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The Reasons For Mexico’s Trade Liberalization*
By
Jorge Sebastian Roberts
Department of Economics University of Washington
Seattle, WA, USA May 2001
Abstract
As part of the current discussion of free trade, this paper provides an understanding of how Mexico’s trade liberalization developed and examines the reasons that motivated policy makers to undertake such reforms.
* This paper was awarded Honorable Mention in the UW Economics Undergraduate Paper Competition.
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“There is probably no area in economics where professional opinion is so united: the vast majority of economists see free trade, warts and all, as superior to protection. The attraction of free trade resides at one level in the theoretical elegance of the principle of comparative advantage. As Paul Samuelson once put it, comparative advantage is the only proposition in economics that is at once true & nontrivial.” –Dani Rodriki
I. Introduction
At the turn of the 21st century, free trade and globalization have been a central
topic in most policy discussions around the globe. As global communication is
becoming readily available and interconnected, more and more people from different
backgrounds and interests are engaging in this discussion. One clear example of this
increasing involvement is the continuous response from groups that have gone to the
streets of Seattle, D.C., Prague, Davos, Cancun, and other cities to protest against the
policies of certain institutions that are involved in redefining the global economy, such as
the World Bank, the International Monetary Fund (IMF), the World Trade Organization
(WTO), and the Organization for Economic Cooperation and Development (OECD). In
this discussion, many nations with closed economies are facing the tough decision of
whether to follow the global trend of liberalization or to wait and see what effects this
liberalization will have on the nations that have decided to open their economies. Other
countries that have liberalized their economies are constantly debating whether they
should continue to liberalize or to revert their policies. The present paper is part of this
discussion of trade in the global economy, and it provides an example of how a country,
in this case Mexico, has engaged in the process of liberalization.
The focus of this paper is mostly on the period that led to Mexico’s trade
liberalization, culminating with the signing of the North American Free Trade Agreement
in 1993. The paper also discusses the post-NAFTA era, though in less detail, showing
some of the preliminary effects of the liberalization process as well as the changes in
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trade policies. The purpose of this paper is to answer certain questions, such as how a
country that was very protectionist at the beginning of 1980 decided to liberalize its trade
in the midst of the debt crisis a couple years later, and why Mexico didn’t start the
process earlier, when it could have sustained the political and economic costs associated
with liberalization.
To answer these questions, I argue that even though there might have been certain
outside pressures, such as the need to compete for Foreign Direct Investment in the world
capital markets and pressures from institutions such as the IMF and World Bank, the
reforms in Mexico had a very strong domestic character. In recognizing this domestic
character, I examine the economic environment at that time, together with the behavior
and motives of the groups in power. We will see that in an attempt to survive, these
groups displaced each other and ultimately caused their own demise. In order to show
how these factors came into play in Mexico’s liberalization process, this paper is divided
into three sections. The first section presents the historical background, which provides
the background for understanding the reasons of the liberalization process. This section
is further divided into two sections, from 1976 to 1983 and then from 1983 to the present.
The second section outlines the reasons for Mexico’s trade liberalization in three sub-
sections: internal economic reasons, internal political reasons, and external reasons. In
the final section, I discuss some of the recent effects and benefits for Mexico from the
liberalization process.
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II. Historical Background
Let’s Liberalize, Let’s Better Not (1976-1982)
Trade liberalization in Mexico officially started after 1983. Previously, however,
during the administration of President José López-Portillo (1976-1982), there were
attempts to liberalize Mexico’s trade. The disequilibrium in the balance of payments
caused by the current import-substitution trade policies led Lopez-Portillo to rethink
these policies. He tried to use a moderate approach in the liberalization process. His new
approach included replacing the existing licenses with tariffs, gradually removing the
official prices for imports and exports, and establishing incentives for foreign countries in
the form of fiscal and trade credits in order to promote Mexico’s exports. At the end of
1979, Lopez-Portillo even toyed with the idea of joining the General Agreement on
Tariffs and Trade (GATT). However, this idea was dismissed the following year when
the prices on Mexico’s oil exports surged and the GATT entry debate became too heated.
Also, at that time, there were many influential people benefiting from the government’s
revenue. Knowing that any reform could jeopardize their economic power, they strongly
opposed any attempts to liberalize (I discuss this further in section III of this paper, under
the political reasons for the liberalization process).
