Towards a New State Foreign Trade Policy.

Francisco Suárez Dávila*

Towards a New State Foreign Trade Policy.
If Mexico wants to achieve sustained development that decisively contributes to reducing poverty and inequality, it needs a vision and—above all—a long-term policy. This article reviews the great historical stages of Mexican foreign trade, identifies achievements and failures of NAFTA’s final days, and proposes concrete measures to move towards a comprehensive foreign trade policy, which can go beyond foreign investment and the assembly of intermediate goods.

LEER EN ESPAÑOL 

 

PRINCIPLES OF A STATE FOREIGN TRADE POLICY

Foreign trade policy is not an isolated policy. Its timeframe is the long term and must be linked to the project or basic model of national development. It must be closely related to the foreign policy of which it is part, but without separating from domestic economic policy. In the British Empire, trade policy was often synonymous with foreign policy, the essence of the so-called mercantilist policy. It has been subordinated to industrial policy, as evidenced by Japan. It evidences conflicts of economic interests and is reviewed when there are abrupt alterations of the environment or dramatic changes in electoral and political results, as in Mexico’s current situation.

 

 

THE HISTORICAL EVOLUTION OF FOREIGN TRADE POLICY IN MEXICO

In Mexico, we can speak of three moments in the State’s trade policy. During the Porfirio Díaz administration (1876-1910) an open liberal economy was implemented; in the inward development stage (1933-1973), it was protectionist and promoted the substitution of imports as the basis of industrialization; and during the “neoliberal” stage (1994-2018), it favored trade openness propped up by the North American Free Trade Agreement (NAFTA).

1.The Porfirio Diaz administration (1876-1910). As part of its vision of national development, the Porfirio Diaz administration integrated “a state trade policy” supported by the modernizing elites. It coincides with one of the upsurges of the trade globalization process and international investment. Mexico wanted to insert itself into the world as an open economy that unfortunately would be become an “enclave economy” of limited links with the domestic economy. Despite this, it was the fastest growing period after that of the economic development era and above the current one.A railroad and port network were created, favoring foreign investment; mining exports and primary agricultural production were supported. All of this was supported by great public finance management and the recovery of external credit. The model failed, as it does today, due to the rebound of poverty and social marginalization, especially in rural areas.

2.Economic Development (1933-1973). Driven from the times of President Cardenas to get out of the Great Depression. It was an inward development model that sought to accelerate economic growth and industrialize the country through protectionist policies. It included far-reaching social reforms, like the agrarian reform, and taking back the control of the country’s natural wealth—oil and mining—that ever since have been reserved for domestic investment. Faced with the limitations imposed by the Second World War, the substitution of imports was reinforced. This stage lasted 40 years and generated an annual growth of 6%; the most successful period of our economic history. In 1954, price stability was achieved, and the model was named “stabilizing development.”

This foreign trade policy was subordinated to industrial policy, as was the case in Asia, and the “new national industry” was protected. While protectionism mainly covered final consumer goods, there was a gradual opening towards intermediate and capital goods. Hence, the full range of instruments was used: tariffs, quotas and subsidies.As an essential complement, there was a financing policy that selectively guided private bank credit, development banks and development funds. In 1937, the National Bank of Foreign Trade was founded; followed by the Fund for the Promotion of Manufactured Product Exports (Fomex, for its acronym in Spanish). An effort to export was seen, especially in raw materials, minerals and agricultural products. A policy of restrictions on foreign investment was maintained, protecting public or private national investment in priority sectors. During the war, there was a Free Trade Agreement with the United States and a Mexican Worker Pact. Mexico decided not to enter into the General Agreement on Customs and Trade Tariffs (GATT), created in 1948, because it considered it a limitation to the then current policies.

3.Absence of consistent policies, derailment of the development model, crisis and adjustment (1973-1988). By 1970, the development model showed signs of depletion, especially in terms of import substitution, export capacity and the fight against inequality. President Echeverria wanted to solve problems through the “shared development” model. He created important institutions, such as the Mexican Institute of Foreign Trade (IMCE, for its acronym in Spanish). But the strategy was derailed due to populist policies that meant serious financial irresponsibility, high fiscal deficits and balance of payments, high external debt, high inflation and, finally, the devaluation of the Mexican peso. The problems were exacerbated after the squandering of Lopez Portillo’s oil bonanza, and the severe debt crisis of 1982 was unleashed.

A severe adjustment had to be made to the economy starting in 1982, which sought to organize public finances by thinning the State, privatizing entities and launching a process of trade openness by unilaterally reducing tariffs, quotas and subsidies; the entry into GATT in 1986; the use of some instruments to promote exports, and the initial development of the automotive industry.

