THE US-MEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

C Parr Rosson III and Amy L Angel

US-Mexico Free Trade Issue Paper Series TAMRC International Market Research Report No IM-12-91

April 1991

Rosson is Assistant Coordinator Texas Agricultural Market Research Center (T AMRC) and Economist Texas Agricultural Extension Service and Graduate Research Assistant respectively Department of Agricultural Economics Texas AampM University

THE USmiddotMEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

Texas Agricultural Market Research Center (TAMRC) US-Mexico Free Trade Issue Paper Series TAMRC International Market Research Report No IM-12-91 April 1991 by Dr C Parr Rosson III and Ms Amy L Angel Texas Agricultural Market Research Center Department of Agricultural Economics Texas AampM University

ABSTRACT The agricultural sector and overall economy in Mexico are closely linked through factors such as exchange rates interest rates and inflation Because a US-Mexico free trade agreement (FfA) would likely cover much more than agriculture a thorough understanding of the potential impacts of freer trade in agriculture requires a general understanding of how an FfA with Mexico would affect the Mexican macroeconomy including monetary policy governmental structure and exchange rate policy and the implications for the agricultural sector

The Texas Agricultural Market Research Center (TAMRC) has been providing timely unique and professional research on a wide range of issues relating to agricultural markets and commodities of importance to Texas and the nation for more than two decades TAMRC is a market research service of the Texas Agricultural Experiment Station and the Texas Agricultural Extension Service The main TAMRC objective is to conduct research leading to expanded and more efficient markets for Texas and US agricultural products Major TAMRC research divisions include International Market Research Consumer and Product Market Research Commodity Market Research and Contemporary Market Issues Research

THE USmiddotMEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

EXECUTIVE SUMMARY

With an annual population growth rate exceeding 22 Mexico represents an important potential market for US Further with almost 40 of the population (35 million) under the age of IS Mexico is poised to expand its potential to import food and food products As historical consumption trends in some rapidly developing countries indicate broad-based income growth leads to imports of not only basic commodities but also high-value food and fiber products

Although agricultural commodities will likely play an important role in negotiations on a USshyMexico free trade agreement (FTA) the scope of trade between the two countries is much broader than agriculture alone Furthermore agriculture in any country including Mexico is affected by variables other than those associated directly with production Interest rates for example influence credit availability inflation influences not only consumer demand but also input prices and exchange rates influence foreign demand and prices of foreign inputs An agreement that affects the general economy also affects agriculture

Trade in food and agricultural products is relatively more important to Mexico than to the United States As a result agricultural issues and the protection of key sectors such as ejido subsistence farms producing corn dry beans rice and wheat will be important to Mexico

The Mexican economy is only 10 the size of the US economy and has undergone major change during the last decade The early 1980s saw the economy stagnate as oil prices droppedshyleaving the country with tremendous external debts and staggering inflation Economic policy changes however under the direction of the International Monetary Fund have improved the economy of Mexico including

bull systematic stabilization of the peso as opposed to a complete free float bringing the peso into line with its natural value which eases inflation by allowing more imports

bull fiscal spending restraint and easing of taxes particularly on business

bull privatization of many industries which were formerly government owned and operated including communications and banking

bull joining and subscribing to the rules of the General Agreement on Tariffs and Trade (GATT) in 1986

bull easing of many barriers to trade and foreign investment including dramatically lowering tariffs and eliminating import or export licenses for many products

The economic relationship of Mexico with the United States is understandably strong The United States is Mexicos largest trading partner At the same time US investment in Mexico represents two-thirds of total foreign investments in Mexico Foreign investment particularly from the United States has been aided by the maquiladora (twin plants) program which allows the plants to be fully foreign-owned

The key issues associated with the Mexican economy to monitor during the negotiations include the role of Canada in an agreement investment reform and permanency of recent changes in foreign investment policy role of interest rate and exchange rate policy and its interaction with the US economy income growth in Mexico and its relationship to the rural sector the balance of payments and trade deficit and Mexicos external debt and market access

THE US-MEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

The proposed US-Mexico Free Trade Agreement (FTA) could cause major changes in agricultural structure and production not only in the United States but also in Mexico Because an

agreement would cover much more than agriculture a thorough understanding of the negotiating position of Mexico and the potential impacts of freer trade require an understanding of the general economic situation in Mexico and the intersectoral impacts

Furthermore the interrelationship between the Mexican economy and the agricultural sector is evident from several key economic indicators Nearly 30 of the Mexican population is rural and 24 are employed in food and fiber related industries Agricultural commodities rank second only to petroleum in terms of top earners of foreign exchange Agriculture accounts for 9 of gross national product and 7 of merchandise exports (World Bank) Despite its overall growth agricultural production has not kept pace with population growth shown by declining per capita real agricultural production (Table I) Rural income remains a small share of total income (Figure I) leading many analysts to conclude that not only has the rural sector of Mexico lagged the rest of the economy in income growth but that the future prospects for rural development may be limited by internal factors Mexican agricultural production although generally not as capital-intensive as that of the United States still relies heavily on credit to purchase inputs hence the importance of interest rates Inflation which is quite often high causes dramatic changes in cost structures and demands for agricultural products especially non-staple foods With the trade sector so large exchange rates become a critical linkage among the economy monetary and fiscal policies and the agricultural sector

This paper provides a brief explanation of the levels of economic integration a recent history of the Mexican economy and an overview of monetary and fiscal policy formulation including exchange rate and foreign investment controls Linkages between the US and Mexican economies are then discussed followed by an exploration of potential effects of a US-Mexico FTA on the Mexican economy and economic policy Finally some priority issues to clarify and monitor during the negotiations are identified

BACKGROUND

The pending negotiations on a US-Mexico FTA have caused some confusion about the level of integration which can be expected between the two countries The term quasi-free trade area might be more appropriate in that trade barriers would be reduced or even eliminated between the two countries but the individual countries would maintain political and economic control over their own trade measures This level of economic cooperation is in contrast to a customs union in which a common external tariff is added to a free trade area or a common market in which the free flow of factors such as labor is allowed between member nations The next level of economic integration is an economic union which adds monetary coordination among member nations to the agreement (Balassa) Although some have called for higher levels of integration a quasi-free trade area is the apparent goal of the negotiations This section describes the Mexican economy and the Mexican agricultural sector and discusses the structure of the Mexican government Mexican monetary policy issues in foreign investment in Mexico Mexican monetary and exchange rate policies and the economic relationship of the US and Mexico

The Mexican Economy

Mexico has the fifteenth largest economy and eleventh largest population in the world at 87 million people Mexico although technically a developing country has an economy larger than many developed countries and most developing countries Figure 2 indicates recent production figures in terms of gross national product (GNP) Mexicos GNP in 1990 was approximately 5200 billion Like most other Latin American countries Mexico has struggled throughout the last decade Gross nationJI product actually declined after 1981 falling 10 in 1986 Per capita GNP declined even more rapidly due to Mexicos annual population growth rate which exceeds 22 The contribution of various sectors of the economy to GNP in 1987 was 9 for agriculture 34 for manufacturing and 57 for services Income distribution is characterized as uneven with 40 of the national income received by 10 of the population (World Bank) Mexicos population is relatively young with 39 under 15 and 61 under 25 (United Nations)

The trade sector of the Mexican economy has grown rapidly after the worldwide recession of the early 1980s Mexicos overall trade surplus with the world has steadily declined since 1987 after entering the General Agreements on Tariffs and Trade (GATT) From a trade balance of 58 billion in 1987 Mexicos surplus has fallen 106 to reflect a 5500 million deficit in 1989 Figure 3 shows recent export and import levels Although robust in the mid-1980s Mexicos exports declined after 1985 but began to recover increasing by two-thirds since 1986 Import growth has expanded in the last half of the 1980s reflecting Mexicos efforts to control inflation and set a more stable currency Manufacturing and machinery are key imports (Figure 4) However raw food products and valueshyadded foods represent 16 of all imports and are a growing component of Mexicos overall imports

Machinery exports along with other manufactures and primary goods including food and agricultural products represent 60 of total Mexican exports (Figure 5) Petroleum is the largest source of foreign exchange comprising 38 of total exports and is probably the most important commodity in the economy The resistance of many Mexicans to foreign interference is perhaps best evidenced by the nationalization of the petroleum industry over fifty years ago It remains under government control today and its now appears that the Mexican national petroleum company PEMEX will not be privatized World oil prices have also driven much of recent economic policy Based on the assumption that oil prices would continually rise Mexico borrowed heavily in the late 1970s and early 1980s to subsidize inefficient industries and promote self -sufficiency in staple food production When oil prices declined in the early 1980s the external debt burden became unbearable External debt rose from around 550 billion in the early 1980s to a peak of 5108 billion in 1988 and now has fallen to an estimated 594 billion for 1990 In 1988 the per capita debt was $1202 or approximately 50 of per capita income In fact external debt represents approximately 50 of GNP one of the highest ratios in the Third World Mexico became unable to pay even interest on external debt in 1982 depleting the government budget for many domestic programs Inflation increased from under 30 in 1981 to almost 100 in 1982 peaking at 132 in 1987 Table 2 shows recent external debt inflation and nominal and real interest rates Although presently under control Mexicos external debt could become a crucial problem for prolonged economic development and overall growth of the Mexican economy Imports of food products would decline under such conditions

Attitudes toward economic policy in Mexico are shaped by the economic and political history of the country Nationalism remains strong and foreign activity in the economy has traditionally been distrusted and discouraged Mexicos economy could previously have been characterized as highly managed and protected by the government Barriers to trade were plentiful including export and import tariffs or taxes import and export licenses and quotas The economic turmoil of the early 1980s however necessitated change in Mexicos economic policy In 1986 a program of economic realism was begun under the auspices of the International Monetary Fund Portions of the external

3

debt were either forgiven refinanced at a lower interest rate or included in debt-for-equity swaps where foreign investors were permitted to buy Mexican debt at a discount on international capital markets this debt was then converted into equity in Mexican firms The levels of total external debt are depicted in Figure 2 Also fiscal and monetary policies were tightened and the peso was sharply devalued with respect to the US dollar To spur its drive to liberalize trade and improve economic growth Mexico accepted membership into the GAIT in 1986 Inflation fell to an annJlai te of 52 at the end of 1988 and to 20 in 1989 The government budget deficit fell from 12 of gross domestic product in 1986 to 6 in 1989

The current administration of President Carlos Salinas de Gortari has also instituted many broad-sweeping changes in economic policy continuing and expanding the program of his predecessor President Miguel de la Madrid Portions of the foreign debt are again being renegotiated to relieve the debt burden New regulations for foreign investment have been issued and intellectual property rights have been more strongly protected both actions are an attempt to generate muchshyneeded capital for technological and infrastructural improvement Many public industries including banking insurance airlines steel telephone and copper mining are being privatized to ease the fiscal burden Fiscal reform has broadened the tax base and improved collection methods Infrastructural improvements have begun inoil and electricity and in the creation of better highways to improve the efficiency of markets and reduce transportation costs (Mexican Agenda)

Major changes in economic policy in Mexico have come in the arena of foreign trade Before Mexicos entrance into the GAIT in 1986 ad valorem tariff rates were often over 100 Those rates are now less than 20 The trade-weighted average tariff fell from 25 in 1985 to about 10 in 1989 (Davis) Import licenses previously required on all Mexican imports are now required on only 230 products on the tariff schedule License requirements still remain however for certain sectors including agriculture Approximately 60 of all US agricultural exports to Mexico still require import licenses As Mexico began to open its economy it became apparent that its trade surplus would suffer To combat this loss the government began promoting non-traditional manufactured exports Oil and oil products have fallen from over 75 of exports in 1983 to 34 by 1989

Agricultural Sector

The Mexican farm sector has been compared to that of Eastern Europe with a bimodal distribution of production between large commercial operations and collective farms (ejidos) on which the vast majority of farmers work The ejido system founded in 1914 did not result in major land reform until 1940 when large portions of land were brought into production and agricultural output grew successfully The second wave of land reform in the 1970s merely chopped up the already-existing parcels of land into smaller holdings Today 54 of all of the national territory belongs to ejidos and other semi-collective farms Two-thirds of all arable land is now held in parcels of less than five hectares Because of its subsistence nature ejido land is typically used to produce corn rice or beans The ejidos suffer from poor economies of scale because the land much of which is only marginal is in individual holdings which are overplanted and too small to warrant highly capitalized inputs or technologies The rural population was approximately 11 per harvested hectare in 1980 up from 7 persons per hectare in 1970 reflecting government efforts to keep rural residents on farmland parcels The inefficient ejido system has repeatedly failed to meet production targets for staple foods Food output per capita actually declined 3 from 1979 to 1981 Grain imports rose by 22 annually from 1970 to 1986

4

Despite the weakening performance of the ejidos other regions of Mexico have a flourishing agricultural sector particularly the Northern and Eastern coastal regions These states produce primarily commodities for export to the United States fruits and vegetables cut flowers and coffee

Agricultural policy in Mexico has relied heavily in the past on price supports and input subsidies For several years self-sufficiency in staple food production was th~main policy goal with fertilizer seed or irrigation given to farmers who would plant rice maize beans or wheat rather than more profitable export-oriented crops The policy of self-sufficiency led to a skewed structure of agricultural production and a loss of revenue necessary for further development Current plans suggest that the Mexican government is interested in eliminating these price and input subsidies in lieu of consumer subsidies to allow market forces to determine production levels and patterns while still maintaining a cheap food policy

Governmental Structure

The framework of the central government of Mexico is similar to that of the United States consisting of executive legislative and judicial branches However the president is elected by direct popular vote and may serve only one six-year term The legislature consists of two bodies the sixtyshyfour member Senate and the 400 member Chamber of Deputies The senators serve six-year terms and the deputies three years Legislators also cannot be re-elected The two major parties are the more powerful Institutional Revolutionary Party (PRI) and the National Action Party (PAN)

The office of the president is extremely powerful including the design and implementation of foreign trade policy Under ordinary laws passed in 1984 the president can intervene in industrial or commercial activities relative to the distribution of goods and services control monetary policy and control and regulate foreign investment among other empowerments Under the Mexican constitution and laws the president can negotiate and sign treaties with senatorial approval (Rudolph)

The legislature typically approves legislation submitted by the president So unlike Prime Minister Mulroney of Canada President Salinas is likely to have the support of his legislature for a free trade agreement with the United States although the strong nationalistic ties of the Mexican people may lead to conflict

Monetary Policy

The banking system in Mexico is very similar to the US Federal Reserve System with credit and reserve requirements a discount rate and open market operations all falling within the powers of the Bank of Mexico The Bank of Mexico is also the fiscal representative of the federal government The Secretary of Finance has veto power over all bank and monetary policies (Rudolph) The banking system was nationalized in 1982 but was reprivatized in 1990

Foreign Investment and Capital Flight

Investment by foreigners in Mexico has a long history but the preceding 50 years have seen severe limitations put on such investment In 1973 the Law for the Promotion of Mexican Investment

5

and Regulation of Foreign Investment limited foreign investment in most Mexican companies to a maximum of 49 of capital stock and less equity in some strategic industries such as petroleum and communications It also gave the federal government sole right to develop petroleum electricity and minerals (Rudolph) Foreign investment was encouraged in the early 1980s but is still restricted to less than a majority share Despite all of the restrictions foreign investment in the Mexican economy is strong Figure 6 shows the structure of foreign investment ~l Mexico by country As might be expected the United States is Mexicos largest foreign investor holding 63 of the total

Efforts to restrict the inflow of foreign capital often encourage the outflow of domestic capital Capital flight in Mexico was in response to high taxes on dividends interest income other income and capital gains and in response to exchange rate uncertainty An estimated $84 billion in Mexican funds had been invested abroad by 1987 (Morgan Guaranty Survey) Although possibly $84 billion is over four times the value of all the stock on the Mexican Stock Exchange

Exchange Rate Policy

Exchange rates in Mexico are subject to a dual system consisting of a controlled market which is adjusted daily and set by the Bank of Mexico and a free parallel market which is determined by market forces The lower controlled market rate applies to payments of principal and interest of public sector external debt interest on private sector debt approved imports merchandise exports and other authorized transactions The free market rate applies to all other transactions (Rudolph IMF) Beginning in 1982 the peso was devalued according to a schedule The current rate of devaluation is 80 centavos per day The peso has been devalued over time from 1439 pesos per US dollar in 1983 to the current level of approximately 29S0 pesos per dollar in 1990 (Table 3)

Mexicos Economic Relationship with the United States

When a relatively smaller country such as Mexico lies beside a large economy such as that of the United States the two economies are often inextricably linked The United States is Mexicos largest trading partner receiving 716 of Mexicos exports and sending 708 of Mexicos imports in 1989 Recent trade levels between the two countries are given in figure 7 and Figure 8 outlines the structure of this trade Agricultural trade between the two countries shown in figure 9 has also continued to increase At $SO billion US-Mexico agricultural trade accounts for about 10 of total Mexican trade but only a small share of total US trade Consequently agricultural trade is relatively more important to Mexico than to the United States Finally the United States contributed some $30 billion in aid to Mexico from 1970-1988 Macroeconomic variations such as interest rate inflation and exchange rate changes in the United States have important implications for Mexico and although the reverse relationship may not hold certain regions of the United States would be more sensitive to changes in Mexicos economy particularly the Southwest Another important linkage of the US and Mexican economies comes through the maquiladora industries The maquiladora program begun in 1965 has over 1500 participating companies and involves mostly industries along the border They principally produce electronics electronic equipment ceramics automotive parts and toys Over SOOOOO Mexicans are employed by the maquiladoras These plants are viewed as important to industrial development along the border and as a means to obtain much-needed foreign exchange