In the end, Lopez-Portillo decided that it was best to leave the liberalization idea
alone. He was confident that as long as the oil money continued to finance the
government’s spending and economic prosperity was in place, there was no need to
pursue the liberalization agenda. In addition, the oil reserves seemed endless and no one
thought that the oil prices would change so drastically. Oil exports continued to boom,
imports surged at a faster rate than exports, and the externa l debt quadrupled as more and
more foreign banks decided to lend to Mexico. The exploitation of the proven oil reserves
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allowed the Mexican government to borrow from abroad and to increase its expenditures
at an increasing rate. The income received by the oil exports and the loans allowed the
government to finance imports and sustain an annual growth of about 7.5% on average
annually.
The economic boom ended in 1981, when, to the surprise of the whole world and
misfortune of Mexico, world oil prices collapsed, taking the whole Mexican economy
into a major recession. Mexico’s revenue, which was almost entirely dependent on oil,
experienced a substantial drop. Oil represented almost 70% of Mexico’s exports, up from
22.3% in 1977. As a result, Mexico was faced with a severe balance of payment
problems.
The expenditures were so excessive that it caused the country to be left insolvent
and unable to meet its obligations by the end of 1981. In four years, the government’s
budget deficit rose from 5.5 percent in 1978 to 16.2 percent in 1982 as a proportion of
GDP (See figure 1). Furthermore, this deficit was the main factor for a current account
deficit, which was also aided by an overvalued peso.
Figure 1. Mexico’s Budget Deficits (1970 -1988)
Source: Banco de México
Budget Deficit (1970-1988)
05
101520
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
% o
f GD
P
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By this time, the financial fragility of the economy became apparent. Real
interest rates became negative as a result of an overvalued peso and a rise in inflation
rates, causing a major capital flight. Bank lending dried out and Mexico could no longer
service its debt commitments. In August 1982, it declared a moratorium on its external
debt. The following month, during the final presidential annual report to Congress, in a
populist move to save his image, Lopez Portillo nationalized the banks in Mexico,
blaming them for the crisis.ii At this point, the government imposed strict exchange
controls, abandoned the trade liberalization program, and reinstated the old trade policies
of import substitution with 100 percent of all imports covered again by licenses. The
year 1982 would not only mark the end of the Lopez-Portillo Administration, but would
also mark the end of the economic model based on oil exports.
The administration that followed had to rethink the current economic policies in
order to recover from the current crisis and bring much-needed economic development
for the country. As we will see in the next section, the administration under Miguel De
La Madrid undertook substantial reforms with the goal of creating a more open economy
and bringing recovery to the nation’s economy.
Let’s Liberalize (1983-2001)
There is a broad misconception of when trade liberalization started in Mexico.
Many people think that Mexico started to liberalize its trade in 1993 when the trilateral
North Free Trade Agreement between Mexico, US, and Canada was signed. Actually, by
the time NAFTA was signed, Mexico had almost completely eliminated its trade barriers
in the manufacturing sector.iii
In the present paper, this period of trade liberalization in Mexico is divided into
four phases. What makes each phase distinct from the other is the speed in which the
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liberalization took place. The first phase starts during Miguel de la Madrid’s
Administration and lasts from 1983 to mid 1985. The second phase starts in 1985, a year
before Mexico’s entry to the General Agreement on Taxes and Tariffs (GATT), and
culminates in 1988 with the end of the De La Madrid’s administration and the beginning
of the Salina’s regime. The third phase ends in 1992, a year before Mexico signs the
NAFTA agreement. The post-NAFTA period is treated as phase four. Since we are still
living in period four and the data available is very limited, this paper will focus mostly on
the first three periods, while still discussing in lesser detail the current period.
Phase one (1983 to mid-1985) of the liberalization started when the
administration of President Miguel de la Madrid decided to loosen the restrictive import
regime that had been adopted the previous year to address the country’s debt and balance
of payment crisis. His administration also signed a bilateral trade agreement with the US
establishing commitments of further trade liberalization and the elimination of export
subsidies. The next year, the import licenses were reduced from 100 to 83 percent and
controls on 44 percent of non-oil exports were relaxed.
Phase two started in the middle of 1985, with Mexico accelerating its
liberalization program by announcing a new four-step tariff reduction program that would
end by 1988 with tariffs ranging between 0 and 30 percent. This new program was an
accelerated version of what De La Madrid’s administration had previously announced.
