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    Policy Brief

    For the Unit for Economic Relations and International Cooperation inMexico

    Policy Recommendations for the Advancement of International

    Trade in Mexico

    EXECUTIVE SUMMARY

    Mexico is a free market economy with both modern industry and agriculturalsectors that have heavy foreign direct investment along with dominance in private sectors.Recent governmental administration has attempted to expand growing industries inrailroads, telecommunications, electricity generation, natural gas distribution andmanufacturing. Mexico is currently on the rebound from the profound impacts of the 2008global financial crisis where its economy shrank by 6.1% in 2009 alone. Mexicos GDP(PPP) had a 5.25% negative growth in 2009 and dropped from 1.553 trillion in 2008 to

    1.471 trillion in 2009 (in US dollars). Unemployment skyrocketed as inflation soared, and700,000 people were out of jobs by 2009; 260,000 of which were in the manufacturingindustry, Mexico's main industry for trade18. All of Mexicos production has slowed and itseconomy, which was the strongest among Latin American countries in the early 2000s, isnow faced with the challenge of re-growth. In addition, impediments to growth existinternally with problems concerning education, infrastructure, labor laws, unemployment,energy private sectors, and the omnipresent drug cartels, to name a few. The potential forimprovement are in Mexicos future, however, as evidenced by its increasing GDP, free-trade agreements such as NAFTA, and the fact that in the past year its economy hasrebounded and grew 5.4%, according to The Economist. Trade is an important factor in itsfuture growth, as last years exports accounted for almost a third of Mexicos trillion dollar

    GDP. It is projected that Mexico will continue to grow as it builds its free-tradeagreements, continues to exports, and implements our suggested policies to enhanceinternational trade.

    Poverty is also one of the foremost issues facing Mexico. Extreme poverty isclassified as living on less that $1.25 a day, or at the level where basic necessities for livingsuch as food and water is not always available. According to The World Hunger EducationService, over 8% of the people in Latin America are living under extreme poverty. For adeveloping country such as Mexico this is a dire concern. Through our recommendationswe believe we can stimulate the Mexican economy and promote economic growth, creatingjobs, which can help end the cycle of poverty that is gripping our nation, ultimatelyallowing Mexico to look more attractive for international trade in the global arena.

    CURRENT MAJOR TRADE ISSUESThe prevalence of Transnational Criminal Organizations (TCOs) as the result of the

    Mexican Drug War is currently one of the most pressing trade issues in Mexico. SincePresident Felipe Calderon took office in 2006, our government has been actively seekingmethods to fight such illicit organizations. Since the beginning of Calderons term it isestimated that there have been approximately 34,612 deaths as a direct result of the war on

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    drugs1. Internal conflict only continues to escalate as evidenced by a recent TSO expansionbeyond narcotics into kidnapping, hi-jacking, migrant smuggling, and extortion. Violencealong Mexican roads and highways is of particular concern as the majority of tradebetween the United States (Mexicos main exporting partner) and Mexico takes placethrough ground transportation.

    This past summer heavy-duty truck manufacturers in particular have experiencedfirst-hand the surge in drug cartel power. Multinational corporations such as DaimlerTrucks North America, Navistar, GM and Ford have witnessed the necessity of increasingsecurity for ground-transported shipments. A number of cars and trucks were hi-jacked bydrug cartels in order to turn them into heavy-duty tanks or other versions of weaponry.Looking at Daimler specifically, not only do they export the vast majority of their trucks toMexico, but they also use Mexico as a thoroughfare for vehicles heading to Latin Americancountries. Daimler was ultimately forced to find an alternate mode of transportation fortheir trucks either through shipments via water or alternate ground routes. If the drugcartels continue to escalate the level of violence in Mexico, the negative implications onMexicos international trade market will be severe.

    In addition to the pervasive presence of the drug cartels, there is also widespreadcorruption among the police and judiciary in Mexico. State and local police forces sufferfrom lack of training and funding, and are a weak deterrent to criminals acting on behalf oforganized crime and armed with an impressive array of weapons2. It is also suspected thatmany local police forces receive money from organized crime to look the other way,oftentimes only given the choice between accepting money and losing their life.Circumstances are similar with the judiciary; they are overworked, underpaid, and lacksufficient training. It is also not uncommon for Mexicos judges to be intimidated or bribedwhen dealing with drug cases. As a result of its corruption and inefficiency, few Mexicanshave confidence in the police or the judicial system, which leads them to fail to reportmany criminal activities. This leads to low rates of convicted criminals, which in turncontributes to Mexicos high crime rate, which ranges from everything from street crimesto organized crime.

