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					   The Mexican Experience
         with NAFTA



                                       Francisco J. Alejo
University of Texas
                               Consul General of Mexico
LBJ School of Public Affairs           October 22, 2003

                                                            1
                     Contents
I.    Introduction
      The Context of NAFTA
      1. Accelerated Globalization
      2. Mexico/ USA: An Asymmetrical Relationship
      3. The Transformations of Mexico
II.   Mexican Experience with NAFTA
      1. Economic Performance, Trade and
      Investment
      2. The Pending Agenda
      3. Lessons and Policy Implications
      4. Conclusions
                                                     2
 I. Introduction


The Context of NAFTA




                       3
I.       Highlights of the Globalization 1
1. Along the last several years, until the
   end of 2001, global trade grew at about
   three times the rate of OCED
   economies, surpassing $7 trillion in cross-
   border movement of goods and
   services.

2. Foreign direct investment (FDI) grew
   even faster than international trade and
   actually surpassed $1 trillion in flows in
   2000

1.   Based on: Earl H. Fry, “North American Integration. Policy
     Options”, CSIS, Policy Papers, July 2003
                                                                  4
3. The number of multinational
   corporations (MNC’s) in the World also
   expanded dramatically, from 7000 in
   the 1960’s to roughly 65,000 today.

3. The 65,000 MNC’s control 850,000
   affiliates, which employ 54 million
   workers world wide and were
   responsible for producing $19 trillion in
   annual sales in 2001, almost three times
   the aggregate value of global
   international trade.

                                               5
5. International currency transactions
   amount to approximately $1.5 trillion per
   day. Production sharing systems and
   stock markets constitute a 24 hour
   phenomena conducted by continuous,
   computerized automatic systems.

6. In spite of September 11, 2001 events,
   international tourism returned to record
   levels in 2002 with 715 million people
   spending over $460 billion


                                               6
7. Immigration and refugee flows are also
   without parallel, and at least 175 million
   people currently reside in countries
   different from their place of birth.



8. The number of transactions through
   internet-crisscrossing the planet is
   astronomical and grows at a maddening
   pace.



                                                7
 I.2. Mexico/US: An Asymmetrical Relationship

1. The US continental land mass is equivalent
   to roughly 4.5 times to that of Mexico. The
   population of the former is almost 2.8 times
   more than the 100 million Mexicans living in
   Mexico.

2. The Mexican GDP is equivalent to one
   sixteenth of the US corresponding GPD. A
   6.5% annual growth of the US economy
   aggregates additional production
   equivalent to the total Mexican GDP, even
   though the latter ranks between the 9th
   and 10th largest in the world.
                                                  8
3. After almost 10 years of NAFTA, 85% of
   total Mexican exports are aimed at the US
   economy and constitute 20% of the
   country’s GDP. Nearly half of the 3 million
   new jobs created in Mexico between 1993
   and 2000 were export related. In contrast,
   37% of total US exports are destined to the
   NAFTA partners, and contribute with only
   4% of the US aggregate GDP and
   employment. US commitments as a
   global superpower increasingly spread out
   all over the planet.


                                                 9
4. The growing size of the US economy, its
  global corporations, and the need to
  keep a large global techno military edge,
  justifies a gigantic and unbeatable
  investment in science and technology.

5. In the case of Mexico, in contrast with
  Canada, there are also very important
  asymmetries in education, cultural and
  institutional development.




                                              10
6. Of special and paramount importance
   are the asymmetries in physical and
   telecommunications infrastructure.

7. It was precisely because of the
   fundamental role of the asymmetries
   that the European Community assigned
   a pivotal role in the achievement of
   European integration to the special
   funds for balancing the levels of basic
   development among the member
   nations.

                                             11
   I.3 The Transformations of Mexico

1.Demographic Transformation: from 20
  million inhabitants in 1950 to 100 million
  2000.

2. Settlements transformation: from 80% rural
  population to 75% urban population in
  only 60 years. With only one city with
  more than one million inhabitants to one
  megalopolis with 18 million inhabitants,
  two cities with more than 3 million and
  ten cities with more than one million
  inhabitants in the year 2000.
                                                12
3. Educational Transformation: from more
   than 70% illiteracy level to more than 90%
   literacy, to almost 100% coverage by the
   elementary school system and to almost
   two thirds coverage by the high-school
   system in only two generations.

4. Economic Structure Transformation: from
  a dominantly agricultural and mining rural
  economy to an essentially industrial and
  service urban economy in only 30 years
  from 1950 to 1980.


                                                13
5. Trading Transformation: from a tightly closed
  economy, with more than 90% of the
  importation code subject to “previous
  specific permit” by the government and an
  average customs tariff of more than 80% by
  1982 to less than 5% of the code subject to
  previous prermission and maximun customs
  tariff of 20% and a weighted average tariff
  of less than 10% by 1990.

