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The experiences and responses of Mexico to globalization, Challenges

and Opportunities

Ángel Villalobos Rodríguez

Undersecretary for International Trade Negotiations

OCTOBER, 2006

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I. IMPACT OF FREE AND OPEN TRADE AND INVESTMENT

3

Honduras

Nicaragua

Venezuela

Guatemala

El Salvador

Colombia

Bolivia

ChileUruguay

12 FTAsCanada

United States

Honduras

Nicaragua

Costa Rica

Venezuela

Guatemala

El Salvador

Colombia

Bolivia

ChileUruguay

Israel

European Free Trade Association

European Union

Japan

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Argentina

Cuba

Peru

Brazil

Mercosur(Framework Agreement ) (Automotive Agreement)

I. IMPACT OF FREE AND OPEN TRADE AND INVESTMENT

MERCOSUR – Framework Agreement

MERCOSUR – Automotive Agreement

Argentina

Brazil

Cuba

Peru

6 Economic Complementation Agreements ( ECAs)

5

23 Bilateral Investment Treaties (BITs)

Germany

Austria

Belgium-Luxembourg

Spain

Italy

Denmark

Finland

France

Argentina

Uruguay

Panama

Cuba

Australia

South Korea

Trinidad & Tobago

Greece

Netherlands

Portugal

Sweden

Czech Republic

United Kingdom

Iceland

Switzerland

6

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Oil exp. Non oil exp.

Exports represent 38% of Mexico’s GDP

26.7

213.7

60.8

Mexico’s Exports 1985-2005 (US billion dollars)

Source: Ministry of the Economy with data from Banxico

Market access

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Source: Ministry of the Economy with data from Banxico

3.5

14.6

1986-1993 1994-2005

Average annual FDI flows in Mexico (US billion dollars)

Market access

Certainty for FDI

4th recipient of FDI among developing countries

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II. CHALLENGES POSED BY THE GLOBAL ECONOMY

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U.S. Chile, Australia, Singapore, Israel, Central America, Thailand*, South Korea*, Andean countries*, etc.

Canada Chile, Costa Rica, Israel EFTA*, South Korea*, Central America* and Singapore*, etc.

Preferential access is gradually eroding as a result of trade negotiations by our main trading partners.

Limitations of FTAs as an additional source of competitiveness.

* In process or about to enter into force

95% of the exports are duty-free.

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2.0

5.5

9.0

12.5

16.0

19.5

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

New competitors in Mexico's export markets, mainly from Asia

Competition in the U.S. market(%)

6.8%

5.4%

14.0%

10.8%

Mexico

China

Source: UNCTAD. World Investment Report, U.S. Department of Commerce and Banco de Mexico.

11Source: UNCTAD. World Investment Report, U.S. Department of Commerce and Banco de Mexico.

8.3%

5.8%6.0%

3.2%

1.9%

1.7%

0.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

China

Japan

South Korea

Taiwan

Malaysia

Singapore

Asia’s share in Mexico’s imports(%)

New competitors in the domestic market

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FDI main recepients among developing countries 1994-2005 (billion dollars)

Source: UNCTAD. World Investment Report, U.S. Department of Commerce and Banco de Mexico.

45.348.952.658.0

77.5130.1

170.7

193.9218.3

494.3

Malaysia

South Korea

Chile

Poland

Argentina

Singapore

Mexico

Brazil

Hong Kong

China

Increased competition in the attraction of FDI flows

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They are also embarked upon free and open trade.

China Thailand, ASEAN, Chile, New Zealand*

South Korea Chile, Singapore, EFTA, U.S*, Canada*, China* and Japan* (in process or study)

Mexico’s most important competitors among developing countries have similar or lower tariff levels.

9.16.69.7

ChinaSouth KoreaMexico

Average industrial tariffs

* In process or about to enter into force

Source: World Trade Organization (WTO) and Mexico’s Law of the General Import and Export Taxes

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Macroeconomic stability has been firmly at the top of the priority list. As a result, the Mexican economy, supported by prudent fiscal and monetary policies and a solid financial system, has continued along its path of stability.

Energy, labor and fiscal structural reforms are still to be introduced so as to foster investment and economic development.

Also, to promote economic efficiency, it is important to strengthen the functioning of markets, by improving the institutional framework and enhancing economic competition for the benefit of all economic agents.

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Being conscious that the development of the ICT industry

can play an important role in achieving a better economic

performance and increasing competitiveness, higher human

capital levels, increased R&D investments and improved

infrastructure are required.

Source: OECD Factbook 2006

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III. STRATEGY TO COPE WITH GLOBALIZATION

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Automotive

Electronics

Software

Aeronautics

Textile and apparel

Agriculture

“Maquiladora” industry

12 Sectoral promotion programs being developed

In order to contribute to the modernization of a number of industrial sectors and to increase their competitiveness, sectoral promotion programs are being implemented.

Chemicals

Leather and footwear

Tourism

Trade

Construction

Measures including:

Tariffs reduction or elimination on inputs,parts and components

Fiscal and administrative incentives for exporting firms

Issuance of new quality standards

Actions againstcounterfeit

SECTORAL PROMOTION PROGRAMS

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Mexico is working to:

Become a world class producer of higher value-added manufactures and services.

Achieve higher levels of specialization to benefit from the country’s comparative advantage.

Increase investment flows.

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The Mexican Government is working on unifying

the two most important export promotion

programs: The “Maquiladora” and Temporary

imports programs.

