NAFTA’sImpactonMexico

LuisBernardoTorresRuiz,Ph.D. July20,2017ResearchEconomist DallasFederalReserve

Contents1. NAFTAProvisions

2.NAFTATradeandEconomicEffects

3.NAFTARenegotiation

Mexico’sPre-NAFTAUnilateralTradeLiberalization

q Firststepsinopeningclosedeconomyfocusedon

eliminatingimportsubstitutionpoliciesinmid-1980s

q In1986,MexicobecamememberofGeneralAgreement

onTariffsandTrade(GATT)

q Mexico’strade-weightedaveragetarifffellfrom25%in

1985toabout19%in1989.

Afterthemid1980s,Mexicomovedfromclosedtoopeneconomy

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1960

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TradeOpenness:Exports+Imports/GDP(Percentage)

Note: Exports and imports of goods and services. Shaded area depicts Mexico’s entry into the GATT.Source: World Bank national accounts data, and OECD National Accounts data files.

Mexico’sNAFTAOpportunity

q Lockinreformsofitsmarketopeningmeasuresfrom

mid-1980s

q Transformformerlystatisticeconomyafterdevastating

debtcrisisof1980s

q Increaseinvestmentconfidencetoattractforeign

investmentandspureconomicgrowth

NAFTAKeyProvisions

1. Removal of trade barriers

2. Rules of origin

3. Services trade

4. Foreign investment

5. Intellectual property rights protection (IPR) (1st FTA)

6. Government procurement

7. Dispute resolution

8. Labor and environmental provisions (side agreement) (1st FTA)

NAFTAKeyProvisions

1. Removal of trade barriers and 2. Rules of origin

Tariff changes based on rules of origin:

§ MostmarketopeningmeasuresfromNAFTAresultedin

removaloftariffsandquotasappliedonimportsfromUnited

StatesandCanada

§ AverageapplieddutyforallimportstotheU.S.2.07%in1993.

§ Over50%ofU.S.importsenteredduty-freeunderU.S.

GeneralizedSystemofPreferences(GSP)in1993.

§ AveragetariffonallimportsfromUnitedStateswas10%in

1993(Canada’swas0.37%).

NAFTAKeyProvisions

1. Removal of trade barriers and 2. Rules of origin:

Tariff changes based on rules of origin:

§ Significantchangesintextiles,apparel,automotive,andagriculturalindustries

§ PhasedoutalldutiesontextileandapparelgoodswithinNorthAmericameetingspecificNAFTArulesoforiginover10yearperiod

§ PhasedoutMexico’srestrictiveautodecree

§ Rulesoforiginrequirementof62.5%NorthAmericancontentforautosand60%forvehicleparts

§ U.S.-Mexicoagriculturaltradebecameduty-freewhenagreementwentintoeffect

NAFTAKeyProvisions

3. Servicestrade.Liberalizedcertainservicessector,particularlyfinancialserviceswhileothersexcludedlikeoilandgasdrilling

4. Foreigninvestment.“Non-discriminatorytreatment”forforeigninvestmentincertainsectors

5. IPR.Enforceablecommitmentsregardingprotectionofcopyrights,patents,trademarks,andtradesecrets

6. Governmentprocurement.Openedupasignificantportionineachcountrynondiscriminatorybasistosuppliersforgoodsandservices

7. Disputeresolution.Createdanarbitrationsystemforresolvingdisputes

8. Laborandenvironmentalprovisions.Firstagreementonlaborandenvironmentalcooperation

Contents1. NAFTAProvisions

2.NAFTATradeandEconomicEffects

3.NAFTARenegotiation

AfterNAFTAexportsgrewrapidly,makingUnitedStatesbyfarMexico’sleadingtradepartner

MexicoExports(BillionsUS$)

Source:SAT,SE,BancodeMéxico,INEGI.BalanzaComercialdeMercancíasdeMéxico.SNIEG.

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U.S. Canada ROW

U.S.$42.9

ROW$7.4andCanada$1.6

U.S.$302.6

ROW$60.9

Canada$10.4

ManufacturingexportsafterNAFTAincreasedsubstantially

MexicoManufacturingExports(BillionsUS$)

Source:SAT,SE,BancodeMéxico,INEGI.BalanzaComercialdeMercancíasdeMéxico.SNIEG.

0

20

40

60

80

100

120

1993

1994

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U.S. ROW

U.S.$35.1

U.S.$281.4

ROW$6.0

ROW$54.6

Automotiveexportsleadincrease

MexicoAutomotiveExports(BillionsUS$)

Source:SAT,SE,BancodeMéxico,INEGI.BalanzaComercialdeMercancíasdeMéxico.SNIEG.