 

 

THE NEOLIBERAL TRADE POLICY DURING THE NAFTA-I ERA (1994-2018)

The foreign trade policy that governs us today corresponds to what might be called the NAFTA I era. It clearly reflects the spirit of the neoliberal model. It complies with the requirements of a State policy: it has been long lasting, almost a quarter of a century. It was implemented through an international agreement that anchored some guidelines, not only commercial, but also macroeconomic, industrial and financial. It was driven by the Salinas, Fox, Calderón and Peña administrations. The Ministry of Economy played a role similar to that of the Japanese Ministry of Foreign Trade (although with a different orientation) and has trained a solid group of negotiators. We have become the world champions of free trade agreements (FTA), both regionally—with Europe, Central America and the countries of the Pacific Alliance and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—and bilateral, like that of Japan. Twelve FTAs were negotiated with 46 countries, 32 agreements for the reciprocal promotion and protection of investments with 33 countries and nine limited-scope agreements.

1.Positive results of the State foreign policy focused on NAFTA IThe foundation of this State trade policy is—of course—NAFTA. It has translated into an increase in our exports, imports and total trade more than six-fold since 1994. We are the third largest trading partner of the United States and Canada, after China and each of those countries. Mexico is a major export destination for several US states, such as Texas and California, which is a strategic negotiation weapon for the new NAFTA. From the trade of goods, we move on to the integration of trilateral value chains, that is, to shared production. The Agreement has had a favorable regional impact in the now called NAFTA states of the north of Mexico, with rapid growth, and on those that concentrate nuclei of exporting companies, such as aeronautics in Queretaro and automotive in Aguascalientes and Chihuahua. There are more exports—in amount—from the automotive and agroindustry sectors in comparison to the oil sector; labor productivity increases and workers earn more than in other sectors; there is a process of technological absorption and an increase in foreign investment in manufacturing export sectors.

To achieve this, multiple FTAs were signed, products were deducted, quotas were eliminated and non-tariff barriers were reduced. Binational instruments were created with the United States and Canada to facilitate border trade and achieve deregulatory convergence. Dispute resolution mechanisms were created for State-investor disputes and against unfair practices (dumping).

2.Unfavorable effects of the NAFTA I eraThere are obvious flaws. Foreign trade and the negotiation of treaties became almost the basis of all foreign policy, although now migration and security problems compete for first place. We did not achieve like income levels with those of our business partners. As NAFTA was not accompanied by complementary policies, such as industrial, regional and educational, inequality increased between the NAFTA and south-southeast states; also, smes and “changarros[1]are among the large export companies; between skilled and unskilled workers. There were no inward value chains and linkages to internal production, so there is a “development model based on exports, which generated poor growth.” A “big assembly factory” and several enclave economies were built.

At the same time, there was a very large trade surplus with the United States—over 60 billion dollars—in second place after China, which has made us very vulnerable to the protectionist threats of the Trump administration. On the other hand, we have a deficit with the rest of the world, especially with China; while the other FTAs have not been used properly, NAFTA has lost its market to Asia. If we exclude remittance flows, there is a strong checking account deficit. The Mexican economy has fallen throughout the millennium in terms of GDP, participation in exports, competitiveness and foreign direct investment.

 

TOWARDS A NEW STATE FOREIGN TRADE POLICY: 2018 ONWARDS

The world is in a real change of era, similar to that of the thirties, after the Great Depression. As then, trade wars are brewing between the United States and the European Union, and between the United States and China; there are also currency competitions. This shaking is the result of the Great Recession itself that severely affected countries of the European Union, which is now in crisis. Also, the result of technological changes, of great migratory movements, of the aging of the population and of lack of opportunities for young people. In short, a fertile breeding ground for the emergence of antisystem social movements that enable the arrival of populist governments—right and left, and enemies of free trade—in countries such as the United States, Great Britain, Poland, Hungary and Italy. In addition, totalitarian governments are opening in Russia, China and Turkey. The country that created the postwar world order is destroying it.

In Mexico, the 2018 election sends a strong message about the demand for great transformation. It is important to review the economic strategy, the foreign policy and the trade policy. The antisystem social movement in Mexico has accumulated problems over decades, with the pairing violence-insecurity, corruption-impunity, inequality-poverty and the “poor growth economy,” center of the discussion. In Mexico, free trade as such is not subject to attacks, and can even be viewed favorably, as the way to have access to cheap products from abroad.

 

 

WHAT COULD BE THE FUNDAMENTAL ELEMENTS OF THIS NEW FOREIGN TRADE POLICY FOR MEXICO?

1.From neoliberalism to neo-development. First, “Mexican-style neoliberalism” must be discarded, with its most dogmatic elements: price stability, fiscal balance and trade openness at all costs. The new objectives: accelerate inclusive and sustainable economic growth, involving all economic actors and leveraging all policy instruments. For this, a modern industrial policy that supports innovation and technological development, a system of financing development and a social policy that reduces inequality and poverty is required.

2.Moving from indiscriminate trade openness to strategic foreign trade. In a changing world, where nationalist and protectionist elements increasingly predominate, we move towards a strategic trade policy or “managed trade,” like Canada, the United States and Asian countries. We have to do what advanced countries practice, not what they preach. They promote and defend certain sectors and companies, subsidize through taxation or financing, administer the supple, use non-tariff barriers. In short, a healthy modern nationalism of purchase and production of Mexican goods.