Under Mexican law maquiladora plants can be fully foreign-owned but must be incorporated within Mexico and conform to Mexican law In return the companies are allowed duty-free entry

THE USmiddotMEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

Texas Agricultural Market Research Center (TAMRC) US-Mexico Free Trade Issue Paper Series TAMRC International Market Research Report No IM-12-91 April 1991 by Dr C Parr Rosson III and Ms Amy L Angel Texas Agricultural Market Research Center Department of Agricultural Economics Texas AampM University

ABSTRACT The agricultural sector and overall economy in Mexico are closely linked through factors such as exchange rates interest rates and inflation Because a US-Mexico free trade agreement (FfA) would likely cover much more than agriculture a thorough understanding of the potential impacts of freer trade in agriculture requires a general understanding of how an FfA with Mexico would affect the Mexican macroeconomy including monetary policy governmental structure and exchange rate policy and the implications for the agricultural sector

The Texas Agricultural Market Research Center (TAMRC) has been providing timely unique and professional research on a wide range of issues relating to agricultural markets and commodities of importance to Texas and the nation for more than two decades TAMRC is a market research service of the Texas Agricultural Experiment Station and the Texas Agricultural Extension Service The main TAMRC objective is to conduct research leading to expanded and more efficient markets for Texas and US agricultural products Major TAMRC research divisions include International Market Research Consumer and Product Market Research Commodity Market Research and Contemporary Market Issues Research

THE USmiddotMEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

EXECUTIVE SUMMARY

With an annual population growth rate exceeding 22 Mexico represents an important potential market for US Further with almost 40 of the population (35 million) under the age of IS Mexico is poised to expand its potential to import food and food products As historical consumption trends in some rapidly developing countries indicate broad-based income growth leads to imports of not only basic commodities but also high-value food and fiber products

Although agricultural commodities will likely play an important role in negotiations on a USshyMexico free trade agreement (FTA) the scope of trade between the two countries is much broader than agriculture alone Furthermore agriculture in any country including Mexico is affected by variables other than those associated directly with production Interest rates for example influence credit availability inflation influences not only consumer demand but also input prices and exchange rates influence foreign demand and prices of foreign inputs An agreement that affects the general economy also affects agriculture

Trade in food and agricultural products is relatively more important to Mexico than to the United States As a result agricultural issues and the protection of key sectors such as ejido subsistence farms producing corn dry beans rice and wheat will be important to Mexico

The Mexican economy is only 10 the size of the US economy and has undergone major change during the last decade The early 1980s saw the economy stagnate as oil prices droppedshyleaving the country with tremendous external debts and staggering inflation Economic policy changes however under the direction of the International Monetary Fund have improved the economy of Mexico including

bull systematic stabilization of the peso as opposed to a complete free float bringing the peso into line with its natural value which eases inflation by allowing more imports

bull fiscal spending restraint and easing of taxes particularly on business

bull privatization of many industries which were formerly government owned and operated including communications and banking

bull joining and subscribing to the rules of the General Agreement on Tariffs and Trade (GATT) in 1986

bull easing of many barriers to trade and foreign investment including dramatically lowering tariffs and eliminating import or export licenses for many products

The economic relationship of Mexico with the United States is understandably strong The United States is Mexicos largest trading partner At the same time US investment in Mexico represents two-thirds of total foreign investments in Mexico Foreign investment particularly from the United States has been aided by the maquiladora (twin plants) program which allows the plants to be fully foreign-owned

The key issues associated with the Mexican economy to monitor during the negotiations include the role of Canada in an agreement investment reform and permanency of recent changes in foreign investment policy role of interest rate and exchange rate policy and its interaction with the US economy income growth in Mexico and its relationship to the rural sector the balance of payments and trade deficit and Mexicos external debt and market access

THE US-MEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

The proposed US-Mexico Free Trade Agreement (FTA) could cause major changes in agricultural structure and production not only in the United States but also in Mexico Because an

agreement would cover much more than agriculture a thorough understanding of the negotiating position of Mexico and the potential impacts of freer trade require an understanding of the general economic situation in Mexico and the intersectoral impacts

Furthermore the interrelationship between the Mexican economy and the agricultural sector is evident from several key economic indicators Nearly 30 of the Mexican population is rural and 24 are employed in food and fiber related industries Agricultural commodities rank second only to petroleum in terms of top earners of foreign exchange Agriculture accounts for 9 of gross national product and 7 of merchandise exports (World Bank) Despite its overall growth agricultural production has not kept pace with population growth shown by declining per capita real agricultural production (Table I) Rural income remains a small share of total income (Figure I) leading many analysts to conclude that not only has the rural sector of Mexico lagged the rest of the economy in income growth but that the future prospects for rural development may be limited by internal factors Mexican agricultural production although generally not as capital-intensive as that of the United States still relies heavily on credit to purchase inputs hence the importance of interest rates Inflation which is quite often high causes dramatic changes in cost structures and demands for agricultural products especially non-staple foods With the trade sector so large exchange rates become a critical linkage among the economy monetary and fiscal policies and the agricultural sector

This paper provides a brief explanation of the levels of economic integration a recent history of the Mexican economy and an overview of monetary and fiscal policy formulation including exchange rate and foreign investment controls Linkages between the US and Mexican economies are then discussed followed by an exploration of potential effects of a US-Mexico FTA on the Mexican economy and economic policy Finally some priority issues to clarify and monitor during the negotiations are identified

BACKGROUND

The pending negotiations on a US-Mexico FTA have caused some confusion about the level of integration which can be expected between the two countries The term quasi-free trade area might be more appropriate in that trade barriers would be reduced or even eliminated between the two countries but the individual countries would maintain political and economic control over their own trade measures This level of economic cooperation is in contrast to a customs union in which a common external tariff is added to a free trade area or a common market in which the free flow of factors such as labor is allowed between member nations The next level of economic integration is an economic union which adds monetary coordination among member nations to the agreement (Balassa) Although some have called for higher levels of integration a quasi-free trade area is the apparent goal of the negotiations This section describes the Mexican economy and the Mexican agricultural sector and discusses the structure of the Mexican government Mexican monetary policy issues in foreign investment in Mexico Mexican monetary and exchange rate policies and the economic relationship of the US and Mexico

The Mexican Economy

Mexico has the fifteenth largest economy and eleventh largest population in the world at 87 million people Mexico although technically a developing country has an economy larger than many developed countries and most developing countries Figure 2 indicates recent production figures in terms of gross national product (GNP) Mexicos GNP in 1990 was approximately 5200 billion Like most other Latin American countries Mexico has struggled throughout the last decade Gross nationJI product actually declined after 1981 falling 10 in 1986 Per capita GNP declined even more rapidly due to Mexicos annual population growth rate which exceeds 22 The contribution of various sectors of the economy to GNP in 1987 was 9 for agriculture 34 for manufacturing and 57 for services Income distribution is characterized as uneven with 40 of the national income received by 10 of the population (World Bank) Mexicos population is relatively young with 39 under 15 and 61 under 25 (United Nations)

The trade sector of the Mexican economy has grown rapidly after the worldwide recession of the early 1980s Mexicos overall trade surplus with the world has steadily declined since 1987 after entering the General Agreements on Tariffs and Trade (GATT) From a trade balance of 58 billion in 1987 Mexicos surplus has fallen 106 to reflect a 5500 million deficit in 1989 Figure 3 shows recent export and import levels Although robust in the mid-1980s Mexicos exports declined after 1985 but began to recover increasing by two-thirds since 1986 Import growth has expanded in the last half of the 1980s reflecting Mexicos efforts to control inflation and set a more stable currency Manufacturing and machinery are key imports (Figure 4) However raw food products and valueshyadded foods represent 16 of all imports and are a growing component of Mexicos overall imports

Machinery exports along with other manufactures and primary goods including food and agricultural products represent 60 of total Mexican exports (Figure 5) Petroleum is the largest source of foreign exchange comprising 38 of total exports and is probably the most important commodity in the economy The resistance of many Mexicans to foreign interference is perhaps best evidenced by the nationalization of the petroleum industry over fifty years ago It remains under government control today and its now appears that the Mexican national petroleum company PEMEX will not be privatized World oil prices have also driven much of recent economic policy Based on the assumption that oil prices would continually rise Mexico borrowed heavily in the late 1970s and early 1980s to subsidize inefficient industries and promote self -sufficiency in staple food production When oil prices declined in the early 1980s the external debt burden became unbearable External debt rose from around 550 billion in the early 1980s to a peak of 5108 billion in 1988 and now has fallen to an estimated 594 billion for 1990 In 1988 the per capita debt was $1202 or approximately 50 of per capita income In fact external debt represents approximately 50 of GNP one of the highest ratios in the Third World Mexico became unable to pay even interest on external debt in 1982 depleting the government budget for many domestic programs Inflation increased from under 30 in 1981 to almost 100 in 1982 peaking at 132 in 1987 Table 2 shows recent external debt inflation and nominal and real interest rates Although presently under control Mexicos external debt could become a crucial problem for prolonged economic development and overall growth of the Mexican economy Imports of food products would decline under such conditions

Attitudes toward economic policy in Mexico are shaped by the economic and political history of the country Nationalism remains strong and foreign activity in the economy has traditionally been distrusted and discouraged Mexicos economy could previously have been characterized as highly managed and protected by the government Barriers to trade were plentiful including export and import tariffs or taxes import and export licenses and quotas The economic turmoil of the early 1980s however necessitated change in Mexicos economic policy In 1986 a program of economic realism was begun under the auspices of the International Monetary Fund Portions of the external

3

debt were either forgiven refinanced at a lower interest rate or included in debt-for-equity swaps where foreign investors were permitted to buy Mexican debt at a discount on international capital markets this debt was then converted into equity in Mexican firms The levels of total external debt are depicted in Figure 2 Also fiscal and monetary policies were tightened and the peso was sharply devalued with respect to the US dollar To spur its drive to liberalize trade and improve economic growth Mexico accepted membership into the GAIT in 1986 Inflation fell to an annJlai te of 52 at the end of 1988 and to 20 in 1989 The government budget deficit fell from 12 of gross domestic product in 1986 to 6 in 1989

The current administration of President Carlos Salinas de Gortari has also instituted many broad-sweeping changes in economic policy continuing and expanding the program of his predecessor President Miguel de la Madrid Portions of the foreign debt are again being renegotiated to relieve the debt burden New regulations for foreign investment have been issued and intellectual property rights have been more strongly protected both actions are an attempt to generate muchshyneeded capital for technological and infrastructural improvement Many public industries including banking insurance airlines steel telephone and copper mining are being privatized to ease the fiscal burden Fiscal reform has broadened the tax base and improved collection methods Infrastructural improvements have begun inoil and electricity and in the creation of better highways to improve the efficiency of markets and reduce transportation costs (Mexican Agenda)

Major changes in economic policy in Mexico have come in the arena of foreign trade Before Mexicos entrance into the GAIT in 1986 ad valorem tariff rates were often over 100 Those rates are now less than 20 The trade-weighted average tariff fell from 25 in 1985 to about 10 in 1989 (Davis) Import licenses previously required on all Mexican imports are now required on only 230 products on the tariff schedule License requirements still remain however for certain sectors including agriculture Approximately 60 of all US agricultural exports to Mexico still require import licenses As Mexico began to open its economy it became apparent that its trade surplus would suffer To combat this loss the government began promoting non-traditional manufactured exports Oil and oil products have fallen from over 75 of exports in 1983 to 34 by 1989

Agricultural Sector

The Mexican farm sector has been compared to that of Eastern Europe with a bimodal distribution of production between large commercial operations and collective farms (ejidos) on which the vast majority of farmers work The ejido system founded in 1914 did not result in major land reform until 1940 when large portions of land were brought into production and agricultural output grew successfully The second wave of land reform in the 1970s merely chopped up the already-existing parcels of land into smaller holdings Today 54 of all of the national territory belongs to ejidos and other semi-collective farms Two-thirds of all arable land is now held in parcels of less than five hectares Because of its subsistence nature ejido land is typically used to produce corn rice or beans The ejidos suffer from poor economies of scale because the land much of which is only marginal is in individual holdings which are overplanted and too small to warrant highly capitalized inputs or technologies The rural population was approximately 11 per harvested hectare in 1980 up from 7 persons per hectare in 1970 reflecting government efforts to keep rural residents on farmland parcels The inefficient ejido system has repeatedly failed to meet production targets for staple foods Food output per capita actually declined 3 from 1979 to 1981 Grain imports rose by 22 annually from 1970 to 1986

4

Despite the weakening performance of the ejidos other regions of Mexico have a flourishing agricultural sector particularly the Northern and Eastern coastal regions These states produce primarily commodities for export to the United States fruits and vegetables cut flowers and coffee

Agricultural policy in Mexico has relied heavily in the past on price supports and input subsidies For several years self-sufficiency in staple food production was th~main policy goal with fertilizer seed or irrigation given to farmers who would plant rice maize beans or wheat rather than more profitable export-oriented crops The policy of self-sufficiency led to a skewed structure of agricultural production and a loss of revenue necessary for further development Current plans suggest that the Mexican government is interested in eliminating these price and input subsidies in lieu of consumer subsidies to allow market forces to determine production levels and patterns while still maintaining a cheap food policy

Governmental Structure

The framework of the central government of Mexico is similar to that of the United States consisting of executive legislative and judicial branches However the president is elected by direct popular vote and may serve only one six-year term The legislature consists of two bodies the sixtyshyfour member Senate and the 400 member Chamber of Deputies The senators serve six-year terms and the deputies three years Legislators also cannot be re-elected The two major parties are the more powerful Institutional Revolutionary Party (PRI) and the National Action Party (PAN)

The office of the president is extremely powerful including the design and implementation of foreign trade policy Under ordinary laws passed in 1984 the president can intervene in industrial or commercial activities relative to the distribution of goods and services control monetary policy and control and regulate foreign investment among other empowerments Under the Mexican constitution and laws the president can negotiate and sign treaties with senatorial approval (Rudolph)

The legislature typically approves legislation submitted by the president So unlike Prime Minister Mulroney of Canada President Salinas is likely to have the support of his legislature for a free trade agreement with the United States although the strong nationalistic ties of the Mexican people may lead to conflict

Monetary Policy

The banking system in Mexico is very similar to the US Federal Reserve System with credit and reserve requirements a discount rate and open market operations all falling within the powers of the Bank of Mexico The Bank of Mexico is also the fiscal representative of the federal government The Secretary of Finance has veto power over all bank and monetary policies (Rudolph) The banking system was nationalized in 1982 but was reprivatized in 1990

Foreign Investment and Capital Flight

Investment by foreigners in Mexico has a long history but the preceding 50 years have seen severe limitations put on such investment In 1973 the Law for the Promotion of Mexican Investment

5

and Regulation of Foreign Investment limited foreign investment in most Mexican companies to a maximum of 49 of capital stock and less equity in some strategic industries such as petroleum and communications It also gave the federal government sole right to develop petroleum electricity and minerals (Rudolph) Foreign investment was encouraged in the early 1980s but is still restricted to less than a majority share Despite all of the restrictions foreign investment in the Mexican economy is strong Figure 6 shows the structure of foreign investment ~l Mexico by country As might be expected the United States is Mexicos largest foreign investor holding 63 of the total

Efforts to restrict the inflow of foreign capital often encourage the outflow of domestic capital Capital flight in Mexico was in response to high taxes on dividends interest income other income and capital gains and in response to exchange rate uncertainty An estimated $84 billion in Mexican funds had been invested abroad by 1987 (Morgan Guaranty Survey) Although possibly $84 billion is over four times the value of all the stock on the Mexican Stock Exchange

Exchange Rate Policy

Exchange rates in Mexico are subject to a dual system consisting of a controlled market which is adjusted daily and set by the Bank of Mexico and a free parallel market which is determined by market forces The lower controlled market rate applies to payments of principal and interest of public sector external debt interest on private sector debt approved imports merchandise exports and other authorized transactions The free market rate applies to all other transactions (Rudolph IMF) Beginning in 1982 the peso was devalued according to a schedule The current rate of devaluation is 80 centavos per day The peso has been devalued over time from 1439 pesos per US dollar in 1983 to the current level of approximately 29S0 pesos per dollar in 1990 (Table 3)

Mexicos Economic Relationship with the United States

When a relatively smaller country such as Mexico lies beside a large economy such as that of the United States the two economies are often inextricably linked The United States is Mexicos largest trading partner receiving 716 of Mexicos exports and sending 708 of Mexicos imports in 1989 Recent trade levels between the two countries are given in figure 7 and Figure 8 outlines the structure of this trade Agricultural trade between the two countries shown in figure 9 has also continued to increase At $SO billion US-Mexico agricultural trade accounts for about 10 of total Mexican trade but only a small share of total US trade Consequently agricultural trade is relatively more important to Mexico than to the United States Finally the United States contributed some $30 billion in aid to Mexico from 1970-1988 Macroeconomic variations such as interest rate inflation and exchange rate changes in the United States have important implications for Mexico and although the reverse relationship may not hold certain regions of the United States would be more sensitive to changes in Mexicos economy particularly the Southwest Another important linkage of the US and Mexican economies comes through the maquiladora industries The maquiladora program begun in 1965 has over 1500 participating companies and involves mostly industries along the border They principally produce electronics electronic equipment ceramics automotive parts and toys Over SOOOOO Mexicans are employed by the maquiladoras These plants are viewed as important to industrial development along the border and as a means to obtain much-needed foreign exchange