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100

120

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U.S. ROW

U.S.$8.2

U.S.$96.8

ROW$1.9

ROW$16.5

Nonautomotiveexportsalsoregisteredimpressiveincrease

MexicoNon-AutomotiveExports(BillionsUS$)

Source:SAT,SE,BancodeMéxico,INEGI.BalanzaComercialdeMercancíasdeMéxico.SNIEG.

0

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100

120

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2016

U.S. ROW

U.S.$26.9

U.S.$184.6

ROW$4.0

U.S.$38.1

Exportgrowthattributedtodevelopmentofsupplychains,

especiallyintheautoindustry

q Trade occurs in the context of production sharing

q Manufacturers in each country work together to

produce goods

q Trade expansion has resulted in the creation of vertical

supply relationships, especially along the U.S.-Mexico

border

Exportgrowthattributedtodevelopmentofsupplychains,

especiallyinautoindustry

q Intermediate inputs produced in U.S. and exported to

Mexico

q Finished product exported from Mexico to U.S.

q 40% of content of Mexican exports are of U.S. origin

Mexico’sexportgrowthattributedtodevelopmentof

supplychains,especiallyintheautoindustry

q Supply chains have been increasingly crossing national

boundaries.

qManufacturing work is performed wherever is most

efficient.

q Autos manufactured in NAFTA region sold in U.S. have a

domestic content of between 47% to 85%.

ForeignDirectInvestment(FDI)increasedrapidlyafterNAFTA

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ForeignDirectInvestmentinMexico(BillionsUS$)

Source:SecretariadeEconomia.

$1.6$4.9

$27.5

U.S.islargestsourceofFDI,integralpartoftheeconomicrelationship,whileMexicanFDIintheU.S.increasedfrom$1.2b1993to$16.6bin2015

U.S.andCanadaForeignDirectInvestmentinMexico(BillionsUS$)

Source:SecretariadeEconomia andBureauofEconomic Analysis.

0

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25

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U.S. Canada

FDI1993US$3.50Canada$0.07

FDI2016US$10.92Canada$1.72

FDI1980US$1.08Canada$0.02

MexicaneconomicgrowthafterNAFTAisslowercomparedtotheprevious20years,butlessvolatile

GDPperCapita(y-o-y%)

Note:Inflationadjusted.Source:WorldBanknationalaccountsdata,andOECDNationalAccountsdatafiles.

-8

-6

-4

-2

0

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1961

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Mexico U.S. Canada1960-1993Mexico2.30%U.S.2.41%Canada2.18%

1994-2016Mexico1.07%U.S.1.51%Canada1.52%

IncomedisparitybetweenMexicoandU.S.andCanadadidnotimproveafterNAFTAandcontinues

RatioofGDPperCapita(#)

Note:GDPperCapitabasedonpurchasing-power-parity(PPP).Source:InternationalMonetaryFundWorldEconomicOutlookDatabaseApril2017.

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

1980

1981

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Mexico/U.S. Mexico/Canada

NAFTAincreasedsynchronicityofMexico-U.S.businesscycle,particularlyinmanufacturingandautomotiveindustries

ManufacturingIndustrialProduction(y-o-y%)

Source:Instituto NacionaldeEstadística yGeografía (NationalInstituteofStatisticsandGeography);FederalReserveBoard..

-20

-15

-10

-5

0

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1981

-Q1

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2017

-Q1

Mexico U.S.

Correlation:0.11 Correlation:0.77

IncomedisparitybetweenborderMexicanstatesandsouthernMexicanstatescontinued

RatioofGDPperCapita(#)

Note:GDPestimatesfrom1993to2005differentwithNationalAccounts2006whileGDPestimatesfrom2006to2015with2008baseyear.Source:Instituto NacionaldeEstadística yGeografía (NationalInstituteofStatisticsandGeography)andConsejo NacionaldePoblacion.

0.40

0.60

0.80

1.00

1.20

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1.60

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Border/National Southern/National

Inthesouthernstates,theagriculturalsectorplaysanimportantrole.AfterNAFTA,theagriculturalsectorregisteredstrongdownturn

MexicoAgricultureValueAdded(asapercentage(%)ofGDP)

Source:WorldBanknationalaccountsdata,andOECDNationalAccountsdatafiles.

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AfterNAFTA,laborproductivityhasimprovedmostnotablyinmanufacturingplants

MexicoLaborProductivity(Index2005Q1=100)

Note:SeasonallyAdjusted.Personalthatisemployedintheestablishment.Source:Instituto NacionaldeEstadística yGeografía (NationalInstituteofStatisticsandGeography).