    There also continues to exist structural inefficiencies within Mexico, whichlimits improvements in productivity and living standards. Especially through looking at theagriculture industry, these inefficiencies include a lack of infrastructure, inadequatesupplies of credit, a communal land structure for many producers, and a large subsistencerural population that is not part of the formal economy3. Included in such structuralinefficiencies is the ever-present gap between the rich and the poor and the opportunities or

    11"Travel Warning U.S. Department of State Bureau of Consular Affairs - Mexico."

    Travel.State.Gov. U.S. Department of State, 22 Apr 2011. Web. 09 Oct 2011.

    .

    22"Mexico Country Specific Information." Travel.State.Gov. U.S. Department of State, n.d. Web. 09

    Oct 2011.

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    lack of opportunities available to each.Another concern is the increase in power the drug cartels have recently obtained.

    They have succeeded in instilling their own individual zones of impunity in which theydictate their own laws and levy their own taxes. There are estimated to be about 233 suchzones across the country, where crime runs rampant and is largely uncontrolled. As civilian

    death tolls continue to rise, Mexican residents continue to lose faith in their government,only spurred by the recent trend of cartels targeting newscasters, bloggers, and journalistsas a way to eliminate drug war coverage.

    The Calderon administration has been actively pursuing new methods to curbdrug related violence. In March 2010, in conjunction with the United States, they decidedto refocus their efforts on strengthening civilian law enforcement institutions andrebuilding communities crippled by poverty and crime4. Through strengthening localMexican communities, the government hopes to help deter youths from getting involvedwith the cartels due to socioeconomic hardships. Another method for absolving crime istaking the focus away from military assistance and focusing on the development of civilianpolice training, not necessarily equipment. Despite this new method to combat TSOs, there

    have since been little improvements, and outrage over the rising death tolls have causedmassive demonstrations and street protests in Mexico City. According to a recent poll,Mexicans now rate public safety above the economy as Mexicos worst problem5.

    While the Mexican government has focused on eradicating the drug cartels, it hasplaced the responsibility of drug trafficking prevention in the hands of the United States.The Obama administration has donated billions of dollars towards anti-drug efforts. Thefunds specifically went towards U.S. contractors who were paid to train local prosecutorsand police, help eradicate fields of coca, and operate surveillance equipment. There hasalso been mass criticism in response to this funding because as of now the death tolls onlyseem to be rising as the political and economic turmoil of Mexico intensifies, especially inthe face of the upcoming Mexican presidential election in 2012.

    EXPORT/IMPORT PARTNERSMexicos geo-strategic position allows it to benefit greatly due to the trilateral trade

    agreement between the North American states: Canada and the United States (US). TheNorth American Trade Agreement (NAFTA) has been extremely advantageous for Mexicoallowing it to trade freely with the US, thus making them its top export and import partner.Over the recent years Mexicos trading partners have remained relatively the same,however percentages of trade has varied tremendously. According to the CIA WorldFactbook, Mexicos top exporting partners are unsurprisingly, the United States of America

    44

    Hidalgo, Oscar. "Mexican Drug Trafficking." The New York Times. The New York Times, 03 Aug2011. Web. 12 Oct 2011..

    55Ellingwood, Ken. "Criticism of Calderon mounts over Mexico drug violence."Los Angeles Times.

    Los Angeles Times, 06 May 2011. Web. 09 Oct 2011. .

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    with 73.5% of trade and Canada, a far off second with 7.5% of trade, followed by Germanywith 1.7% trade (2010). In 2006, the United States held 90.9% of trade, Canada only 2.2%and Spain, Germany and Colombia all with trade sub-two percent. Mexicos top importingpartners include the United States again with 60.6%, China with 6.6%, South Korea with5.2%, and Japan with 4.1% of trade (2010). In 2005, estimates put the United States with

    53.4% trade, China with 8%, and Japan with 5.9%24

    .Overall, Mexico has a great variety of trading partners due to its participation in 12different free-trade agreements among 44 countries. The US and Canada will remainMexicos top trading partners because they share borders, allowing transportation costs toremain low due to distance. In accordance with the Gravity Model due to close borders andcultural affinity, Mexican trade is fully incorporated with its North American partners:close to 90% of Mexican exports and 50% of its imports are traded with the US andCanada. Since Mexico, the US, and Canada engage in many trade operations, cooperationis imperative, especially due to the implications of NAFTA.