  After signing free trade agreements with
  Chile and the United States in the early 90’s,
  Mexico has signed such treaties with more
  than 30 countries. No other country has
  signed so many.
                                                   14
6. Public/Private sectors roles
  Transformation: from an economy tightly
  controlled and dominated by the public
  sector (the public sector expenditure
  represented 48% of the GDP in 1982 and
  there were more the 1200 corporations
  fully or mostly owned by the federal
  government) to a highly decentralized
  economy with only a bundle of state
  owned corporations and public sector
  expenditures representing a maximum of
  22% of GDP. The process of deregulation
  has encompassed almost all sectors of
  economic activity.
                                            15
7. Democratic Transformation: from a highly
  centralized and one hegemonic party system
  that lasted for more than half a century to a
  multiparty, highly reliable and competitive
  political system in only 22 years. This comprised
  new legislation for political parties in 1978, new
  polling legislation in 1978, 1987 and 1995; a
  judiciary system for dealing with post polling
  disputes in 1995 and 1998; a massive transfer of
  financial resources from federal to state and
  local governments took place between 1995
  and 2002; a new legislation on transparency
  and accessibility to public records and
  information as an indisputable right for citizens
  and the media.
                                                       16
8. Human Rights Transformation:
  constitutional reforms and new legislation
  allowed for a new autonomous regime
  for the 10 million members of the indian
  communities of the country and the
  establishment of a fully independent
  national commission as a watchdog for
  human rights plus the subscription to the
  Inter-American and United Nations
  Human Rights treaties.




                                               17
 II. The Mexican Experience
          with NAFTA 2



2/ Based on: Aldo Flores Quiroga, “The North American Free
   Trade Agreement…”, Secretaria de Relaciones Exteriores,
   Mexico, Agosto, 2003.
                                                             18
Four favorable outcomes for Mexico stand
out during NAFTA’s first 10 years

1.   Substantial increase in trade and investment, with a positive
     impact on economic growth and job creation


2.   Lower vulnerability to foreign shocks, except for those that
     have originated in the US economy.


3.   Productivity increases associated with technology transfers


4.   Stable and credible legal framework for the solution of
     trade controversies


                                                                     19
Much more, however, needs to be done:


1. Integration of productive chains

2. Expand physical, financial, and informational
   infrastructure, especially at the borders

3. Create compensation funds to promote regionally
   balanced growth

4. Improve existing mechanisms for conflict resolution

5. Develop intelligent borders for the flow of goods,
   services, knowledge and people



                                                         20
Contents

I.    Economic performance, trade and
      investment

II.   The pending agenda

III. Lessons and policy implications

IV. Conclusions




                                        21
A. Macroeconomic convergence

 1.   Inflation rates

 2.   Interest rates

 3.   Exchange rate

 4.   Country risk

 5.   Production

                               22
                                                                                                                                                                    23
                                                                                                                          4.3%
                                                                                                                          2.6%
                                                                                                                          2.1%
Mexican inflation is converging toward the US and




                                                                                                                                          2003/06
                                                                                                                                          2003/04
                                                    Annual inflation rates, Mexico, United States and Canada




                                                                                                                                          2003/02
                                                                                                                                          2002/12
                                                                                                                                          2002/10
                                                                                                                                          2002/08
                                                                                                                                          2002/06
                                                                                                                                          2002/04
                                                                                                                                          2002/02
                                                                                                                                          2001/12
                                                                                                                                          2001/10
                                                                                                                                          2001/08
                                                                                                                                          2001/06
                                                                                                                                          2001/04
                                                                                                                                          2001/02
                                                                                                                                          2000/12
                                                                                                                                          2000/10




                                                                                                                                 Canada
                                                                                                                                          2000/08


                                                                                                                        United
                                                                                                                        States
                                                                                                                                          2000/06
                                                                                                               Mexico
Canadian rates…




                                                                                                                                          2000/04
                                                                                                                                          2000/02
                                                                                                                                          1999/12
                                                                                                                                          1999/10
                                                                                                                                          1999/08




                                                                                                                                                    Source: INEGI
                                                                                                                                          1999/06
                                                                                                                                          1999/04
                                                                                                                                          1999/02




                                                                                                               20
                                                                                                               18
                                                                                                               16
                                                                                                               14
                                                                                                               12
                                                                                                               10
                                                                                                                8
                                                                                                                6
                                                                                                                4
                                                                                                                2
                                                                                                                0
…gradually contributing to interest-rate
convergence between Mexico and the United
States
                Interest rates, Mexico and United States
                   (One month certificated deposits)
35
30
        Mexico
25
20
15
       United
10
       States
5                                                          5.18%
                                                           1.22%
0
     1999/02
     1999/04
     1999/06
     1999/08
     1999/10
     1999/12
     2000/02
     2000/04
     2000/06
     2000/08
     2000/10
     2000/12
     2001/02
     2001/04
     2001/06
     2001/08
     2001/10
     2001/12
     2002/02
     2002/04
     2002/06
     2002/08
     2002/10
     2002/12
     2003/02
     2003/04
     2003/06
Source: INEGI
                                                                   24
                                                                                                                                                                                                                                         25
                                        Average daily volatility in the




                                                                                                                                                                                          30/06/2003
                                                                          (% daily apreciation or depreciation)
                                          foreign exchange market