Under Mexican law maquiladora plants can be fully foreign-owned but must be incorporated within Mexico and conform to Mexican law In return the companies are allowed duty-free entry

THE USmiddotMEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

EXECUTIVE SUMMARY

With an annual population growth rate exceeding 22 Mexico represents an important potential market for US Further with almost 40 of the population (35 million) under the age of IS Mexico is poised to expand its potential to import food and food products As historical consumption trends in some rapidly developing countries indicate broad-based income growth leads to imports of not only basic commodities but also high-value food and fiber products

Although agricultural commodities will likely play an important role in negotiations on a USshyMexico free trade agreement (FTA) the scope of trade between the two countries is much broader than agriculture alone Furthermore agriculture in any country including Mexico is affected by variables other than those associated directly with production Interest rates for example influence credit availability inflation influences not only consumer demand but also input prices and exchange rates influence foreign demand and prices of foreign inputs An agreement that affects the general economy also affects agriculture

Trade in food and agricultural products is relatively more important to Mexico than to the United States As a result agricultural issues and the protection of key sectors such as ejido subsistence farms producing corn dry beans rice and wheat will be important to Mexico

The Mexican economy is only 10 the size of the US economy and has undergone major change during the last decade The early 1980s saw the economy stagnate as oil prices droppedshyleaving the country with tremendous external debts and staggering inflation Economic policy changes however under the direction of the International Monetary Fund have improved the economy of Mexico including

bull systematic stabilization of the peso as opposed to a complete free float bringing the peso into line with its natural value which eases inflation by allowing more imports

bull fiscal spending restraint and easing of taxes particularly on business

bull privatization of many industries which were formerly government owned and operated including communications and banking

bull joining and subscribing to the rules of the General Agreement on Tariffs and Trade (GATT) in 1986

bull easing of many barriers to trade and foreign investment including dramatically lowering tariffs and eliminating import or export licenses for many products

The economic relationship of Mexico with the United States is understandably strong The United States is Mexicos largest trading partner At the same time US investment in Mexico represents two-thirds of total foreign investments in Mexico Foreign investment particularly from the United States has been aided by the maquiladora (twin plants) program which allows the plants to be fully foreign-owned

The key issues associated with the Mexican economy to monitor during the negotiations include the role of Canada in an agreement investment reform and permanency of recent changes in foreign investment policy role of interest rate and exchange rate policy and its interaction with the US economy income growth in Mexico and its relationship to the rural sector the balance of payments and trade deficit and Mexicos external debt and market access

THE US-MEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

The proposed US-Mexico Free Trade Agreement (FTA) could cause major changes in agricultural structure and production not only in the United States but also in Mexico Because an

agreement would cover much more than agriculture a thorough understanding of the negotiating position of Mexico and the potential impacts of freer trade require an understanding of the general economic situation in Mexico and the intersectoral impacts

Furthermore the interrelationship between the Mexican economy and the agricultural sector is evident from several key economic indicators Nearly 30 of the Mexican population is rural and 24 are employed in food and fiber related industries Agricultural commodities rank second only to petroleum in terms of top earners of foreign exchange Agriculture accounts for 9 of gross national product and 7 of merchandise exports (World Bank) Despite its overall growth agricultural production has not kept pace with population growth shown by declining per capita real agricultural production (Table I) Rural income remains a small share of total income (Figure I) leading many analysts to conclude that not only has the rural sector of Mexico lagged the rest of the economy in income growth but that the future prospects for rural development may be limited by internal factors Mexican agricultural production although generally not as capital-intensive as that of the United States still relies heavily on credit to purchase inputs hence the importance of interest rates Inflation which is quite often high causes dramatic changes in cost structures and demands for agricultural products especially non-staple foods With the trade sector so large exchange rates become a critical linkage among the economy monetary and fiscal policies and the agricultural sector

This paper provides a brief explanation of the levels of economic integration a recent history of the Mexican economy and an overview of monetary and fiscal policy formulation including exchange rate and foreign investment controls Linkages between the US and Mexican economies are then discussed followed by an exploration of potential effects of a US-Mexico FTA on the Mexican economy and economic policy Finally some priority issues to clarify and monitor during the negotiations are identified

BACKGROUND

The pending negotiations on a US-Mexico FTA have caused some confusion about the level of integration which can be expected between the two countries The term quasi-free trade area might be more appropriate in that trade barriers would be reduced or even eliminated between the two countries but the individual countries would maintain political and economic control over their own trade measures This level of economic cooperation is in contrast to a customs union in which a common external tariff is added to a free trade area or a common market in which the free flow of factors such as labor is allowed between member nations The next level of economic integration is an economic union which adds monetary coordination among member nations to the agreement (Balassa) Although some have called for higher levels of integration a quasi-free trade area is the apparent goal of the negotiations This section describes the Mexican economy and the Mexican agricultural sector and discusses the structure of the Mexican government Mexican monetary policy issues in foreign investment in Mexico Mexican monetary and exchange rate policies and the economic relationship of the US and Mexico

The Mexican Economy

Mexico has the fifteenth largest economy and eleventh largest population in the world at 87 million people Mexico although technically a developing country has an economy larger than many developed countries and most developing countries Figure 2 indicates recent production figures in terms of gross national product (GNP) Mexicos GNP in 1990 was approximately 5200 billion Like most other Latin American countries Mexico has struggled throughout the last decade Gross nationJI product actually declined after 1981 falling 10 in 1986 Per capita GNP declined even more rapidly due to Mexicos annual population growth rate which exceeds 22 The contribution of various sectors of the economy to GNP in 1987 was 9 for agriculture 34 for manufacturing and 57 for services Income distribution is characterized as uneven with 40 of the national income received by 10 of the population (World Bank) Mexicos population is relatively young with 39 under 15 and 61 under 25 (United Nations)

The trade sector of the Mexican economy has grown rapidly after the worldwide recession of the early 1980s Mexicos overall trade surplus with the world has steadily declined since 1987 after entering the General Agreements on Tariffs and Trade (GATT) From a trade balance of 58 billion in 1987 Mexicos surplus has fallen 106 to reflect a 5500 million deficit in 1989 Figure 3 shows recent export and import levels Although robust in the mid-1980s Mexicos exports declined after 1985 but began to recover increasing by two-thirds since 1986 Import growth has expanded in the last half of the 1980s reflecting Mexicos efforts to control inflation and set a more stable currency Manufacturing and machinery are key imports (Figure 4) However raw food products and valueshyadded foods represent 16 of all imports and are a growing component of Mexicos overall imports

Machinery exports along with other manufactures and primary goods including food and agricultural products represent 60 of total Mexican exports (Figure 5) Petroleum is the largest source of foreign exchange comprising 38 of total exports and is probably the most important commodity in the economy The resistance of many Mexicans to foreign interference is perhaps best evidenced by the nationalization of the petroleum industry over fifty years ago It remains under government control today and its now appears that the Mexican national petroleum company PEMEX will not be privatized World oil prices have also driven much of recent economic policy Based on the assumption that oil prices would continually rise Mexico borrowed heavily in the late 1970s and early 1980s to subsidize inefficient industries and promote self -sufficiency in staple food production When oil prices declined in the early 1980s the external debt burden became unbearable External debt rose from around 550 billion in the early 1980s to a peak of 5108 billion in 1988 and now has fallen to an estimated 594 billion for 1990 In 1988 the per capita debt was $1202 or approximately 50 of per capita income In fact external debt represents approximately 50 of GNP one of the highest ratios in the Third World Mexico became unable to pay even interest on external debt in 1982 depleting the government budget for many domestic programs Inflation increased from under 30 in 1981 to almost 100 in 1982 peaking at 132 in 1987 Table 2 shows recent external debt inflation and nominal and real interest rates Although presently under control Mexicos external debt could become a crucial problem for prolonged economic development and overall growth of the Mexican economy Imports of food products would decline under such conditions

Attitudes toward economic policy in Mexico are shaped by the economic and political history of the country Nationalism remains strong and foreign activity in the economy has traditionally been distrusted and discouraged Mexicos economy could previously have been characterized as highly managed and protected by the government Barriers to trade were plentiful including export and import tariffs or taxes import and export licenses and quotas The economic turmoil of the early 1980s however necessitated change in Mexicos economic policy In 1986 a program of economic realism was begun under the auspices of the International Monetary Fund Portions of the external

3

debt were either forgiven refinanced at a lower interest rate or included in debt-for-equity swaps where foreign investors were permitted to buy Mexican debt at a discount on international capital markets this debt was then converted into equity in Mexican firms The levels of total external debt are depicted in Figure 2 Also fiscal and monetary policies were tightened and the peso was sharply devalued with respect to the US dollar To spur its drive to liberalize trade and improve economic growth Mexico accepted membership into the GAIT in 1986 Inflation fell to an annJlai te of 52 at the end of 1988 and to 20 in 1989 The government budget deficit fell from 12 of gross domestic product in 1986 to 6 in 1989

The current administration of President Carlos Salinas de Gortari has also instituted many broad-sweeping changes in economic policy continuing and expanding the program of his predecessor President Miguel de la Madrid Portions of the foreign debt are again being renegotiated to relieve the debt burden New regulations for foreign investment have been issued and intellectual property rights have been more strongly protected both actions are an attempt to generate muchshyneeded capital for technological and infrastructural improvement Many public industries including banking insurance airlines steel telephone and copper mining are being privatized to ease the fiscal burden Fiscal reform has broadened the tax base and improved collection methods Infrastructural improvements have begun inoil and electricity and in the creation of better highways to improve the efficiency of markets and reduce transportation costs (Mexican Agenda)

Major changes in economic policy in Mexico have come in the arena of foreign trade Before Mexicos entrance into the GAIT in 1986 ad valorem tariff rates were often over 100 Those rates are now less than 20 The trade-weighted average tariff fell from 25 in 1985 to about 10 in 1989 (Davis) Import licenses previously required on all Mexican imports are now required on only 230 products on the tariff schedule License requirements still remain however for certain sectors including agriculture Approximately 60 of all US agricultural exports to Mexico still require import licenses As Mexico began to open its economy it became apparent that its trade surplus would suffer To combat this loss the government began promoting non-traditional manufactured exports Oil and oil products have fallen from over 75 of exports in 1983 to 34 by 1989

Agricultural Sector

The Mexican farm sector has been compared to that of Eastern Europe with a bimodal distribution of production between large commercial operations and collective farms (ejidos) on which the vast majority of farmers work The ejido system founded in 1914 did not result in major land reform until 1940 when large portions of land were brought into production and agricultural output grew successfully The second wave of land reform in the 1970s merely chopped up the already-existing parcels of land into smaller holdings Today 54 of all of the national territory belongs to ejidos and other semi-collective farms Two-thirds of all arable land is now held in parcels of less than five hectares Because of its subsistence nature ejido land is typically used to produce corn rice or beans The ejidos suffer from poor economies of scale because the land much of which is only marginal is in individual holdings which are overplanted and too small to warrant highly capitalized inputs or technologies The rural population was approximately 11 per harvested hectare in 1980 up from 7 persons per hectare in 1970 reflecting government efforts to keep rural residents on farmland parcels The inefficient ejido system has repeatedly failed to meet production targets for staple foods Food output per capita actually declined 3 from 1979 to 1981 Grain imports rose by 22 annually from 1970 to 1986

4

Despite the weakening performance of the ejidos other regions of Mexico have a flourishing agricultural sector particularly the Northern and Eastern coastal regions These states produce primarily commodities for export to the United States fruits and vegetables cut flowers and coffee

Agricultural policy in Mexico has relied heavily in the past on price supports and input subsidies For several years self-sufficiency in staple food production was th~main policy goal with fertilizer seed or irrigation given to farmers who would plant rice maize beans or wheat rather than more profitable export-oriented crops The policy of self-sufficiency led to a skewed structure of agricultural production and a loss of revenue necessary for further development Current plans suggest that the Mexican government is interested in eliminating these price and input subsidies in lieu of consumer subsidies to allow market forces to determine production levels and patterns while still maintaining a cheap food policy

Governmental Structure

The framework of the central government of Mexico is similar to that of the United States consisting of executive legislative and judicial branches However the president is elected by direct popular vote and may serve only one six-year term The legislature consists of two bodies the sixtyshyfour member Senate and the 400 member Chamber of Deputies The senators serve six-year terms and the deputies three years Legislators also cannot be re-elected The two major parties are the more powerful Institutional Revolutionary Party (PRI) and the National Action Party (PAN)

The office of the president is extremely powerful including the design and implementation of foreign trade policy Under ordinary laws passed in 1984 the president can intervene in industrial or commercial activities relative to the distribution of goods and services control monetary policy and control and regulate foreign investment among other empowerments Under the Mexican constitution and laws the president can negotiate and sign treaties with senatorial approval (Rudolph)

The legislature typically approves legislation submitted by the president So unlike Prime Minister Mulroney of Canada President Salinas is likely to have the support of his legislature for a free trade agreement with the United States although the strong nationalistic ties of the Mexican people may lead to conflict

Monetary Policy

The banking system in Mexico is very similar to the US Federal Reserve System with credit and reserve requirements a discount rate and open market operations all falling within the powers of the Bank of Mexico The Bank of Mexico is also the fiscal representative of the federal government The Secretary of Finance has veto power over all bank and monetary policies (Rudolph) The banking system was nationalized in 1982 but was reprivatized in 1990

Foreign Investment and Capital Flight

Investment by foreigners in Mexico has a long history but the preceding 50 years have seen severe limitations put on such investment In 1973 the Law for the Promotion of Mexican Investment

5

and Regulation of Foreign Investment limited foreign investment in most Mexican companies to a maximum of 49 of capital stock and less equity in some strategic industries such as petroleum and communications It also gave the federal government sole right to develop petroleum electricity and minerals (Rudolph) Foreign investment was encouraged in the early 1980s but is still restricted to less than a majority share Despite all of the restrictions foreign investment in the Mexican economy is strong Figure 6 shows the structure of foreign investment ~l Mexico by country As might be expected the United States is Mexicos largest foreign investor holding 63 of the total

Efforts to restrict the inflow of foreign capital often encourage the outflow of domestic capital Capital flight in Mexico was in response to high taxes on dividends interest income other income and capital gains and in response to exchange rate uncertainty An estimated $84 billion in Mexican funds had been invested abroad by 1987 (Morgan Guaranty Survey) Although possibly $84 billion is over four times the value of all the stock on the Mexican Stock Exchange

Exchange Rate Policy

Exchange rates in Mexico are subject to a dual system consisting of a controlled market which is adjusted daily and set by the Bank of Mexico and a free parallel market which is determined by market forces The lower controlled market rate applies to payments of principal and interest of public sector external debt interest on private sector debt approved imports merchandise exports and other authorized transactions The free market rate applies to all other transactions (Rudolph IMF) Beginning in 1982 the peso was devalued according to a schedule The current rate of devaluation is 80 centavos per day The peso has been devalued over time from 1439 pesos per US dollar in 1983 to the current level of approximately 29S0 pesos per dollar in 1990 (Table 3)

Mexicos Economic Relationship with the United States

When a relatively smaller country such as Mexico lies beside a large economy such as that of the United States the two economies are often inextricably linked The United States is Mexicos largest trading partner receiving 716 of Mexicos exports and sending 708 of Mexicos imports in 1989 Recent trade levels between the two countries are given in figure 7 and Figure 8 outlines the structure of this trade Agricultural trade between the two countries shown in figure 9 has also continued to increase At $SO billion US-Mexico agricultural trade accounts for about 10 of total Mexican trade but only a small share of total US trade Consequently agricultural trade is relatively more important to Mexico than to the United States Finally the United States contributed some $30 billion in aid to Mexico from 1970-1988 Macroeconomic variations such as interest rate inflation and exchange rate changes in the United States have important implications for Mexico and although the reverse relationship may not hold certain regions of the United States would be more sensitive to changes in Mexicos economy particularly the Southwest Another important linkage of the US and Mexican economies comes through the maquiladora industries The maquiladora program begun in 1965 has over 1500 participating companies and involves mostly industries along the border They principally produce electronics electronic equipment ceramics automotive parts and toys Over SOOOOO Mexicans are employed by the maquiladoras These plants are viewed as important to industrial development along the border and as a means to obtain much-needed foreign exchange

Under Mexican law maquiladora plants can be fully foreign-owned but must be incorporated within Mexico and conform to Mexican law In return the companies are allowed duty-free entry

The key issues associated with the Mexican economy to monitor during the negotiations include the role of Canada in an agreement investment reform and permanency of recent changes in foreign investment policy role of interest rate and exchange rate policy and its interaction with the US economy income growth in Mexico and its relationship to the rural sector the balance of payments and trade deficit and Mexicos external debt and market access

THE US-MEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

The proposed US-Mexico Free Trade Agreement (FTA) could cause major changes in agricultural structure and production not only in the United States but also in Mexico Because an

agreement would cover much more than agriculture a thorough understanding of the negotiating position of Mexico and the potential impacts of freer trade require an understanding of the general economic situation in Mexico and the intersectoral impacts