    Overall trade has increased in Mexico over the recent years due to various tradeagreements and its large labor market. In 2005, Mexico was the world's fifteenth largest

    merchandise exporter and twelfth largest merchandise importer with a 12% annualpercentage increase in overall trade. Mexico is the biggest exporter and importer in LatinAmerica; in 2005, Mexico alone exported US $213.7 billion, roughly equivalent to the sumof the exports of Brazil, Argentina, Venezuela, Uruguay, and Paraguay. While trade withthe US increased 183% from 19932002, and trade with Canada increased by 165%, othertrade agreements have shown even more impressive results: trade with Chile increased285%, with Costa Rica 528% and Honduras 420%. Trade with the European Unionincreased 105% over the same time period23.COMMODITIES AND TRADE

    Mexico produces and trades a majority of agricultural and industrial products. Itsagriculture products include: corn, wheat, soybeans, rice, beans, cotton, coffee, fruit,tomatoes, beef, poultry, dairy products, and wood products. Its industrial productionincludes: processed foods and beverages, tobacco, chemicals, iron and steel, petroleum andoil, mining and silver, textiles, clothing, motor vehicles, consumer durables, and personalelectronics, parts and computers. With all these products its export commodities includealmost all production products from the manufactured goods, oil and oil products,electricity, silver, fruits and vegetables, coffee, and cotton24. Mexicos large land resourcesand labor force propels its exports to be related to agricultural harvesting and production ofmanufactured goods. Manufactured goods are a large industry all in itself and productsrange across the board from computers and electronics to motor vehicles and aircrafts, toclothing textiles, tobacco, food and more. This is directly correlated to Mexicos labor-intensive industry, which allows Mexico to produce these goods for other wealthy nations,using Multinational Corporations (MNCs) to its advantage. The technology and training isprovided, and because Mexico is not a capital rich country, production of such labor-intensive goods seems to fit its mold and allows for greater manufactured exports. MNCshave really made an impact coming in to take advantage of Mexicos large labor supply,low wages, and lesser governmental regulations.

    Mexicos imports seem to reflect upon its exports, because they happen to becommodities that accelerate its production of export goods. This makes sense because

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    Mexico lacks the capital for research and development and technology to allow it to keepup with the leading advances in productions from agricultural harvesting to motor vehicleand aircraft manufacturing to oil and energy refineries. Therefore Mexicos main importcommodities include: metalworking machines, steel mill products, agricultural machinery,electrical equipment, car parts for assembly, repair parts for motor vehicles, aircraft and

    aircraft parts. All these imports are directly related to its production of its exportcommodities.Mexicos most interesting numbers are in its production, consumption, and trade of

    electricity, oil and natural gas. Mexico produces 239.1 billion kilowatt-hours (kWh) ofelectricity where its consumption is only 181.5 billion kWh. It exports only 1.32 billionkWh and still imports 699.2 million kWh. The reason for its limited exports of kWh is thecost and difficulty of transporting the kWh electricity. Mexicos oil production is 2.983million bbl/daybbl is a unit measuring the rate at which petroleum is produced at therefinery and represents a barrelwhile its consumption is 2.073 million bbl/day. Mexicoexports 1.511 million bbl/day and imports 496,000 bbl/day. Mexicos natural gasproduction is 59.07 billion cu ma measure of natural gas in cubic meterswhile its

    consumption is greater at 62.42 billion cu m. It exports 200 million cu m, and imports14.59 billion cu m per year24. The access oil, electricity and gas are held in reserves and canbe used for trading or unexpected increase in demand of any resource.

    The reason Mexico still imports some electricity, and oil, while it has excess inreserves and exports multiple amounts more of those products is because those imports aresigned to contracts of trade and they receive these goods even though they may not have adirect need for them. These imports can be done through companies or MNCs withinMexico that have trade agreements with other companies and therefore receive oil, orelectricity simply at different rates and included in trade deals. Natural gas on the otherhand has a national consumption higher than its national production, so therefore there arevery minimal exports and greater imports of that commodity.

