Globally integrated: Free trade agreements to help diversify Mexico’s export markets

In the 20 years since the North American Free Trade Agreement (NAFTA) was implemented, successive Mexican governments have remained committed to opening borders and promoting trade. After Mexico, the US and Canada launched NAFTA in January 1994, Mexico entered into FTAs with more than two dozen countries, making it one of the most economically open countries in the world. In the 1990s, Mexico signed FTAs with other Latin American countries, including the G-3 with Colombia, Chile and Venezuela (though Caracas withdrew from the agreement in 2006).

In 2000, FTAs were signed with the EU, Israel and the European Free Trade Association (which includes Norway, Switzerland, Iceland and Liechtenstein). Over the past decade, agreements have also been penned with Uruguay, Peru and Japan, among others.

In an export-dependent country, it is no surprise that governments have prioritised building access to new foreign markets. The current administration led by President Enrique Peña Nieto’s Institutional Revolutionary Party (Partido Revolucionario Internacional, PRI) has been no exception to this. Indeed, Peña Nieto’s government has been a strong advocate of the Pacific Alliance (Alianza del Pacífico, AP) – a Latin American free trade zone – and has also entered into talks over the Trans-Pacific Partnership (TPP), which, if ratified, would create a free trade zone comprising coastal nations within the Americas, Asia and the South Pacific. By courting foreign investment and passing several reforms, such as 2013’s constitutional reform that will open up Mexico’s energy market to private investment, the government appears committed to openness.

20 Years Of NAFTA

NAFTA remains largely responsible for Mexico’s emergence as an industrial power, giving rise to industries from textiles to aerospace. According to the Economist, between 1993 and 2012, trade between the US and Mexico grew by some 506%, while US trade with non-NAFTA countries went up by 279%. This growth in trade has resulted, in large part, from the success of one of the agreement’s original goals: the integration of supply chains across North America. Today, supply chains criss-cross the continent, often connecting metal mills in one country to factories in another and to assembly plants in a third. These kinds of supply chains are most notable in the automotive and aerospace industries, which have been able to tap the specific advantages of each country, such as low labour costs in Mexico or low energy costs in the US, for each phase of the chain of production.

NAFTA, which opened up Mexico’s economy after decades of protectionism, has also benefitted the country’s consumer base by bringing in goods that could not be competitively produced locally when the economy was closed. However, NAFTA has been largely unsuccessful in one of the original promises of the agreement – that it would help close the prosperity gap among Mexicans, Americans and Canadians. According to the OECD, as of 2013 the average household net-adjusted disposable income in Mexico was $12,732 per year, which compared to $28,194 in Canada, $38,001 in the US and the OECD average of $23,047.

Pacific Alliance

Formed in June 2012, the AP is the most significant free trade deal Mexico has endorsed since NAFTA. All current member states – Mexico, Colombia, Peru and Chile – had independent FTAs with each other before entering into the new trade pact. The AP has since replaced these bilateral agreements with one free trade zone, which had a combined GDP in 2013 of over $2trn, 36.8% of the combined total for all of South American. Just as NAFTA did, the AP has freed businesses to operate across borders with few restrictions, effectively creating a more diverse and competitive economic area that received 41% of investment to the continent in 2013.

The AP has brought almost all tariffs down to zero and many of the remaining ones are expected to be phased out over time. In many ways, the AP stands in contrast to South America’s Mercosur, which is formed of Venezuela, Uruguay, Argentina and Brazil. However, Mercosur has been unable to control protectionism, so FTAs underpinning the organisation have broken down and tariffs have grown. Politics have further weakened the agreement. In 2012, Mercosur suspended Paraguay and added Venezuela as a new sovereign member.

Trans-Pacific Partnership

The TPP is the next important FTA on the horizon for Mexico. A dozen countries from both sides of the Pacific are participating in the talks: the US, Canada, Chile, Mexico, Peru, Australia, Brunei-Darussalam, Malaysia, New Zealand, Singapore, Vietnam and Japan. Together these countries represent a sizable portion of the world’s GDP. The US hopes that the TPP, which excludes China, will serve as a bastion for liberal economic policies in the Pacific rim, in essence serving a strategic role similar to the one the AP holds in Latin America. However, at the time of writing talks were far from concluded and some points of contention existed. Rules of origin are one pressing topic. These rules define what percentage of a product’s content must be produced by a member nation for the good to be traded under the auspices of the agreement. US and Mexican industry have expressed concern that relaxed rules of origin could allow cheap Asian goods to flow into their economies untaxed.

Japan, for its part, has been reluctant to grant the US access to its automobile market and has insisted on excluding certain agricultural products from the agreement. In Mexico, opinion on the TPP is mixed. Some sectors, such as the textiles and garments industry, could be hurt by increased competition from South-east Asia. But, in general, the TPP, if ratified and signed without undue protectionist measures included, would be a boon to Mexico’s economy. Industry and government both acknowledge the need to diversify the mix of countries Mexico exports to – about 80% of exports currently go to the US, leaving the economy vulnerable to any economic slowdown across the border. Achieving enough export diversification to mitigate this risk will take time, but gaining more open access to the Pacific would be a big step in the right direction.

Small-Market FTAs

Mexico has also ratified FTAs with small markets in Latin America that have little ability to affect the former’s economy, such as recent agreements with Panama and Costa Rica, which are both striving to join the AP, and the Northern Triangle (Guatemala, Honduras and El Salvador). These FTAs serve a political and diplomatic purpose related to Mexico’s efforts to create a liberal axis within Latin America separate from Brazil and its economic partners. Angeles Villarreal, a specialist in international trade and finance at the US Congressional Research Service, told OBG that FTAs with these countries are primarily “building blocks in Mexico’s foundation as a regional leader”.

Mexico’s sustained commitment to free trade should be a source of comfort to investors in the country and those doing business there, especially after the harmful effects of Brazil’s shift toward protectionism. In Mexico, all signs point towards future openness to trade, investment and conducting business globally.