Furthermore the interrelationship between the Mexican economy and the agricultural sector is evident from several key economic indicators Nearly 30 of the Mexican population is rural and 24 are employed in food and fiber related industries Agricultural commodities rank second only to petroleum in terms of top earners of foreign exchange Agriculture accounts for 9 of gross national product and 7 of merchandise exports (World Bank) Despite its overall growth agricultural production has not kept pace with population growth shown by declining per capita real agricultural production (Table I) Rural income remains a small share of total income (Figure I) leading many analysts to conclude that not only has the rural sector of Mexico lagged the rest of the economy in income growth but that the future prospects for rural development may be limited by internal factors Mexican agricultural production although generally not as capital-intensive as that of the United States still relies heavily on credit to purchase inputs hence the importance of interest rates Inflation which is quite often high causes dramatic changes in cost structures and demands for agricultural products especially non-staple foods With the trade sector so large exchange rates become a critical linkage among the economy monetary and fiscal policies and the agricultural sector

This paper provides a brief explanation of the levels of economic integration a recent history of the Mexican economy and an overview of monetary and fiscal policy formulation including exchange rate and foreign investment controls Linkages between the US and Mexican economies are then discussed followed by an exploration of potential effects of a US-Mexico FTA on the Mexican economy and economic policy Finally some priority issues to clarify and monitor during the negotiations are identified

BACKGROUND

The pending negotiations on a US-Mexico FTA have caused some confusion about the level of integration which can be expected between the two countries The term quasi-free trade area might be more appropriate in that trade barriers would be reduced or even eliminated between the two countries but the individual countries would maintain political and economic control over their own trade measures This level of economic cooperation is in contrast to a customs union in which a common external tariff is added to a free trade area or a common market in which the free flow of factors such as labor is allowed between member nations The next level of economic integration is an economic union which adds monetary coordination among member nations to the agreement (Balassa) Although some have called for higher levels of integration a quasi-free trade area is the apparent goal of the negotiations This section describes the Mexican economy and the Mexican agricultural sector and discusses the structure of the Mexican government Mexican monetary policy issues in foreign investment in Mexico Mexican monetary and exchange rate policies and the economic relationship of the US and Mexico

The Mexican Economy

Mexico has the fifteenth largest economy and eleventh largest population in the world at 87 million people Mexico although technically a developing country has an economy larger than many developed countries and most developing countries Figure 2 indicates recent production figures in terms of gross national product (GNP) Mexicos GNP in 1990 was approximately 5200 billion Like most other Latin American countries Mexico has struggled throughout the last decade Gross nationJI product actually declined after 1981 falling 10 in 1986 Per capita GNP declined even more rapidly due to Mexicos annual population growth rate which exceeds 22 The contribution of various sectors of the economy to GNP in 1987 was 9 for agriculture 34 for manufacturing and 57 for services Income distribution is characterized as uneven with 40 of the national income received by 10 of the population (World Bank) Mexicos population is relatively young with 39 under 15 and 61 under 25 (United Nations)

The trade sector of the Mexican economy has grown rapidly after the worldwide recession of the early 1980s Mexicos overall trade surplus with the world has steadily declined since 1987 after entering the General Agreements on Tariffs and Trade (GATT) From a trade balance of 58 billion in 1987 Mexicos surplus has fallen 106 to reflect a 5500 million deficit in 1989 Figure 3 shows recent export and import levels Although robust in the mid-1980s Mexicos exports declined after 1985 but began to recover increasing by two-thirds since 1986 Import growth has expanded in the last half of the 1980s reflecting Mexicos efforts to control inflation and set a more stable currency Manufacturing and machinery are key imports (Figure 4) However raw food products and valueshyadded foods represent 16 of all imports and are a growing component of Mexicos overall imports

Machinery exports along with other manufactures and primary goods including food and agricultural products represent 60 of total Mexican exports (Figure 5) Petroleum is the largest source of foreign exchange comprising 38 of total exports and is probably the most important commodity in the economy The resistance of many Mexicans to foreign interference is perhaps best evidenced by the nationalization of the petroleum industry over fifty years ago It remains under government control today and its now appears that the Mexican national petroleum company PEMEX will not be privatized World oil prices have also driven much of recent economic policy Based on the assumption that oil prices would continually rise Mexico borrowed heavily in the late 1970s and early 1980s to subsidize inefficient industries and promote self -sufficiency in staple food production When oil prices declined in the early 1980s the external debt burden became unbearable External debt rose from around 550 billion in the early 1980s to a peak of 5108 billion in 1988 and now has fallen to an estimated 594 billion for 1990 In 1988 the per capita debt was $1202 or approximately 50 of per capita income In fact external debt represents approximately 50 of GNP one of the highest ratios in the Third World Mexico became unable to pay even interest on external debt in 1982 depleting the government budget for many domestic programs Inflation increased from under 30 in 1981 to almost 100 in 1982 peaking at 132 in 1987 Table 2 shows recent external debt inflation and nominal and real interest rates Although presently under control Mexicos external debt could become a crucial problem for prolonged economic development and overall growth of the Mexican economy Imports of food products would decline under such conditions

Attitudes toward economic policy in Mexico are shaped by the economic and political history of the country Nationalism remains strong and foreign activity in the economy has traditionally been distrusted and discouraged Mexicos economy could previously have been characterized as highly managed and protected by the government Barriers to trade were plentiful including export and import tariffs or taxes import and export licenses and quotas The economic turmoil of the early 1980s however necessitated change in Mexicos economic policy In 1986 a program of economic realism was begun under the auspices of the International Monetary Fund Portions of the external

3

debt were either forgiven refinanced at a lower interest rate or included in debt-for-equity swaps where foreign investors were permitted to buy Mexican debt at a discount on international capital markets this debt was then converted into equity in Mexican firms The levels of total external debt are depicted in Figure 2 Also fiscal and monetary policies were tightened and the peso was sharply devalued with respect to the US dollar To spur its drive to liberalize trade and improve economic growth Mexico accepted membership into the GAIT in 1986 Inflation fell to an annJlai te of 52 at the end of 1988 and to 20 in 1989 The government budget deficit fell from 12 of gross domestic product in 1986 to 6 in 1989

The current administration of President Carlos Salinas de Gortari has also instituted many broad-sweeping changes in economic policy continuing and expanding the program of his predecessor President Miguel de la Madrid Portions of the foreign debt are again being renegotiated to relieve the debt burden New regulations for foreign investment have been issued and intellectual property rights have been more strongly protected both actions are an attempt to generate muchshyneeded capital for technological and infrastructural improvement Many public industries including banking insurance airlines steel telephone and copper mining are being privatized to ease the fiscal burden Fiscal reform has broadened the tax base and improved collection methods Infrastructural improvements have begun inoil and electricity and in the creation of better highways to improve the efficiency of markets and reduce transportation costs (Mexican Agenda)

Major changes in economic policy in Mexico have come in the arena of foreign trade Before Mexicos entrance into the GAIT in 1986 ad valorem tariff rates were often over 100 Those rates are now less than 20 The trade-weighted average tariff fell from 25 in 1985 to about 10 in 1989 (Davis) Import licenses previously required on all Mexican imports are now required on only 230 products on the tariff schedule License requirements still remain however for certain sectors including agriculture Approximately 60 of all US agricultural exports to Mexico still require import licenses As Mexico began to open its economy it became apparent that its trade surplus would suffer To combat this loss the government began promoting non-traditional manufactured exports Oil and oil products have fallen from over 75 of exports in 1983 to 34 by 1989

Agricultural Sector

The Mexican farm sector has been compared to that of Eastern Europe with a bimodal distribution of production between large commercial operations and collective farms (ejidos) on which the vast majority of farmers work The ejido system founded in 1914 did not result in major land reform until 1940 when large portions of land were brought into production and agricultural output grew successfully The second wave of land reform in the 1970s merely chopped up the already-existing parcels of land into smaller holdings Today 54 of all of the national territory belongs to ejidos and other semi-collective farms Two-thirds of all arable land is now held in parcels of less than five hectares Because of its subsistence nature ejido land is typically used to produce corn rice or beans The ejidos suffer from poor economies of scale because the land much of which is only marginal is in individual holdings which are overplanted and too small to warrant highly capitalized inputs or technologies The rural population was approximately 11 per harvested hectare in 1980 up from 7 persons per hectare in 1970 reflecting government efforts to keep rural residents on farmland parcels The inefficient ejido system has repeatedly failed to meet production targets for staple foods Food output per capita actually declined 3 from 1979 to 1981 Grain imports rose by 22 annually from 1970 to 1986

4

Despite the weakening performance of the ejidos other regions of Mexico have a flourishing agricultural sector particularly the Northern and Eastern coastal regions These states produce primarily commodities for export to the United States fruits and vegetables cut flowers and coffee

Agricultural policy in Mexico has relied heavily in the past on price supports and input subsidies For several years self-sufficiency in staple food production was th~main policy goal with fertilizer seed or irrigation given to farmers who would plant rice maize beans or wheat rather than more profitable export-oriented crops The policy of self-sufficiency led to a skewed structure of agricultural production and a loss of revenue necessary for further development Current plans suggest that the Mexican government is interested in eliminating these price and input subsidies in lieu of consumer subsidies to allow market forces to determine production levels and patterns while still maintaining a cheap food policy

Governmental Structure

The framework of the central government of Mexico is similar to that of the United States consisting of executive legislative and judicial branches However the president is elected by direct popular vote and may serve only one six-year term The legislature consists of two bodies the sixtyshyfour member Senate and the 400 member Chamber of Deputies The senators serve six-year terms and the deputies three years Legislators also cannot be re-elected The two major parties are the more powerful Institutional Revolutionary Party (PRI) and the National Action Party (PAN)

The office of the president is extremely powerful including the design and implementation of foreign trade policy Under ordinary laws passed in 1984 the president can intervene in industrial or commercial activities relative to the distribution of goods and services control monetary policy and control and regulate foreign investment among other empowerments Under the Mexican constitution and laws the president can negotiate and sign treaties with senatorial approval (Rudolph)

The legislature typically approves legislation submitted by the president So unlike Prime Minister Mulroney of Canada President Salinas is likely to have the support of his legislature for a free trade agreement with the United States although the strong nationalistic ties of the Mexican people may lead to conflict

Monetary Policy

The banking system in Mexico is very similar to the US Federal Reserve System with credit and reserve requirements a discount rate and open market operations all falling within the powers of the Bank of Mexico The Bank of Mexico is also the fiscal representative of the federal government The Secretary of Finance has veto power over all bank and monetary policies (Rudolph) The banking system was nationalized in 1982 but was reprivatized in 1990

Foreign Investment and Capital Flight

Investment by foreigners in Mexico has a long history but the preceding 50 years have seen severe limitations put on such investment In 1973 the Law for the Promotion of Mexican Investment

5

and Regulation of Foreign Investment limited foreign investment in most Mexican companies to a maximum of 49 of capital stock and less equity in some strategic industries such as petroleum and communications It also gave the federal government sole right to develop petroleum electricity and minerals (Rudolph) Foreign investment was encouraged in the early 1980s but is still restricted to less than a majority share Despite all of the restrictions foreign investment in the Mexican economy is strong Figure 6 shows the structure of foreign investment ~l Mexico by country As might be expected the United States is Mexicos largest foreign investor holding 63 of the total

Efforts to restrict the inflow of foreign capital often encourage the outflow of domestic capital Capital flight in Mexico was in response to high taxes on dividends interest income other income and capital gains and in response to exchange rate uncertainty An estimated $84 billion in Mexican funds had been invested abroad by 1987 (Morgan Guaranty Survey) Although possibly $84 billion is over four times the value of all the stock on the Mexican Stock Exchange

Exchange Rate Policy

Exchange rates in Mexico are subject to a dual system consisting of a controlled market which is adjusted daily and set by the Bank of Mexico and a free parallel market which is determined by market forces The lower controlled market rate applies to payments of principal and interest of public sector external debt interest on private sector debt approved imports merchandise exports and other authorized transactions The free market rate applies to all other transactions (Rudolph IMF) Beginning in 1982 the peso was devalued according to a schedule The current rate of devaluation is 80 centavos per day The peso has been devalued over time from 1439 pesos per US dollar in 1983 to the current level of approximately 29S0 pesos per dollar in 1990 (Table 3)

Mexicos Economic Relationship with the United States

When a relatively smaller country such as Mexico lies beside a large economy such as that of the United States the two economies are often inextricably linked The United States is Mexicos largest trading partner receiving 716 of Mexicos exports and sending 708 of Mexicos imports in 1989 Recent trade levels between the two countries are given in figure 7 and Figure 8 outlines the structure of this trade Agricultural trade between the two countries shown in figure 9 has also continued to increase At $SO billion US-Mexico agricultural trade accounts for about 10 of total Mexican trade but only a small share of total US trade Consequently agricultural trade is relatively more important to Mexico than to the United States Finally the United States contributed some $30 billion in aid to Mexico from 1970-1988 Macroeconomic variations such as interest rate inflation and exchange rate changes in the United States have important implications for Mexico and although the reverse relationship may not hold certain regions of the United States would be more sensitive to changes in Mexicos economy particularly the Southwest Another important linkage of the US and Mexican economies comes through the maquiladora industries The maquiladora program begun in 1965 has over 1500 participating companies and involves mostly industries along the border They principally produce electronics electronic equipment ceramics automotive parts and toys Over SOOOOO Mexicans are employed by the maquiladoras These plants are viewed as important to industrial development along the border and as a means to obtain much-needed foreign exchange

Under Mexican law maquiladora plants can be fully foreign-owned but must be incorporated within Mexico and conform to Mexican law In return the companies are allowed duty-free entry

THE US-MEXICO FREE TRADE AGREEMENT GENERAL ECONOMIC ISSUES

The proposed US-Mexico Free Trade Agreement (FTA) could cause major changes in agricultural structure and production not only in the United States but also in Mexico Because an

agreement would cover much more than agriculture a thorough understanding of the negotiating position of Mexico and the potential impacts of freer trade require an understanding of the general economic situation in Mexico and the intersectoral impacts

Furthermore the interrelationship between the Mexican economy and the agricultural sector is evident from several key economic indicators Nearly 30 of the Mexican population is rural and 24 are employed in food and fiber related industries Agricultural commodities rank second only to petroleum in terms of top earners of foreign exchange Agriculture accounts for 9 of gross national product and 7 of merchandise exports (World Bank) Despite its overall growth agricultural production has not kept pace with population growth shown by declining per capita real agricultural production (Table I) Rural income remains a small share of total income (Figure I) leading many analysts to conclude that not only has the rural sector of Mexico lagged the rest of the economy in income growth but that the future prospects for rural development may be limited by internal factors Mexican agricultural production although generally not as capital-intensive as that of the United States still relies heavily on credit to purchase inputs hence the importance of interest rates Inflation which is quite often high causes dramatic changes in cost structures and demands for agricultural products especially non-staple foods With the trade sector so large exchange rates become a critical linkage among the economy monetary and fiscal policies and the agricultural sector

This paper provides a brief explanation of the levels of economic integration a recent history of the Mexican economy and an overview of monetary and fiscal policy formulation including exchange rate and foreign investment controls Linkages between the US and Mexican economies are then discussed followed by an exploration of potential effects of a US-Mexico FTA on the Mexican economy and economic policy Finally some priority issues to clarify and monitor during the negotiations are identified

BACKGROUND

The pending negotiations on a US-Mexico FTA have caused some confusion about the level of integration which can be expected between the two countries The term quasi-free trade area might be more appropriate in that trade barriers would be reduced or even eliminated between the two countries but the individual countries would maintain political and economic control over their own trade measures This level of economic cooperation is in contrast to a customs union in which a common external tariff is added to a free trade area or a common market in which the free flow of factors such as labor is allowed between member nations The next level of economic integration is an economic union which adds monetary coordination among member nations to the agreement (Balassa) Although some have called for higher levels of integration a quasi-free trade area is the apparent goal of the negotiations This section describes the Mexican economy and the Mexican agricultural sector and discusses the structure of the Mexican government Mexican monetary policy issues in foreign investment in Mexico Mexican monetary and exchange rate policies and the economic relationship of the US and Mexico

The Mexican Economy

Mexico has the fifteenth largest economy and eleventh largest population in the world at 87 million people Mexico although technically a developing country has an economy larger than many developed countries and most developing countries Figure 2 indicates recent production figures in terms of gross national product (GNP) Mexicos GNP in 1990 was approximately 5200 billion Like most other Latin American countries Mexico has struggled throughout the last decade Gross nationJI product actually declined after 1981 falling 10 in 1986 Per capita GNP declined even more rapidly due to Mexicos annual population growth rate which exceeds 22 The contribution of various sectors of the economy to GNP in 1987 was 9 for agriculture 34 for manufacturing and 57 for services Income distribution is characterized as uneven with 40 of the national income received by 10 of the population (World Bank) Mexicos population is relatively young with 39 under 15 and 61 under 25 (United Nations)

The trade sector of the Mexican economy has grown rapidly after the worldwide recession of the early 1980s Mexicos overall trade surplus with the world has steadily declined since 1987 after entering the General Agreements on Tariffs and Trade (GATT) From a trade balance of 58 billion in 1987 Mexicos surplus has fallen 106 to reflect a 5500 million deficit in 1989 Figure 3 shows recent export and import levels Although robust in the mid-1980s Mexicos exports declined after 1985 but began to recover increasing by two-thirds since 1986 Import growth has expanded in the last half of the 1980s reflecting Mexicos efforts to control inflation and set a more stable currency Manufacturing and machinery are key imports (Figure 4) However raw food products and valueshyadded foods represent 16 of all imports and are a growing component of Mexicos overall imports

