Mexican exports, NAFTA and the EU

Table of Contents

1. Introduction

2. National Economy

3. Mexican Exports

4. NAFTA
4.1 Mexico’s Role in NAFTA
4.2 The effects of NAFTA on the Mexican economy

5. Dependency of the Mexican exports on the United States’ business cycle

6. Mexico and the EU
6.1 MEUFTA
6.2 MEUFTA Influence on Mexican exports
6.3. MEUFTA Criticism

7. Conclusions

8. Sources

1. Introduction

The report examines the Mexican exports development in connection with NAFTA and MEUFTA `s regulations and provides insights on the strong dependency of the Mexican exports on the cycles of the American economy. In the introductory part Mexico’s macroeconomics and export compositions are discussed. The main part analyzes the influence of NAFTA on Mexican economy and exports, the dependency of Mexican exports on the United States’ business cycle as well as of MEUFTA and its effects on Mexico. In conclusion Mexico’s future perspectives in terms of economical outcomes are summarized.

2. National Economy

Mexico is the post populous Spanish-speaking country in the world^[1]. It is a free market economy with most developed sectors in agriculture, industry and services. The country is a main importer of goods and oil for USA and Canada. The macroeconomic situation of the country is characterised by steady inflation rate and average annual growth rates of about 3-4 % (FCO). Income is very unequally distributed.

In the mid-1980s Mexico completely shifted its economic strategy, in line with the so called “Washington consensus”. Nevertheless, its macroeconomic evolution was punctuated by a deep crisis in the mid-1990s, and average economic growth rate during the last two decades has been dismal. This had an adverse effect on the standard of living of the population. It was also a clear signal of inefficient economic management. Poor economical growth cannot be explained by insufficiency of resources but rather by misuse of capital and labour. (Lòpez, 1998; Huerta and Lòpez, 2006)

Today the macroeconomic politics of Mexico is strongly influenced by the country’s membership in the North American Free Trade Agreement (NAFTA) and the MexicoEuropean Union Trade Agreement (MEUFTA). Mexico has 12 free trade agreements with over 40 countries. Under the regulations the FTAs, the Mexican economy is gradually moving toward completely free market economy. According to statistical data gathered by “The Heritage Foundation” for 2008, “Mexico’s economy is 66.4 percent free, which marks the country as the world’s 44th freest economy”. With the opening of its economy and the liberalization of its markets, Mexico has become an attractive destination for foreign direct investment. Trade has especially increased with USA and Canada. Nevertheless the rates of productivity and employability haven’t improved as expected. “According to the Ministry of the Economy (EU), nearly 90 per cent of the Mexican imports are intermediate goods that are not produced in Mexico.”(Reveles and Rocha L.). The government still faces a lot challenges in the areas of infrastructure, labour law, income distribution and creation of jobs.

3. Mexican Exports

A main feature of the Latin American economies is the large percentage of the export taxes as a part of the total government revenues. Therefore, the export levels are tightly connected to the government expenditures and public debt in these countries. This connection has a historical background.

Between 1850 and 1945 Mexico as well as the bigger part of Latin America experienced the “Export Led Era”. At that time the country exported mainly agricultural and later also industrial goods to England. Dictatorships were established in order to keep wages low. The low wages were the resource dictators needed to export cheaper and gain higher profits. The end of the dictatorships came in Mexico with the Mexican Civil Revolution in 1910. The reason was the imposition of even lower wages due to a reduction in the demand for industrial inputs and goods. This reduction was based on the World War One and the Great Depression in USA. They were followed by the World War Two and the production of synthetics, the latter of which shrank the market for natural and industrial inputs in large degrees.

The end of the Mexican Civil Revolution put the beginning of a new era in the Mexico’s economy, namely that one of the Import-Substitution-Industrialization (1982). A need for development of Mexico’s own industry as a mean for gaining independence from foreign trade was realized and clean objectives were established. It was decided that industry should be a leading economic sector and its development should be done fast. Though these objectives were not met, Mexico succeeded to liberalize its economy and receive a status of a free market economy for within less than three decades. Moreover, it adopted the Neoliberal model in 1990 promoting Free Capitalism. Since 1985 when Mexico signed a Bilateral Trade Agreement with the USA and 1993 when Mexico signed the NAFTA agreement, “Mexico has signed another nine FTAs, including one with the European Union”.^[2] As a result Mexico`s participation in the international trade has increased remarkably. “From 1980 to 2000 exports grew at an average rate of 7.9 per cent a year; 2 per cent more than in the 1940-1982 period.

This result was achieved despite the fact that the value of mining and oil exports shrank considerably during this period. This rapid growth is illustrated by the change in the importance of exports and imports as a percentage of the Mexican GDP shown in Table I^[3]:”

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Another reason for the escalation of the Mexico’s exports is considered to be the nature of trade among Mexico, U.S and Canada. Eighty per cent of the trade in the NAFTA is considered to be intra-firm trade dominated by international conglomerates such as General Motor, Ford and Chrysler. This explains to some degree the restructure of the Mexico’s exports after NAFTA implementation. In the 80s primary exports were delivered by the agriculture sector, in the 90s, as it is presented on the table below, leading export sectors were manufacture and mining and oil.

TABLE II. COMPOSITION OF MEXICAN EXPORTS.^[4]

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Moreover, there is a clear preference of Mexican exporters to concentrate on the USA as it can be observed in the data presented on TABLE III. After NAFTA implementation, the share of exports to countries outside the trade agreement has been declining considerably.

TABLE III ^[5]

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COMPOSITION OF EXPORTS

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[...]

^[1] Source:“Mexico’s Importance and Multiple Relationships with the United Sates“, The Library of Congress, 2006

^[2] Source: “Trade Liberalization in Mexico: Some Macroeconomic and Sectoral Impacts and the Implications for Macroeconomic Policy“, Alicia Puyana and Josè Romero, 2006

^[3] Source of text and table: “Trade Liberalization in Mexico: Some Macroeconomic and Sectoral Impacts and the Implications for Macroeconomic Policy“, Alicia Puyana and Josè Romero, 2006

^[4] Source: “Trade Liberalization in Mexico: Some Macroeconomic and Sectoral Impacts and the Implications for Macroeconomic Policy“, Alicia Puyana and Josè Romero, 2006

^[5] Source: “Trade Liberalization in Mexico: Some Macroeconomic and Sectoral Impacts and the Implications for Macroeconomic Policy“, Alicia Puyana and Josè Romero, 2006