The Mexican Experience with NAFTA Francisco J. Alejo Consul General of Mexico October 22, 2003 University of Texas LBJ School of Public Affairs
Contents • Introduction • The Context of NAFTA • 1. Accelerated Globalization • 2. Mexico/ USA: An Asymmetrical Relationship • 3. The Transformations of Mexico • II. Mexican Experience with NAFTA • 1. Economic Performance, Trade and Investment • 2. The Pending Agenda • 3. Lessons and Policy Implications • 4. Conclusions
The Context of NAFTA I. Introduction
Along the last several years, until the end of 2001, global trade grew at about three times the rate of OCED economies, surpassing $7 trillion in cross-border movement of goods and services. 2. Foreign direct investment (FDI) grew even faster than international trade and actually surpassed $1 trillion in flows in 2000 1. Based on: Earl H. Fry, “North American Integration. Policy Options”, CSIS, Policy Papers, July 2003 Highlights of the Globalization 1
The number of multinational corporations (MNC’s) in the World also expanded dramatically, from 7000 in the 1960’s to roughly 65,000 today. The 65,000 MNC’s control 850,000 affiliates, which employ 54 million workers world wide and were responsible for producing $19 trillion in annual sales in 2001, almost three times the aggregate value of global international trade.
5. International currency transactions amount to approximately $1.5 trillion per day. Production sharing systems and stock markets constitute a 24 hour phenomena conducted by continuous, computerized automatic systems. 6. In spite of September 11, 2001 events, international tourism returned to record levels in 2002 with 715 million people spending over $460 billion
7. Immigration and refugee flows are also without parallel, and at least 175 million people currently reside in countries different from their place of birth. 8. The number of transactions through internet-crisscrossing the planet is astronomical and grows at a maddening pace.
I.2. Mexico/US: An Asymmetrical Relationship The US continental land mass is equivalent to roughly 4.5 times to that of Mexico. The population of the former is almost 2.8 times more than the 100 million Mexicans living in Mexico. 2. The Mexican GDP is equivalent to one sixteenth of the US corresponding GPD. A 6.5% annual growth of the US economy aggregates additional production equivalent to the total Mexican GDP, even though the latter ranks between the 9th and 10th largest in the world.
3. After almost 10 years of NAFTA, 85% of total Mexican exports are aimed at the US economy and constitute 20% of the country’s GDP. Nearly half of the 3 million new jobs created in Mexico between 1993 and 2000 were export related. In contrast, 37% of total US exports are destined to the NAFTA partners, and contribute with only 4% of the US aggregate GDP and employment. US commitments as a global superpower increasingly spread out all over the planet.
4.The growing size of the US economy, its global corporations, and the need to keep a large global techno military edge, justifies a gigantic and unbeatable investment in science and technology. 5. In the case of Mexico, in contrast with Canada, there are also very important asymmetries in education, cultural and institutional development.
Of special and paramount importance are the asymmetries in physical and telecommunications infrastructure. 7. It was precisely because of the fundamental role of the asymmetries that the European Community assigned a pivotal role in the achievement of European integration to the special funds for balancing the levels of basic development among the member nations.
I.3 The Transformations of Mexico 1.Demographic Transformation: from 20 million inhabitants in 1950 to 100 million 2000. 2. Settlements transformation: from 80% rural population to 75% urban population in only 60 years. With only one city with more than one million inhabitants to one megalopolis with 18 million inhabitants, two cities with more than 3 million and ten cities with more than one million inhabitants in the year 2000.
3. Educational Transformation: from more than 70% illiteracy level to more than 90% literacy, to almost 100% coverage by the elementary school system and to almost two thirds coverage by the high-school system in only two generations. 4. Economic Structure Transformation: from a dominantly agricultural and mining rural economy to an essentially industrial and service urban economy in only 30 years from 1950 to 1980.
5. Trading Transformation: from a tightly closed economy, with more than 90% of the importation code subject to “previous specific permit” by the government and an average customs tariff of more than 80% by 1982 to less than 5% of the code subject to previous prermission and maximun customs tariff of 20% and a weighted average tariff of less than 10% by 1990. After signing free trade agreements with Chile and the United States in the early 90’s, Mexico has signed such treaties with more than 30 countries. No other country has signed so many.
