Evaluating Mexico’s Trade Agreements
Luz María de la Mora*
Mexico began its trade openness process in the 1980s and negotiations for free trade agreements (FTA) a decade later. In 25 years, the country has built a network of 12 FTAs with 46 countries. The Mexican Senate approved the most recent one, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in April 2018, and once it comes into force the network will have extended to 13 agreements and will cover 52 countries.
When Mexico began its openness process, foreign trade and direct foreign investment (DFI) appeal became a cornerstone for the economic growth and development strategy. The FTA network was conceived as a fundamental tool to open markets to Mexican exports with preferential conditions, to import supplies, components, machinery and equipment that would strengthen national competitiveness, and to attract productive investments that would modernize the production plant. By way of an evaluation, we can identify results from that network of agreements on trade and investment, as well as identify the challenges that must be faced to leverage it.
First, the impulse this network of agreements has given to trade and investment flows stands out. Mexico’s total trade went from 117.199 billion dollars in 1993 to 829.863 billion in 2017, an increase of over 600%. In these years, the average annual growth rate of Mexico’s total trade with the world was 9%, which was above the average annual growth rate of real dgp, which stood at around 2.5%.
However, not all FTAs have shown the same performance. Without a doubt, the North America one (NAFTA) is the most relevant. It covers the majority of Mexican foreign trade —65.4% of total trade and 83% of exports, according to figures from 2017 —and is the fastest growing in absolute terms, going from 90.944 billion dollars in 1993 to 542.687 billion in 2017.
On the other hand, the agreement signed with the European Union, Mexico’s third commercial partner, experienced average annual growth rates of 8.6%, slightly higher than those of NAFTA. This is also true for current agreements with Colombia, Israel and Uruguay, with average annual growth rates that exceed those of NAFTA, but whose absolute values are less than 1% of the country’s total trade. (See Table 1.)
Second, the FTA network contributes to consolidating Mexico as a manufacturing exporter. In the early nineties, raw materials accounted for 45.7% of total exports, while in 2016 this proportion fell to 10.2%. On the other hand, the participation of capital goods in the export basket went from 14.6% in 1990 to 49.21% in 2016.
A third noteworthy aspect related to the extension of the FTA network is the increase in the level of integration and openness of the country. Indeed, the country’s total trade of goods and services, as a percentage of GDP (trade openness index) went from 27.8% in 1993 to 77.6% in 2017 (see Figure 1).
Fourth, the FTA network has also been an important magnet to attract DFI because, in addition to the 32 agreements for the Promotion and Reciprocal Protection of Investments (APRPI) signed with 33 countries, it offers legal certainty to foreign investors. In 2017, Mexico received over 31 billion dollars in DFI. Before the openness, in the 1970s and 1980s, those flows averaged around 1.2 billion dollars per year. In the nineties, with the coming into force of NAFTA, Mexico received a DFI of 8.5 billion dollars per year, and between 2000 and 2017, it reached an annual average of 27 billion dollars(see Figure 2).
The foreign capital received in Mexico between 1999 and 2017 was destined mainly to manufacturing (48.6%), which enabled the growth of sector exports; followed by financial services (14.4%) and trade (7.6%). At a local level, of the 32 federal entities, the resource flow was concentrated in only 12 (Mexico City, State of Mexico, Nuevo Leon, Chihuahua, Jalisco, Baja California, Guanajuato, Tamaulipas, Coahuila, Veracruz, Queretaro and Sonora) that got 76.7% of these flows.
Fifth, the 12-FTA network, in addition to eliminating trade tariffs among partners, has created a set of rules whose great added value has been to provide certainty to economic agents in order to foster production and commercial activities.
This extensive FTA network that Mexico has negotiated with different countries and regions also translates into the great challenge of making all its rules compatible with each other. The more the regulations established in each of the FTAs differ, the more complicated and costlier the process for the exporter becomes.