3.Trade policy, complement of a modern and innovative industrial policy. Trade policy must be subordinated to industrial (and development) policy, not the other way around. Modern industrial policy has to favor the integration of productive chains, not only outward, but also inward, promoting greater local content and leveraging more of the internal market. We need a competitive import substitution policy. The country has been deindustrialized; we must reverse this trend by improving the current industrial structure, which includes a few dominant companies, many of which are transnational, and thousands of small businesses or low-productivity “changarros.” We must identify new sectors with potential that can be engines of growth, examining regional vocations and supporting national champion companies, which should not be lost. Our productive apparatus should be aimed at sectors of high added value and the modern services sector, according to a fourth industrial revolution.

4.To promote a modernized trilateral NAFTA as the axis of trade policy. The centrality of the relationship with the United States should be preserved through institutional treatment and trying to safeguard NAFTA in its current state, modernizing it or transiting thewto Even though there are encouraging signs in the negotiation, such as Trumps letter of intent to Congress on “a trade agreement with Mexico, and if possible, with Canada,” the ratification process is long and tortuous, and faces uncertainties in each of its stages, because of the midterm elections in the United States and the visceral behavior of Trump himself, as we saw in his decision to abandon the Trans-Pacific Partnership. We must try to maintain the trilateral character of the agreement. Trump’s thesis of two bilateral agreements should not be accepted. The new FTA needs to be updated with the new generation themes, including progress made in the TPP: electronic commerce; energy sector; environmental standards; regulatory simplification; free movement of professionals, at the time; protection of migrant workers; trade facilitation, etc. Faced with the protectionist threats of the US Government and the pressures surrounding the wall and its financing, we must draw up contingent plans to defend our trade and our productive plant. In general, the error of a NAFTA without complementary industrial and regional policies must be corrected.

5.Effective diversification of exports and imports. It is urgent to promote the diversification of our trade in terms of products, markets and regions, without neglecting current priorities: North America, Central America, the Pacific Alliance, the European Union, Japan and China. The relationship with China must be strengthened, the Silk Road must be leveraged and new markets in Africa and the Middle East must be attacked. The effectiveness and use of current FTAs should be reviewed and re-evaluated.

6.Strengthen the National Bank of Foreign Trade as the axis of the new foreign trade financing policy. Any attempt to merge or eliminate it must be resisted and, even more so, resources must be increased to fulfill its functions. It would be ideal, even, to reestablish the indispensable promotion-financing pairing by reincorporating ProMéxico into the Bank’s structure. Before the split, Bancomext financed the promotion with its profits and no other budget was required. This was also the case when IMCE joined Bancomext. No large country lacks this specialized instrument: the United States (Eximbank), Canada (EDC), England (ECGD), Japan and Korea (Eximbanks), and so on.

The foregoing, as part of a true financing system that allows to meet the objectives of accelerated growth and industrial and commercial policy. In emerging countries that are growing—before Japan and Korea, now other successful economies—industrial, commercial and financing policies are a fundamental triangle. The development bank has an important role to play as a policy bank that formulates sectoral guidelines, framing the behavior of private commercial banks. Yes, you can consolidate some development institutions—different funds—because there are many (30), but you have to keep the essential ones: Nafin (industrial policy), Banobras (infrastructure), Financier Rural (countryside), a housing bank and, of course, Bancomext.

7.Support the external trade aspect in the regional development, particularly in the south-southeast, including special economic areas. Development programs must be developed for the two borders (north and south).

8.Review our participation in international and regional organizations. Mexico must be associated with the Asian Infrastructure Bank. The strengthening of the North American Development Bank (Nadbank) must be supported so that it broadens its scope of action by financing border infrastructure and regional programs to retain workforce in areas that expel it.

9.Some policies must be kept. Macroeconomic policies, that favor price stability and “reasonable” health for public finance, as well as a flexible exchange rate policy. The payment balance must be at equilibrium so that over time it becomes a surplus (like with the United States). It is also convenient to maintain the communication dynamic and dialogue with the private sector through bodies such as Comce, Comexi and councils or committees linked to competitiveness and strategic negotiations.

10.A strong and prestigious strategic think tank in foreign trade and investment is needed. The aim is to examine the global economy and geopolitics in a permanent and prospective way. This can be done at Bancomext, in association with academic institutions or autonomously.

These and other elements can configure a State foreign trade policy, with a long-term vision that contributes to a new stage of economic development in Mexico. I am thinking of a stage of accelerated growth, less inequality and poverty and in which the country becomes stronger until it becomes a real power, at least the seventh in the world in economic terms, able to defend its interests in front of a complicated neighbor and in a turbulent world.

 

*Masters in Economics from King’s College, Cambridge University. He represented Mexico at the OECD and IMF; Deputy Secretary of the Ministry of Treasury and Public Credit; federal congressman and ambassador of Mexico to Canada.

 

[1]Little shops, as they are called in Mexico.