    Mexicos significance for tradable and non-tradable commodities lies is its barriersto trade. Since Mexico has established so many free-trade agreements, barriers to tradehave been drastically reduced thus allowing Mexico to benefit a great deal, opening itsoptions for trade. However transport costs always plays an important role, thereforeproducts such as electricity cannot be traded as efficiently. Mexicos imports are inputfactors of production for their exports and therefore its imports aid to its economy andtrade. The country continues to be relatively poor and is still in the process of developing,therefore a large portion of our exports in agriculture, clothing and manufactured goods areconsumed by our population rather than entirely exported. Because Mexico has low wagesand therefore production and manufacturing of such items are cheaper, we produce andexport labor-intensive goods with free trade, and also have no need to import such cheapgoods where prices normally rise due to production and transportation costs.

    TARIFF AND NON-TARIFF BARRIERS TO TRADE

    Probably the most important trade agreement in the history of Mexican trade is theNorth American Free Trade Agreement (NAFTA). NAFTA was put into place starting thecalendar year in 2004. It was to immediately eliminate all quota and tariff barriers betweenthe US, Mexico, and Canada in efforts to promote more localized trade and help stimulateeconomic growth within the three countries. In Mexico especially the hope was for

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    significant economic growth to help large areas of our country where unemployment andpoverty are out of control. Poverty is one of the largest problems Mexico faces, andthrough economic growth perhaps it can be helped.

    One of the prevailing beliefs behind NAFTA is that each country in the agreementhas a substantial competitive advantage in various aspects of production. Through these

    differences all countries involved can mutually benefit from the increase in trade. Mexicohas a distinct competitive advantage when it comes to unskilled labor. Due to the unionsystem in the United States, the cost per hour has risen exponentially in the past fifty years.A worker in Mexico can perform the same task equally well and costs a company a fractionof the cost it would have in the United States. This alone has been a leading cause behindthe dramatic increase in FDI into Mexico in the years following NAFTAs implementation.Numerous companies are choosing to build factories and production facilities in Mexico, asthe cost is so much lower. This will hopefully even help steer some of the FDI that has beengoing to countries such as China back to the North American shores.

    There has been some opposition to the elements of NAFTA. The leading cause ofconcern is the previously mentioned outsourcing of jobs. Both the US and Canada have

    received tremendous amounts of backlash for the current problems with unemploymentduring the hard economic times. Many citizens are frustrated with the current policies thatthey feel is driving away jobs that could otherwise be given to natives. While this is a validconcern, it is a loaded argument. The workers who are unemployed are frequently thosewho are part of the unions, or are otherwise used to a much higher salary than the companycan afford to pay them. The cost of living for this portion of the workforce is significantlyhigher than for that of their Mexican counterparts. While the US worker is looking for anAmerican Dream lifestyle, workers here in Mexico may be only hoping to be able to feeda family each night.

    The question of whether much of this is ethical is an interesting subject. While itcan be said that the jobs being created in these factories, often within miles of the US, arejobs that people would otherwise not have, the conditions and compensation are not ideal.This is evident from the large number of Mexicans who immigrate to the United States,often illegally. Thus while the companies are doing what they see as fiscally responsible totheir shareholders, they are not necessarily doing what is socially responsible with respectto their host countries.

    FACTOR ENDOWMENTS AND COMPARATIVE ADVANTAGESMexico's greatest factor endowment is its labor. Some may argue that Mexico's

    most useful factor endowment is their land as Mexico occupies a large space, especially inLatin America. This will be addressed in the Policy Recommendation section, as Mexicodoes not sufficiently utilize this advantage. Mexico is a labor-intensive country, and as a

    labor-intensive country, Mexico's economy operates best when it utilizes this comparativeadvantage. Mexico can produce goods much cheaper than developed countries, such as theUS, Canada, and EU countries because of a large labor force that is willing to work forless. In addition, because Mexico's labor abundance is unskilled, and there is a lack ofunions, it costs less to pay Mexican workers.

    Let us consider a hypothetical production possibility frontier between the UnitedStates (a capital rich country) and Mexico (a labor rich country), where the both economyare based on the production of computers and textiles. Let's assume autarky and the price of

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    one computer is the same for the price of one T-shirt.

