THE DIVERSIFICATION OF MEXICAN FOREIGN TRADE

Julio Faesler Carlisle

THE DIVERSIFICATION OF MEXICAN FOREIGN TRADE
The international environment demands it. The development of production processes and the transportation industry, facilitate it. Market diversification is a must and a viable alternative. This article reviews the history of Mexican foreign trade, evaluates its current state, and suggests ways in which Mexico can venture into new markets.

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The diversification of foreign trade is a strong indicator in the evaluation of a country’s development. It can be analyzed in terms of export destinations, the places of origin of imports and, of course, of the composition of the goods exchanged. Other factors to consider include the degree of openness of the national economy, or its participation in the markets of client countries. Diversification is key if foreign trade is to become an effective promotor of a country’s development. The actively globalized scenario is an invitation to become familiar with and take advantage of the broad range of international markets. In Mexico’s particular case, the diversification of foreign trade is far from complete. The attraction held by Mexico’s neighboring market has had a large influence on the mentality of the Mexican producer-exporter, resulting in a decreased interest in Latin American, European, Asian and African markets.

Composition of Exports

Although foreign trade accounts for 70% of our GDP, the scale of its composition and supply are comparatively limited. The opportunities granted by Mexico’s 12 free trade agreements with 46 different countries, as well as its 32 promotion and protection agreements, and nine partial agreements under the LAIA (Latin American Integration Association), have not been adequately taken advantage of. In terms of variety, Mexico’s commercial exchanges are limited. Many of the country’s current exports are comprised by a range of products which, although locally manufactured, are made from imported goods. The bulk of Mexican industry is involved in assembly, rather than production.

In 2015, the automotive industry –largely comprised of spare and replacement parts– accounted for 34.5% of Mexico’s export products, while electric and electronic products accounted for 25.6%. Agricultural product exports are mainly comprised by fresh, refrigerated, processed and packaged fruits and vegetables. The scales have tilted in our favor. Distribution agents and supermarket chains move the greater part of their goods in the Unites States and Europe. The exchange, however, of other basic products –mainly corn, sorghum and wheat– is deficient. In terms of Mexico’s foreign trade, the importance of crude oil has decreased since the days in which its participation rose to over 80%. Today, crude oil accounts for only 5% of Mexican foreign trade. Petroleum sales represent approximately 140 million USD per day, or 50 million USD per annum. Mexico is the world’s eighth most important oil-producing country, and the United States’ third largest supplier. Mining, which Mexico has been renowned for since the Spanish Colony, now accounts for only 4% of the country’s GDP, and 5% of its exports. Despite being the largest silver-producing country, Mexico sells the metal mainly through European agents, as is also the case with gold. Today’s industries call for a large variety of products such as copper, graphite, sulfur, diatomite, bismuth, molybdenum, cadmium or barite, all of which exist in abundant quantities in Mexico, representing strong alternatives in terms of diversification.

 

The attraction held by the United Sates has had a large influence on the mentality of the Mexican producer-exporter, resulting in a decreased interest in other markets

 

Agriculture and Industry

Prior to the Second World War, Mexico’s foreign trade was composed of a small range of primary mineral products, crude oil, raw cotton, ixtle (an Agave fiber used for cordage, nets, etc.), Mexican broomroot, sugar, canned pineapple, strawberries, shrimp, livestock and refrigerated meats. Meanwhile, Mexico purchased high-value products. The production of manufactured goods was essential, not only for the purchase of foreign-made goods, but also in the creation of jobs for the rural population displaced by ongoing agricultural reform. Once the decision to foster national development through industrialization, had been made, it was necessary to transform the rural population into an industrial workforce, and to create new production units by complementing national investment with international investment.

Stable Development

The “stabilizing development” formula developed by then Secretary of Finance Antonio Ortiz Mena, articulated, from the government, the abundant workforce and natural resources, in an effective association between the public, corporate and labor sectors, within a strategy that included administrative and financial support. This triple strategy resulted in the creation of hundreds of new companies; the government not only promoted these companies, but was in many cases the proprietor or associate of a great many semipublic companies created to address national demand. The scheme produced positive results. There was an increase in production with no inflation, and monetary parity remained stable, while foreign investment grew alongside national investment. Agricultural reform, however, continued to displace a rural population which, far from becoming an industrialized workforce, swelled urban areas. During this period, foreign trade was not particularly diversified.

The Maquiladora Solution

The copious migration of unemployed people from rural areas, found an answer in a program first implemented in 1965, which aimed to stimulate the creation of maquiladoras in Mexico’s northernmost states, whereupon cheap manual labor was offered to US-owned industries, in order to compete with imported electronics, home appliances, textile products and low-cost auto parts. A great deal of US-owned manufacturing plants that benefitted from targeted tax breaks set up shop on Mexican territory. Automotive assembly plants that worked with foreign components reached the same size as their European, Asian and North American headquarters. Today, Mexico is the world’s seventh largest exporter of automobiles, with an integration of approximately 30%. The maquiladoras and assembly plants of a large variety of products became the country’s most important source of employment. In 2015, 13% of Mexico’s workforce was employed in five thousand maquiladoras. Foreign trade had diversified to the rhythm of foreign initiatives.