There were two reasons for this. First, Mexico, by entering the GATT in 1986,
committed itself to getting rid, by the following year, of all the official prices for imports
and exports. Second, in December 1987, in order to combat high inflation, Mexico put
into practice the Pacto de Solidaridad Económica (Economic Solidarity Pact). This pact
included a lower (0-20 percent) tariff target range designed to promote external
competition to keep domestic prices in check. It also included new price and wage
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guidelines. During this period, the administration decided to change its trade policies and
decided to substitute the subsidies with temporary exemptions of tariffs and licenses on
crucial imported industrial inputs. Also, in 1987, Mexico and the US signed an
agreement that included a broader legal framework than the one they had previously
signed during phase one.
When Carlos Salinas de Gortari took office in 1988, most of Mexico’s
commercial liberalization in the manufacturing sector had been completed, while the
agricultural and services sectors remained closed. From 1988 to 1992, the administration
focused mostly on fine-tuning the liberalization, while at the same time liberalizing the
services sector with radical privatizations. This fine-tuning consisted mostly of reducing
the tariffs for goods that were still showing unusually high prices and contributing to
inflationary pressures. On the other hand, it increased the tariffs for consumer goods that
were registering an import surge. As a result of this net increase, it caused a slight
increase in the mean and weighted tariff rates in 1990, as seen in Table 1.
Table 1. Changes in Mexico’s import regime, 1982-1993 (in percentages)
Measure 1982 1984 1986 1988 1990 1993 Import license coverage 100 83 27 22 18 16.5 Number of Tariff items 16 10 11 5 5 5 Maximum tariff 100 100 45 20 20 25 Tariff mean 27 23.3 22.6 10.4 13.1 13.0 Production Weighted Avg. Tariff 22.8 23.5 24 11 12.5 12.5
Source: Secretaría de Economía (SECOFI)
In 1992, Mexico and Chile signed the Economic Complementation Agreement,
which was basically a Free Trade Agreement (FTA). After very positive signs from this
first FTA, such as a sevenfold increase in trade from US$188 million in 1991 to US$1.4
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billion in 1998, and with the prospects of Chile’s possible future addition to NAFTA,
both countries decided to replace the 1992 FTA with a new FTA modeled after NAFTA
in August 1, 1999.
In the early 90’s, as negotiations with Chile took place, Mexico was also initiating
negotiations with Canada and the US on what would be later called the North American
Free Trade Agreement (NAFTA). In 1993, the three countries signed the agreement, and
in 1994, the agreement went into effect. NAFTA would push the liberalization to the
next step (see table 2 for NAFTA’s tariff elimination schedule). This marked the
beginning of phase four of the liberalization process. In this phase, the agricultural sector
has been liberalized gradually, and is expected to be fully liberalized by 2010.
Table 2. NAFTA’S Tariff Elimination Schedule
Elimination on January 1 Dutiable Goods on which Tariffs are eliminated 1994 60% 1998 9% 1999 11% 2002 1% 2003 12% 2008 8%
Source: US Congressional Budget Office
After 1993, the Salinas administration saw that the initial trade reforms were very
closely related to the promotion of foreign investment in Mexico. With this in mind,
Mexico became a member of the OECD in 1994 and a founding member of the WTO in
1995.
Continuing with Salina’s foreign policy, the Zedillo administration (1994-2000)
pursued a policy of signing as many trade agreements as possible (see figure 2). As of
2000, it had signed 10 agreements with 31 countries iv, granting Mexico’s export industry
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access to over 860 million consumers. Most of these agreements were signed with Latin
American Countries. However, the most significant for Mexico were the ones signed
with the two major economic blocs in the world, that is North America (Canada and the
US) and the European Union. The most recent agreement, which will enter into effect as
of July 2001, was signed with the European Free Trade (EFTA), composed of Norway,
Iceland, Liechtenstein, and Switzerland.
Figure 2. Timeline of Mexico’s Free Trade Agreements and adhesions to Organizations
Source: Secretary of Economy (SECOFI)
In addition, Mexico has signed other kinds of cooperation agreements relating to
trade and investment with various countries (including South Korea, Australia, New
Zealand), is currently in talks with Japan, and has set up ad hoc groups to administer
trade relations. Furthermore, as a member of the Asia-Pacific Economic Cooperation
(APEC), Mexico has participated actively in the organization’s goal of creating a free
trade and investment area by the year 2020.
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III. Reasons For The Trade Liberalization
The reasons for Mexico’s decision to liberalize its trade are divided in this paper
into internal & external reasons. The internal reasons are further divided according to
whether they are economic or political in nature. Clearly it was not one sole factor or
reason that influenced Mexico to engage in a free trade policy. Therefore, in this paper, I
try to present an inclusive view of the main factors in Mexico’s decision to liberalize its
trade.
