements

1. Evolution of Mexican exports

2. Performance of Mexican imports

Mexican exports to the United States, Costa Rica and the G3 have increased notably since the launching of the respective FTAs…

Source: DGREB con datos de INEGI

Exports (Index based on real exports, constant dollars of 1990, semiannual moving average)

Costa Rica

Canadá

Time to double sales

Country Months

Costa Rica 15

USA 33

Chile 38

Canada n.d.** Not duplicated

Time to triple sales

Country Months

Costa Rica 41

USA 76

Chile 39

Canada n.t.** Not tripled

Number of months after FTA

Unión Europea

NicaraguaBolivia

Uruguay

…but exports to Bolivia and Nicaragua, with whom Mexico also has FTAs, have not grown significantly

Time to double sales

Country Months

Bolivia 19

Nicaragua

E.U. n.d.

Northern Triangle

Uruguay n.d.

* Not doubled

Triángulo del Norte

Exports (Index based on real exports, constant dollars of 1990, semiannual moving average)

The FTAs with Chile and Costa Rica have generated a substantial increase in Mexican imports from them…

Costa Rica

Time to doubled purchases

Country Months

Costa Rica 6

Chile 11

Time to triple purchases

Country Months

Costa Rica 12

Chile 14

Imports (Index based on real imports, constant dollars of 1990, semiannual moving average)

…just like the FTAs with the United States, Canada, Venezuela, Colombia, Guatemala, Honduras and El Salvador

Nicaragua

G3Canadá

Time to double purchases

Country Months

Nicaragua 13

Canadá 69

USA 65

Uruguay n.d.Time to triple

purchases

Country Months

Nicaragua 13

Canadá n.t.

G3 n.t.

USA n.t.

Uruguay n.t.

Uruguay

The trend in imports from Bolivia and Israel, however, has not changed with the FTAs

UEBolivia

Time for a 50% increase

Country Months

Northern Triangle 2

E.U. N.A.

Bolivia N.A.

Israel N.A.* Not reached

Time to double purchases

Country Months

Northern Triangle n.d.

E.U. n.d.

Bolivia n.d.

Israel n.d.* Not doubled

Israel

Contents

IV. Conclusions

A. Low domestic-content integration of Mexican products

1. Relevance of the in-bond sector for manufacturing exports

2. Low domestic-content of goods produced in in-bond plants

The in-bond industry generates more than 50% of manufacturing exports…

Mexican exports of manufactured goods(constant billion dollars of 2000)

19 22 27 29 33 3948

80 79 7518 20

66 6662

In-Bond Industry Other

37 41.3

70.883.8

146 13

…but it uses very few domestic components…

In-bond industry inputs(billions of pesos of 2002)

181 186 212250

372431 465

507 527563

514 513

Imports Domestic

440475

543580

25496.3%

3.7%533

Contents

IV. Conclusions

1. Mexico’s unilateral trade liberalization that took place during the late 1980’s was too fast, too abrupt and without being accompanied with appropriate promotional and supporting policies as well as the necessary sequencing of such policies as to avoid excessive destruction of productive industrial chains and linkages as in effect happened.

2. By the time the NAFTA was enacted, beginning in 1994, a large proportion of previously existing productive chains in the country’s manufacturing industry had been obliterated by foreign competition.

Lessons

3. Free trade cannot address every development problem -it is just one instrument among many in the policymaker’s tool kit

4. Productivity increased by time requires continuous technological innovation and expansion of human capital

5. Export promotion alone does not guarantee the integration of productive chains

1. Implement domestic policies to redistribute incomes between the north and the south of the country, which implies the reduction of differences in productivity levels.

2. Consider the establishment of cross-border, social-cohesion funds to help balance the development process and provide adjustment assistance: the leveling out of availability and quality of physical and telecommunications infrastructure, a drastic reduction in the “digital divide”, and the expansion and spreading of human capital.

Implications: A few examples

3. Create an environment that favors continuous productivity increases

a. Invest more in education and training

b. Improve production processes

c. Modernize physical and financial infrastructure

d. Promote technology transfers

4. Seriously consider the possibility of “NAFTA plus” with structural adjustment assistance funds, a customs union, a common market including labor or even EU-style arrangements.

Contents

III. Lessons and implications

IV. Conclusions

1. Free trade has yet to benefit the Mexican south and that is essentially dependent on appropriate development policies adopted by Mexico and development assistance provided by the other NAFTA partners.

2. Existing dispute settlement procedures have been insufficient to address notable trade controversies (cross-border transportation, agriculture), hence it is necessary to consider the creation of a North American Commission, a permanent North American Court on Trade and Investment that replaces the current NAFTA panels, and possibly even a North American Parliamentary Group.

Conclusions - The bad

3. The absence of adjustment assistance funds slows down the process of factor reallocation and trade integration and the overall growth potential of the region.

4. Mexico’s growth has become excessively dependent on the dynamics of the US economy. It has to rely more on its own domestic and third international markets and keep in tune with the US economy’s pace of technological change.

1. NAFTA provides a stable legal framework for the expansion of trade and investment

a. Significant increase in Mexican trade and benefits for the three parties involved.

b. Significant increase in FDI flows

c. Greater competitiveness of the manufacturing sector

2. NAFTA has helped to spur growth and job creation in Mexico

3. Mexico’s trade negotiating stance in world markets has improved because of NAFTA

Conclusions - The good

1 the mexican experience with nafta university of texas lbj school of public affairs francisco j....

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