    United States' Economy Mexico's Economy

    T-Shirts (output/hour) 5 3

    Computers (output/hour) 10 1

    Absolute AdvantageUnited States in both Computers and T-Shirts

    Comparative AdvantageUnited States in Computers

    Mexico in T-ShirtsRelative Price

    The relative price of T-Shirts under trade is (, 3)

    The US can produce T-Shirts more effectively by producing Computers and trading themfor T-Shirts. In direct production, 1 hour of U.S. labor produces 5 T-Shirts. However, withtrade, 1 hour of U.S labor produces 10 units of Computers, which can be traded for 30 T-Shirts. That being said, Mexico is better off trading t-shirts for computers, than directly

    producing computers. One hour of Mexico's labor produces 1 computer. With trade, 1 hourof Mexico's labor produces 3 T-shirts, which can be traded for 1.5 units of computers.Under NAFTA, Mexico's trade mentality becomes very simple; Mexico simply needs tofocus on its comparative advantage. With non-free trade agreement countries, Mexicanbarriers to trade, such as transportation costs, have to be accounted for. However, whentransportation costs are minimized, Mexico trades based on their factor of endowments.

    There is empirical evidence that defends the Heckscher-Ohlin (H-O) theory ofMexico's trading scheme. Among Mexico's primary exports are manufactured goods,coffee, and cotton. These goods are labor-intensive commodities.6 Furthermore, the H-Oalso states that countries should export the resources that they are abundant in. Mexico isabundant with oil, especially compared to the US. As of 2008, Mexico's exported 22

    billions dollars of crude oil to the U.S.7

    Aside from land, Mexico's other major factor endowment is oil. Mexico's largestexport to the US is crude oil. In 2009, crude oil exports comprised 12.5% of Mexico'sexport to the United States.8 Mexico's petroleum industry is the sixth largest producer of oilin the world, and second in the Western Hemisphere after the US.

    6 Economy Watch Content. "Mexico Export, Import & Trade | Economy Watch."Mexico Export, Import& Trade. Web. 12 Oct. 2011. .

    7 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-BillionDollar Trade Advantage | Suite101.com."Daniel Workman | Suite101.com. Web. 12 Oct. 2011..

    8 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-BillionDollar Trade Advantage | Suite101.com."Daniel Workman | Suite101.com. Web. 12 Oct. 2011..

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    PROJECTIONS OF FUTURE IMPORT, EXPORT, AND TRADE COMPOSITIONPATTERNSFor IMF chart, see the end of the section.

    Mexico's current economic outlook is promising, according to IMF projections. In

    2010, Mexico's GDP grew 5.4%. Between 2011-2015, Mexico's GDP is estimated to havegrown between 3%-4% each year. Mexico's predicted inflation and unemployment is astrong indication that the country will be stable. Between 2011-2015, inflation is estimatedto remain at approximately 3%, while unemployment is projected to decrease, bottomingout at 3.5%. This is a great indication because low unemployment, low inflation, andrelative steady projected PPP (8.5-9.2) are indicators of increased foreign investment.These metrics coupled with projected stable debt reduces sovereign risk, which discouragesFDI. Lastly, the estimated stability of Mexico's economy reduces the risk of capital flight,which can cripple the economy.

    Mexico's projection of future imports, exports, and trade composition is cloudy atthis point in time because Mexico's exports relies heavily on the US economy, as Mexico

    sends 80.5% of its total exports to US.9 If the US economy rebounds from the recessiondriven by consumption and investment, then Mexico's projected exports will increaseacross the board. The IMF projections do not account for the current volatility in the worldeconomy. In 2009, six of Mexico's ten top exports to the US showed double digit lossesfrom 2008: crude oil fell 40.7%, auto parts and accessories fell 23.1%, video equipment fell

    9 Economy Watch Content. "Mexico Export, Import & Trade | Economy Watch."Mexico Export, Import& Trade. Web. 12 Oct. 2011. .

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    18.1%, passenger cars fell 27.9%, telecommunications equipment fell 11.4%, and electricapparatuses fell 24.5%. Much of these losses can be contributed to low consumption andinvestment.10 If consumption increases in the US, then passenger cars exports wouldincrease. Investment has a greater link to Mexico's exports. If investment would increase,specifically with business investment and production, then oil, auto parts and accessories,

    electric apparatus, telecommunications, and video equipment would increase dramatically.Mexico's furniture industry and computer industry have been growing rapidly. In2009, Mexico exported over 900 million dollars worth of furniture and 6.3 billion dollarsworth of computers to the US.11 These two exports are projected to increase, especially thefurniture industry. Mexico holds a clear competitive advantage over furniture. Because thefurniture industry is labor-intensive, the US is not able to produce the same good as cost-efficiently as Mexico is able to do so. In 2009, Mexico has a 593.1 million net export offurniture with the US.12 This will increase over time, especially when Americanconsumption increases.