Machinery exports along with other manufactures and primary goods including food and agricultural products represent 60 of total Mexican exports (Figure 5) Petroleum is the largest source of foreign exchange comprising 38 of total exports and is probably the most important commodity in the economy The resistance of many Mexicans to foreign interference is perhaps best evidenced by the nationalization of the petroleum industry over fifty years ago It remains under government control today and its now appears that the Mexican national petroleum company PEMEX will not be privatized World oil prices have also driven much of recent economic policy Based on the assumption that oil prices would continually rise Mexico borrowed heavily in the late 1970s and early 1980s to subsidize inefficient industries and promote self -sufficiency in staple food production When oil prices declined in the early 1980s the external debt burden became unbearable External debt rose from around 550 billion in the early 1980s to a peak of 5108 billion in 1988 and now has fallen to an estimated 594 billion for 1990 In 1988 the per capita debt was $1202 or approximately 50 of per capita income In fact external debt represents approximately 50 of GNP one of the highest ratios in the Third World Mexico became unable to pay even interest on external debt in 1982 depleting the government budget for many domestic programs Inflation increased from under 30 in 1981 to almost 100 in 1982 peaking at 132 in 1987 Table 2 shows recent external debt inflation and nominal and real interest rates Although presently under control Mexicos external debt could become a crucial problem for prolonged economic development and overall growth of the Mexican economy Imports of food products would decline under such conditions

Attitudes toward economic policy in Mexico are shaped by the economic and political history of the country Nationalism remains strong and foreign activity in the economy has traditionally been distrusted and discouraged Mexicos economy could previously have been characterized as highly managed and protected by the government Barriers to trade were plentiful including export and import tariffs or taxes import and export licenses and quotas The economic turmoil of the early 1980s however necessitated change in Mexicos economic policy In 1986 a program of economic realism was begun under the auspices of the International Monetary Fund Portions of the external

3

debt were either forgiven refinanced at a lower interest rate or included in debt-for-equity swaps where foreign investors were permitted to buy Mexican debt at a discount on international capital markets this debt was then converted into equity in Mexican firms The levels of total external debt are depicted in Figure 2 Also fiscal and monetary policies were tightened and the peso was sharply devalued with respect to the US dollar To spur its drive to liberalize trade and improve economic growth Mexico accepted membership into the GAIT in 1986 Inflation fell to an annJlai te of 52 at the end of 1988 and to 20 in 1989 The government budget deficit fell from 12 of gross domestic product in 1986 to 6 in 1989

The current administration of President Carlos Salinas de Gortari has also instituted many broad-sweeping changes in economic policy continuing and expanding the program of his predecessor President Miguel de la Madrid Portions of the foreign debt are again being renegotiated to relieve the debt burden New regulations for foreign investment have been issued and intellectual property rights have been more strongly protected both actions are an attempt to generate muchshyneeded capital for technological and infrastructural improvement Many public industries including banking insurance airlines steel telephone and copper mining are being privatized to ease the fiscal burden Fiscal reform has broadened the tax base and improved collection methods Infrastructural improvements have begun inoil and electricity and in the creation of better highways to improve the efficiency of markets and reduce transportation costs (Mexican Agenda)

Major changes in economic policy in Mexico have come in the arena of foreign trade Before Mexicos entrance into the GAIT in 1986 ad valorem tariff rates were often over 100 Those rates are now less than 20 The trade-weighted average tariff fell from 25 in 1985 to about 10 in 1989 (Davis) Import licenses previously required on all Mexican imports are now required on only 230 products on the tariff schedule License requirements still remain however for certain sectors including agriculture Approximately 60 of all US agricultural exports to Mexico still require import licenses As Mexico began to open its economy it became apparent that its trade surplus would suffer To combat this loss the government began promoting non-traditional manufactured exports Oil and oil products have fallen from over 75 of exports in 1983 to 34 by 1989

Agricultural Sector

The Mexican farm sector has been compared to that of Eastern Europe with a bimodal distribution of production between large commercial operations and collective farms (ejidos) on which the vast majority of farmers work The ejido system founded in 1914 did not result in major land reform until 1940 when large portions of land were brought into production and agricultural output grew successfully The second wave of land reform in the 1970s merely chopped up the already-existing parcels of land into smaller holdings Today 54 of all of the national territory belongs to ejidos and other semi-collective farms Two-thirds of all arable land is now held in parcels of less than five hectares Because of its subsistence nature ejido land is typically used to produce corn rice or beans The ejidos suffer from poor economies of scale because the land much of which is only marginal is in individual holdings which are overplanted and too small to warrant highly capitalized inputs or technologies The rural population was approximately 11 per harvested hectare in 1980 up from 7 persons per hectare in 1970 reflecting government efforts to keep rural residents on farmland parcels The inefficient ejido system has repeatedly failed to meet production targets for staple foods Food output per capita actually declined 3 from 1979 to 1981 Grain imports rose by 22 annually from 1970 to 1986

4

Despite the weakening performance of the ejidos other regions of Mexico have a flourishing agricultural sector particularly the Northern and Eastern coastal regions These states produce primarily commodities for export to the United States fruits and vegetables cut flowers and coffee

Agricultural policy in Mexico has relied heavily in the past on price supports and input subsidies For several years self-sufficiency in staple food production was th~main policy goal with fertilizer seed or irrigation given to farmers who would plant rice maize beans or wheat rather than more profitable export-oriented crops The policy of self-sufficiency led to a skewed structure of agricultural production and a loss of revenue necessary for further development Current plans suggest that the Mexican government is interested in eliminating these price and input subsidies in lieu of consumer subsidies to allow market forces to determine production levels and patterns while still maintaining a cheap food policy

Governmental Structure

The framework of the central government of Mexico is similar to that of the United States consisting of executive legislative and judicial branches However the president is elected by direct popular vote and may serve only one six-year term The legislature consists of two bodies the sixtyshyfour member Senate and the 400 member Chamber of Deputies The senators serve six-year terms and the deputies three years Legislators also cannot be re-elected The two major parties are the more powerful Institutional Revolutionary Party (PRI) and the National Action Party (PAN)

The office of the president is extremely powerful including the design and implementation of foreign trade policy Under ordinary laws passed in 1984 the president can intervene in industrial or commercial activities relative to the distribution of goods and services control monetary policy and control and regulate foreign investment among other empowerments Under the Mexican constitution and laws the president can negotiate and sign treaties with senatorial approval (Rudolph)

The legislature typically approves legislation submitted by the president So unlike Prime Minister Mulroney of Canada President Salinas is likely to have the support of his legislature for a free trade agreement with the United States although the strong nationalistic ties of the Mexican people may lead to conflict

Monetary Policy

The banking system in Mexico is very similar to the US Federal Reserve System with credit and reserve requirements a discount rate and open market operations all falling within the powers of the Bank of Mexico The Bank of Mexico is also the fiscal representative of the federal government The Secretary of Finance has veto power over all bank and monetary policies (Rudolph) The banking system was nationalized in 1982 but was reprivatized in 1990

Foreign Investment and Capital Flight

Investment by foreigners in Mexico has a long history but the preceding 50 years have seen severe limitations put on such investment In 1973 the Law for the Promotion of Mexican Investment

5

and Regulation of Foreign Investment limited foreign investment in most Mexican companies to a maximum of 49 of capital stock and less equity in some strategic industries such as petroleum and communications It also gave the federal government sole right to develop petroleum electricity and minerals (Rudolph) Foreign investment was encouraged in the early 1980s but is still restricted to less than a majority share Despite all of the restrictions foreign investment in the Mexican economy is strong Figure 6 shows the structure of foreign investment ~l Mexico by country As might be expected the United States is Mexicos largest foreign investor holding 63 of the total

Efforts to restrict the inflow of foreign capital often encourage the outflow of domestic capital Capital flight in Mexico was in response to high taxes on dividends interest income other income and capital gains and in response to exchange rate uncertainty An estimated $84 billion in Mexican funds had been invested abroad by 1987 (Morgan Guaranty Survey) Although possibly $84 billion is over four times the value of all the stock on the Mexican Stock Exchange

Exchange Rate Policy

Exchange rates in Mexico are subject to a dual system consisting of a controlled market which is adjusted daily and set by the Bank of Mexico and a free parallel market which is determined by market forces The lower controlled market rate applies to payments of principal and interest of public sector external debt interest on private sector debt approved imports merchandise exports and other authorized transactions The free market rate applies to all other transactions (Rudolph IMF) Beginning in 1982 the peso was devalued according to a schedule The current rate of devaluation is 80 centavos per day The peso has been devalued over time from 1439 pesos per US dollar in 1983 to the current level of approximately 29S0 pesos per dollar in 1990 (Table 3)

Mexicos Economic Relationship with the United States

When a relatively smaller country such as Mexico lies beside a large economy such as that of the United States the two economies are often inextricably linked The United States is Mexicos largest trading partner receiving 716 of Mexicos exports and sending 708 of Mexicos imports in 1989 Recent trade levels between the two countries are given in figure 7 and Figure 8 outlines the structure of this trade Agricultural trade between the two countries shown in figure 9 has also continued to increase At $SO billion US-Mexico agricultural trade accounts for about 10 of total Mexican trade but only a small share of total US trade Consequently agricultural trade is relatively more important to Mexico than to the United States Finally the United States contributed some $30 billion in aid to Mexico from 1970-1988 Macroeconomic variations such as interest rate inflation and exchange rate changes in the United States have important implications for Mexico and although the reverse relationship may not hold certain regions of the United States would be more sensitive to changes in Mexicos economy particularly the Southwest Another important linkage of the US and Mexican economies comes through the maquiladora industries The maquiladora program begun in 1965 has over 1500 participating companies and involves mostly industries along the border They principally produce electronics electronic equipment ceramics automotive parts and toys Over SOOOOO Mexicans are employed by the maquiladoras These plants are viewed as important to industrial development along the border and as a means to obtain much-needed foreign exchange

Under Mexican law maquiladora plants can be fully foreign-owned but must be incorporated within Mexico and conform to Mexican law In return the companies are allowed duty-free entry

The Mexican Economy

Mexico has the fifteenth largest economy and eleventh largest population in the world at 87 million people Mexico although technically a developing country has an economy larger than many developed countries and most developing countries Figure 2 indicates recent production figures in terms of gross national product (GNP) Mexicos GNP in 1990 was approximately 5200 billion Like most other Latin American countries Mexico has struggled throughout the last decade Gross nationJI product actually declined after 1981 falling 10 in 1986 Per capita GNP declined even more rapidly due to Mexicos annual population growth rate which exceeds 22 The contribution of various sectors of the economy to GNP in 1987 was 9 for agriculture 34 for manufacturing and 57 for services Income distribution is characterized as uneven with 40 of the national income received by 10 of the population (World Bank) Mexicos population is relatively young with 39 under 15 and 61 under 25 (United Nations)

The trade sector of the Mexican economy has grown rapidly after the worldwide recession of the early 1980s Mexicos overall trade surplus with the world has steadily declined since 1987 after entering the General Agreements on Tariffs and Trade (GATT) From a trade balance of 58 billion in 1987 Mexicos surplus has fallen 106 to reflect a 5500 million deficit in 1989 Figure 3 shows recent export and import levels Although robust in the mid-1980s Mexicos exports declined after 1985 but began to recover increasing by two-thirds since 1986 Import growth has expanded in the last half of the 1980s reflecting Mexicos efforts to control inflation and set a more stable currency Manufacturing and machinery are key imports (Figure 4) However raw food products and valueshyadded foods represent 16 of all imports and are a growing component of Mexicos overall imports

Machinery exports along with other manufactures and primary goods including food and agricultural products represent 60 of total Mexican exports (Figure 5) Petroleum is the largest source of foreign exchange comprising 38 of total exports and is probably the most important commodity in the economy The resistance of many Mexicans to foreign interference is perhaps best evidenced by the nationalization of the petroleum industry over fifty years ago It remains under government control today and its now appears that the Mexican national petroleum company PEMEX will not be privatized World oil prices have also driven much of recent economic policy Based on the assumption that oil prices would continually rise Mexico borrowed heavily in the late 1970s and early 1980s to subsidize inefficient industries and promote self -sufficiency in staple food production When oil prices declined in the early 1980s the external debt burden became unbearable External debt rose from around 550 billion in the early 1980s to a peak of 5108 billion in 1988 and now has fallen to an estimated 594 billion for 1990 In 1988 the per capita debt was $1202 or approximately 50 of per capita income In fact external debt represents approximately 50 of GNP one of the highest ratios in the Third World Mexico became unable to pay even interest on external debt in 1982 depleting the government budget for many domestic programs Inflation increased from under 30 in 1981 to almost 100 in 1982 peaking at 132 in 1987 Table 2 shows recent external debt inflation and nominal and real interest rates Although presently under control Mexicos external debt could become a crucial problem for prolonged economic development and overall growth of the Mexican economy Imports of food products would decline under such conditions

Attitudes toward economic policy in Mexico are shaped by the economic and political history of the country Nationalism remains strong and foreign activity in the economy has traditionally been distrusted and discouraged Mexicos economy could previously have been characterized as highly managed and protected by the government Barriers to trade were plentiful including export and import tariffs or taxes import and export licenses and quotas The economic turmoil of the early 1980s however necessitated change in Mexicos economic policy In 1986 a program of economic realism was begun under the auspices of the International Monetary Fund Portions of the external

3

debt were either forgiven refinanced at a lower interest rate or included in debt-for-equity swaps where foreign investors were permitted to buy Mexican debt at a discount on international capital markets this debt was then converted into equity in Mexican firms The levels of total external debt are depicted in Figure 2 Also fiscal and monetary policies were tightened and the peso was sharply devalued with respect to the US dollar To spur its drive to liberalize trade and improve economic growth Mexico accepted membership into the GAIT in 1986 Inflation fell to an annJlai te of 52 at the end of 1988 and to 20 in 1989 The government budget deficit fell from 12 of gross domestic product in 1986 to 6 in 1989

The current administration of President Carlos Salinas de Gortari has also instituted many broad-sweeping changes in economic policy continuing and expanding the program of his predecessor President Miguel de la Madrid Portions of the foreign debt are again being renegotiated to relieve the debt burden New regulations for foreign investment have been issued and intellectual property rights have been more strongly protected both actions are an attempt to generate muchshyneeded capital for technological and infrastructural improvement Many public industries including banking insurance airlines steel telephone and copper mining are being privatized to ease the fiscal burden Fiscal reform has broadened the tax base and improved collection methods Infrastructural improvements have begun inoil and electricity and in the creation of better highways to improve the efficiency of markets and reduce transportation costs (Mexican Agenda)

Major changes in economic policy in Mexico have come in the arena of foreign trade Before Mexicos entrance into the GAIT in 1986 ad valorem tariff rates were often over 100 Those rates are now less than 20 The trade-weighted average tariff fell from 25 in 1985 to about 10 in 1989 (Davis) Import licenses previously required on all Mexican imports are now required on only 230 products on the tariff schedule License requirements still remain however for certain sectors including agriculture Approximately 60 of all US agricultural exports to Mexico still require import licenses As Mexico began to open its economy it became apparent that its trade surplus would suffer To combat this loss the government began promoting non-traditional manufactured exports Oil and oil products have fallen from over 75 of exports in 1983 to 34 by 1989

Agricultural Sector

The Mexican farm sector has been compared to that of Eastern Europe with a bimodal distribution of production between large commercial operations and collective farms (ejidos) on which the vast majority of farmers work The ejido system founded in 1914 did not result in major land reform until 1940 when large portions of land were brought into production and agricultural output grew successfully The second wave of land reform in the 1970s merely chopped up the already-existing parcels of land into smaller holdings Today 54 of all of the national territory belongs to ejidos and other semi-collective farms Two-thirds of all arable land is now held in parcels of less than five hectares Because of its subsistence nature ejido land is typically used to produce corn rice or beans The ejidos suffer from poor economies of scale because the land much of which is only marginal is in individual holdings which are overplanted and too small to warrant highly capitalized inputs or technologies The rural population was approximately 11 per harvested hectare in 1980 up from 7 persons per hectare in 1970 reflecting government efforts to keep rural residents on farmland parcels The inefficient ejido system has repeatedly failed to meet production targets for staple foods Food output per capita actually declined 3 from 1979 to 1981 Grain imports rose by 22 annually from 1970 to 1986

4

Despite the weakening performance of the ejidos other regions of Mexico have a flourishing agricultural sector particularly the Northern and Eastern coastal regions These states produce primarily commodities for export to the United States fruits and vegetables cut flowers and coffee

Agricultural policy in Mexico has relied heavily in the past on price supports and input subsidies For several years self-sufficiency in staple food production was th~main policy goal with fertilizer seed or irrigation given to farmers who would plant rice maize beans or wheat rather than more profitable export-oriented crops The policy of self-sufficiency led to a skewed structure of agricultural production and a loss of revenue necessary for further development Current plans suggest that the Mexican government is interested in eliminating these price and input subsidies in lieu of consumer subsidies to allow market forces to determine production levels and patterns while still maintaining a cheap food policy

Governmental Structure

The framework of the central government of Mexico is similar to that of the United States consisting of executive legislative and judicial branches However the president is elected by direct popular vote and may serve only one six-year term The legislature consists of two bodies the sixtyshyfour member Senate and the 400 member Chamber of Deputies The senators serve six-year terms and the deputies three years Legislators also cannot be re-elected The two major parties are the more powerful Institutional Revolutionary Party (PRI) and the National Action Party (PAN)

The office of the president is extremely powerful including the design and implementation of foreign trade policy Under ordinary laws passed in 1984 the president can intervene in industrial or commercial activities relative to the distribution of goods and services control monetary policy and control and regulate foreign investment among other empowerments Under the Mexican constitution and laws the president can negotiate and sign treaties with senatorial approval (Rudolph)