 

Prior to the Second World War, Mexico’s foreign trade was composed of a small range of primary mineral products

 

Achieved Growth

The impressive growth that reached 7% of the GDP and that characterized the period of “stabilizing development” was paired with inflation control, improving the population’s spending power. Monetary parity contributed to the notion held by many that this was the economic model to follow. It is important to consider that the achievements of the period were due to a combination of financial and fiscal policies, as well as to the promotion of industries and of commercial agriculture, all if which benefitted from explicit and widely-condoned protectionist policies that favored burgeoning industrial and agricultural companies. Ad valorem duties, rigid importation permits, government-controlled pricing, controlled government purchases, the Banco de México’s reserve requirements, the protection of state-owned companies that did not always generate profits, and concessional financing for high-priority activities, were all elements that came together to constitute the framework for national development. It was the successful articulation of financial and political instruments which made possible this decisive chapter in the country’s history, one which today would be virtually impossible to repeat, and yet one which signaled the beginning of an incipient yet permanent diversification of the country’s economy.

The End of Mexico’s Period of Stabilizing Development

In 1970, then President Luis Echeverría created the Mexican Institute for Foreign Trade (Instituto Mexicano de Comercio Exterior), that launched an energetic policy centered on the promotion of exports, with fiscal support reinforced by Cedis (Certificados de Devolución de Impuestos or Tax Return Certificates) and Extra Cedis. The measure aimed to complete the diversification program by rationalizing imports in order to transform each product into the starting point of its production in Mexico. The creation of exportable goods was fostered through state-run commissions presided by the producers themselves, and which liaised with foreign trade ministries that detected demand for Mexican products. The aim was to concentrate the process in one single organism integrated by representatives from both public and private sectors involved in foreign trade. Although it is true that the country’s incursion in new markets grew and became more diverse, and that exporter services multiplied while there was an increased interest in foreign trade as a basic component of progress, the bulk of the Mexican corporate world continued to opt for geographic proximity and the logistic advantages of the US market. Mexico’s adherence to the General Agreement on Tariffs and Trade (GATT) deprived the private sector of the support it had become accustomed to, and gave way to the opening if the Mexican market, through the elimination of the previous importation permits, as well as through a systematic dismantling of customs tariffs. Mexican exports were then subject to international competition, a situation which the Mexican economy was notoriously ill-prepared to face. The industrialization process continued, but many Mexican companies either disappeared or began marketing the imported goods that they had once manufactured.

 

The impressive growth that reached 7% of the GDP and that characterized the period of “stabilizing development” was paired with inflation control

 

The North American Free Trade Agreement

Ten years after the creation of the GATT, the NAFTA (The North American Free Trade Agreement) was negotiated, and Mexico entered an economic alliance with the United States and Canada, which meant abandoning any attempts at associations with Latin America, as well as a clear shift in referents and finally tying Mexico’s progress to that of the countries to its north. The new recipe included becoming a member of the Organization for Economic Cooperation and Development (OECD). Twenty-three years later, the NAFTA continues to fulfill its aim of stimulating Mexican exports to North America and, particularly, to the United States. The exchanges have increased several times over, but the diversification of Mexico’s markets has stagnated. The NAFTA underlined the importance of the rules of origin in defining the possibility of diversification within a broad range of manufacturing sectors. The choice to integrate products is either fostered or discouraged according to the national or regional origin of the goods. This is of particular relevance to certain sectors, including the automotive, pharmaceutical and textile industries. Manufactured goods that require a large component of local labor can easily accredit their national origin, which can guide them toward the production of industrial components and supplies for international sale.

Components: a Priority

From January to October of 2016, the United States’ trade deficit with Mexico reached 123 million USD. The repeated commercial imbalance registered in US trade with Mexico, is at the forefront of President Trump’s obsessive complaints. It is important to put this situation into perspective. If the value of the North American components were subtracted from Mexican exports to the US, the resulting deficit would be substantially lower than that which is often quoted. It is estimated, for example, that Mexican components of those exports reaches only 29% of what is assembled in the country, leaving a hefty margin for components which are likely North American. Regardless of this fact, this issue underlines the importance of foreign supplies in plants that assemble finished products. Regional rules of origin are at the base of the future of the global components industry. On the matter, the United Nations Conference on Trade and Development (UNCTAD) reported that intermediate goods, more so than primary products or capital goods, comprise the largest portion of international trade, by far. Industrial production on a global scale is being dispersed among a growing number of plants that in turn require an increasing amount of foreign components in order to assemble finished products. It is likely that at least 40% of the components required globally, are imported from another country. Thus, there is an increase in the international exchange of a large variety of components that countries import for their industries. The greater the amount of assembly plants, the greater the demand for components that Mexico is capable of producing and supplying to a growing market. This is a more advanced stage of foreign trade, in which components are cheaply imported in order to become incorporated into the manufacturing processes of products that are finished in plants that are well-connected to end markets. The transportation of voluminous finished products is more costly than that of components, which benefit from modern logistics systems. Thanks to new technologies in maritime and air transport, and to perfected systems that ensure punctual delivery, the global components trade represents a promising future for a diverse range of small and medium companies (Pymes: Pequeñas y Medianas Empresas) in Mexico.