Internal Economic Reasons
The internal reasons that led Mexico to liberalize its trade and engage in trade
agreements with other nations were derived from the fact that the import-substitution
policy was no longer effective and the liberalization after 1983 proved successful in
creating jobs and growth in the export industry. Also, according to economic theory,
open economies might encourage producers to raise their supply volumes and diminish
their marginal revenues, which in turn translates into lower prices for consumers, and in
the long run, a better income distribution.
During the period of the economic model Desarrollo Establizador (Stabilizing
Development), used by the Mexican government in the 70’s, the import-substitution
policy imposed a series of tariffs, permits, and direct subsidies to promote the country’s
industrialization and development. However, this policy created a distorted picture in the
economy and a heavy fiscal deficit. These distortions were based on heavy subsidies
given to industries, such as the transportation, energy, water, and, most importantly, the
credit industry. In addition to this, there were fiscal extensions granted to private and
statev companies, assets depreciated at an accelerated rate, and price controls on food,
which continued to sustain the low nominal salaries. By the end of 1983, according to
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Herminio Blanco, former Minister of Commerce and Industrial Development, all these
different regulation instruments made it almost impossible to determine the duration of
the subsidies, their size, and which industries were receiving them. Investors grew
uneasy of these practices and, as a result, the levels of capital necessary to sustain the
growth disappeared. Therefore, at the end of the period based on the import-substitution
model, the country had few possibilities to continue sustaining a stable economy and
generate new jobs.
In addition to the negative results of the import-substitution model, there was a
sector of the economy that proved that free trade could create economic growth. This
industry was the maquiladoravi industry. Prior to 1993, the maquiladora industry, in
contrast to the rest of the economy, demonstrated that it was a dynamic industry that
could generate new jobs and retain foreign capital. In the first 28 years of its existence,
the number of maquiladora plants grew from 50 in 1965 to over 2000 in 1992. Over this
period of time, such expansion created an annual growth rate of employment of 10
percent, versus the national average of 2 percent. Exports soared from US$2.5 billion in
1980 to US$18.7 billion in 1992. In 1992, this represented a net value added for Mexico
of US$4.7 billion.
Table 3. Maquiladora Industry (1980 – 1993) 1980 1983 1985 1990 1993 1996 1999 2000 Number of plants 620 629 760 1,938 2,692 3,403 4,636 4,762 Employment (thousands) 119 173 212 460 543 n.a. n.a 1,300 Employment change (%) ----- 30.96 18.35 53.94 15.17 n.a. n.a. n.a. Average Wage (US$/hr) 1.08 n.a. 1.38 1.78 2.51 n.a. n.a. n.a. Source: SECOFI, INEGI, Galhardi (1998)
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The growth in the country as a whole, however, did not match the growth of the
maquiladora industry. The main reason for this was that the rest of the economy was
practically closed and the maquiladora industry had been operating under a more
liberalized regime since 1965. Therefore, as a result of the sluggish growth in the early
80’s, and with the imperative of generating one million new jobs to keep up with the
growing population, Salina’s Administration, in 1988, engaged itself in an extensive
modernization program with the objective of promoting economic competitiveness and
economic growth. This program included major constitutional reforms and dozens of
deregulatory measures, such as privatization of the major state companies with the
exception of the oil company, Petróleos Mexicanos (Pemex), and continued with the
liberalization of the economy.
By 1992, the experience with the maquiladora industry and the successful
development of an export industry through the trade liberalization process initiated in
1983 proved to the Salina’s Administration that free trade in Mexico was a viable way of
creating a dynamic growing export industry and more new jobs, and, at the same time, of
training the workforce in modern production processes.
The Salinas administration negotiated trade agreements with other countries,
which remained consistent with the administration’s modernization program. Also, since
Mexico’s trade policies are closely linked to the promotion of foreign investment,
Mexico decided to continue formalizing its commitments to reforms and liberalization
through a permanent framework of trade and investment rules embodied in multilateral
and preferential arrangements. It is important to note that the successes of these
agreements were conditioned by the fact that Mexico had to stabilize its economy. This
stabilization included fiscal reforms and the restructuring of the public debt. Moreover,
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these agreements reinforced Mexico’s commitment to a predictable, sustainable, and
viable trade policy. vii
Reinforcing Mexico’s commitment to continue reforms and continue with the
liberalization process was one of the major goals of the Zedillo Administration. It
seemed that in 1994 the crisis would slow down the liberalization process, but on the
contrary, the liberalization was intensified, which became a major part of Mexico’s
recovery from the crisis. Zedillo’s administration, which lasted from 1994 to the year
2000, pursued the outward model agenda very strongly and reaffirmed Mexico’s
commitment to Free Trade by signing multiple agreements.