    Lastly, in regards to exporting, it is likely that there will be an increase in exports ofwatermelon and shrimp from Mexico. Mexico holds competitive advantages in both these

    industries. Mexico holds a 553 million dollar trade surplus over the US for watermelons.This is because Mexico is exempt from US watermelon tariffs.13 For shrimp, the US liftedMexico's shrimp import ban in October of 2010. In 2009, exporting was estimated at 250million dollars.14 With this ban lifted, Mexico will once again start exporting shrimp to theUS.

    Lastly, the Mexican industrial sector has been growing rapidly since its tradeliberation. Mexico will be exports in automobiles will increase. Mexico's automobile sectoris internationally recognized as reliable. Automobile manufacturing plants in Mexico areused to install complex systems, not just simple assembly as in developing countries.

    The main imports that are growing are in the developing industries. First, Mexicohas been working diligently in creating an aerospace industry. Among Mexico's ten fastestgrowing imports from the US, three are related to aerospace: weapons, completed militaryaircrafts, military aircraft engines and turbines.15 As Mexico further develops theiraerospace industry, they will import more of these goods. Furthermore, Mexico is alsodeveloping their automotive industry and their computer industry. Vehicle parts and

    10 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-BillionDollar Trade Advantage | Suite101.com."Daniel Workman | Suite101.com. Web. 12 Oct. 2011..

    11 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-BillionDollar Trade Advantage | Suite101.com."Daniel Workman | Suite101.com. Web. 12 Oct. 2011..

    12 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-BillionDollar Trade Advantage | Suite101.com."Daniel Workman | Suite101.com. Web. 12 Oct. 2011.

    .13 Workman, Daniel. "Mexico's Fresh Watermelon Exports | Suite101.com."Daniel Workman |

    Suite101.com. Web. 12 Oct. 2011. .

    14 Workman, Daniel. "U.S. Certifies Mexico's Use of TEDs, Ending Shrimp Import Ban | Suite101.com."Suite101.com: Online Magazine and Writers' Network. Web. 12 Oct. 2011..

    15 Workman, Daniel. "Mexico's Top Exports & Imports: Most Popular Products Traded Between Mexico& America | Suite101.com."Daniel Workman | Suite101.com. Web. 12 Oct. 2011. .

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    computer accessories will also grow.Mexico's trade composition will change slightly. As mentioned in an earlier section,

    with NAFTA, Mexico trades mostly with the US and Canada. Mexico's trade compositionfollows the H-O model, as Mexico primarily trades with developed countries. However,currently Mexico's trade with Canada is slight compared to with the United States. Canada

    only trades 3.6% of its exports with Canada in comparison to 80.5% with the UnitedStates.16 In the first quarter of 2010, Mexico's export to Canada has increased 69.5%, whileCanada's export to Mexico has increased 34.4%.17 When considering NAFTA and thedecreased transportation costs, trade between these countries will increase dramatically inthe upcoming years. Currently Mexico does not trade with other emerging markets;however, we supply a potential industry that Mexico can utilize to start doing this inPolicy Recommendations.

    16 Economy Watch Content. "Mexico Export, Import & Trade | Economy Watch."Mexico Export, Import& Trade. Web. 12 Oct. 2011. .

    17 Workman, Daniel. "Canada's Exports and Imports with Mexico | Suite101.com."Daniel Workman |Suite101.com. Web. 12 Oct. 2011. .

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    POLICY RECOMMENDATIONSThere are numerous policy recommendations that Mexico should consider to help

    develop their economy:

    Mexico needs to export to a diverse range of countries. Mexico should start

    exporting more to Canada and create relationships with fellow developing

    countries.NAFTA provides the opportunity for Mexico to trade with Canada at lowcosts. Currently it trades at 3.6%. Increasing trade with Canada would be beneficialfor both parties, and the increased aggregate revenue for Mexico would offset theslightly higher transportation costs. It is important for Mexico to diversify theirmain export country, the US, because our economy is too interwoven in the UnitedStates' economy. Canada is currently in a stronger financial position than the US,and Mexico should take advantage of Canada's economic strength and hedge oureconomy's exposure to the United States' economy. This would help in case of afuture US recession or depression. In 2009, Mexico's economy shrank by 6.1%.Between late 2008 and early 2009, 700,000 jobs were lost. 260,000 of those jobswere in manufacturing.18This occurred because of the financial crisis in 2008 that

    started in the United States. In 2009, Mexico sent only 3% of exported goods toBrazil, Russia, India, or China. However, Brazil sent 16% to its fellow developingcountries. Mexico needs to hedge against the United States; it is the responsibleaction to take for our middle-income country. To do this best, increasing trade withCanada and other emerging markets is necessary.