The purpose is to solve the complexity of Mexico’s

tariff structure, while adapting to the new ways of

doing business, including outsourcing and

offshoring, and the importance of reducing the

logistic and administrative costs for exporting

firms.

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On September 29, a unilateral reduction of the Most Favored Nation tariffs (MFN) applied to 6,089 inputs took place.

9.711.9

AfterBefore

Mexico’s average tariff on industrial goods

(before and after the reduction on inputs) Reduce production costs for Mexican enterprises

Reduce tariff inconsistencies

Contribute to decrease counterfeit and triangulations through Mexico’s FTAs

Reduce customs administrative costs

Facilitate SMEs’ access to inputs

This measure will:

Source: Mexico’s Law of the General Import and Export Taxes and Tariff reductions decree.

TARIFFS REDUCTION ON INPUTS

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USD $5billion dollars of ICT related goods

Latin AmericanLeader

Expenditure on ICT equivalent to the

average of Mexico’s trade partners

Exports and investment promotion

Human capital development

Improvement of the legal framework

Strengthening the domestic ICT market

Strengthening the local industry

Achievement of world quality levels

Clusters development

3 7Goals By 2013

Strategies

Promotion Program on Software (PROSOFT), launched four years ago.

PROSOFT

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2,345

1,880 2003

2004 1,926

2005 2,132

2006p

3%

7%

10.7%

11.4%

Annual Production

(USD$ millions)

Production growth rate

Exports 2003-2006(USD$ millions)

50

105

300

500

So far, the implementation of PROSOFT has brought positive results.

More than USD$ 226 million of investment .

Over 3,000 firms have benefited from the program.

Nearly 22,000 jobs, which pay five times the manufacturing average.

PROSOFT

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ITA-Plus has been established with the aim of enhancing competitiveness for the ICT industry in Mexico.

It is intended to go beyond the international (WTO) ITA by promoting local integration in backward linkages along the productive chains including:

Subassemblies.

Raw materials required by the ICT industries such as steel and other metals, plastics and chemicals.

Electronics final goods, by liberalizing their entire productivechain, including inputs and raw materials.

INFORMATION TECHNOLOGY AGREEMENT (ITA) PLUS PROGRAM

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Promotes the access of all Mexican population to information technologies regardless of the geographic situation and social condition.

Internet connections in all of the municipalities with access to informative and cultural contents.

e-Government services.

e-MEXICO BROADENING THE USE OF ICT

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Mexico’s expenditure on education has increased.

The benefits of ICT were brought to the classrooms through Enciclomedia, an interactive system providing school manuals anddigital educational materials.

Scholarships are provided for undergraduate and graduate students in science and technology.

Curricula updates for ICT-related programs to reflect industry’s requirements.

Support to public and private universities, involving firms thatdemand these human resources.

HUMAN CAPITAL DEVELOPMENT

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R&D Expenditure

Goals Strategies

2006 = 1% of GDP

2025 R&D Expenditure

= 2% of GDP

Training Equipment Consultancy Product design Prototyping Infrastructure

Training Scholarships and

specialized capacity building

Research and modernization projects

Science and technology dissemination

R&D centers

RESEARCH & DEVELOPMENT (R&D)

Research funds

Tax incentives

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The Mexican government has established a network of Digital Community Centers (7,200 so far).

Free access to e-Mexico is provided as well as general access to the internet.

Digital Community Centers are located in public schools, libraries, health centers and post offices, especially in disadvantaged and rural areas.

INFRASTRUCTURE

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Financial funds are being allocated to provide business assistance to SMEs in order to raise productivity and increase competitiveness through the use of ICT and partnerships with other enterprises, universities and the public sector.

Technology Business Accelerator Program (TechBa)

Operated by a U.S.-Mexico nongovernmental body.

The objectives of this program include :

Promotion of successful Mexican ICT firms in the global markets.

Facilitating the interaction of these firms in the international environment to accelerate their growth.

SMEs

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4 TechBas

Madrid (October12, 2006)

Quebec

Austin, Texas

Silicon Valley

TechBa

100.79Montreal, Canada

151.06Madrid, Spain

3 countries

Austin, Texas, U.S.

San Jose, California, U.S.

Location

112

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55

SMEs

10.06

2.45

5.76

Investment (USD$ Million)

TechBas include SMEs from sectors such as software, multimedia, biology, biometrics and biotechnology.

SMEs

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Mexico needs to evaluate itself in terms of the best practices.

Being an OECD member and trade partner of Japan, the U.S., Canada and the EU, among others, Mexico has a comparative advantage to adopt the best practices and expertise.

By 2010 the world demand of ICT services will reach USD$ 150 billion dollars and the U.S., Mexico’s main trade partner will be demanding 50% of that amount.

Multinational corporations are encouraged to establish R&D centers and laboratories.

FDI represents a major contribution to employment, technology transfer and competitiveness.

BENCHMARKING AND TAKING ADVANTAGE OF CURRENT TRENDS

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IV. WHAT LAYS AHEAD

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Free and open trade and investment policies have served us well.But as the world changes, Mexico must effectively cope with new challenges to increase competitiveness.

A number of policies are being implemented by the Mexican government to develop the ICT industry which shall result in improved economic performance and productivity.

Strengthened efforts are required, most of all in the technical skills area and the development of physical and communications infrastructure.

Strategy must be complemented by improvements to the economic infrastructure.

The combination of global integration, economic and technological changes is creating a unique opportunity for Mexico.