6. Public/Private sectors roles Transformation: from an economy tightly controlled and dominated by the public sector (the public sector expenditure represented 48% of the GDP in 1982 and there were more the 1200 corporations fully or mostly owned by the federal government) to a highly decentralized economy with only a bundle of state owned corporations and public sector expenditures representing a maximum of 22% of GDP. The process of deregulation has encompassed almost all sectors of economic activity.
7. Democratic Transformation: from a highly centralized and one hegemonic party system that lasted for more than half a century to a multiparty, highly reliable and competitive political system in only 22 years. This comprised new legislation for political parties in 1978, new polling legislation in 1978, 1987 and 1995; a judiciary system for dealing with post polling disputes in 1995 and 1998; a massive transfer of financial resources from federal to state and local governments took place between 1995 and 2002; a new legislation on transparency and accessibility to public records and information as an indisputable right for citizens and the media.
8. Human Rights Transformation: constitutional reforms and new legislation allowed for a new autonomous regime for the 10 million members of the indian communities of the country and the establishment of a fully independent national commission as a watchdog for human rights plus the subscription to the Inter-American and United Nations Human Rights treaties.
2/ Based on: Aldo Flores Quiroga, “The North American Free Trade Agreement…”, Secretaria de Relaciones Exteriores, Mexico, Agosto, 2003. II. The Mexican Experience with NAFTA 2
Four favorable outcomes for Mexico stand out during NAFTA’s first 10 years Substantial increase in trade and investment, with a positive impact on economic growth and job creation Lower vulnerability to foreign shocks, except for those that have originated in the US economy. Productivity increases associated with technology transfers Stable and credible legal framework for the solution of trade controversies
Much more, however, needs to be done: Integration of productive chains Expand physical, financial, and informational infrastructure, especially at the borders Create compensation funds to promote regionally balanced growth Improve existing mechanisms for conflict resolution Develop intelligent borders for the flow of goods, services, knowledge and people
Contents Economic performance, trade and investment The pending agenda III. Lessons and policy implications IV. Conclusions
A. Macroeconomic convergence • Inflation rates • Interest rates • Exchange rate • Country risk • Production
Mexican inflation is converging toward the US and Canadian rates… Annual inflation rates, Mexico, United States and Canada Mexico United States 4.3% 2.6% Canada 2.1% Source:INEGI
…gradually contributing to interest-rate convergence between Mexico and the United States Interest rates, Mexico and United States (One month certificated deposits) Mexico United States 5.18% 1.22% Source: INEGI
The Mexican peso has weakened but its volatility is relatively low Average daily volatility in the foreign exchange market (% daily apreciation or depreciation) InterbankForeign Exchange Rate (MXP/USD) 10.93 Source:SREwith Banxico´s data Source:Banco de México
Country risk has differentiated from other Latin American markets Country risk (Emerging Markets Bond Index EMBI+, JP Morgan) Latin America EMBI+ Mexico Source: JP Morgan
Mexico’s GDP performance is closely associated with variations in US GDP Quarterly GDP, Mexico* and USA** (seasonally adjusted series) United States (right scale) Correlation coefficient: 97% Mexico (left scale) * Billions of pesos of 1993 ** Billions of dollars of 1996 Source:INEGI
This close correlation is due to the deepening integration of US and Mexican industrial sectors Industrial production (annual % variation, three month moving average) Canada USA Mexico Correlation coefficient: 97.2% Source:INEGI
B. Trade and investment • Trajectory and reallocation of trade flows in the North American area • Mexican participation in the US market • Long and short term capital flows into Mexico
Seventy-six percent of Mexico’s total trade is oriented toward the United States Africa and the Middle East United States Eastern Europe Western Europe Latin America and the Caribbean Asia Canada Source: INEGI
Exports shipped to United States represent 90% of the Mexico’s total sales abroad United States Africa and the Middle East Eastern Europe Western Europe Latin America and the Caribbean Asia Canada Source: INEGI