The legislature typically approves legislation submitted by the president So unlike Prime Minister Mulroney of Canada President Salinas is likely to have the support of his legislature for a free trade agreement with the United States although the strong nationalistic ties of the Mexican people may lead to conflict

Monetary Policy

The banking system in Mexico is very similar to the US Federal Reserve System with credit and reserve requirements a discount rate and open market operations all falling within the powers of the Bank of Mexico The Bank of Mexico is also the fiscal representative of the federal government The Secretary of Finance has veto power over all bank and monetary policies (Rudolph) The banking system was nationalized in 1982 but was reprivatized in 1990

Foreign Investment and Capital Flight

Investment by foreigners in Mexico has a long history but the preceding 50 years have seen severe limitations put on such investment In 1973 the Law for the Promotion of Mexican Investment

5

and Regulation of Foreign Investment limited foreign investment in most Mexican companies to a maximum of 49 of capital stock and less equity in some strategic industries such as petroleum and communications It also gave the federal government sole right to develop petroleum electricity and minerals (Rudolph) Foreign investment was encouraged in the early 1980s but is still restricted to less than a majority share Despite all of the restrictions foreign investment in the Mexican economy is strong Figure 6 shows the structure of foreign investment ~l Mexico by country As might be expected the United States is Mexicos largest foreign investor holding 63 of the total

Efforts to restrict the inflow of foreign capital often encourage the outflow of domestic capital Capital flight in Mexico was in response to high taxes on dividends interest income other income and capital gains and in response to exchange rate uncertainty An estimated $84 billion in Mexican funds had been invested abroad by 1987 (Morgan Guaranty Survey) Although possibly $84 billion is over four times the value of all the stock on the Mexican Stock Exchange

Exchange Rate Policy

Exchange rates in Mexico are subject to a dual system consisting of a controlled market which is adjusted daily and set by the Bank of Mexico and a free parallel market which is determined by market forces The lower controlled market rate applies to payments of principal and interest of public sector external debt interest on private sector debt approved imports merchandise exports and other authorized transactions The free market rate applies to all other transactions (Rudolph IMF) Beginning in 1982 the peso was devalued according to a schedule The current rate of devaluation is 80 centavos per day The peso has been devalued over time from 1439 pesos per US dollar in 1983 to the current level of approximately 29S0 pesos per dollar in 1990 (Table 3)

Mexicos Economic Relationship with the United States

When a relatively smaller country such as Mexico lies beside a large economy such as that of the United States the two economies are often inextricably linked The United States is Mexicos largest trading partner receiving 716 of Mexicos exports and sending 708 of Mexicos imports in 1989 Recent trade levels between the two countries are given in figure 7 and Figure 8 outlines the structure of this trade Agricultural trade between the two countries shown in figure 9 has also continued to increase At $SO billion US-Mexico agricultural trade accounts for about 10 of total Mexican trade but only a small share of total US trade Consequently agricultural trade is relatively more important to Mexico than to the United States Finally the United States contributed some $30 billion in aid to Mexico from 1970-1988 Macroeconomic variations such as interest rate inflation and exchange rate changes in the United States have important implications for Mexico and although the reverse relationship may not hold certain regions of the United States would be more sensitive to changes in Mexicos economy particularly the Southwest Another important linkage of the US and Mexican economies comes through the maquiladora industries The maquiladora program begun in 1965 has over 1500 participating companies and involves mostly industries along the border They principally produce electronics electronic equipment ceramics automotive parts and toys Over SOOOOO Mexicans are employed by the maquiladoras These plants are viewed as important to industrial development along the border and as a means to obtain much-needed foreign exchange

Under Mexican law maquiladora plants can be fully foreign-owned but must be incorporated within Mexico and conform to Mexican law In return the companies are allowed duty-free entry

3

debt were either forgiven refinanced at a lower interest rate or included in debt-for-equity swaps where foreign investors were permitted to buy Mexican debt at a discount on international capital markets this debt was then converted into equity in Mexican firms The levels of total external debt are depicted in Figure 2 Also fiscal and monetary policies were tightened and the peso was sharply devalued with respect to the US dollar To spur its drive to liberalize trade and improve economic growth Mexico accepted membership into the GAIT in 1986 Inflation fell to an annJlai te of 52 at the end of 1988 and to 20 in 1989 The government budget deficit fell from 12 of gross domestic product in 1986 to 6 in 1989

The current administration of President Carlos Salinas de Gortari has also instituted many broad-sweeping changes in economic policy continuing and expanding the program of his predecessor President Miguel de la Madrid Portions of the foreign debt are again being renegotiated to relieve the debt burden New regulations for foreign investment have been issued and intellectual property rights have been more strongly protected both actions are an attempt to generate muchshyneeded capital for technological and infrastructural improvement Many public industries including banking insurance airlines steel telephone and copper mining are being privatized to ease the fiscal burden Fiscal reform has broadened the tax base and improved collection methods Infrastructural improvements have begun inoil and electricity and in the creation of better highways to improve the efficiency of markets and reduce transportation costs (Mexican Agenda)

Major changes in economic policy in Mexico have come in the arena of foreign trade Before Mexicos entrance into the GAIT in 1986 ad valorem tariff rates were often over 100 Those rates are now less than 20 The trade-weighted average tariff fell from 25 in 1985 to about 10 in 1989 (Davis) Import licenses previously required on all Mexican imports are now required on only 230 products on the tariff schedule License requirements still remain however for certain sectors including agriculture Approximately 60 of all US agricultural exports to Mexico still require import licenses As Mexico began to open its economy it became apparent that its trade surplus would suffer To combat this loss the government began promoting non-traditional manufactured exports Oil and oil products have fallen from over 75 of exports in 1983 to 34 by 1989

Agricultural Sector

The Mexican farm sector has been compared to that of Eastern Europe with a bimodal distribution of production between large commercial operations and collective farms (ejidos) on which the vast majority of farmers work The ejido system founded in 1914 did not result in major land reform until 1940 when large portions of land were brought into production and agricultural output grew successfully The second wave of land reform in the 1970s merely chopped up the already-existing parcels of land into smaller holdings Today 54 of all of the national territory belongs to ejidos and other semi-collective farms Two-thirds of all arable land is now held in parcels of less than five hectares Because of its subsistence nature ejido land is typically used to produce corn rice or beans The ejidos suffer from poor economies of scale because the land much of which is only marginal is in individual holdings which are overplanted and too small to warrant highly capitalized inputs or technologies The rural population was approximately 11 per harvested hectare in 1980 up from 7 persons per hectare in 1970 reflecting government efforts to keep rural residents on farmland parcels The inefficient ejido system has repeatedly failed to meet production targets for staple foods Food output per capita actually declined 3 from 1979 to 1981 Grain imports rose by 22 annually from 1970 to 1986

4

Despite the weakening performance of the ejidos other regions of Mexico have a flourishing agricultural sector particularly the Northern and Eastern coastal regions These states produce primarily commodities for export to the United States fruits and vegetables cut flowers and coffee

Agricultural policy in Mexico has relied heavily in the past on price supports and input subsidies For several years self-sufficiency in staple food production was th~main policy goal with fertilizer seed or irrigation given to farmers who would plant rice maize beans or wheat rather than more profitable export-oriented crops The policy of self-sufficiency led to a skewed structure of agricultural production and a loss of revenue necessary for further development Current plans suggest that the Mexican government is interested in eliminating these price and input subsidies in lieu of consumer subsidies to allow market forces to determine production levels and patterns while still maintaining a cheap food policy

Governmental Structure

The framework of the central government of Mexico is similar to that of the United States consisting of executive legislative and judicial branches However the president is elected by direct popular vote and may serve only one six-year term The legislature consists of two bodies the sixtyshyfour member Senate and the 400 member Chamber of Deputies The senators serve six-year terms and the deputies three years Legislators also cannot be re-elected The two major parties are the more powerful Institutional Revolutionary Party (PRI) and the National Action Party (PAN)

The office of the president is extremely powerful including the design and implementation of foreign trade policy Under ordinary laws passed in 1984 the president can intervene in industrial or commercial activities relative to the distribution of goods and services control monetary policy and control and regulate foreign investment among other empowerments Under the Mexican constitution and laws the president can negotiate and sign treaties with senatorial approval (Rudolph)

The legislature typically approves legislation submitted by the president So unlike Prime Minister Mulroney of Canada President Salinas is likely to have the support of his legislature for a free trade agreement with the United States although the strong nationalistic ties of the Mexican people may lead to conflict

Monetary Policy

The banking system in Mexico is very similar to the US Federal Reserve System with credit and reserve requirements a discount rate and open market operations all falling within the powers of the Bank of Mexico The Bank of Mexico is also the fiscal representative of the federal government The Secretary of Finance has veto power over all bank and monetary policies (Rudolph) The banking system was nationalized in 1982 but was reprivatized in 1990

Foreign Investment and Capital Flight

Investment by foreigners in Mexico has a long history but the preceding 50 years have seen severe limitations put on such investment In 1973 the Law for the Promotion of Mexican Investment

5

and Regulation of Foreign Investment limited foreign investment in most Mexican companies to a maximum of 49 of capital stock and less equity in some strategic industries such as petroleum and communications It also gave the federal government sole right to develop petroleum electricity and minerals (Rudolph) Foreign investment was encouraged in the early 1980s but is still restricted to less than a majority share Despite all of the restrictions foreign investment in the Mexican economy is strong Figure 6 shows the structure of foreign investment ~l Mexico by country As might be expected the United States is Mexicos largest foreign investor holding 63 of the total

Efforts to restrict the inflow of foreign capital often encourage the outflow of domestic capital Capital flight in Mexico was in response to high taxes on dividends interest income other income and capital gains and in response to exchange rate uncertainty An estimated $84 billion in Mexican funds had been invested abroad by 1987 (Morgan Guaranty Survey) Although possibly $84 billion is over four times the value of all the stock on the Mexican Stock Exchange

Exchange Rate Policy

Exchange rates in Mexico are subject to a dual system consisting of a controlled market which is adjusted daily and set by the Bank of Mexico and a free parallel market which is determined by market forces The lower controlled market rate applies to payments of principal and interest of public sector external debt interest on private sector debt approved imports merchandise exports and other authorized transactions The free market rate applies to all other transactions (Rudolph IMF) Beginning in 1982 the peso was devalued according to a schedule The current rate of devaluation is 80 centavos per day The peso has been devalued over time from 1439 pesos per US dollar in 1983 to the current level of approximately 29S0 pesos per dollar in 1990 (Table 3)

Mexicos Economic Relationship with the United States

When a relatively smaller country such as Mexico lies beside a large economy such as that of the United States the two economies are often inextricably linked The United States is Mexicos largest trading partner receiving 716 of Mexicos exports and sending 708 of Mexicos imports in 1989 Recent trade levels between the two countries are given in figure 7 and Figure 8 outlines the structure of this trade Agricultural trade between the two countries shown in figure 9 has also continued to increase At $SO billion US-Mexico agricultural trade accounts for about 10 of total Mexican trade but only a small share of total US trade Consequently agricultural trade is relatively more important to Mexico than to the United States Finally the United States contributed some $30 billion in aid to Mexico from 1970-1988 Macroeconomic variations such as interest rate inflation and exchange rate changes in the United States have important implications for Mexico and although the reverse relationship may not hold certain regions of the United States would be more sensitive to changes in Mexicos economy particularly the Southwest Another important linkage of the US and Mexican economies comes through the maquiladora industries The maquiladora program begun in 1965 has over 1500 participating companies and involves mostly industries along the border They principally produce electronics electronic equipment ceramics automotive parts and toys Over SOOOOO Mexicans are employed by the maquiladoras These plants are viewed as important to industrial development along the border and as a means to obtain much-needed foreign exchange

Under Mexican law maquiladora plants can be fully foreign-owned but must be incorporated within Mexico and conform to Mexican law In return the companies are allowed duty-free entry

4

Despite the weakening performance of the ejidos other regions of Mexico have a flourishing agricultural sector particularly the Northern and Eastern coastal regions These states produce primarily commodities for export to the United States fruits and vegetables cut flowers and coffee

Agricultural policy in Mexico has relied heavily in the past on price supports and input subsidies For several years self-sufficiency in staple food production was th~main policy goal with fertilizer seed or irrigation given to farmers who would plant rice maize beans or wheat rather than more profitable export-oriented crops The policy of self-sufficiency led to a skewed structure of agricultural production and a loss of revenue necessary for further development Current plans suggest that the Mexican government is interested in eliminating these price and input subsidies in lieu of consumer subsidies to allow market forces to determine production levels and patterns while still maintaining a cheap food policy

Governmental Structure

The framework of the central government of Mexico is similar to that of the United States consisting of executive legislative and judicial branches However the president is elected by direct popular vote and may serve only one six-year term The legislature consists of two bodies the sixtyshyfour member Senate and the 400 member Chamber of Deputies The senators serve six-year terms and the deputies three years Legislators also cannot be re-elected The two major parties are the more powerful Institutional Revolutionary Party (PRI) and the National Action Party (PAN)

The office of the president is extremely powerful including the design and implementation of foreign trade policy Under ordinary laws passed in 1984 the president can intervene in industrial or commercial activities relative to the distribution of goods and services control monetary policy and control and regulate foreign investment among other empowerments Under the Mexican constitution and laws the president can negotiate and sign treaties with senatorial approval (Rudolph)

The legislature typically approves legislation submitted by the president So unlike Prime Minister Mulroney of Canada President Salinas is likely to have the support of his legislature for a free trade agreement with the United States although the strong nationalistic ties of the Mexican people may lead to conflict

Monetary Policy

The banking system in Mexico is very similar to the US Federal Reserve System with credit and reserve requirements a discount rate and open market operations all falling within the powers of the Bank of Mexico The Bank of Mexico is also the fiscal representative of the federal government The Secretary of Finance has veto power over all bank and monetary policies (Rudolph) The banking system was nationalized in 1982 but was reprivatized in 1990

Foreign Investment and Capital Flight

Investment by foreigners in Mexico has a long history but the preceding 50 years have seen severe limitations put on such investment In 1973 the Law for the Promotion of Mexican Investment

5

and Regulation of Foreign Investment limited foreign investment in most Mexican companies to a maximum of 49 of capital stock and less equity in some strategic industries such as petroleum and communications It also gave the federal government sole right to develop petroleum electricity and minerals (Rudolph) Foreign investment was encouraged in the early 1980s but is still restricted to less than a majority share Despite all of the restrictions foreign investment in the Mexican economy is strong Figure 6 shows the structure of foreign investment ~l Mexico by country As might be expected the United States is Mexicos largest foreign investor holding 63 of the total

Efforts to restrict the inflow of foreign capital often encourage the outflow of domestic capital Capital flight in Mexico was in response to high taxes on dividends interest income other income and capital gains and in response to exchange rate uncertainty An estimated $84 billion in Mexican funds had been invested abroad by 1987 (Morgan Guaranty Survey) Although possibly $84 billion is over four times the value of all the stock on the Mexican Stock Exchange

Exchange Rate Policy

Exchange rates in Mexico are subject to a dual system consisting of a controlled market which is adjusted daily and set by the Bank of Mexico and a free parallel market which is determined by market forces The lower controlled market rate applies to payments of principal and interest of public sector external debt interest on private sector debt approved imports merchandise exports and other authorized transactions The free market rate applies to all other transactions (Rudolph IMF) Beginning in 1982 the peso was devalued according to a schedule The current rate of devaluation is 80 centavos per day The peso has been devalued over time from 1439 pesos per US dollar in 1983 to the current level of approximately 29S0 pesos per dollar in 1990 (Table 3)

Mexicos Economic Relationship with the United States

When a relatively smaller country such as Mexico lies beside a large economy such as that of the United States the two economies are often inextricably linked The United States is Mexicos largest trading partner receiving 716 of Mexicos exports and sending 708 of Mexicos imports in 1989 Recent trade levels between the two countries are given in figure 7 and Figure 8 outlines the structure of this trade Agricultural trade between the two countries shown in figure 9 has also continued to increase At $SO billion US-Mexico agricultural trade accounts for about 10 of total Mexican trade but only a small share of total US trade Consequently agricultural trade is relatively more important to Mexico than to the United States Finally the United States contributed some $30 billion in aid to Mexico from 1970-1988 Macroeconomic variations such as interest rate inflation and exchange rate changes in the United States have important implications for Mexico and although the reverse relationship may not hold certain regions of the United States would be more sensitive to changes in Mexicos economy particularly the Southwest Another important linkage of the US and Mexican economies comes through the maquiladora industries The maquiladora program begun in 1965 has over 1500 participating companies and involves mostly industries along the border They principally produce electronics electronic equipment ceramics automotive parts and toys Over SOOOOO Mexicans are employed by the maquiladoras These plants are viewed as important to industrial development along the border and as a means to obtain much-needed foreign exchange

Under Mexican law maquiladora plants can be fully foreign-owned but must be incorporated within Mexico and conform to Mexican law In return the companies are allowed duty-free entry

5

and Regulation of Foreign Investment limited foreign investment in most Mexican companies to a maximum of 49 of capital stock and less equity in some strategic industries such as petroleum and communications It also gave the federal government sole right to develop petroleum electricity and minerals (Rudolph) Foreign investment was encouraged in the early 1980s but is still restricted to less than a majority share Despite all of the restrictions foreign investment in the Mexican economy is strong Figure 6 shows the structure of foreign investment ~l Mexico by country As might be expected the United States is Mexicos largest foreign investor holding 63 of the total