    Mexico needs to devalue our currency with respect to the U.S. dollar.The Peso has dropped 4.8% in the past two weeks. As an export-oriented country,Mexico needs its exchange rate to remain weak relative to the dollar. Furthermore,Mexico needs its currency to remain competitive with the USs other majorimporting countries, such as China and Japan. China and Japan have both exercisedefforts to devalue their respective currencies,19and Mexico needs to ensure that as

    US demand for imported goods increase (as their economy recovers), the demand isdirected towards Mexican goods. The best recommendation to achieve this is bybuying US currency, similar to what China has done. By no means does Mexicohave to achieve this to the same extent as China, but in order to remain competitivein trade some devaluation needs to occur. In accordance to the Gravity Model ofTrade, Mexico and the US will trade regardless of the currency; however, a weakercurrency will help us utilize our geographic location and minimize transportationcosts with the US.

    18 "Mexicos Economy: Making the Desert Bloom | The Economist." The Economist - World News,Politics, Economics, Business & Finance. Web. 12 Oct. 2011..

    19 "News Headlines." CNBC Mobile Home. Web. 12 Oct. 2011..

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    Mexico needs to increase furniture exports.Noted in the previous section, Mexicoowns a considerable comparative advantage in furniture manufacturing with theUS. Mexico's trade surplus of almost 600 million needs to reach at least 800 millionin the next three years. This is especially plausible because as the US economygrows, consumer consumption will increase. Furthermore, as a labor-intensiveindustry, Mexico will have the cost advantage in production.

    The Mexican government should subsidize domestic companies in the creation of

    computer parts. After achieving economies of scale, Mexico should then export

    domestic made computers to the rest of Latin America. Currently, Mexico enjoys a4.9 billion dollar trade advantage in completed computers. However, the US enjoysa 4.5 billion dollar trade advantage in computer accessories. In terms of computerrelated goods, Mexico has a 400 million dollar advantage. If the Mexicangovernment subsidizes the creation of computer parts, Mexico can create a newmarket. This would create significant revenue. Under the New Theory of Trade,first strike is a significant advantage. With subsidies, Mexico can decrease the UStrade advantage considerably within five years. While Mexico's primary labor isunskilled, they still have a large resource of skilled labor, illustrated by carmanufacturers utilizing Mexican labor to install complex system in their cars.Additionally, after Mexican firms can effectively make this product, they can sell it

    to Latin American countries as the middle-class computer. Consider Tata Motorsin India. Tata created a 2,500 dollar car for the emerging middle class in India.While these cars do not compare to imported cars, these cars do serve a market thatcan't afford imported cars. Likewise, Mexican computers would be the affordablecomputer for Latin American countries. Furthermore, we previously mentioned thatMexico needs to diversify their trading partners, and Mexico can use an affordablecomputer to do this. Most Latin American countries and the BRICs have weakcurrencies relative to the dollar and the middle classes in those countries do not

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    have the excess income for high-end computers such as Dells, IBM, Samsung, HP,etc. This would be effective simply for the fact that Mexico's currency relative todeveloped countries is weak. While subsidizing a domestic industry is expensivefor governments, the opportunity to create a new market in a plethora of countriesis worth the initial cost.

    Note: First strike advantage is more likely to be achieved in fellow LatinAmerican countries; however, in the BRICs, there already exists domesticcompetition. This is by no means to dissuade exporting to the BRICs; however,this recommendation will be more profitable in Latin America.