Sixty three percent of the Mexican imports come from the United States Africa and the Middle East Eastern Europe United States Western Europe Latin America and the Caribbean Asia Canada Source: INEGI
Since 1994 Mexican exports have expanded notably and are more concentrated in the manufacturing sector Total Mexican exports (billions of dollars of 2002) NAFTA GATT Accession Growth 1993-2002: 149% $160.7 Growth 1985-1993: 80% 88% $32.6 20% 67% 9% Source: SRE with INEGI data
Imports have also increased, driven primarily by the demand of intermediate goods Total Mexican imports (billions of dollars of 2002) NAFTA GATT Accession $168.7 Growth 1993-2001: 107% Growth 1985-1993: 237% 75% $40.7 61% 12% 27% Source: SRE with INEGI data
NAFTA has thus produced a significant trade expansion for the US, Mexico and Canada Intra-regional trade (billions of dollars) North American trade integration 1993-2002: Trilateral trade increased 109% Mexico’s participation in intra-regional increased from 15% to 20% Last year’s trade decline is due to the sluggish performance of the US economy Source: SRE with USDOC, Statistics Canada and INEGI data
Mexico is the second trade partner of the United States... Main US trade partners (total trade, billons of dollars) Participation of Mexican products in the US market (%) NAFTA start date Source: Ministry of the Economy with USDOC data
…and it is the second largest export market for the US US exports (billions of dollars) Source: Ministry of the Economy with USDOC data
United States is the main investor in Mexico Foreign Direct Investment (billions of dollars, cumulative 1994-2002: 112.4 bd) * Excludes the Banamex-Citigroup transaction Source: Ministry of the Economy
C. NAFTA’s impact by sector • Agriculture • Manufacturing
Reciprocal tariff eliminations helped Mexican exporters increase their participation in the US market… Mexican agricultural exports to the United States * Includes the January-October Source: Ministry of the Economy
…placing them among the main suppliers of a diverse set of goods in the US market Mexican agricultural goods in the US market * January-October Source: Ministry of the Economy with USDOC data
NAFTA has benefited Mexican consumers by fostering competition among suppliers, thereby lowering the prices of many goods Prices of staples in the average Mexican diet has declined Source: Ministry of the Economy
Mexico’s manufacturing sector has also been a beneficiary of NAFTA, through greater exports and lower consumer prices Real price change of manufactured products Exports to the USA and Canada of manufactured products Positive export performance due to NAFTA Real price decrease Source: Ministry of the Economy
Output in sectors with significant backward and forward linkages has increased NAFTA success stories Source: Ministry of the Economy
D. Effectiveness of Mexico’s free trade agreements • Evolution of Mexican exports • Performance of Mexican imports
Mexican exports to the United States, Costa Rica and the G3 have increased notably since the launching of the respective FTAs… Exports (Index based on real exports, constant dollars of 1990, semiannual moving average) Costa Rica * Not duplicated EUA G3 Chile Canadá Number of months after FTA Source: DGREB con datos de INEGI * Not tripled
…but exports to Bolivia and Nicaragua, with whom Mexico also has FTAs, have not grown significantly Exports (Index based on real exports, constant dollars of 1990, semiannual moving average) Triángulo del Norte Bolivia Nicaragua Unión Europea Uruguay * Not doubled Number of months after FTA Source: DGREB con datos de INEGI
The FTAs with Chile and Costa Rica have generated a substantial increase in Mexican imports from them… Imports (Index based on real imports, constant dollars of 1990, semiannual moving average) Costa Rica Chile Number of months after FTA Source: DGREB con datos de INEGI
…just like the FTAs with the United States, Canada, Venezuela, Colombia, Guatemala, Honduras and El Salvador Imports (Index based on real imports, constant dollars of 1990, semiannual moving average) Nicaragua Canadá G3 EUA TN Uruguay Number of months after FTA Source: DGREB con datos de INEGI
The trend in imports from Bolivia and Israel, however, has not changed with the FTAs Imports (Index based on real imports, constant dollars of 1990, semiannual moving average) UE Bolivia Israel * Not reached Number of months after FTA * Not doubled Source: DGREB con datos de INEGI