Efforts to restrict the inflow of foreign capital often encourage the outflow of domestic capital Capital flight in Mexico was in response to high taxes on dividends interest income other income and capital gains and in response to exchange rate uncertainty An estimated $84 billion in Mexican funds had been invested abroad by 1987 (Morgan Guaranty Survey) Although possibly $84 billion is over four times the value of all the stock on the Mexican Stock Exchange

Exchange Rate Policy

Exchange rates in Mexico are subject to a dual system consisting of a controlled market which is adjusted daily and set by the Bank of Mexico and a free parallel market which is determined by market forces The lower controlled market rate applies to payments of principal and interest of public sector external debt interest on private sector debt approved imports merchandise exports and other authorized transactions The free market rate applies to all other transactions (Rudolph IMF) Beginning in 1982 the peso was devalued according to a schedule The current rate of devaluation is 80 centavos per day The peso has been devalued over time from 1439 pesos per US dollar in 1983 to the current level of approximately 29S0 pesos per dollar in 1990 (Table 3)

Mexicos Economic Relationship with the United States

When a relatively smaller country such as Mexico lies beside a large economy such as that of the United States the two economies are often inextricably linked The United States is Mexicos largest trading partner receiving 716 of Mexicos exports and sending 708 of Mexicos imports in 1989 Recent trade levels between the two countries are given in figure 7 and Figure 8 outlines the structure of this trade Agricultural trade between the two countries shown in figure 9 has also continued to increase At $SO billion US-Mexico agricultural trade accounts for about 10 of total Mexican trade but only a small share of total US trade Consequently agricultural trade is relatively more important to Mexico than to the United States Finally the United States contributed some $30 billion in aid to Mexico from 1970-1988 Macroeconomic variations such as interest rate inflation and exchange rate changes in the United States have important implications for Mexico and although the reverse relationship may not hold certain regions of the United States would be more sensitive to changes in Mexicos economy particularly the Southwest Another important linkage of the US and Mexican economies comes through the maquiladora industries The maquiladora program begun in 1965 has over 1500 participating companies and involves mostly industries along the border They principally produce electronics electronic equipment ceramics automotive parts and toys Over SOOOOO Mexicans are employed by the maquiladoras These plants are viewed as important to industrial development along the border and as a means to obtain much-needed foreign exchange

Under Mexican law maquiladora plants can be fully foreign-owned but must be incorporated within Mexico and conform to Mexican law In return the companies are allowed duty-free entry

6

of all machinery materials and equipment needed to establish plants and are allowed to export processed goods tax-free and can take advantage of lower labor costs The foreign-owned maquiladoras can re-export to the United States without duty on US contents only on the value added in Mexico (Rudolph) A very large share of the maquiladoras are US-owned

POTENTIAL EFFECTS OF FREE US-MEXICO TRADE

If a US-Mexico FTA were restricted to agricultural trade alone some impact upon the general economy of Mexico would be expected Because the agreement will probably be far-reaching covering almost all sectors of the economy general economy economic repercussions on the agricultural sector will be significant Most preliminary analyses predict increases in US-Mexico trade certainly the objective of a free trade agreement with some sectors gainers and others losers These trade changes could make more foreign exchange available in Mexico and raise average incomes

The effect on the inflation rate is ambiguous because more US goods flowing into the country would mean lower inflation while more exports to the United States would increase the money supply and could spell higher inflation The potential effect on the Mexican government budget would likely be similar ie less expected to be spent on producer subsidies in agriculture but lost revenues from tariffs and licenses and increased direct consumer subsidies to counteract higher food prices Also unclear is the effect on interest rates More investment demand by US investors particularly if foreign investment restraints are loosened could push up interest rates while the loosening of investment restraints itself could pull interest rates down One reasonable certainty however is that capital flight would decrease if the Mexican economy responds with better investment opportunities

Perhaps the most important effect of a US-Mexico FTA could be that of ensuring market access for the United States in the rapidly expanding market in Mexico The two requirements for effective demand consumer want and ability to pay would be satisfied by the expanding population and the expected increase in incomes By negotiating and agreeing to specific levels of trade intervention with Mexico the United States better ensures its access to the market and places an upper bound on tariffs and other trade measures should the next president in Mexico be less in favor of an open economy Other countries without free trade agreements would not have that security

PRIORITY ISSUES TO MONITOR AND CLARIFY

Although a US-Mexico FTA would create gainers and losers in the short run long term prospects for economic growth and trade are positive However these prospects depend crucially upon policies ad events related to the general economy Priority issues relating to the general economy impacts of a US-Mexico FTA and the implications for agriculture to clarify and monitor during the negotiations include the following

7

Issue 1 Canadian Involvement

Although Canada the US and Mexico have agreed in principle to a discuss more open borders the actual role of Canada in US-Mexico free trade talks has yet to be determined Trade between Canada and Mexico is nominat but many of the two countries exports to the United States are competitive especially automobile parts The combined GNP of the three nations would exceed $60 trillion with over 360 million consumers Instead of one trilateral agreement among the three countries it is likely that they will negotiate a series of bilateral agreements among them patterned after the US-Canada FTA

Issue 2 Investment Reform

The Mexican government has proposed major changes in the regulation of foreign investment in Mexico The permanency of these changes however is of concern to foreign investors especially those from outside the United States Even though many reforms have already been made particularly in banking questions remain regarding land ownership laws foreign participation in joint ventures and regulating foreign-owned business enterprises and operations in Mexico If a USshyMexico FTA were to contain specific language as to the flow of foreign investment it would enhance investor confidence and could lead to larger investment in the near term Subsequent investment in satellite industries and services in both countries would likely follow

Issue 3 Role of Interest Rates and Exchange Rates and Interaction with US Economy

The relationship between the US and Mexican economies has been described at length inshyearlier portions of this paper Although a US-Mexico FTA is unlikely to contain specific policies for monetary and exchange rate regulation a closer economic relationship between the two countries could likely lead to more cooperation in the area of interest rate and exchange rate policy These relationships are particularly important when considering the key role that exchange rates can play in international competitiveness

Issue 4 Income Growth and Relationship to Rural Sector

Income growth and distribution is a pressing issue for the Mexican people and for the development of broad-based economic growth and the development of a strong US export market potential A US-Mexico FT A could have a significant impact on rural incomes in Mexico particularly for subsistence farmers who may no longer be fully protected and heavily subsidized In lieu of direct agricultural subsidies the Mexican government has indicated it would substitute consumer subsidies and perhaps direct income subsidies A weakened rural sector would provide little growth in import demand for products and could become a destabilizing social force in any move toward more open markets

8

Issue 5 Balance of Payments and Trade Deficit

A US-Mexico FTA will likely have little effect in increasing trade between the United States and Mexico if the economic growth of either country is in jeopardy Mexicos recent deficit in trade denies it much-needed forign exchange As Mexico continues to open its economy this deficit may increase to further exacerbate the balance of payments problem Given the size of Mexicos external debt and the role of key exports in servicing that debt a weak trade sector could have severe consequences for US market growth in Mexico

Issue 6 External Debt and Market Aceess

Although currently under control Mexicos external debt is highly dependent upon general economic conditions The importance of oil revenues and the relationship to debt service is obvious Additionally US policies that cause interest rates to rise will adversely affect Mexicos ability to service its debt The resultant impacts on economic growth and access to the Mexican market could reduce US trade with Mexico This may take on additional importance as Mexico formulates a negotiating strategy to assure market access to the US for crucial export crops such as fruits and vegetables oil and others

REFERENCES

Balassa Bela The Theory of Economic Integration London Allen and Unwin 1961

Davis William L Breaking into the Mexican Market Policy Shifts Offer New Opportunities AgExporter March 19914-8

bull International Monetary Fund International Financial Statistics New York International Monetary Fund various issues

The Mexican Agenda Government of Mexico October 1990

Penson John B Jr and C Robert Taylor Modeling the Interface Between Agriculture and the General Economy AFPC Policy Working Paper No 90-13 Dept of Agricultural Economics Texas AampM Univ October 1990

Rudolph James D bull ed Mexico a Country Study Washington DC US Secretary of the Army 1985

United Nations Statistical Yearbook for Latin America and the Caribbean New York Economic Commission for Latin America and the Caribbean United Nations 1989

US International Trade Commission (USITC) The Likely Impact on the United States of a Free Trade Agreement with Mexico USITC Publication 2353 Washington DC February 1991

US International Trade Commission (USITC) Review of Trade and Investment Liberalization Measures by Mexico and Prospects for Future United States-Mexico Relations Phase II Summary of Views on Prospects for Future United States-Mexico Relations USITC Publication 2326 Washington DC October 1990

World Bank World Development Report New York Oxford University Press various editions

Table 1 Mexican Total and Per Capita Agricultural Production and Per Capita GNP 1984-1990

Total Agriculture Total Ag per capita GNP per capita Year Index 1980 = 100 Index 1980 =100 (US dollars)

215152

1985 1082 975

1984 1086 1004

220514

1986 1109 952 168182

1987 1115 935 172913

1988 1141 933 202362

1989 NA NA 215304

1990 Nl NA 227609

Source USDAERS World Agricultural Trends and Indicators 1989 and World Bank

Table 2 Mexican External Debt Inflation and Interest Rates 1983-1989

Total External Inflation Nominal Deposit Real Deposit Year Debt ($ million) ( A CPI) Interest Rate Interest Rate

1983 93698 1018 547 -537

1984 97307 655 484 -171

1985 97429 577 594 18

1986 101722 862 846 -16

1987 101567 1318 972 -346

1988 107882 1142 529 -613

1989 95000 200 321 121

Note Real interest rate is the difference of the nominal rate and rate of inflation

Source World Bank and IMF

Table 3 Mexican Exchange Rates 1983-1990

Controlled Year Market Rate

1983 1201

1984 1678

1985 2569

1986 6118

1987 13782

1988 22731

1989 24610

1990 28510

Free Market Rate

1503

1852

3102

6374

14058

22883

28920

Real Con trolled Rate

38207

25560

42352

277564

490937

648970

102542

Notes Rates are in Mexican pesos per US dollar Real exchange rate equals nominal rate time the ratio of US and Mexican inflation rates

Source IMF

Figure 1 Rural Income as a Share of Total Mexico 1910-1990

PERCENT OF TOTAL INCOME 1 00 1rgt7gt1 Pgtraquogt] raquoraquo4 Vgt7gtgti P7gtraquoJ tgt7raquoA Praquogt gt J Iraquoraquo A Cgt gt raquo i

75

50

25

0 1910 1920 1930 1940 1950 1960 1970 1980 1990

_ Rural ~ Urban

Source INEGI World Bank

Figure 2 Gross National Product (GNP) and External Debt for Mexico 1984-1990

BILLION us DOLLARS 250~1--~----------------------------------------~

200

150

100

50

o r~4ltcltJ vpound-rltcd Lc=~ltJ rlaquoltAtltlt1 ~~ rltltJlaquo1r ~

1984 1985 1986 1987 1988 1989 1990

-- External debt ~ GNP

Source World Bank

BILLION us DOLLARS 25Fu==~----------------------

20

15

10

5

o

-5

Figure 3 Mexicos Imports Exports and Trade Balance 1985-1989

1985 1986 1987 1988 1989

_ Exports ~ Imports (raquo1 Trade Balance

Source IMF Inti Financial Statistics

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

7

Issue 1 Canadian Involvement

Although Canada the US and Mexico have agreed in principle to a discuss more open borders the actual role of Canada in US-Mexico free trade talks has yet to be determined Trade between Canada and Mexico is nominat but many of the two countries exports to the United States are competitive especially automobile parts The combined GNP of the three nations would exceed $60 trillion with over 360 million consumers Instead of one trilateral agreement among the three countries it is likely that they will negotiate a series of bilateral agreements among them patterned after the US-Canada FTA

Issue 2 Investment Reform

The Mexican government has proposed major changes in the regulation of foreign investment in Mexico The permanency of these changes however is of concern to foreign investors especially those from outside the United States Even though many reforms have already been made particularly in banking questions remain regarding land ownership laws foreign participation in joint ventures and regulating foreign-owned business enterprises and operations in Mexico If a USshyMexico FTA were to contain specific language as to the flow of foreign investment it would enhance investor confidence and could lead to larger investment in the near term Subsequent investment in satellite industries and services in both countries would likely follow

Issue 3 Role of Interest Rates and Exchange Rates and Interaction with US Economy

The relationship between the US and Mexican economies has been described at length inshyearlier portions of this paper Although a US-Mexico FTA is unlikely to contain specific policies for monetary and exchange rate regulation a closer economic relationship between the two countries could likely lead to more cooperation in the area of interest rate and exchange rate policy These relationships are particularly important when considering the key role that exchange rates can play in international competitiveness

Issue 4 Income Growth and Relationship to Rural Sector

Income growth and distribution is a pressing issue for the Mexican people and for the development of broad-based economic growth and the development of a strong US export market potential A US-Mexico FT A could have a significant impact on rural incomes in Mexico particularly for subsistence farmers who may no longer be fully protected and heavily subsidized In lieu of direct agricultural subsidies the Mexican government has indicated it would substitute consumer subsidies and perhaps direct income subsidies A weakened rural sector would provide little growth in import demand for products and could become a destabilizing social force in any move toward more open markets

8

Issue 5 Balance of Payments and Trade Deficit

A US-Mexico FTA will likely have little effect in increasing trade between the United States and Mexico if the economic growth of either country is in jeopardy Mexicos recent deficit in trade denies it much-needed forign exchange As Mexico continues to open its economy this deficit may increase to further exacerbate the balance of payments problem Given the size of Mexicos external debt and the role of key exports in servicing that debt a weak trade sector could have severe consequences for US market growth in Mexico

Issue 6 External Debt and Market Aceess

Although currently under control Mexicos external debt is highly dependent upon general economic conditions The importance of oil revenues and the relationship to debt service is obvious Additionally US policies that cause interest rates to rise will adversely affect Mexicos ability to service its debt The resultant impacts on economic growth and access to the Mexican market could reduce US trade with Mexico This may take on additional importance as Mexico formulates a negotiating strategy to assure market access to the US for crucial export crops such as fruits and vegetables oil and others

REFERENCES

Balassa Bela The Theory of Economic Integration London Allen and Unwin 1961

Davis William L Breaking into the Mexican Market Policy Shifts Offer New Opportunities AgExporter March 19914-8

bull International Monetary Fund International Financial Statistics New York International Monetary Fund various issues

The Mexican Agenda Government of Mexico October 1990

Penson John B Jr and C Robert Taylor Modeling the Interface Between Agriculture and the General Economy AFPC Policy Working Paper No 90-13 Dept of Agricultural Economics Texas AampM Univ October 1990

Rudolph James D bull ed Mexico a Country Study Washington DC US Secretary of the Army 1985

United Nations Statistical Yearbook for Latin America and the Caribbean New York Economic Commission for Latin America and the Caribbean United Nations 1989

US International Trade Commission (USITC) The Likely Impact on the United States of a Free Trade Agreement with Mexico USITC Publication 2353 Washington DC February 1991

US International Trade Commission (USITC) Review of Trade and Investment Liberalization Measures by Mexico and Prospects for Future United States-Mexico Relations Phase II Summary of Views on Prospects for Future United States-Mexico Relations USITC Publication 2326 Washington DC October 1990

World Bank World Development Report New York Oxford University Press various editions

Table 1 Mexican Total and Per Capita Agricultural Production and Per Capita GNP 1984-1990

Total Agriculture Total Ag per capita GNP per capita Year Index 1980 = 100 Index 1980 =100 (US dollars)

215152

1985 1082 975

1984 1086 1004

220514

1986 1109 952 168182

1987 1115 935 172913

1988 1141 933 202362

1989 NA NA 215304

1990 Nl NA 227609

Source USDAERS World Agricultural Trends and Indicators 1989 and World Bank

Table 2 Mexican External Debt Inflation and Interest Rates 1983-1989

Total External Inflation Nominal Deposit Real Deposit Year Debt ($ million) ( A CPI) Interest Rate Interest Rate

1983 93698 1018 547 -537

1984 97307 655 484 -171

1985 97429 577 594 18

1986 101722 862 846 -16

1987 101567 1318 972 -346

1988 107882 1142 529 -613

1989 95000 200 321 121

Note Real interest rate is the difference of the nominal rate and rate of inflation

Source World Bank and IMF

Table 3 Mexican Exchange Rates 1983-1990

Controlled Year Market Rate

1983 1201

1984 1678

1985 2569

1986 6118

1987 13782

1988 22731

1989 24610

1990 28510

Free Market Rate

1503

1852

3102

6374

14058

22883

28920

Real Con trolled Rate

38207

25560

42352

277564

490937

648970

102542

Notes Rates are in Mexican pesos per US dollar Real exchange rate equals nominal rate time the ratio of US and Mexican inflation rates

Source IMF

Figure 1 Rural Income as a Share of Total Mexico 1910-1990

PERCENT OF TOTAL INCOME 1 00 1rgt7gt1 Pgtraquogt] raquoraquo4 Vgt7gtgti P7gtraquoJ tgt7raquoA Praquogt gt J Iraquoraquo A Cgt gt raquo i