                                                                                                                                                                                          28/02/2003
                                                                                                                                                                                          30/10/2002
                                                                                                                                                                                          30/06/2002
                                                                                                                                                                                                       Source: SRE with Banxico´s data



                                                                                                                                                                                          28/02/2002
                                                                                                                                                                                          30/10/2001
The Mexican peso has weakened but its




                                                                                                                                                                                          30/06/2001
                                                                                                                                                                                          28/02/2001
                                                                                                                                                                                          30/10/2000
                                                                                                                                                                                          30/06/2000
                                                                                                                                                                                          29/02/2000
                                                                                                                                                                                          30/10/1999
                                                                                                                                                                                          30/06/1999
                                                                                                                                                                                          28/02/1999
                                                                                                                                                                                          30/10/1998
                                                                                                                                                                                          30/06/1998
                                                                          1.20%



                                                                                                                       1.00%


                                                                                                                                      0.80%


                                                                                                                                                0.60%


                                                                                                                                                            0.40%



                                                                                                                                                                          0.20%


                                                                                                                                                                                  0.00%
volatility is relatively low




                                                                                                                                                                                          30/06/2003
                                                                                                                                              10.93

                                                                                                                                                                                          28/02/2003
                                                                                                                                                                                          30/10/2002
                                                                                                                                                                                          30/06/2002
                                        Interbank Foreign
                                          Exchange Rate




                                                                                                                                                                                          28/02/2002
                                                                                                                                                                                          30/10/2001
                                                                           (MXP/USD)




                                                                                                                                                                                                          Source: Banco de México
                                                                                                                                                                                          30/06/2001
                                                                                                                                                                                          28/02/2001
                                                                                                                                                                                          30/10/2000
                                                                                                                                                                                          30/06/2000
                                                                                                                                                                                          29/02/2000
                                                                                                                                                                                          30/10/1999
                                                                                                                                                                                          30/06/1999
                                                                                                                                                                                          28/02/1999
                                                                                                                                                                                          30/10/1998
                                                                                                                                                                                          30/06/1998




                                                                          11.5


                                                                                                                  11

                                                                                                                               10.5


                                                                                                                                         10




                                                                                                                                                        9




                                                                                                                                                                            8
                                                                                                                                               9.5




                                                                                                                                                                    8.5




                                                                                                                                                                                  7.5
Country risk has differentiated from other Latin
American markets
                                                           Country risk
1600
                                         (Emerging Markets Bond Index EMBI+, JP Morgan)

1400

1200

1000

 800                                                                                                                                                                                                                                Latin
                                                                                                                                                                                                                                    America
 600
                                                                                                                                                                                                                                    EMBI+
 400

 200                                                                                                                                                                                                                                Mexico

   0
       28/05/1999

                    28/08/1999

                                 28/11/1999

                                              28/02/2000

                                                           28/05/2000

                                                                        28/08/2000

                                                                                     28/11/2000

                                                                                                  28/02/2001

                                                                                                               28/05/2001

                                                                                                                            28/08/2001

                                                                                                                                         28/11/2001

                                                                                                                                                      28/02/2002

                                                                                                                                                                   28/05/2002

                                                                                                                                                                                28/08/2002

                                                                                                                                                                                             28/11/2002

                                                                                                                                                                                                          28/02/2003

                                                                                                                                                                                                                       28/05/2003
  Source: JP Morgan

                                                                                                                                                                                                                                              26
Mexico’s GDP performance is closely associated
with variations in US GDP
                                            Quarterly GDP, Mexico* and USA**
                                                              (seasonally adjusted series)
  1650                                                                                                                                                                                                           9800

                                                                                                                                                                                                                 9600

  1600                                                                                                                                                                                                           9400

                                                                                                                                                                                                                 9200
                        United States
  1550                                                                                                                                                                                                           9000
                        (right scale)                                                                  Correlation coefficient: 97%
                                                                                                                                                                                                                 8800

  1500                                                                                                                                                                                                           8600

                                                                                                                                                                                                                 8400

  1450                                            Mexico                                                                                                                                                         8200
                                                  (left scale)                                                                                                                                                   8000

  1400                                                                                                                                                                                                           7800
         1998/01
                   1998/02
                             1998/03
                                       1998/04
                                                 1999/01
                                                           1999/02
                                                                     1999/03
                                                                               1999/04
                                                                                         2000/01
                                                                                                   2000/02
                                                                                                             2000/03
                                                                                                                       2000/04
                                                                                                                                 2001/01
                                                                                                                                           2001/02
                                                                                                                                                     2001/03
                                                                                                                                                               2001/04
                                                                                                                                                                         2002/01
                                                                                                                                                                                   2002/02
                                                                                                                                                                                             2002/03
                                                                                                                                                                                                       2002/04
 * Billions of pesos of 1993
** Billions of dollars of 1996
   Source: INEGI
                                                                                                                                                                                                                        27
 This close correlation is due to the deepening
 integration of US and Mexican industrial sectors
                                                   Industrial production
10%
                                    (annual % variation, three month moving average)

8%

6%

4%

2%                                                                                                                                                                                                                      Canada

0%
                                                                                                                                                                                                                                  USA
      1998/03

