Since January 1, 1994, when the North American Free Trade Agreement (NAFTA) was implemented, Mexico has become one of the world’s most attractive emerging markets. Now, several Latin American countries are on the free trade path with the U.S. in hopes of obtaining similar payoffs.

Mexico Expands Free Trade Agreements

Mexico has negotiated free trade agreements (FTAs) with 32 countries and regions, including the European Union (EU), European Free Trade Area, Israel, and 10 countries in Latin America. Currently, Mexico is negotiating additional accords with other Latin American and Asian nations. Although problems persist, the free trade model has proven successful. But will these agreements compete with NAFTA?

The Mexico-EU FTA, for example, provides EU goods with “rough NAFTA parity from 2003 onwards,” according to the U.S. and Foreign Commercial Service. This could negate many of the advantages U.S. and Canadian companies currently enjoy under NAFTA.

NAFTA at Nine

On January 1, 1994, when NAFTA began, Mexico embarked on a progressive, scheduled reduction of tariffs on U.S. and Canadian goods. Now, Mexican tariffs average only 2 percent, and more than 80 percent of U.S. goods enter Mexico duty free. Consequently, since NAFTA’s implementation, U.S.-Mexican merchandise trade has almost tripled, rising from $81 billion in 1993 to $233 billion in 2001. Due to slower global growth, however, this figure represents a decline from $247 billion in 2000.

Nevertheless, greater bilateral trade promoted by NAFTA has contributed to Mexico surpassing Japan in 1999 to become the United States’ second largest trading partner. U.S. exports to and imports from Mexico of commercial services, which excludes military and government services, were $14 billion and $11 billion, respectively, in 2000 (latest available data).

Increased Trade Is the Minor Benefit

But increased trade in goods and services only represents a portion of NAFTA’s benefits. Since U.S. gross domestic product (GDP) was 20 times larger than Mexico’s prior to the implementation of the agreement, and U.S. tariffs on Mexican goods already averaged a low 2 percent, the free trade agreement would not have a large impact on the U.S. economy.

“NAFTA was more about foreign policy than about the domestic economy,” says Dan Griswold, associate director of the Center for Trade Policy Studies at the Washington, DC-based CATO Institute. “Its biggest payoff for the United States has been to institutionalize our southern neighbor’s turn away from centralized protectionism and toward decentralized, democratic capitalism. By that measure, NAFTA has been a spectacular success.”

The typical Mexican boom-and-bust-cycle, high inflation, large debt, and the election-cycle economic crises seem to be things of the past. This has resulted in a more stable environment, increasing Mexico’s level of global attractiveness in terms of its ability to capture foreign direct investment (FDI).

Foreign Direct Investment Climbs

Although global FDI flows fell by approximately half from 2000 to 2001, Mexico continues to be one of the largest recipients of global FDI among emerging markets.

Under NAFTA, U.S. and Canadian investment is accorded “national treatment,” which grants U.S. and Canadian investors the same rights as Mexican investors. Exceptions exist, especially in the energy sector, but overall, Mexico is relatively open to FDI. In fact, approximately 95 percent of all investment transactions do not require government approval. As a result, from 1994 through 2001, the United States and Canada accounted for 72 percent of Mexican inward FDI, the European Union provided 18 percent, and Japan, 3 percent. During this period, Mexico received an annual average of $12.3 billion. However, from 1989 through 1993, years prior to NAFTA, Mexico only received $3.7 billion annually, according to the Mexican government.

Economic Growth To Accelerate

Mexican gross domestic product (GDP) registered a 0.9 percent increase in 2002, slightly below expectations, according to Country Alert, a Banc of America Securities publication. This reflected a slower-than anticipated U.S. economic recovery, to which Mexico is closely tied. However, Mexico’s GDP is anticipated to exceed 3 percent in 2003 and continue to rise through 2004. According to the World Bank, Mexico’s average annual GDP during the 1990s was 2.7 percent, more than twice its 1980s rate of 1.1 percent.

The Mexican peso remains somewhat volatile as a result of recent jolts of depreciation, according to the Bank of America publication, Global Economic Outlook. On February 18, 2000, the peso was almost 9.4 to the U.S. dollar. By February 18, 2003, its value had declined, requiring 10.8 pesos to the dollar. In addition to various current factors, the peso is under downward pressure amid a contentious political environment as mid-year congressional elections take place. Additionally, the inability to achieve compromise among political parties has resulted in fewer structural reforms than anticipated.

Mexican Global Trade Is Strong

The world’s current population growth rate of 1.16 percent annually has continued to decrease since 1963. Mexico’s rate is also decreasing, but not as rapidly. As a result, its population is anticipated to reach almost 105 million this year, making it the 11th largest population. Consequently, the country’s demand is continuing to accelerate. Thus, Mexican world imports jumped from $44 billion in 1990 to $183 billion in 2000. Due to slower growth, imports decreased slightly to $176 billion in 2001. The country’s exports increased from $41 billion in 1990 to $166 billion in 2001. But due to slower world trade, Mexico’s world exports decreased to $159 billion in 2001, according to the World Trade Organization. On the services side, Mexico’s world exports and imports registered $13 billion and $17 billion, respectively, in 2001.

Mexico’s most promising sectors for trade and inward investment include:

• Automotive parts and supplies,
• Computers, software and services,
• Inter-modal transportation equipment,
• Oil and gas field equipment/services,
• Franchising,
• Security and safety equipment/services,
• Water resources equipment/services,
• Pollution control equipment,
• Plastic materials and resins, and
• Telecommunication equip./services.

More Latin American FTAs Coming

In December 2002, after two years of intensive negotiations, the U.S. and Chile reached an agreement on an FTA. This was welcomed with much enthusiasm by the Washington, DC-based National Association of Manufacturers, who claim U.S. companies have lost $800 million annually due to preferential access granted to Canadian products under the 1997 Canada-Chile FTA. If the new FTA is passed by Congress, more than 85 percent of U.S. and Chilean bilateral trade in consumer and industrial products will become duty-free upon implementation.

In January 2003, U.S. Trade Representative Robert Zoellick announced the launch of U.S.-Central American FTA (CAFTA) negotiations. The participants, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, who have more than 20 trade agreements in place with various countries, wish to significantly increase inward FDI. This is a goal a U.S. FTA could make a reality. Many in the U.S. view CAFTA as a stepping stone to the creation of the Free Trade Agreement of the Americas based on the NAFTA model.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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