90

100

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120

2005

-Q1

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-Q3

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-Q3

2017

-Q1

Global Manufacturing

Contents1. NAFTAProvisions

2.NAFTATradeandEconomicEffects

3.NAFTARenegotiation

InMay2017,theU.S.traderepresentativesent30-daynotificationtoCongressofadministrationsintenttobegintalkswithCanadaandMexicotorenegotiateNAFTA

q The parties may agree on any modification of or anaddition to the agreement

qWhen so agreed and approved in accordance with theapplicable legal procedures of each party, amodification or addition constitutes an integral part ofagreement (NAFTA Article 2202)

IssuesfacingMexico

q Has stated it would consider modernizing NAFTA

q Government officials have alluded Mexico may seek tobroaden NAFTA negotiations to include bilateral ortrilateral cooperation on various issues, especiallysecurity and immigration

qMay consider withdrawing from NAFTA, if negotiationsare not favorable

q Priority for the government would be to improveagreement rather than to withdraw from it

PotentialTopicsforProspectNAFTArenegotiations

1. Automotive sector

§ Newrulesoforigintoaddressmodern

developmentsinautoandautoparts

manufacturing

§ EncouragemoreproductioninNorthAmerican

automanufacturingindustrybyraisingrules-of-

originrequirements

PotentialTopicsforProspectNAFTArenegotiations

2. Services

§ Removebarrierstoelectronicpaymentcardservices,electronicsignature,mobiletelecommunications,internationalroamingrates,andadditionalmarketaccessinareassuchasaudiovisualservices

3.E-Commerce,DataFlows,andDataLocalization

§ Cross-bordertransferofinformationbyelectronic

meansorforcelocalizationofdatacenters

PotentialTopicsforProspectNAFTArenegotiations

4. IPR:

§ Copyright in digital environment, additional patentprotections for pharmaceuticals

§ Criminal penalties for trade secret theft

§ Provisions for customs agents to have ex officioauthority to seize counterfeit and pirated goods

§ Requirements for countries to provide criminalpenalties for copyright and trademark infringementin digital environment

PotentialTopicsforProspectNAFTArenegotiations

5. SOE

§ Addressingpotentialcommercialdisadvantagesto

privatesectorfirmsfromstate-supported

competitorsreceivingpreferentialtreatment

6.Disputesettlement:

§ NAFTApanelsmaybeexaminedtofunction

properly

PotentialTopicsforProspectNAFTArenegotiations

7.Labor:

§ Protectingcollectivebargainingandreformingitssystemforadministrationlaborjustice

§ UpdateMexicolaborreform

8.Environment

§ Adopt,enforceandnotdetractfromtheirenvironmentallawstoattracttradeandinvestment

§ Increasecooperationtoaddresstrans-nationalthreatsandpoliceenvironmentalcrimessuchendangeredspeciestradeandillegalfishing

PotentialTopicsforProspectNAFTArenegotiations

9. Energy:

§ Enhancebilateralcooperationonenergy

productionandsecurity

§ Updateenergyreform

10.Customsandtradefacilitation:

§ Improvebyloweringtimesinthemovementof

goodsandservicesacrosscountries

PotentialTopicsforProspectNAFTArenegotiations

11. Sanitary and Phytosanitary Standards (SPS)

§ Improve scientific basis of SPS regulation,

notifications to importers or exporters of shipments

detained by SPS issues, or consultative mechanisms

to seek quick resolution of such detentions

NorthAmericanSupplyChains

qManyNorthAmericanautomotiveassemblylinesand

partmakersworktogetherasoneintegratedproduction

regionfromcitiessuchasTorontoinCanadathrough

DetroitandintonumerousregionsofMexico

q LaborintensivepartscanbemanufacturedinMexico,

whereproductioncostsarelower,whilemorecomplex

partsaremadeintheUnitedStates

NorthAmericanSupplyChains

q Tariffsortradebarriershavepotentialofdisrupting

theseproductionchains

q Proponentswanttobringbackashareofglobal

productiontoUnitedStates

q Opponentsargueitcouldcausethousandsoflostjobs

inallthreecountriesandbenefitcountrieslike

Germany,JapanandChina

ImportpenetrationofChinesemanufacturedproductshassurpassedMexico

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Mexico China

Note:ImportpenetrationistheratiobetweenthevalueofimportsdividedbyGrossDomesticOutputminusexportsplusimports.Source:BureauofEconomicAnalysis.

ImportPenetration(#)

FreeTradeAgreement(FTA)Diversification

qMexicohasnumerousFTAswithothercountriesand

maycontinuetoseektodiversifytradethroughFTAs

qMexicowillingtonegotiateanewagreementwiththe

Asia-PacificregiontobesimilartoTPPandinclude

Chinaindiscussions

NAFTAWithdrawal

q Acountrycanwithdrawfromtheagreementsixmonths

afterithasprovidedwrittennoticeofwithdrawaltothe

otherparties

q Italsoprovidestheagreementremainsinforcefor

otherparties

q Underthisprovision,existingNAFTArateswould

continueforoneyear

NAFTAWithdrawal

q Duringthistime,governmentscanproclaimtariffrates

existingpriortoNAFTA

q Likelymost-favored-nation(MFN)rateforMexico

qMFNaccordedtoallmembersofWTO

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