                1998/06

                          1998/09

                                    1998/12

                                              1999/03

                                                        1999/06

                                                                  1999/09

                                                                            1999/12

                                                                                      2000/03

                                                                                                2000/06

                                                                                                          2000/09

                                                                                                                    2000/12

                                                                                                                              2001/03

                                                                                                                                        2001/06

                                                                                                                                                  2001/09

                                                                                                                                                            2001/12

                                                                                                                                                                      2002/03

                                                                                                                                                                                2002/06

                                                                                                                                                                                          2002/09

                                                                                                                                                                                                    2002/12

                                                                                                                                                                                                              2003/03

                                                                                                                                                                                                                        2003/06
-2%                                                                                                                                                                                                                               Mexico
-4%


-6%                                               Correlation coefficient: 97.2%

-8%


      Source: INEGI

                                                                                                                                                                                                                                           28
B. Trade and investment

  1.   Trajectory and reallocation of trade
       flows in the North American area


  2.   Mexican participation in the US
       market


  3.   Long and short term capital flows into
       Mexico


                                                29
   Seventy-six percent of Mexico’s total trade is
   oriented toward the United States

                  Africa and the                                              Total trade (MD)
                  Middle East                                      United
        Eastern
                                                                   States    Period     Level
        Europe

                                                                              1999
                        0%
                       1%                                                              273,915.8
      Western                  0%
                              0%
      Europe      7%
                                                                              2000     339,415.2
                             7%       0%
                                       0%




Latin America                        6%                                76%
              4%
                                             0%
                                            7%
                                                           81%   78%          2001     325,506.5
and the                 4%          3%      3%
                                            5%
                                             2%
                                                     82%
Caribbean                           6%                                        2002     329,360.5
                         8%          2%

                10%                           1999
     Asia                    2%                                                Performance

                                              2000                           Period     % var
                       2%

            Canada                                                           1999-00     23.91
                                                  2001
                                                                             2001-02     1.18
                                                  2002
     Source: INEGI
                                                                                                   30
   Exports shipped to United States represent
   90% of the Mexico’s total sales abroad
                                                                               Mexican total
                                                           United States       exports (MD)
                  Africa and the
                  Middle East                                                Period     Level
        Eastern
        Europe
                                                                              1999     135,752
       Western    0% 0%


                 3%            0%
                               0%                                             2000     166,066
       Europe              4%        0%
                                      0%


Latin America                        4%    0%                                 2001     158,264
               4%         4%               4%
and the                             4%
                                    1%
                                           4%
                                           1%
                                           2%      89%   89%   89%     89%
Caribbean      2%
                          1%
                          2%
                                    2%                                        2002     160,682
               2%
    Asia
     Canada                                     1999                          Performance

                                                2000                         Period     % var

                                                                             1999-00    22.3
                                                2001
                                                                             2001-02     1.5
                                                2002
    Source: INEGI
                                                                                                 31
  Sixty three percent of the Mexican imports come
  from the United States
                     Africa and the Middle East
                                                                                    Mexican total
        Eastern Europe                                            United States     imports (MD)
                           0%
                          1%                                                      Period      Level
      Western
      Europe                     1%
                                1%
                                                                                  1999      138,318.8
                   10%
                          10%                                           63%
                                                                                  2000      173,552.9
                                       0%
                                        1%




Latin America                     9%            1%
                                               0%
                                                                  68%
                                              10%           73%
and the       4%         3%      3%           2%
                                              9%
                                                      76%                         2001      167,425.3
Caribbean                                      2%

                                  11%
                                                                                  2002      168,678.7
                                        2%
                         15%
                                                 1999
                                                                                    Performance
                   19%                3%           2000
        Asia                                                                      Period      % var
                                                   2001                           1999-00      25.47
                                         3%
                                                                                  2001-02      0.75
                                      Canada       2002
  Source: INEGI
                                                                                                        32
  Since 1994 Mexican exports have expanded
  notably and are more concentrated in the
  manufacturing sector
                                    Total Mexican exports (billions of dollars of 2002)

                                                 GATT                                                    NAFTA
               Manufactures
                                                 Accession                                               Growth                                              $160.7
                                                 Growth                                                  1993-2002:
               Mining                            1985-1993:                                              149%
                                                 80%
               Agriculture

               Petroleum                                                                                                                                                88%



      $32.6
20%
67%                                                                                                                                                                     9%
       1980
              1981
                     1982
                            1983
                                   1984
                                          1985
                                                 1986
                                                        1987
                                                               1988
                                                                      1989
                                                                             1990
                                                                                    1991
                                                                                           1992
                                                                                                  1993
                                                                                                         1994
                                                                                                                1995
                                                                                                                       1996
                                                                                                                              1997
                                                                                                                                     1998
                                                                                                                                            1999
                                                                                                                                                   2000
                                                                                                                                                          2001
                                                                                                                                                                 2002
      Source: SRE with INEGI data
                                                                                                                                                                              33
  Imports have also increased, driven primarily by
  the demand of intermediate goods

                                     Total Mexican imports (billions of dollars of 2002)