Perhaps the main challenge for Mexico lies in how to most leverage this large and growing network of trade agreements. Even though Mexico has access to 46 markets with preferential conditions, its exports have focused on the US market —approximately 80% of the total— which shows the level of interdependence of the Mexican economy with its main destination of its goods and services. In comparison, the origin of Mexican imports has diversified, with an important rebound of Asian imports, despite Mexico only having one FTA in force with one country from that continent. In 2017, the United States supplied 46.3% of Mexican imports, while seven countries in Asia (China, Japan, South Korea, Malaysia, Chinese Taipei, Thailand and Vietnam) contributed with 31.9% and the EU28 with 11.7%.
The contribution to foreign trade from the different federal entities in Mexico shows significant disparities. In 2016, the six states on the northern border accounted for over 51% of total exports and received 30% of the accumulated DFI between 1999 and 2017. These entities have leveraged their geographical proximity with the US market to become one of the leading Mexican exporters. The challenge for other states —especially those in the south-southeast— is to leverage opportunities provided by these FTAs to boost their growth via exports and attracting DFIs (see Table 2).
The FTA network, built since the nineties, also faces the challenge of adapting to the new reality of international trade, where 80% of trade is linked to global value chains and 60% of global flows correspond to intermediate goods. Therefore, Mexico has sought to update its trade agreements to reflect the current state of global production and adapt its participation in global value chains.
In 2013, Mexico and the EU began negotiations to modernize their trade agreement, which concluded in April 2018. Throughout this process, both parties sought to integrate new standards for trade in goods and services, to establish binding mechanisms to solve controversies and introduce new topics, such as those related to anti-corruption practices, public procurement, intellectual property, digital commerce and small and medium-sized enterprises. In May 2016, Mexico also began the process of modernizing its FTA with the European Free Trade Association (EFTA).
In August 2017, Mexico, Canada and the United States began the process of renegotiating their trilateral agreement. Although Mexico and Canada indicated their interest in renegotiating NAFTA to achieve a modern agreement that responded to the new realities of global value chains, the United States promoted a more restrictive agenda for regional integration, in keeping with the nationalist and protectionist policy of the Trump administration. On August 27, 2018, Mexico and the United States announced they had reached an agreement that is expected to be part of a trilateral agreement with Canada.
Mexico sought to modernize NAFTA through the negotiation of the Trans-Pacific Partnership (TPP), a cutting-edge trade agreement in which the three North American trade partners initially participated. Although President Trump decided to withdraw his country from said agreement in January 2017, the remaining 11 countries resumed negotiations and under the leadership of Japan created the CPTPP. Likewise, within the framework of the Pacific Alliance, as of 2017 and in response to the United States leaving the TPP, Mexico, together with Colombia, Chile and Peru, embarked on negotiations for an FTA with Australia, Canada, New Zealand and Singapore to become Associated States. This negotiation seeks to establish rules with high standards, as does the CPTPP.
The FTAs Mexico has negotiated since the 1990s have been a trigger for trade and investment for the country as a whole. However, these agreements still offer great potential for export markets that remain unexplored. With this network, Mexico is well positioned to promote the diversification of markets beyond the United States, but it needs to involve more sectors, more companies and more regions in the export activity; in addition to an active and clear export development policy that has the necessary technical and financial resources to achieve the objective set.
*PhD in Political Science from Yale University and is Affiliate Professor in CIDE’s International Studies Department; headed the Trade Negotiations of the Ministry of Economy; appointed Deputy Secretary of Foreign Trade in the upcoming Federal Administration.
The CPTPP includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, and will come into force 60 days after six of its members notify their internal legal processes have finished. At the time when this article was written, Mexico, Japan and Singapore had already approved the CPTPP in their respective legislatures, had finished their internal legal processes and had had deposited the instrument with New Zealand, acting as holder country.
World Bank, World Integrated Trade Solution,accessed on August 28, 2018 onhttps://wits.worldbank.org/CountryProfile/es/Country/MEX/Year/2016/ SummaryText
National Commission for Foreign Investment, Statistics Report on the Behavior of Foreign Direct Investment in Mexico, in (January-December, 2017), page 6
Ibid., page 17.
 International Trade Center, Connection with Value Chains: Competitiveness, Diversification and Links of SMEs with export markets, in http://www.intracen.org/itc/acerca-del-itc/Conexion-con-las-cadenas-de-valor-competitividad-diversificacion-y-vinculacion-de-las-PYME-con-losmercados-de-exportacion/