The newly elected president Vicente Fox is very unlikely to change Mexico’s
trade policies. He has mentioned that he will try to take the agreements to the next level.
In his first visit as President of Mexico to Washington, D.C., maybe naïvely, but with a
vision of NAFTA’s future, he proposed to the Bush administration the expansion of
NAFTA by adding free movement of labor. The Bush administration immediately
expressed a negative reaction to the proposal and said that it would be prepared to
consider such proposal in twenty years. Fox’s proposal might seem far- fetched, but let’s
not forget that in the early 90’s nobody expected the occurrence of NAFTA. In another
region of the world, for example, no one expected that the developed countries within the
EU would accept countries with lesser developed economies, such as Portugal, Spain,
and Greece, into the Union, much less come to share the same currency with them.
Fox has decided to also continue with Zedillo’s idea of diversifying Mexico’s
access to markets in the world and to lessen its dependence on the US economy. The Fox
administration hopes to offset any effects of economic slowdowns in the US by stepping
up the trade with Europe, Latin America, and Asia. Fox’s goal is to establish a
continental agreement in the Americas within the next five years.
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Internal Political Reasons
While there were obvious economic reasons why Mexico went ahead with
reforming its trade policies, there were political reasons that laid the ground for the
implementation of these reforms. It is perplexing to see that Mexico did not liberalize its
trade in the seventies when it was considered necessary and when economic conditions
could have supported it, but that it was instead in the midst of the economic crisis of the
mid-eighties that the liberalization was implemented. Also, it is important to note that it
was President de la Madrid, who was commonly considered weak and indecisive, who
initiated the change, rather than President López Portillo, who tended to be seen as a
strong leader. From this one can conclude that government actions do not reflect only the
will of an all-powerful authority, nor are they solely determined by the will of a majority
of voters. Therefore, there are other groups that have a considerable influence in
governmental policies. In order to better explain this process, I use a political economy
model developed by Aaron Tornell, a professor at UCLA.
Tornell develops a political economy analysis for the reforms that took place in
the early 1980’s in a two period model.viii In this model, he identifies three powerful
groups, or elitesix, during the 70’s and early 80’s, which played a major role in the
government’s actions. Two of these groups were in the manufacturing sector, comprised
of the private import-competing elite and the statist elite. The statist elite was made up of
managers, union leaders, and suppliers that were part of networks associated with state-
owned enterprises. The other was the rural elite, which was comprised of the regional
bosses who controlled the PRI’s voting machine and distributed government subsidies to
the agricultural sector.
In this two period model, the import competing elite and statist elite both enjoyed
governmental transfers in the form of subsidies during the 70’s. In 1980, when the debt
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crisis developed, both groups were left to compete for the government’s reduced fiscal
revenue. Tornell argues that the reduction in the size of the pie increased the marginal
utility of gaining a greater share of it, and increased the payoff of becoming the “leader”
and displacing the other group. In fact, the statist elite, in their attempts to displace the
private elite, induced the government to expropriate all Mexican private banks.x The
banks channeled much fiscal revenue into the private sector (through subsidized credit
and implicit guarantees of their borrowings from foreign banks), and their owners
comprised one of the strongest groups in the private elite.
In response to the statist elite’s move, the private elite, aware that trade
liberalization could be a way to destroy the power of the statist elite, decided to support
the liberalization of the 80’s instead of opposing it as they did in the 70’s. This time, the
private elite was not choosing between the trade liberalization and the protectionist status
quo, but between trade liberalization and becoming the “follower”. This means that trade
liberalization would reduce the power of the statist elite to further expropriate the private
elite and extract fiscal subsidies.
After the expropriation of the banks and the trade liberalization, both groups
became weaker and worse off. In the early 80’s, as Tornell puts it, even though both
groups knew about the outcome, the payoff of unilaterally deviating from the status quo
at that time by trying to become the leader exceeded the payoff of maintaining the status
quo due to the decrease in the government’s revenue. With both groups becoming
weaker, the administrations of De La Madrid and Salinas gained more autonomy in their
decision-making. Both administrations used this autonomy to implement a tax reform, a
radical privatization program, and a deregulation program that eliminated many
privileges and monopolies conferred in earlier administrations. Two new groups, the
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export elite and the foreign investors, replaced the statist and the private import-
competing elite. The rural elite remained.