                Consumption                       GATT                                                     NAFTA
                                                  Accession                                                Growth                                             $168.7
                goods                             Growth                                                   1993-2001:
                Intermediate                      1985-1993:                                               107%
                                                  237%
                goods

                Capital goods

                                                                                                                                                                         75%


      $40.7

61%
                                                                                                                                                                         12%
27%
        1980
               1981
                      1982
                             1983
                                    1984
                                           1985
                                                  1986
                                                         1987
                                                                1988
                                                                       1989
                                                                              1990
                                                                                     1991
                                                                                            1992
                                                                                                   1993
                                                                                                          1994
                                                                                                                 1995
                                                                                                                        1996
                                                                                                                               1997
                                                                                                                                      1998
                                                                                                                                             1999
                                                                                                                                                    2000
                                                                                                                                                           2001
                                                                                                                                                                  2002
      Source: SRE with INEGI data
                                                                                                                                                                               34
NAFTA has thus produced a significant trade
expansion for the US, Mexico and Canada
                                                     Intra-regional trade
North American trade
integration 1993-2002:                                (billions of dollars)
                                                                                  659
                                                                                         615 604
1.   Trilateral trade                                                      568
     increased 109%                                                 512
                                                             475
                                                     418
2.   Mexico’s participation                   375
                                       339
     in intra-regional         289
     increased from 15% to
     20%


3.   Last year’s trade
     decline is due to the
                                1993

                                       1994


                                              1995

                                                      1996

                                                             1997


                                                                    1998


                                                                           1999

                                                                                  2000


                                                                                         2001

                                                                                                2002
     sluggish performance
     of the US economy        Source: SRE with USDOC, Statistics Canada and INEGI
                                   data
                                                                                                       35
Mexico is the second trade partner of the
United States...
                 Main US trade partners                                         Participation of Mexican products in the US
                (total trade, billons of dollars)                                                market (%)

400      370                                                             NAFTA start
                                                                                                                                                11.5 11.6
                                                                         date                                                            11.2
                                                             1993                                                                 10.7
                                                                                                                           10.4
300
                                                                                                                    9.9
                      232                                    2002
      211                                                                                                    9.2

200                              173
                              155           147                                                       8.3


                                                                                               7.5
                 85                                    89
100                                                                 74
                                                                                        6.9
                                       40         48           48                6.6
                                                                         6.3

 0
                                                                         1991
                                                                                 1992
                                                                                        1993
                                                                                               1994
                                                                                                      1995
                                                                                                             1996
                                                                                                                    1997
                                                                                                                           1998
                                                                                                                                  1999
                                                                                                                                         2000
                                                                                                                                                2001
                                                                                                                                                       2002
                               Japan


                                        China
       Canadá


                   Mexico *




                                                               Kingdom
                                                   Germany



                                                                United




Source: Ministry of the Economy with USDOC data
                                                                                                                                                              36
…and it is the second largest export market for
the US
                                    US exports
                               (billions of dollars)


                                                                 160.9
         Canada
                                                   100.1

                                                   97.47
          Mexico*
                                      45.3

                                       51.4
            Japan
                                      47.9
                                                                 2002
  France and                        52.2
United Kingdom                   39.5                            1993

 China, Singapur                       50.9
 and Hong Kong                 30.1

                     0            50              100      150           200

Source: Ministry of the Economy with USDOC data
                                                                               37
United States is the main investor in Mexico

                         Foreign Direct Investment
          (billions of dollars, cumulative 1994-2002: 112.4 bd)
                        TOTAL                             USA
15.5

13.5

11.5

 9.5

 7.5

 5.5

 3.5
        1994


                 1995


                          1996


                                  1997


                                           1998


                                                  1999


                                                         2000




                                                                        2002
                                                                2001*
* Excludes the Banamex-Citigroup transaction
Source: Ministry of the Economy
                                                                               38
C. NAFTA’s impact by sector



 1.   Agriculture



 2.   Manufacturing




                              39
Reciprocal tariff eliminations helped Mexican exporters
increase their participation in the US market…
                   Mexican agricultural exports to the United States

                          Millions of                            Millions of
                                         TCPA                                   TCPA
                           dollars                                dollars
         Product                                      Product
                                         1993-                                  1993-
                         1993    2001                            1993   2001
                                         2002*                                  2002*
Berries                  0.22    21.24   69.6%   Broccoli        6.68   35.95   18.70%
Beans (dehydrated)       0.02     1.07   66.5%   Pineapple       1.46    6.89   20.28%
Tamarind                 0.15     4.57   44.5%   Esqueje         1.80    8.01   15.93%
Avocado                  3.63    39.45   36.5%   Corn (sweet)    2.94   12.62   16.89%
Vegetable (mix)          3.75    32.77   27.6%   Pepper          4.77   19.97   16.38%
Papaya                   5.38    40.74   23.1%   Fresh Flowers   4.92   19.49   16.07%
Mango                    0.76     5.74   25.3%   Artichokes      0.21    0.75   15.85%
Oranges                  0.67     4.79   30.9%   Cabbage         2.08    7.39   15.41%
Turnip                   0.03     0.19   18.2%   Chickpea        7.07   25.08   11.33%
Leek                     0.75     4.25   18.4%   Spinach         1.48    5.23   11.96%