 

Twenty-three years later, the NAFTA continues to fulfill its aim of stimulating Mexican exports to North America

 

 

Pymes and Foreign Trade

Just over four million small and medium companies generate 72% of Mexican jobs on a national scale, and account for 52% of the GDP. Only 10% of the supplies used by the maquiladoras are of national origin, and only 9% of these companies export their goods. The Pymes comprise the bulk of Mexican commerce during this new global phase, manufacturing industrial components for the assembly pants that require them. “Nationalizing” our finished goods industries with Mexican components means diversifying our economy. In general terms, the Pymes have the capacity to increase their participation in the value chain, and create jobs in regions yet to be exploited, providing diversified training in skills and abilities, taking advantage of vocational education programs such as the Berufsschule in the German education model. Thirty-two million people between the ages of 15 and 39, comprising 25.6% of the total population, are ready to become a part of this new phase of global trade, not only by manufacturing, but through innovation in processes and products, diversifying operations in the agricultural, industrial and service sectors, and progressively absorbing the informal sector.

 

The global components trade represents a promising future for a diverse range of small and medium companies in Mexico

 

Productive Agreements

The strategies of international trade are not limited to the exchange of physical products. Diversifying our global markets implies using several forms of interaction, beyond joint ventures, and shaping associations that invest in both the exporter and the importer. These associations have a role to play in the sharing of market contacts, technology and information, as well as in defending projects presented to authorities, and creating permanent relationships based on shared interests and reciprocal loyalty. The diversification of Mexico’s trade relations will be strengthened by associations between interested and committed parties. Rivalries among manufacturers of the same product can be solved if the parties come together to share objectives.

Many of the products offered by Mexico, such as food, household goods, and electronic and transportation equipment, coincide with those that we import from the same countries with which we hold trade agreements, and whose markets we wish to break into. It is here where Mexican companies should become associates of their counterparts, in order to convene on respectful practices based on international and local regulations.

Diversification on a Global Scale

While Mexico has aimed a great part of its promotion toward the Unite States, it hasn’t ignored its longstanding relationship with Latin America. In addition to agreements with Brazil and Argentina, Mexico has joined the Pacific Alliance, the most recent regional association program, which is currently assessing the possibility of extending eastward, with Asian countries such as South Korea, Indonesia and the Philippines. The success of Mexican products within open national markets, confirms Mexico’s competitive edge over other exporters that may not enjoy preferential treatment. Should Mexico withdraw from the NAFTA due to non-acceptance of the conditions placed on our exports to the United States, the customs tariffs registered by the US with the World Trade Organization (WTO) would be covered. Mexico is the second largest supplier to the US market, with 13% participation, and our main competitor would be China, a country whose costs are on the rise. While China raises its salaries and production costs, Mexico can diversify and identify its supply using modern logistics, and thus take full advantage of its privileged and irreplaceable geographic advantage. China’s interest in entering the Mexican market and offering copious investment in infrastructure, is an indication of a varied and profitable potential relationship. Mexico can open itself to and execute new chapters in the diversification of its economy, as long as it maintains a clear picture and a keen awareness of the objectives –even political ones– behind China’s current expansion. India, the other demographic giant, is highly aware of western customs. Mexico has limited its trade relations with India to contracting the services of its prestigious IT centers. There are nonetheless valuable experiences in India’s administration of rural and arid regions, which Mexico should apply. The diversification of our rural industries could benefit from India’s accumulated experience.

 

The success of Mexican products within open national markets, confirms Mexico’s competitive edge over other exporters

 

Final Comments

The painstaking process of Mexico’s attempt to diversify its foreign trade has experienced several stages over the course of the last 100 years. Today, diversification finds its expression not only in the plethora of regional and intercontinental agreements, but also in the national plans adopted by countries that embark on their development processes in an independent manner. The division between industrialized and developing nations has become diluted in a great universal community whose members face common problems such as unemployment, inequality, transnational corporations and insufficient government response to public demands. In the midst of these realities, diversified foreign trade irrigates and invigorates all levels of production, consumer and service sectors, allowing for the fruits of its efforts to be distributed among the general population.