The rural elite remained because the manufacturing sector was the only sector
liberalized. Therefore, the agricultural elite continued to enjoy political control in the
rural areas and decided not to interfere with the government’s policies. Tornell and
Esquivel state that liberalizing only the manufacturing sector goes against any economic
logic, but that the administrations at that time realized that it was necessary not to
liberalize the agricultural and services fully in order to ensure that the reform process
would not be blocked.xi In order to ensure this, reformers had to make sure that they
were going to be re-elected and they had to avoid alienating at the same time all-powerful
groups while they waited to build the two new elites to support further reforms.xii
External Reasons: Global Trends
The decision to engage in free trade with other countries is congruent with the
need to take advantage of the globalization process. The technological changes and cost
reduction in information systems, telecommunication, and in transportation have caused
the integration of markets to create global markets in which more and more countries can
participate. The struggle to dominate or even survive in this world market has forced
countries to specialize in the goods or activities in which they pose a comparative
advantage.
The other external reason motivated Mexico to liberalize its trade was the
increasing competition in the world for outside capital and FDI. In 1982, Mexico was
faced with a serious debt crisis. The consolidation of financial markets as well as
production processes, together with the opening of markets like China and Eastern
Europe, have led to an increasing mobility of capital throughout the world. This has
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forced many developing economies to engage in liberalization of their trade and financial
sectors. Also, to a lesser extent, the influence of institutions such as the World Bank and
IMF under the so-called “Washington Consensus” contributed to this liberalization
process. In many instances, the conditions for lending money to countries through these
institutions require that the borrowing countries liberalize their economies or establish
certain macroeconomic policies.
Furthermore, the need to attract FDI and capital for development has forced
many countries to create environments where there is a lower economic and political risk
for investors. Mexico, before the liberalization process, had a very strict regime for
foreign investment. In order to create a stable and predictable economic environment for
investors, it had to engage in radical reforms, allowing it to attract large amounts of
foreign capital in the 1990’s.
Before the 1970’s, many, if not most, of the developing nations pursued the
strategy of import-substituting industrialization (ISI). This strategy came under attack in
the 70’s, when the countries that had pursued the ISI strategy had clearly not shown any
signs of catching up with the more developed and advanced countries. Chile was the first
country in Latin America and one of the first in the world to abandon the ISI strategy in
the 70’s. The move to liberalization and the move to the establishment of an export- led
growth strategy allowed Chile to recover very rapidly from the “debt crisis” in the early
80’s by showing an impressive economic performance in the mid 80’s. Chile’s example,
together with the success of the so-called “high performance Asian economies” (HPAEs),
persuaded countries like Mexico to shift their policies towards an export- led growth
strategy. This strategy involved liberalizing the economy and dropping the ISI strategy.
Today, Mexico is leading the way in regards to liberalization in the world arena.
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IV. Recent Effects and Benefits of the Liberalization Process
Even though it is still early to assess the complete impact that NAFTA or any
trade agreement has had on Mexico, it is possible to observe very good preliminary
results from the liberalization process. The benefits can be seen both in the increase of
FDI and in the amount of traded goods. During the first five years of this administration,
foreign direct investment reached US$54.5 billion dollars compared to US$27 billion
between 1990 and 1994. In matters of trade, as a result of the trade growth between the
US and Mexico since the implementation of NAFTA in 1994, Mexico has displaced
Japan as the US’ second largest trading partner.
The positive effects of the liberalization were seen in the recovery of the Mexican
economy after the 1994 currency crisis. As one can observe in Figure 4, as a result of
having a more open economy, Mexico was able to recover from the 1994 crisis in two
years as opposed to five years after the 1982 crisis.
Figure 4. Mexico’s recovery after the crisis, 1982 vs. 1994
Source: 1997 US Trade Rep. Report on NAFTA
Mexico is no longer dependent strictly on oil. As of 1999, only 8% of Mexico’s
total exports came from oil & mining as opposed to 70% in 1982 (see figure 5). After
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Mexico’s experience in the early 80’s, when the fall in oil prices put Mexico in a serious
debt crisis, Mexico has decided to encourage its exports more through the manufacturing
sector. As we saw earlier, the agricultural and fisheries sectors are still in the
liberalization process, which is why the share of exports in those sectors have not shown
an increase in the share of exports relative to oil and manufacturing exports since 1982.
Reducing the dependency on oil exports has allowed Mexico to be less susceptible to
external oil shocks, such as changes in the oil price.