* Includes the January-October
  Source: Ministry of the Economy
                                                                                         40
…placing them among the main suppliers of a diverse
set of goods in the US market
                  Mexican agricultural goods in the US market

                                            Participation in the US market
            Product
                                    1993                2001                 2002*
 Avocado                             3.6                 21.6                32.7
 Garlic                              48.1                43.2                28.4
 Onion                               81.2                74.0                73.3
 Chickpea                            61.8                75.0                44.5
 Corn (sweet)                        0.0                 94.1                93.0
 Mango                               25.0                90.3                89.0
 Turnip (fresh)                      11.7                52.9                88.7
 Okras                               0.0                 96.9                98.3
 Papaya                              70.6                74.0                68.4
 Pepper                              0.0                 99.2                99.6
 Tomato                              91.7                67.2                67.7
 Carrot                              13.5                23.8                29.4

* January-October
  Source: Ministry of the Economy with USDOC data
                                                                                     41
NAFTA has benefited Mexican consumers by fostering
competition among suppliers, thereby lowering the
prices of many goods
                                                      Relative prices
                                    Product         change 1994-2001
                                                            (%)
                              Pineapple                     6.4
                              Lettuce                       -0.5
                              Chickpea                      -8.5
                              Grape                        -11.0
                              Garlic                       -14.8
   Prices of staples in the   Carrot                       -15.1

 average Mexican diet has     Papaya                       -16.4
                              Melon                        -20.4
          declined
                              Mango                        -21.5
                              Corn (sweet)                 -25.0
                              Tomato                       -34.0
                              Onion                        -34.8
                              Oranges                      -36.4
                              Grapefruit                   -41.5
                              Source: Ministry of the Economy
                                                                        42
Mexico’s manufacturing sector has also been a
beneficiary of NAFTA, through greater exports and lower
consumer prices

 Exports to the USA and Canada                        Real price change of
   of manufactured products                          manufactured products

                                    TCPA                             Relative price
             Products                                                  change*
                                  1994-2001            Products
                                                                      1994-2001
Electrical and electronic
devices, machinery and              22.3%     Electrical devices        -14.9%
equipment
                                              Electronic devices        -19.9%
Textiles and cloths                 21.2%
Auto-motors                         21.0%     Automotives               -16.0%
Auto-parts                          12.8%
                                              Auto-parts                 -3.3%
Steel Industry                      12.4%


 Positive export performance due                      Real price decrease
                 to NAFTA

Source: Ministry of the Economy
                                                                                      43
Output in sectors with significant backward and
forward linkages has increased

                              NAFTA success stories



                                          Mexican total
                      Annual exports                      Jobs created   Market share
       Sector                                exports
                      (million dollars)                   since NAFTA     in USA (%)
                                           (share, %)



 Automotive sector        33,000              21%           200,000          15%


 Electrical and
                          56,000              36%           351,000          19%
 electronic sector

 Textile and cloths
                          11,000               7%           500,000         12.4%
 sector


Source: Ministry of the Economy


                                                                                        44
D. Effectiveness of Mexico’s free trade
agreements



 1.   Evolution of Mexican exports



 2.   Performance of Mexican imports




                                          45
 Mexican exports to the United States, Costa Rica and
 the G3 have increased notably since the launching of
 the respective FTAs…
 Exports (Index based on real exports, constant dollars of 1990,                                                                     Time to double
                 semiannual moving average)                                                                                               sales
                                   600                                                                                             Country         Months
                                                                                                                                   Costa
                                                                                                                                                     15
                                                                                                                                   Rica
                                   500
                                                                                                                                    USA              33
                                                                                                                                    G3                5
                                   400                                                                                             Chile             38
                                                                                            Costa Rica                            Canada            n.d.*
                                   300                                                                                          * Not duplicated
                                                                                                     EUA
                                                                                            G3                                    Time to triple sales
                                   200                                                                                            Country          Months
                                                                                                                  Chile
                                                                                                                                  Costa
                                                                                                    Canadá                                           41
                                   100                                                                                            Rica
                                                                                                                                   USA               76
                                                                                                                                   G3                74
                                      0
                                                                                                                                  Chile              39
                                          0
-6 0

       -5 0
              -4 0

                     -3 0
                            -2 0

                                   -1 0


                                              10

                                                   20
                                                        30

                                                              40

                                                                   50
                                                                        60

                                                                             70
                                                                                  80

                                                                                       90
                                                                                             10 0
                                                                                                    11 0

                                                                                                           12 0
                                                                                                                  13 0

                                                                                                                         14 0
                                                             Number of months after FTA
                                                                                                                                 Canada             n.t.*
Source: DGREB con datos de INEGI                                                                                                * Not tripled
                                                                                                                                                            46
       …but exports to Bolivia and Nicaragua, with whom
       Mexico also has FTAs, have not grown significantly
         Exports (Index based on real exports, constant dollars of
                    1990, semiannual moving average)
                                    300                                                                                  Time to double sales