75

50

25

0 1910 1920 1930 1940 1950 1960 1970 1980 1990

_ Rural ~ Urban

Source INEGI World Bank

Figure 2 Gross National Product (GNP) and External Debt for Mexico 1984-1990

BILLION us DOLLARS 250~1--~----------------------------------------~

200

150

100

50

o r~4ltcltJ vpound-rltcd Lc=~ltJ rlaquoltAtltlt1 ~~ rltltJlaquo1r ~

1984 1985 1986 1987 1988 1989 1990

-- External debt ~ GNP

Source World Bank

BILLION us DOLLARS 25Fu==~----------------------

20

15

10

5

o

-5

Figure 3 Mexicos Imports Exports and Trade Balance 1985-1989

1985 1986 1987 1988 1989

_ Exports ~ Imports (raquo1 Trade Balance

Source IMF Inti Financial Statistics

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

8

Issue 5 Balance of Payments and Trade Deficit

A US-Mexico FTA will likely have little effect in increasing trade between the United States and Mexico if the economic growth of either country is in jeopardy Mexicos recent deficit in trade denies it much-needed forign exchange As Mexico continues to open its economy this deficit may increase to further exacerbate the balance of payments problem Given the size of Mexicos external debt and the role of key exports in servicing that debt a weak trade sector could have severe consequences for US market growth in Mexico

Issue 6 External Debt and Market Aceess

Although currently under control Mexicos external debt is highly dependent upon general economic conditions The importance of oil revenues and the relationship to debt service is obvious Additionally US policies that cause interest rates to rise will adversely affect Mexicos ability to service its debt The resultant impacts on economic growth and access to the Mexican market could reduce US trade with Mexico This may take on additional importance as Mexico formulates a negotiating strategy to assure market access to the US for crucial export crops such as fruits and vegetables oil and others

REFERENCES

Balassa Bela The Theory of Economic Integration London Allen and Unwin 1961

Davis William L Breaking into the Mexican Market Policy Shifts Offer New Opportunities AgExporter March 19914-8

bull International Monetary Fund International Financial Statistics New York International Monetary Fund various issues

The Mexican Agenda Government of Mexico October 1990

Penson John B Jr and C Robert Taylor Modeling the Interface Between Agriculture and the General Economy AFPC Policy Working Paper No 90-13 Dept of Agricultural Economics Texas AampM Univ October 1990

Rudolph James D bull ed Mexico a Country Study Washington DC US Secretary of the Army 1985

United Nations Statistical Yearbook for Latin America and the Caribbean New York Economic Commission for Latin America and the Caribbean United Nations 1989

US International Trade Commission (USITC) The Likely Impact on the United States of a Free Trade Agreement with Mexico USITC Publication 2353 Washington DC February 1991

US International Trade Commission (USITC) Review of Trade and Investment Liberalization Measures by Mexico and Prospects for Future United States-Mexico Relations Phase II Summary of Views on Prospects for Future United States-Mexico Relations USITC Publication 2326 Washington DC October 1990

World Bank World Development Report New York Oxford University Press various editions

Table 1 Mexican Total and Per Capita Agricultural Production and Per Capita GNP 1984-1990

Total Agriculture Total Ag per capita GNP per capita Year Index 1980 = 100 Index 1980 =100 (US dollars)

215152

1985 1082 975

1984 1086 1004

220514

1986 1109 952 168182

1987 1115 935 172913

1988 1141 933 202362

1989 NA NA 215304

1990 Nl NA 227609

Source USDAERS World Agricultural Trends and Indicators 1989 and World Bank

Table 2 Mexican External Debt Inflation and Interest Rates 1983-1989

Total External Inflation Nominal Deposit Real Deposit Year Debt ($ million) ( A CPI) Interest Rate Interest Rate

1983 93698 1018 547 -537

1984 97307 655 484 -171

1985 97429 577 594 18

1986 101722 862 846 -16

1987 101567 1318 972 -346

1988 107882 1142 529 -613

1989 95000 200 321 121

Note Real interest rate is the difference of the nominal rate and rate of inflation

Source World Bank and IMF

Table 3 Mexican Exchange Rates 1983-1990

Controlled Year Market Rate

1983 1201

1984 1678

1985 2569

1986 6118

1987 13782

1988 22731

1989 24610

1990 28510

Free Market Rate

1503

1852

3102

6374

14058

22883

28920

Real Con trolled Rate

38207

25560

42352

277564

490937

648970

102542

Notes Rates are in Mexican pesos per US dollar Real exchange rate equals nominal rate time the ratio of US and Mexican inflation rates

Source IMF

Figure 1 Rural Income as a Share of Total Mexico 1910-1990

PERCENT OF TOTAL INCOME 1 00 1rgt7gt1 Pgtraquogt] raquoraquo4 Vgt7gtgti P7gtraquoJ tgt7raquoA Praquogt gt J Iraquoraquo A Cgt gt raquo i

75

50

25

0 1910 1920 1930 1940 1950 1960 1970 1980 1990

_ Rural ~ Urban

Source INEGI World Bank

Figure 2 Gross National Product (GNP) and External Debt for Mexico 1984-1990

BILLION us DOLLARS 250~1--~----------------------------------------~

200

150

100

50

o r~4ltcltJ vpound-rltcd Lc=~ltJ rlaquoltAtltlt1 ~~ rltltJlaquo1r ~

1984 1985 1986 1987 1988 1989 1990

-- External debt ~ GNP

Source World Bank

BILLION us DOLLARS 25Fu==~----------------------

20

15

10

5

o

-5

Figure 3 Mexicos Imports Exports and Trade Balance 1985-1989

1985 1986 1987 1988 1989

_ Exports ~ Imports (raquo1 Trade Balance

Source IMF Inti Financial Statistics

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

REFERENCES

Balassa Bela The Theory of Economic Integration London Allen and Unwin 1961

Davis William L Breaking into the Mexican Market Policy Shifts Offer New Opportunities AgExporter March 19914-8

bull International Monetary Fund International Financial Statistics New York International Monetary Fund various issues

The Mexican Agenda Government of Mexico October 1990

Penson John B Jr and C Robert Taylor Modeling the Interface Between Agriculture and the General Economy AFPC Policy Working Paper No 90-13 Dept of Agricultural Economics Texas AampM Univ October 1990

Rudolph James D bull ed Mexico a Country Study Washington DC US Secretary of the Army 1985

United Nations Statistical Yearbook for Latin America and the Caribbean New York Economic Commission for Latin America and the Caribbean United Nations 1989

US International Trade Commission (USITC) The Likely Impact on the United States of a Free Trade Agreement with Mexico USITC Publication 2353 Washington DC February 1991

US International Trade Commission (USITC) Review of Trade and Investment Liberalization Measures by Mexico and Prospects for Future United States-Mexico Relations Phase II Summary of Views on Prospects for Future United States-Mexico Relations USITC Publication 2326 Washington DC October 1990

World Bank World Development Report New York Oxford University Press various editions

Table 1 Mexican Total and Per Capita Agricultural Production and Per Capita GNP 1984-1990

Total Agriculture Total Ag per capita GNP per capita Year Index 1980 = 100 Index 1980 =100 (US dollars)

215152

1985 1082 975

1984 1086 1004

220514

1986 1109 952 168182

1987 1115 935 172913

1988 1141 933 202362

1989 NA NA 215304

1990 Nl NA 227609

Source USDAERS World Agricultural Trends and Indicators 1989 and World Bank

Table 2 Mexican External Debt Inflation and Interest Rates 1983-1989

Total External Inflation Nominal Deposit Real Deposit Year Debt ($ million) ( A CPI) Interest Rate Interest Rate

1983 93698 1018 547 -537

1984 97307 655 484 -171

1985 97429 577 594 18

1986 101722 862 846 -16

1987 101567 1318 972 -346

1988 107882 1142 529 -613

1989 95000 200 321 121

Note Real interest rate is the difference of the nominal rate and rate of inflation

Source World Bank and IMF

Table 3 Mexican Exchange Rates 1983-1990

Controlled Year Market Rate

1983 1201

1984 1678

1985 2569

1986 6118

1987 13782

1988 22731

1989 24610

1990 28510

Free Market Rate

1503

1852

3102

6374

14058

22883

28920

Real Con trolled Rate

38207

25560

42352

277564

490937

648970

102542

Notes Rates are in Mexican pesos per US dollar Real exchange rate equals nominal rate time the ratio of US and Mexican inflation rates

Source IMF

Figure 1 Rural Income as a Share of Total Mexico 1910-1990

PERCENT OF TOTAL INCOME 1 00 1rgt7gt1 Pgtraquogt] raquoraquo4 Vgt7gtgti P7gtraquoJ tgt7raquoA Praquogt gt J Iraquoraquo A Cgt gt raquo i

75

50

25

0 1910 1920 1930 1940 1950 1960 1970 1980 1990

_ Rural ~ Urban

Source INEGI World Bank

Figure 2 Gross National Product (GNP) and External Debt for Mexico 1984-1990

BILLION us DOLLARS 250~1--~----------------------------------------~

200

150

100

50

o r~4ltcltJ vpound-rltcd Lc=~ltJ rlaquoltAtltlt1 ~~ rltltJlaquo1r ~

1984 1985 1986 1987 1988 1989 1990

-- External debt ~ GNP

Source World Bank

BILLION us DOLLARS 25Fu==~----------------------

20

15

10

5

o

-5

Figure 3 Mexicos Imports Exports and Trade Balance 1985-1989

1985 1986 1987 1988 1989

_ Exports ~ Imports (raquo1 Trade Balance

Source IMF Inti Financial Statistics

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

Table 1 Mexican Total and Per Capita Agricultural Production and Per Capita GNP 1984-1990

Total Agriculture Total Ag per capita GNP per capita Year Index 1980 = 100 Index 1980 =100 (US dollars)

215152

1985 1082 975

1984 1086 1004

220514

1986 1109 952 168182

1987 1115 935 172913

1988 1141 933 202362

1989 NA NA 215304

1990 Nl NA 227609

Source USDAERS World Agricultural Trends and Indicators 1989 and World Bank

Table 2 Mexican External Debt Inflation and Interest Rates 1983-1989

Total External Inflation Nominal Deposit Real Deposit Year Debt ($ million) ( A CPI) Interest Rate Interest Rate

1983 93698 1018 547 -537

1984 97307 655 484 -171

1985 97429 577 594 18

1986 101722 862 846 -16

1987 101567 1318 972 -346

1988 107882 1142 529 -613

1989 95000 200 321 121

Note Real interest rate is the difference of the nominal rate and rate of inflation

Source World Bank and IMF

Table 3 Mexican Exchange Rates 1983-1990

Controlled Year Market Rate

1983 1201

1984 1678

1985 2569

1986 6118

1987 13782

1988 22731

1989 24610

1990 28510

Free Market Rate

1503

1852

3102

6374

14058

22883

28920

Real Con trolled Rate

38207

25560

42352

277564

490937

648970

102542

Notes Rates are in Mexican pesos per US dollar Real exchange rate equals nominal rate time the ratio of US and Mexican inflation rates

Source IMF

Figure 1 Rural Income as a Share of Total Mexico 1910-1990

PERCENT OF TOTAL INCOME 1 00 1rgt7gt1 Pgtraquogt] raquoraquo4 Vgt7gtgti P7gtraquoJ tgt7raquoA Praquogt gt J Iraquoraquo A Cgt gt raquo i

75

50

25

0 1910 1920 1930 1940 1950 1960 1970 1980 1990

_ Rural ~ Urban

Source INEGI World Bank

Figure 2 Gross National Product (GNP) and External Debt for Mexico 1984-1990

BILLION us DOLLARS 250~1--~----------------------------------------~

200

150

100

50

o r~4ltcltJ vpound-rltcd Lc=~ltJ rlaquoltAtltlt1 ~~ rltltJlaquo1r ~

1984 1985 1986 1987 1988 1989 1990

-- External debt ~ GNP

Source World Bank

BILLION us DOLLARS 25Fu==~----------------------

20

15

10

5

o

-5

Figure 3 Mexicos Imports Exports and Trade Balance 1985-1989

1985 1986 1987 1988 1989

_ Exports ~ Imports (raquo1 Trade Balance

Source IMF Inti Financial Statistics

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

Table 3 Mexican Exchange Rates 1983-1990

Controlled Year Market Rate

1983 1201

1984 1678

1985 2569

1986 6118

1987 13782

1988 22731

1989 24610

1990 28510

Free Market Rate

1503

1852

3102

6374

14058

22883

28920

Real Con trolled Rate

38207

25560

42352

277564

490937

648970

102542

Notes Rates are in Mexican pesos per US dollar Real exchange rate equals nominal rate time the ratio of US and Mexican inflation rates

Source IMF

Figure 1 Rural Income as a Share of Total Mexico 1910-1990

PERCENT OF TOTAL INCOME 1 00 1rgt7gt1 Pgtraquogt] raquoraquo4 Vgt7gtgti P7gtraquoJ tgt7raquoA Praquogt gt J Iraquoraquo A Cgt gt raquo i

75

50

25

0 1910 1920 1930 1940 1950 1960 1970 1980 1990

_ Rural ~ Urban

Source INEGI World Bank

Figure 2 Gross National Product (GNP) and External Debt for Mexico 1984-1990

BILLION us DOLLARS 250~1--~----------------------------------------~

200

150

100

50

o r~4ltcltJ vpound-rltcd Lc=~ltJ rlaquoltAtltlt1 ~~ rltltJlaquo1r ~

1984 1985 1986 1987 1988 1989 1990

-- External debt ~ GNP

Source World Bank

BILLION us DOLLARS 25Fu==~----------------------

20

15

10

5

o

-5

Figure 3 Mexicos Imports Exports and Trade Balance 1985-1989

1985 1986 1987 1988 1989

_ Exports ~ Imports (raquo1 Trade Balance

Source IMF Inti Financial Statistics

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

Figure 1 Rural Income as a Share of Total Mexico 1910-1990

PERCENT OF TOTAL INCOME 1 00 1rgt7gt1 Pgtraquogt] raquoraquo4 Vgt7gtgti P7gtraquoJ tgt7raquoA Praquogt gt J Iraquoraquo A Cgt gt raquo i

75

50

25

0 1910 1920 1930 1940 1950 1960 1970 1980 1990

_ Rural ~ Urban

Source INEGI World Bank

Figure 2 Gross National Product (GNP) and External Debt for Mexico 1984-1990

BILLION us DOLLARS 250~1--~----------------------------------------~

200

150

100

50

o r~4ltcltJ vpound-rltcd Lc=~ltJ rlaquoltAtltlt1 ~~ rltltJlaquo1r ~

1984 1985 1986 1987 1988 1989 1990

-- External debt ~ GNP

Source World Bank

BILLION us DOLLARS 25Fu==~----------------------

20

15

10

5

o

-5

Figure 3 Mexicos Imports Exports and Trade Balance 1985-1989

1985 1986 1987 1988 1989

_ Exports ~ Imports (raquo1 Trade Balance

Source IMF Inti Financial Statistics

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

Figure 2 Gross National Product (GNP) and External Debt for Mexico 1984-1990

BILLION us DOLLARS 250~1--~----------------------------------------~

200

150

100

50

o r~4ltcltJ vpound-rltcd Lc=~ltJ rlaquoltAtltlt1 ~~ rltltJlaquo1r ~

1984 1985 1986 1987 1988 1989 1990

-- External debt ~ GNP

Source World Bank

BILLION us DOLLARS 25Fu==~----------------------

20

15

10

5

o

-5

Figure 3 Mexicos Imports Exports and Trade Balance 1985-1989

1985 1986 1987 1988 1989

_ Exports ~ Imports (raquo1 Trade Balance

Source IMF Inti Financial Statistics

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

BILLION us DOLLARS 25Fu==~----------------------

20

15

10

5

o

-5

Figure 3 Mexicos Imports Exports and Trade Balance 1985-1989

1985 1986 1987 1988 1989

_ Exports ~ Imports (raquo1 Trade Balance

Source IMF Inti Financial Statistics

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

if Q) 1J 0 0 at

0 gtshy+- shyea shy0 -E c shy

Qif shyE CD- s

0 0 if co0 0shyX Q)

E 1-00 000 Q)Ogt- shyl 0 l shy+- en

bull q-Q) shyl s C) ()- ea

LL E

if Q) (I) CD shyJ

() ea-J C ea E

ea - 0

C

-0

--shyc 10

bull Q)

~ c lEI ~

~ 0 ~

I 0

CD

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

Figure 5 Structure of Mexicos Exports 1988

Fuels minerals 38

Other primary goods 7

Machinery 33

Other manufactures 20

Textiles clothing 2

$21 billion total

Source World Bank

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

Figure 6 Accumulated Foreign Investment in Mexico by Country of Origin

United States $167bililon

Other $38blllion

Switzerland $12billion Great Britain S18billionJapan $13billion West Germany $17billion

$265 billion total

Source USITC Publ 2363

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

Figure 7 Mexicos Trade with the US 1983-1989

81 LLION US DOLLARS 30~~~~~~~~~~~==~----------------------

25

20

15

10

5

o 1983 1984 1985 1986 1987 1988 1989

_ Mexican exports ~ Mexican Imports VltI Trade balance

Source USITC Publ 2326

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

Figure 8 Structure of US-Mexico Trade 1989

us imports from Mexico US exports to Mexico

Manufacturing 67 ~ Manufacturing

77

Other Other 5 6

Fuelraw materialFuel raw material 918

$266 billion total $241 billion total

Source USITC Publ 2326

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull

Figure 9 US-Mexico Agricultural Trade 1982-1991

BILLION US DOLLARS3-

2

1

o

-1 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

_ Mexican exports ~ Mexican imports 11 Trade Balance

Source USDA Note 1990 value are etlmatebullbull 1991 value are pred Ictlonbull