Figure 5. Diversification of Mexico’s Exports (1982 vs. 1999)
Mexico's Exportsin 1982
Oil & Mining 70%
Agriculture & Fisheries
5%
Manufacturing25%
Mexican Exports Diversified as of 1999
Agriculture & Fisheries
3%
Manufacturing89%
Oil & Mining 8%
Source: Secretary of Economy (SECOFI)
Also, Mexico not only has diversified its exports, but it also has gained a very
strong position as an international trade hub and global market production platform. In
1999, Mexican exports reached over US$136 billion, making Mexico the 8th largest
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exporter in the world. It is not surprising that Mexico is gaining more and more respect
among the international community. Even Japan, which currently has no FTA with any
country in the world, has expressed that in the future it might consider an FTA with
Mexico. Japan’s ambassador to Mexico, Katsuyuki Tanaka, most recently expressed that
an FTA would be very beneficial to both countries, and that the reason they are holding
back on the FTA with Mexico is that Japan has not signed a FTA with any other country
and the Japanese government believes that if it signs one with Mexico, every other nation
will request one as well. However, it has expressed that as a first step towards a FTA
with Mexico, it will sign the Reciprocal Investment Promotion and Protection Agreement
(APPRI), which will open the investment opportunities and encourage Japanese
investment in Mexico.
Mexico is a strategic location for foreign businesses that are looking for top-notch
strategic partnerships, a young and skilled workforce, and preferential access to 870
million consumers in 31 countries.
Maquiladora Industry Today
As of this year, maquiladora exports make up 46% of total Mexican foreign sales.
There are over 4,700 plants operating in Mexico. This means that there are 2,070 more
plants this year than in 1993 (see Table 3). While most are concentrated around the
border, after NAFTA they started to establish themselves in other parts of the country
(see figure 7). This will create a more uniform growth across the country and prevent the
economy from fragmenting and becoming a dual economy. The economic dualism is
apparent with the North being more affluent and industrialized and the South falling
behind in the growth process. Already, we have seen groups in the South, such as the
Zapatista National Liberation Army (EZLN), express their concerns that the south is not
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receiving the benefits of the economy’s growth. This is one example of many of the
disparities in growth between the North and South.
Figure 7. Number of Maquiladoras per State (2001)
Source: Secretary of Economy (SECOFI)
It is important to note that the growth of the maquiladora industry has promoted
the creation of industrial clusters in different regions of the country such as:
• Guadalajara: electric and electronics cluster
• Saltillo-Monterrey industrial corridor: automotive cluster
• Tijuana-Mexicali corridor: world’s largest TV production center
• Puebla, Tlaxcala, and La Laguna: textiles and apparel cluster
• Aguascalientes: automotive and electronics cluster
It would be interesting to see, in future research, if these clusters are a modern
example of Alfred Marshall’s nineteenth century concept of “external economies”,
where the concentration of production for a certain industry in one location reduces the
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industry’s costs, even if the individual firms in the industry remain small. This could
benefit Mexico because companies will find it attractive to establish their production
centers inside those clusters in order to receive the benefits of the external economies. As
more and more companies settle in Mexico, more jobs will be provided and everyone will
benefit as a whole. For the nature of this paper I make this connection very superficially.
It would require a more thorough analysis in order to prove this point and find out if
external economies of scale are actually present in these clusters.
V. Conclusions
The reasons that led Mexico to liberalize its markets had a strong domestic
character. There were undeniably externa l reasons, such as the competition for capital
and FDI in the global market, but as outlined in this paper, domestic reasons are what
ultimately make a country pursue a certain policy. Also, Tornell’s model provides us
with the framework to understand how the two power groups, the statist elite and the
private import-competing elite in Mexico, in an attempt to survive in the midst of the
crisis, decided to displace one another from power. The end result of this game between
these groups led to the demise of both groups and laid the foundations for the deep
reforms carried about by the government at that time. It also led to the creation of new
power groups, such as the export-competing elite and foreign investors.
In general, the reasons for Mexico’s liberalization process can be summarized as
three internal and two external reasons. The first of these reasons was the increasing
incapacity of the import-substitution model used during three decades to create a
sustainable economy with the creation of new jobs. The second was the positive effect
that free trade had on the export sector, as well as in the creation of new jobs, as shown in
the maquiladora industry. The third internal reason for continuing with the liberalization
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process was the positive effects felt in the economy since the process started in 1983.
Finally, the two external reasons were the opportunity to expand to other markets by
forming economic blocks in the world economy and the intense competition for capital,
which obligates countries to have stable economic environments that encourage local and
foreign investment.