                                    250                                                                                   Country      Months

                                    200                                                                                   Bolivia        19


                                    150                                                                                Nicaragua         23
       Triángulo del
       Norte                                                                                      Bolivia
                                    100
                                                                             Nicaragua                                      E.U.        n.d.
                                                              Unión Europea
                                                         Uruguay                                                         Northern
                                      50                                                                                                n.d.
                                                                                                                         Triangle

                                           0                                                                             Uruguay        n.d.
                                               0
-6 0

        -5 0

               -4 0

                      -3 0

                             -2 0

                                    -1 0



                                                   10

                                                        20

                                                              30

                                                                   40

                                                                        50

                                                                              60

                                                                                   70

                                                                                        80

                                                                                             90

                                                                                                  10 0

                                                                                                         11 0

                                                                                                                12 0
                                                                                                                       * Not doubled
                                                             Number of months after FTA
       Source: DGREB con datos de INEGI
                                                                                                                                                47
       The FTAs with Chile and Costa Rica have generated a
       substantial increase in Mexican imports from them…
        Imports (Index based on real imports, constant dollars of
                   1990, semiannual moving average)                                                                              Time to doubled
                                    4500                                                                                            purchases
                                                                                          Costa Rica
                                    4000                                                                                         Country    Months

                                    3500                                                                                         Costa
                                                                                                                                               6
                                                                                                                                 Rica
                                    3000
                                                                                                                                 Chile        11
                                    2500

                                    2000
                                                                                                                                   Time to triple
                                                                                                               Chile
                                    1500                                                                                             purchases

                                    1000                                                                                         Country    Months

                                    500                                                                                          Costa
                                                                                                                                               12
                                                                                                                                 Rica
                                        0
                                                                                                                                 Chile         14
                                            0
-6 0

        -5 0
               -4 0

                      -3 0
                             -2 0

                                     -1 0


                                                10

                                                     20
                                                          30

                                                                40

                                                                     50
                                                                          60

                                                                               70
                                                                                    80

                                                                                         90
                                                                                              10 0
                                                                                                     11 0

                                                                                                            12 0
                                                                                                                   13 0

                                                                                                                          14 0
                                                               Number of months after FTA
       Source: DGREB con datos de INEGI
                                                                                                                                                     48
       …just like the FTAs with the United States, Canada,
       Venezuela, Colombia, Guatemala, Honduras and El
       Salvador
        Imports (Index based on real imports, constant dollars of                                                                 Time to double
                   1990, semiannual moving average)                                                                                 purchases
                                    350                                                                                          Country     Months
                                                                                                                                Nicaragua       13
                                    300                                                                                          Canadá         69
                                               Nicaragua
                                                                                                                                    G3          79
                                    250
                                                                                                    Canadá                         USA          65
                                                                                             G3
                                                                                                     EUA                         Uruguay       n.d.
                                    200
                                               TN
                                                                                                                                   Time to triple
                                    150                                                                                              purchases
                                                                                                                                 Country     Months
                                    100
                                                                                                                                Nicaragua       13
                                                                                                                                Canadá         n.t.
                                     50
                                               Uruguay                                                                             G3          n.t.
                                       0                                                                                          USA          n.t.
                                                                                                                                Uruguay        n.t.
                                           0
-6 0

        -5 0
               -4 0

                      -3 0
                             -2 0

                                    -1 0


                                               10

                                                    20
                                                         30

                                                               40

                                                                    50
                                                                         60

                                                                              70
                                                                                   80

                                                                                        90
                                                                                             10 0
                                                                                                    11 0

                                                                                                           12 0
                                                                                                                  13 0

                                                                                                                         14 0
                                                              Number of months after FTA
       Source: DGREB con datos de INEGI
                                                                                                                                                      49
       The trend in imports from Bolivia and Israel, however,
       has not changed with the FTAs
        Imports (Index based on real imports, constant dollars of
                   1990, semiannual moving average)                                                                                   Time for a 50%
                                                                                                                                         increase
                                    160
                                                                                                                                    Country     Months
                                    140                                                                                            Northern
                                                                                                                                                  2
                                                                                                                                   Triangle
                                    120                                                                                               E.U.       N.A.
                                                    UE
                                                                                             Bolivia                                Bolivia      N.A.
                                    100
                                                          Israel                                                                     Israel      N.A.
                                                                                                                                * Not reached
                                     80
                                                                                                                                     Time to double
                                     60                                                                                                purchases
                                                                                                                                   Country      Months
                                     40
                                                                                                                                  Northern
                                                                                                                                                 n.d.
                                                                                                                                  Triangle
                                     20
                                                                                                                                     E.U.        n.d.
                                       0                                                                                           Bolivia       n.d.
                                           0
-6 0

        -5 0
               -4 0

                      -3 0
                             -2 0

                                    -1 0


                                               10

                                                    20
                                                         30

                                                               40

                                                                    50
                                                                         60

                                                                              70
                                                                                   80

                                                                                        90
                                                                                             10 0
                                                                                                    11 0

                                                                                                           12 0
                                                                                                                  13 0

                                                                                                                         14 0
                                                                                                                                    Israel       n.d.
                                                              Number of months after FTA
       Source: DGREB con datos de INEGI                                                                                         * Not doubled
                                                                                                                                                         50
Contents
I.     Economic performance, trade and
       investment