    Reform bureaucracy, paying special attention to corruption, legal agencies, and

    market institutions

    For Mexico to ever become a developed country, we need to minimizebureaucratic risk. This can occur through increased transparency of thegovernment. Globally, corruption occurs at lowers levels of bureaucracybecause of unlivable salaries. If Mexico increased checks on its workers,increased transparency, and increased salaries to livable standards, then

    corruption would decrease. Bureaucratic risk hinders foreign direct investment.Firms are not willing to invest abroad if the target country is high-risk. The highlevels of corruption and red tape create unneeded hassles for multinationalcorporations. Due to Mexico's trade agreements with Canada and the US,Mexico's FDI stock would increase with less bureaucratic risk because of theability to produce manufactured goods cheaply, and then export said goodseasily. Increased FDI would be beneficial for several reasons. It would increaseemployment, increase trade, and help knowledge dissipation. All of these wouldlead to sustainable economic growth.

    Mexico's legal system limits hinders business activity. The lack of an institutionto enforce commitments makes business transactions more difficult. Often

    business is done in cash and between trusted family members.20

    Furthermore,the lack of market institutions increases the risk and transaction costs ofentrepreneurship. Without available credit and trustworthy institutions, it isharder to foster small business development.

    Increase investment in infrastructure, specifically in transportation and utilities.Mexico is a very mountainous country and much of the country is accessible onlyby narrow, winding two-lane highways that are slow and dangerous. Continuedexpansion of the modern highway system will help improve the efficiency of trucktransportation of products...21 Improved efficiency of transportation will lead toincreased FDI as corporations would be able to transport their goods quickly andsafely throughout the country. Furthermore, investment in utilities will lead to

    higher levels of service based FDI. A reason why India lags behind other countriesin their FDI is because their utilities are unreliable. Mexico is in the same boat. IfMexican utilities were reliable, then not only would service based companies bemore willing to come to Mexico, but Mexico may be able to attract more foreigners

    20 Peel, Derell S. "Comparative Advantage and Labor Issues in the Livestock and Meat Industry in Mexicoand the U.S." Web. 12 Oct. 2011. . (pg. 9)

    21 Peel, Derell S. "Comparative Advantage and Labor Issues in the Livestock and Meat Industry in Mexicoand the U.S." Web. 12 Oct. 2011. . (pg. 9)

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    as well. Foreigners contribute to increased consumption, which is a determinant ofeconomic growth.

    Increase Livestock and Poultry production. This is a key reform. While some mayconsider Mexico's land as a strong factor endowment, it is not. The fact that only11 percent of Mexico is arable means that a large amount of land is available for

    grazing.22

    Because Mexico doesn't have the proper land available for intensivecrop cultivation, it should focus on livestock and poultry production because it islabor intensive. In 2009, one of Mexico's fastest growing exports was meat andpoultry, valued at 555.6 million dollars. This represented a 25.1% growth from2008. This growth can increase dramatically if the government provides thisindustry with the proper reforms. As mentioned above, Mexico needs to improve itstransportation infrastructure and reform their bureaucracy. Should this occur, thenthe livestock and poultry industry will grow. Furthermore, this industry, along withMexico's furniture industry can play a vital role in Mexico's future growth. IfMexico continues developing capital intensive sectors concurrently with laborintensive sectors, then growth will occur in all of Mexico's working populations,

    reducing the inequality gap that occurs as countries develop.

    CONCLUSIONThe potential for economic growth and development in Mexico is vast, especially

    through increased international trade. Our policy recommendations outline steps to betaken at both the international and domestic levels in order to continue fostering thisexpansion, ultimately elevating Mexico to the status of a developed country. However,Mexico faces many internal structural issues that will need to be confronted before movingforward. In addition to our aforementioned recommendations, with a focus on stabilizingits economy after the negative effects of the 2008 global financial crisis, eliminatingpoverty, and implementing regulations to curb drug cartel expansion, Mexican expansion

    becomes more viable. All in all, our hope is to assist in the development of our country inthe hopes that Mexico will eventually evolve to be more attractive to foreign investors andexport industries, creating more jobs and increasing the flow of capital into our country.

    22Peel, Derell S. "Comparative Advantage and Labor Issues in the Livestock and Meat Industry in

    Mexico and the U.S." Web. 12 Oct. 2011. . (pg. 5)

    23 Gereffi, G; Martnez, M (September 30, 2004). "Mexico's Economic Transformation under NAFTA". In

    Crandall, R; Paz, G; Roett, R.Mexico's Democracy at Work: Political and Economic Dynamics. Lynne

    Reiner Publishers.

    24

    "CIA - The World Factbook." Cia.gov. Central Intelligence Agency, 27 Sept. 2011. Web. 8 Oct.

    2011. .