In this paper, I showed that Mexico, by signing multiple agreements, has
demonstrated a greater commitment to the liberalization and reform process. This
commitment to other countries has established confidence in the foreign investor,
showing that regardless of the party or group in power, Mexico’s trade policies will be
less likely to experience a reversal. This creates stability and predictability for everyone
involved in the economy. By establishing multiple bilateral agreements, such as the one
signed with the European Union, Mexico gains more leverage power in negotiating trade
matters with the United States. These agreements also allow Mexican producers to
secure access to Mexico’s major trading partners’ markets.
VI. Topics For Future Research
While this paper’s main focus was to show the process and reasons for the trade
liberalization in Mexico, it has also laid the groundwork for future research. Further
areas of interest include assessing the impacts of NAFTA and other FTAs on the Mexican
economy and society, and examining whether the maquiladora clusters exhibit external
economies of scale. Also, it would be interesting to examine the reasons for Mexico’s
pursuit of multiple FTAs and to ask why other countries have not followed Mexico’s
footsteps. Furthermore, there are social policy matters that need to be examined in future
research, such as the causes for income disparity within the country, how the income gap
can be reduced, the benefits of free trade on the lower income population, how far
25
Mexico is in creating a common market similar to the European Union with the US and
Canada, and what labor shifts a common market would cause between these three
countries. Finally, it would be interesting to conduct a study to see if regional agreements
have caused an asymmetric concentration of capital in participating countries and capital
shortages in nonparticipating countries.
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NOTES i Rodrik adds that Samuelson was challenged by a mathematician, who disdained economics, to come up with such a proposition; he was confused to being at a loss until he came up with the principle of comparative advantage. That it is true, Samuelson pointed out, need not be explained at great length to a mathematician. That it is nontrivial, he said, was evidenced by the long history of errors committed by individuals who had not understood it. ii Tornell states that the nationalization of Mexican banks together with the crisis set the stage for reforms in Mexico. iii See Aaron Tornell and Gerardo Esquivel, “Political Economy of NAFTA”, pg. 2. By 1993, the manufacturing sector was almost completely liberalized. Because of political reasons as outlined in this paper, the ruling party only liberalized the manufacturing sector and waited to liberalize the agricultural and service industries only after the signing of NAFTA. iv 31 countries if we count all the 15 countries that make up the European Union. v The state owned industries are called in Spanish: Industrias Paraestatales. vi The word “maquiladora” is from colonial Mexico when “maquila” was the charge that millers collected for processing other people’s grain. Today, the term applies to companies that process or assemble components imported into Mexico that are then re-exported. vii Tornell & Esquivel state that NAFTA was a commitment by the Mexican government to eliminate protection in agriculture and services within the next fifteen years and continue to reduce the protection of the already liberalized manufacturing sector. viii For a detailed explanation of this model refer to Tornell, Aaron. “Are Economic Crises Necessary for Trade Liberalization and Fiscal Reform? The Mexican Experience.” ix A Powerful group or elite can be defined as a group of people that control some fixed factors. These groups are not identified by the names of people who comprise it, but by the type of fixed factors it controls. Thus, even if a group is destroyed, its members may remain powerful as part of a new group. x Tornell stresses in his paper that even though the banks’ expropriation was really a bailout, the bankers lost the “right” to operate the banks and thus lost access to future bailouts, as well as the right to obtain other types of fiscal transfers. xi See Tornell and Esquivel, pg. 18, for a complete explanation of why, from an economic standpoint, it is more advantageous to liberalize the agricultural and services sector. xii Reformers depended in 1988 and 1994 heavily on the rural vote as a result of the damaging urban votes lost with the reforms in the manufacturing sector.
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Acknowledgements I would like to thank Professor Phil Brock, my faculty mentor from the University of Washington’s Economics Department for his advice, patience, interest, support, guidance and for sharing his knowledge and experience with me. Also, I want to thank the Economics Department for awarding me Honorable Mention for this paper in “The Undergraduate Paper Competition”. I extend my gratitude to the McNair Program for the financial support and for printing this paper in the McNair Journal, and most importantly the staff, especially Vega Subramaniam, Carlos Tovares, and Gabriel Gallardo for their continuous support, patience and guidance through this long journey to graduate school and for encouraging me to get involve in research. Also, I want to thank Gerardo Luna in Mexico for his helpful comments and resources and Bob Bernreuter from the UW Instructional Center for editing this paper. Finally, I am grateful to Maryah for her patience, perseverance and for encouraging me not to give up on this research.
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