II.    The pending agenda


III.   Lessons and policy implications

IV. Conclusions




                                         51
A. Low domestic-content integration
of Mexican products


 1.   Relevance of the in-bond sector for
      manufacturing exports



 2.   Low domestic-content of goods
      produced in in-bond plants



                                            52
        The in-bond industry generates more than 50%
        of manufacturing exports…
                         Mexican exports of manufactured goods
                             (constant billion dollars of 2000)

                                                                          146    145
                                                                                        137
                                                                   132
           In-Bond Industry           Other                 119
                                                                           66    66
                                                     100                                62     45.5%
                                                                   63
                                              83.8          59
                                       70.8          52
                               56.4           45
                        50.6           38
                 41.3
          37            24
                               27
                                                                           80    79     75     54.5%
                 20                                                69
          18                                                60
49.9%                                                48
                                       33     39
                 22     27     29
50.1%     19
          1991

                 1992

                        1993

                               1994

                                       1995

                                              1996

                                                     1997

                                                            1998

                                                                   1999

                                                                          2000

                                                                                 2001

                                                                                        2002
        Source: SRE with INEGI data
                                                                                                       53
…but it uses very few domestic components…
                                   In-bond industry inputs
                                  (billions of pesos of 2002)



                                                                       580
          Imports          Domestic                             543    18
                                                                              533    533
                                                         521     16
                                                         14                   19     20     3.7%
                                                  475
                                           440
                                    378

                           254                                  527
                                                                       563
                    216                           465
                                                         507                  514    513    96.3%
  184       189                            431
                                    372

                           250
            186     212
   181
   1991

             1992

                    1993

                           1994

                                    1995

                                           1996

                                                  1997

                                                         1998

                                                                1999

                                                                       2000

                                                                              2001

                                                                                     2002
 Source: SRE with INEGI data
                                                                                                    54
Contents
I.     Economic performance, trade and
       investment

II.    The pending agenda


III.   Lessons and policy implications


IV. Conclusions




                                         55
  Lessons
1. Mexico’s unilateral trade liberalization that took place
   during the late 1980’s was too fast, too abrupt and
   without being accompanied with appropriate
   promotional and supporting policies as well as the
   necessary sequencing of such policies as to avoid
   excessive destruction of productive industrial chains
   and linkages as in effect happened.


2. By the time the NAFTA was enacted, beginning in
   1994, a large proportion of previously existing
   productive chains in the country’s manufacturing
   industry had been obliterated by foreign competition.

                                                              56
3.   Free trade cannot address every development
     problem -it is just one instrument among many
     in the policymaker’s tool kit


4.   Productivity increased by time requires
     continuous technological innovation and
     expansion of human capital


5.   Export promotion alone does not guarantee
     the integration of productive chains



                                                     57
 Implications: A few examples

1.   Implement domestic policies to redistribute incomes
     between the north and the south of the country, which
     implies the reduction of differences in productivity levels.

2.   Consider the establishment of cross-border, social-cohesion
     funds to help balance the development process and
     provide adjustment assistance: the leveling out of
     availability and quality of physical and telecommunications
     infrastructure, a drastic reduction in the “digital divide”, and
     the expansion and spreading of human capital.




                                                                        58
3.    Create an environment that favors continuous
      productivity increases

     a.   Invest more in education and training

     b.   Improve production processes

     c.   Modernize physical and financial infrastructure

     d.   Promote technology transfers



4.    Seriously consider the possibility of “NAFTA plus” with
      structural adjustment assistance funds, a customs union,
      a common market including labor or even EU-style
      arrangements.



                                                                 59
Contents

I.     Economic performance, trade and
       investment

II.    The pending agenda

III.   Lessons and implications

IV. Conclusions




                                         60
 Conclusions - The bad
1. Free trade has yet to benefit the Mexican south
   and that is essentially dependent on appropriate
   development policies adopted by Mexico and
   development assistance provided by the other
   NAFTA partners.


2. Existing dispute settlement procedures have been
   insufficient to address notable trade controversies
   (cross-border transportation, agriculture), hence it
   is necessary to consider the creation of a North
   American Commission, a permanent North
   American Court on Trade and Investment that
   replaces the current NAFTA panels, and possibly
   even a North American Parliamentary Group.
                                                          61
3.   The absence of adjustment assistance funds
     slows down the process of factor reallocation
     and trade integration and the overall growth
     potential of the region.


4.   Mexico’s growth has become excessively
     dependent on the dynamics of the US
     economy. It has to rely more on its own
     domestic and third international markets and
     keep in tune with the US economy’s pace of
     technological change.



                                                     62
Conclusions - The good
1.   NAFTA provides a stable legal framework for the expansion
     of trade and investment

     a.   Significant increase in Mexican trade and benefits for
          the three parties involved.

     b.   Significant increase in FDI flows

     c.   Greater competitiveness of the manufacturing sector

2.   NAFTA has helped to spur growth and job creation in
     Mexico

3.   Mexico’s trade negotiating stance in world markets has
     improved because of NAFTA

                                                                   63

				
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