Experience of Mexico regarding Free Trade Agreements

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How to organize free trade across Atlantic - Reality and
Expectations
By Carlos Martínez Velázquez (@carlosmartinezv)
I. Free trade and the openness of Mexican economy
One of the goals of free trade agreements (FTA) is to eliminate or reduce
barriers to trade (such as taxes) to get the full advantages of the free
market. In 1986, Mexico decided to open its economy by joining the
General Agreement on Tariffs and Trade (GATT). From that moment
onwards, Mexico has followed a commercial policy of openness and free
trade; on 2012, merchandise trade as a percentage of Mexico’s GDP
was 63%1
. In this regard, Mexico has 12 Free Trade Agreements2
with
44 countries and 28 agreements to promote reciprocal foreign
investment.
After the GATT, the most important step to liberalization was the signing
of NAFTA. In the early 90s, Mexico, the USA and Canada negotiated the
North American Free Trade Agreement (NAFTA), which Mexico signed
in November 1993 and it entered into effect on January 1, 1994. NAFTA
was an instrument that set a new paradigm in international trade; it was
an agreement between countries with different economies and different
levels of development.
1 Merchandise trade as defined by the WB: The sum of merchandise exports and imports divided by
the value of GDP, all in current U.S. dollars. Other Latin-American countries: Brazil (21.1%);
Argentina (31.5%); Peru (44.7%); Chile (58.9%); Venezuela (44.1%).
2 NAFTA, Costa Rica, Colombia, Nicaragua, Chile, Israel, European Union, Guatemala, Honduras,
El Salvador, Islandia, Liechtenstein, Noruega y Suiza, Uruguay, Japón y Perú.

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Since the entry into force of NAFTA, trade and investment among
members have increased. The relationship that has deepened the most
is between Mexico and US. Among these countries trade in goods
increased 5 times, in services it doubled and finally on investment flows
the trade increased six fold compared to levels in 1993. In addition, 6
million jobs in the US depend on Mexican commerce.
However, as scholars such as Gerardo Esquivel and Robert Blecker
have contended, the treaty has not yielded the expected results,
especially, regarding job creation and wage convergence. It is also
important to mention that economic convergence between countries is
far from being a reality: as an example, the 2012 GDP per capita
(purchasing power parity) in Mexico was approximately three times
lower than in the United States and twice less than Canada.
Graphic 1Trade of Mexico with Different Partners

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II. The Agreement with Europe
The second relevant moment of openness was the economic
relationship with Europe. On July 1 of 2000 the Free Trade Agreement
between Mexico and the European Union came in to effect. That treaty
was part of the Economic Partnership, Political Coordination and
Cooperation Agreement signed between Mexico and the member States
of the European Union in 1997. Hence, this year we will celebrate 17
years of economic cooperation with Europe. Cooperation that has been
beneficial for all the members.
Official data3
from 2013 indicates that at the end of last year, the total
amount of commerce (which takes into account the sum of imports and
exports) between the two parts was 62 thousand million dollars. In
addition, the European Union represents 8.26% of Mexico’s
International trade. If we compare the aforementioned data with the data
before the agreement was signed, the results are striking. Compared
with 1999, exports to Europe more than tripled and the annual growth
rate of exports in the period 2000-2013 was 10.4%; accordingly, imports
from Europe have tripled and its annual growth rate is 9.6%.
Furthermore, in the period from 2000 to 2013 the Foreign Direct
Investment from Europe to Mexico was 132 thousand million dollars -
which is 37% of the total FDI received in Mexico in the same period -
from 15 thousand European businesses operating in Mexico (Graphic
2).
3 From Secretary of Economy

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Graphic 2 Total FDI received in Mexico
There is something to note here4
. Foreign Direct Investment has
increased nearly 10 times since Mexico opened its market in the 90s.
However, economic growth within the country has been unequal. If we
consider that FDI and economic growth are related variables, we can
see that the Mexican states that have more growth are those that were
better endowed with physical and human capital before the opening.
Hence, we can assert that in this period the inequalities among Mexican
regions have exacerbated (Graphic 3). Therefore, to take full advantage
of trade liberalization, we need to consider establishing mechanisms for
cooperation between the parties in a FTA, when there are inequalities
between and within them. For example, drawing in Robert Pastor’s
ideas, my organization has proposed that, in the case of NAFTA, it would
be desirable to create a joint fund for productive infrastructure projects
4 For a full review. Look at the document: “TLCAN 20 años. Comercio, Inversión y Desarrollo”.
Spanish. Available: http://www.centralcyc.mx/?p=154

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and education to help equalize the less advantaged regions in Mexico
(that go beyond the NADBANK).
Graphic 3 Average Growth Rate by State compared with its Per capita GDP on 1993
Back to the results of European Agreement. Among the European
countries Germany (27.4%), Spain (18.3%), Italy (10.92%), Netherlands
(9.21%), France (7.91%) and the United Kingdom (6.27%) concentrated
the 80% of all trade5
between Mexico and Europe in 2013 (likewise for
previous years). Also, it is important to note the commerce profile
between the two regions. The top export products from Mexico were
crude oils, tourism vehicles, telephone machines, data processing
machines, and vehicle parts or accessories. The top import products to
Mexico were gasoline motors, medicines, petroleum oils, and vehicle
parts or accessories.
5 Exports plus imports

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As we can see, under the agreement, economic integration among
regions has advanced in the right direction but there are still some
challenges for the future. The first is the possibility of greater integration
between the United States and the European Union. In this respect, my
assertion is that the agreement must be built upon the basis of regional
integration. In other words, Europe must view North America as an
integrated region. For that purpose, it is necessary that Mexico (and
Canada) participate with its vast experience of cooperation with Europe
in this new effort.
III. Conclusions
We must recognize that free trade, by promoting competition and open
markets for more products, benefits consumers. Certainly, the
challenges that exist today in the transatlantic trade are very clear if we
were to focus on the regulation. For example, the TPP negotiations imply
providing the same technical standards for the free movement of
products. While this is desirable, participating countries should take a
model of democratic regulation.
Regarding the relationship between Mexico and Europe, as we have
seen, it has been beneficial in terms of trade; however, there is still room
for improvement. For instance, we can develop cooperation programs in
global matters such as data protection and e-commerce. While there is
local legislation, consumers are global and need to be protected globally
too. We need to develop a long-run view and put in the center of the
debate the consumer rights and the adoption of best business practices
Finally, it is important to make progress in generating production chains
that substantially exploit the comparative advantages of different

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countries of the European Union and the various regions of Mexico and
North America as a whole. If this is achieved, the benefits of economic
integration will be more tangible for consumers and may cause deeper
social and cultural integration. And, of course, it will generate a different
discussion among businesses and consumers about the benefits of free
trade.